Reference no: EM132591610

1. The auditor of Thomas Agencies Co is facing a legal claim for negligence. It is alleged that a fraud was perpetrated by the manager at one of the smallest of the company's 20 branches. Mr Thomas had not visited that branch for five years as he had adopted a rotational testing approach. As a consequence the fraud had gone undetected for two years. What is the auditor's BEST defence against the claim?

2. You are a manager in the audit firm of Zagol Co; and this is your first time you have worked on one of the firm's established clients, Co. The main activity of Damot Co is providing investment advice to individuals regarding saving for retirement, purchase of shares and securities and investing in tax efficient savings schemes. Damot is regulated by the relevant financial services authority. You have been asked to start the audit planning for Damot Co, by Mr Matiwos, a partner in Zagol. Mr Matiwos has been the engagement partner for Damot Co, for the previous nine years and so has excellent knowledge of the client. Mr Son has informed you that he would like his daughter Meron to be part of the audit team this year; Meron is currently studying for her first set of fundamentals papers for her ACCA qualification. Mr Matiwos also informs you that Mr Gizachew, the audit senior, received investment advice from Damot Co during the year and intends to do the same next year. In an initial meeting with the finance director of Damot Co, you learn that the audit team will not be entertained on Damot Co's Hotel this year as this could appear to be an attempt to influence the opinion of the audit. Instead, he has arranged a trip costing less than one-tenth of the expense of using the hotel and hopes this will be acceptable. The director also states that the fee for taxation services this year should be based on a percentage of tax saved and trusts that your firm will accept a fixed fee for representing Damot Co in a dispute regarding the amount of sales tax payable to the taxation authorities. Required:
• Explain the ethical threats which may affect the auditor of Damot Co.
• For each ethical threat, discuss how the effect of the threat can be mitigated.

3. You are the audit manager of Hareg& Jones co and you are planning the audit of MM Co, 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 MM Co are entitled to purchase mobile phones at a discount of 10%. The audit team has in previous years been offered the same level of staff discount. During the year the financial controller of MM Co was ill and hence unable to work. The company had no spare staff able to fulfil the role and hence a qualified audit senior of Hareg& co was seconded to the client for three months. The audit partner has recommended that the audit senior work on the audit as he has good knowledge of the client. The fee income derived from MM Co was boosted by this engagement and along with the audit and tax fee, now accounts for 16% of the firm's total fees. From a review of the correspondence files you note that the partner and the finance director 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 yet spoken to the client about the fee for last year's audit, 20% of which is still outstanding. Required:
• Explain the ethical threats which may affect the independence of Jones & Co's audit of MM Co.
• For each threat explain how it might be avoided.