Reference no: EM132669747

ABC Partnersis a growing accounting firm in Australia. During the year of 2019, ABC Partners gained a new client, Medical Services Holding Group, which owns 100 per cent of the following two entities: (1) Austin Nursing Home, a private nursing home group, and (2) Twister Pty Ltd, a private oncology clinic that specialises the treatment of cancer. Year-end for all Medical Services Holding Group entities is 30 June 2019.

Twister Pty Ltd owns three relatively old linear accelerators used in radiation therapy. Recently, there have been some concerns raised from radiographers that using these linear accelerators have adverse radiation impacts on patients.

The general manager of Twister Pty Ltd, Betty Smith, has approached Lisa Dallimore, the audit partner responsible for the financial report audit, about undertaking an engagement in respect of linear accelerators. Betty has requested Lisa to provide an opinion that the three linear accelerators are fit for use. Betty pointed out that the Twister Pty audit is up for tender the following year and suggested ABC Partners might like to take on the linear accelerators without charging a fee as a gesture of goodwill.

Prior to the appointment of ABC Partners as the auditor for Medical Services Holding Group for the 2019 financial year, some preliminary analysis by Lisa identified the following situations:

(1) One of the accountants intended to be part of the audit team owns shares in Medical Services Holding Group. The accountant's interest is not material to him.

(2) ABC Partners was previously engaged by Medical Services Holding Group to value its intellectual property. The consolidated balance sheet at 30 June 2019 includes intangible assets of $7 million, which were valued by ABC Partners on 1 February 2019 following Medical Services Holding Group's acquisition of Austin Nursing Home. The intangibles are considered material to Medical Services Holding Group.

Required:

Problem 1. Explain why Lisa Dallimore should have reservations about accepting the engagement in respect of linear accelerators. (Note: Use appropriate fundamental ethical principles to support your answer).

Problem 2. Use your knowledge of APES 110 to identify and explain the potential type of threat to ABC Partners' independence in scenarios (1) and (2) above.

Problem 3. What action should ABC Partners take to eliminate the potential threats to independence in scenarios (1) and (2) above? What safeguards should be instituted to reduce the risk of similar independence threats occurring in the future?