Problem
Consider the following independent situations:
• You are the auditor of Halo Pty Ltd a medium sized furniture manufacturer. Your audit firm has finalised the financial statements after the client has substantially prepared the accounting records. However, the client admits to having limited knowledge of identifying and calculating impairment and has asked for your assistance. You have proposed a number of adjustments to account for the impairment of assets.
• You are the auditor of Extra Time Ltd, a large Extra agent that also handles all your audit firms Extra arrangements on normal commercial rates and provides excellent service. The managing director of Extra Time has indicated that the company is having a tough time of it due to the lack of consumer confidence in the economy at the moment and has asked if you could help by recommending their services to your other audit clients. He has said that he will understand if you are not able to do so. You happily agree to provide the recommendation, as you have always been satisfied with their service.
• Your audit firm has been approached by a new client, Foundation Constructions Ltd, to conduct the audit for the coming year. As part of your client acceptance procedures, you identify that the wife of one of the audit firm's partners has a substantial shareholding in Foundation Constructions Ltd.
• Your audit client, Leisure Cruises Ltd, is having cash flow problems and has not paid any of the current year's fee by the time the auditor's report is due to be issued. They expect business to pick up in the coming year and have requested an additional time to pay the bill.
Task: For each of the independent situations above:
1. Identify the type of potential threat to independence. Justify your answer.
2. Describe a safeguard, if any, which could be implemented to reduce each of the independence threats.