Audit and Assurance Health Care Holdings Group

Questions: 1. Using your knowledge of APES 110, identify and explain the potential type of threat to Fellowes and Associates independence in situations (1) and (2) above. 2. What action should Fellowes and Associates take to eliminate the potential threats to independence in situations (1) and (2) above? What safeguards should be instituted to reduce the risk of similar independence threats occurring in the future? Answers: Introduction Professional accountants have an obligation to comply with regulatory norms and codes of conduct in order to ensure integrity in provided information. In Australia, APES 110 deals with Code of Ethics for professional accountants for audit engagement and quality control (Chapple, Ferguson Hronsky, 2014). The present report is focused on the applicability of provisions of APES 110 on case situations of Health Care Holdings Group (HCHG). In audit team of Fellowes and Associates one accountant is proposed to participate. However, the accountant has a shareholding in HCHG, but interest is not material in accordance to him. Threat to Independence By considering the provided situation one the accountant is proposed to be part of the audit team in 2014 and at the same time he is a shareholder of HCHG. However, the accountant does not have a material interest in business (George, Jones Harvey, 2014). In this aspect, provisions of Sec. AUST291.104 of APES 110 will be applicable as it deals with financial interest. As per this section, owning of shares will lead to self-interest threat. In accordance with AUST290.41.3 "Self-Interest Threat" is considered to be there if the entire firm or a team member could get benefit from the audit client (APES 110 Code of Ethics for Professional Accountants, 2010). This situation will raise the concern about conflict of interest. Actions to Eliminate Potential Threats For this aspect, the auditor is required to consider the nature of financial interest. In this manner, they will be capable of determining the significance of the risk (Chapple, Ferguson Hronsky, 2014). For this purpose, they are required to evaluate the position of the member in a team like their role and duties along with their interest either (direct or indirect) in company or firm of which audit is undertaken. On the basis of these provisions, Audit team has direct financial interest in the organisation as per Sec. AUST290.106. Further, the impact of threat is significant high that it cannot be compensated by any safeguard in order to mitigate the risk at an acceptable level (Townsend, 2014). Further, for accepting this audit, Fellowes and Associate must dispose their financial interest, or they are required to terminate the membership of individual in audit team having a shareholding of business entity. Viable Safeguards Disposal of direct financial interest of team member before acceptance of audit engagement. Termination of member from the team in order to maintain independence and integrity of assurance team (Townsend, 2014) Eradication Indirect Financial Interest entirely or partially so that interest is not material. This is to be done, prior to making an individual member of assurance team. Situation 2 Fellowes and Associates had valued intangible assets (intellectual property) in previous financial year. As per balance sheet intangible asset of the business is $30 million determined by Fellowes and Associates on 1st March 2014 subsequent of HCHGs acquirement of the subsidiary Shady Oaks Hospital. The value of intangible assets is material for HCHG. Threat to Independence Provisions of section 290 of APES 110 deals with the Independence Audit and Review Engagements. In accordance with this section, Auditor must be independent in order to provide an appropriate opinion on the concerned matter. In the current situation, provisions of APES 110 ss. 290.174 290.179 is applicable as it deals with the issues regarding valuation services provided to an audit client (APES 110 Code of Ethics for Professional Accountants, 2010). For assessment audit, the auditor is required to collect evidence of the process through asset is valued by clients. In a situation where auditor had provided the valuation they auditor will do an audit of their work. This situation will create the threat of self-review. Actions to Eliminate Potential Threats In this particular situation, the main issue is that valuation comprises a significant degree of subjectivity. This aspect shows that Fellowes and Associates are required to withdraw their consent from the audit assignment or HCHG is needed to obtain the opinion of another expert for valuation of intangible assets (CPA Australia, 2014). Although; case description shows that services for valuation are provided before acceptance of audit engagement. Consequently, at present, there is no conflict of the situation regarding valuer and auditor as different duties are to be performed at different times. For this audit assignment, Fellowes and Associates should mandatorily comply with provisions of Section 290.177 regarding valuation of intangible assets (Hossain, Wilson Jubb, 2016). Valuation done by audit team must be review by an independent expert who must not be a member or related to assurance team. In addition to this, audit team must not include an individual who had done a valuation of assets of the business entity (Carson, Redmayne Liao, 2014). Further, acknowledgement regarding the responsibility of valuation must be taken from the client. Viable Safeguards as per Sec 290.177 Including independent professional for valuation of intangible to ensure integrity in audit opinion of financial statements Do not participate in audit engagements Attaining clients acknowledgement regarding the responsibility of results by making them understand significant assumptions taken for valuation (APES 110 Code of Ethics for Professional Accountants, 2010). Conclusion In accordance with the present study, the conclusion can be drawn that Fellowes and Associates must with the above-described safeguard prior to the audit of Health Care Holdings Group (HCHG). By compliance with the above-described standards, they will be able to ensure independence and ethics aspects while providing an opinion on the fairness of financial statements. References Books and Journals Carson, E., Redmayne, N.B. Liao, L., (2014). Audit Market Structure Competition in Australia. Australian Accounting Review. 24(4). Pp.298-312. Chapple, L., Ferguson, C. Hronsky, J., (2014). Professional independence attachment bias: an exploratory study. George, G., Jones, A. Harvey, J., (2014). Analysis of the language used within codes of ethical conduct. Journal of Academic Business Ethics. 8. P.1. Hossain, S., Monroe, G.S., Wilson, M. Jubb, C., (2016). The Effect of Networked Clients' Economic Importance on Audit Quality. Auditing: A Journal of Practice Theory. Townsend, S.R., (2014). The regulation of auditor ethical behaviour in Australia. (Doctoral dissertation, Macquarie University). Online APES 110 Code of Ethics for Professional Accountants. (2010). [PDF]. Available through https://www.apesb.org.au/uploads/stards/apesb_stards/stard1.pdf. [Accessed on 3rd January 2017]. CPA Australia. (2014). An overview of apes 110 code of ethics for professional accountants. [PDF]. Available through https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/ethics/an-overview-of-apes-110-code-of-ethics.pdf. 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