question archive AUDITING subject)6/ Alan has been asked to prepare report that analyses the potential acquisition of XYZ Pty Ltd by his client Sun Ltd
AUDITING subject)6/ Alan has been asked to prepare report that analyses the potential acquisition of XYZ Pty Ltd by his client Sun Ltd
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AUDITING subject)6/ Alan has been asked to prepare report that analyses the potential acquisition of XYZ Pty Ltd by his client Sun Ltd. Prior to conducting the analysis, Alan decided to verify the accuracy and completeness of the cash flow statement provided by XYZ Pty Ltd for the year ended 30th June 2020. After reviewing a draft of his analysis, Sun Ltd.'s Chief Financial Officer has asked Alan to focus his attention on the sales and profitability of XYZ Pty Ltd and avoid the distraction of cash flow reporting. Chief Financial Officer suggests that the acquisition will provide substantial future benefits to Sun Ltd and that confusing the board with cash flow issues would not be helpful to the acquisition or to the likelihood of Alan being asked to undertake similar engagements in Future.
Required)
a) Two (2) threats to Independence with a brief explanation.
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a) Two (2) threats to Independence with a brief explanation.
Answer :
First threat to the independence of the audit report result would be collusion by the auditor with the CFO, because the CFO can give incentives/bribe and motivate the auditor to not notice any issue from the cash flow in order for the CFO to continue his hidden transaction to corrupt money from the cash flow and also to have the audit report result to be in the CFO side. Second threat to the independence is the fraud done by the CFO that is why he kept avoiding the auditor to do not evaluate the cash flow because of the acquisition that is not really helpful to the company.
Step-by-step explanation
Independence in auditing refers to the audit report result that should not be affected by any bribery or collusion with the management. Independence also means that the auditor should not have any relation with the company management and does not also once be part of that management in order to prevent fraud and collusion to happen at the time of auditing.
