Reference no: EM132739797

Question - You are the audit manager of Mervin & Co. and you are planning the audit of Chrome Co., a non-listed company which has been an audit client for four years and specialises in manufacturing luxury mobile phones.

During the planning stage of the audit, you have obtained the following information. The employees of Chrome are entitled to purchase the luxury mobile phones at 40% discount. The audit team has in previous years been offered the same level of staff discount.

During the year, the financial controller of Chrome was ill and unable to work. The company had no spare staff to replace the role and hence, a qualified audit senior, James Tan of Mervin & Co. was deployed to the client for three months to help with financial reporting. The engagement partner has also recommended that the same audit senior, James be in the audit team of Chrome since he already has good knowledge of the client. The finance director of Chrome has also invited you to accompany him to meet the bankers next week to request for a new loan.

From the review of correspondence file, you also noted that the engagement partner and the finance director of Chrome have known each other socially for many years and in fact, went on holiday together last summer with their families. As a result of this friendship, the partner has not spoken to the client about the audit fee for last year's audit which is still not paid.

Required -

(a) From the information above, identify and explain FIVE (5) ethical threats to the auditor's independence.

(b) For each of the threat identified in (a), suggest the safeguard(s) to reduce the threat to an acceptable level.