You have just been employed as a junior auditor at the chartered accountant firm of PMG.

Upon joining the firm, the partners request that you review the firm s audit clients to ensure

that the independence requirements of APES 110 are being met. Your review has revealed

the following:

(a) Paul Smith, the current senior manager on the audit of John Deer (JD) Ltd which

specialises in the production in mining equipment, has just entered into a business

venture (PJ Motors) with the CFO of JD Ltd, whereby they are both equal partners in

a business retailing motor vehicles. Paul has informed you that this is not a problem

since the 2 entities (JD Ltd and PJ Motors) are in different non-competing industries.

(b) PMG has recently accepted an engagement to provide audit services to Stocky Ltd.

Upon discussion with the manager of the Audit Team for Stocky Ltd, you were

informed that one of PMG s partner, Jeff Bates daughter currently works at Stocky

Ltd. You later found out that Jeff s daughter is the Financial Accountant at Stocky

Ltd. Jeff Bates is not on the Audit Team of Stocky Ltd.

(c) PMG s secretarial services division has a pool of experienced and qualified company

secretaries. These qualified company secretaries are either outsourced full time or

part time to listed entities in Australia. Due to cost effective quality services, this

division has a high growth in the last three years. Treck Manufacturing Ltd and

Platinum Fabricators Ltd are two listed companies to whom secretarial services have

been outsourced and assurance services provided.

(d) Audrey Jones, a senior auditor at PMG, has been on the audit team of Barminco Ltd

for a number of years. The account clerk of Barminco resigned 9 months ago, and

Barminco has yet to replace him. As a result, Barminco is significantly behind in their

bookkeeping. The financial controller of Barminco recently asked one of PMG s

partners to allow Audrey to join Barminco s accounting team for a period of up to 6

months in order to bring their bookkeeping up-to-date and ready for the year end


(e) While discussing with one of your colleagues, Shelly McDonald, she told you that she

had a great weekend attending a musical show at the theatre. She further let out that

the tickets to the show were gifted to her by the CFO of Macmahon Ltd at the

completion of this year s review because he was so please with the speed and

efficiency to which the audit was completed.


For each of the independent situations above, and using the conceptual framework in

APES 110, answer the following questions.

1. Identify potential threats to independence & recommend safeguards to reduce

the independence threat (5 marks)

2. Provide an objective assessment of whether audit independence can be