Question 1 of 25

Specimen exam

Q1 Section A

2 marks

You are an audit manager at Buffon & Co, responsible for the audit of Maldini Co.

The audit engagement partner for Maldini Co, a listed company, has been in place for approximately eight years and her son has just been offered a role with Maldini Co as a sales manager.

This role would entitle him to shares in Maldini Co as part of his remuneration package.

Maldini Co’s board of directors are considering establishing an internal audit function, and the finance director has asked the audit firm, Buffon & Co, about the differences in the role of internal audit and external audit.

If the internal audit function is established, the directors have suggested that they may wish to outsource this to Buffon & Co.

The finance director has suggested to the board that if Buffon & Co are appointed as internal as well as external auditors, then fees should be renegotiated with at least 20% of all internal and external audit fees being based on the profit after tax of the company, as this will align the interests of Buffon & Co and Maldini Co.

Your audit assistant has highlighted a number of potential threats to independence in respect of the audit of Maldini Co.

Identify which of the following facts from the scenario represent valid threats to independence, matching each threat to the appropriate category.

Facts

  • Partner's son may hold shared in Maldini Co
  • Maldini Co has asked for advice regarding role of internal audit
  • Maldini Co has asked Buffon & Co to carry out internal audit work
  • Audit partner has been in position for eight years
  • Fee will be 20% of profit after tax

Category of threat

  • Familiarity
  • Self-interest
  • Self-review
  • Self-interest