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Audit Independence and Ethics


Question 1 ( 6 marks) You are an audit manager with Bishop and Knight (BK) .For the past three years BK has been the auditor of Escape Holidays (EH), a travel company. Geoff the audit partner has asked you to contact Dave, the CEO of EH with a view to BK being re-engaged as the auditor for the upcoming audit of the 30 June 2015 financial report. Geoff has indicated that he intends to allocate Michael ,a first year accountant fresh out of University and Jane an accountant from BK’s tax advisory department to the EH audit for the first time as the two auditors doing the day to day audit work as he believes from their background they would be ideally suited to audit the firm. You have held discussions with both of the staff and Dave the CEO of EH and excerpts of these conversations follow: 1. Discussion with Dave, CEO of EH: Dave stated : “The Board was impressed with last years audit and would like to reappoint BK as auditor of the 30 June 2015 financial report audit. The Board would also like to invite Geoff to give a speech about EH at the next travel agency seminar, to assist in promoting EH’s business to attract more investors. I understand that this is outside BK’s normal practice, however the Board expressed the view that it would be very difficult for EH to continue any business engagements with BK should Geoff refuse to provide such assistance”. 2. Discussion number two with Dave, CEO of EH: Dave stated : “To express our sincerity towards BK and Geoff , and to maintain the good relationship in anticipation of another smooth audit for 2015, EH would like to present a complimentary 14 day holiday package voucher for four people to the Greek Isles for both Geoff ‘s and your family .All expenses, including accommodation and travelling costs will be paid by EH”. 3. Excerpt from discussion with Michael Michael stated: “I am very excited to be part of the audit team. I believe that I will be a valuable asset to the team, as my Dad is EH’s financial controller. He is responsible for preparation of EH’s financial report. 4. Excerpt from discussion with Jane Jane stated : “I’m glad that I have been allocated to this year’s EH audit team .It’s going to be a very efficient audit this year as I was on a temporary assignment at EH just a month ago ,helping EH with its tax calculations and preparing accounting entries that will be reflected in the 30 June 2015 financial report so I don’t think there will be much audit work required around the tax accounts. It will be great to catch up with everybody at EH again as they are so easy to work with. Required: (a) Identify the ethical principles violated (b)In each discussion /excerpt above identify the specific threat to independence.