Reference no: EM133465963

ABC Plc is a well-established public limited company listed on the NSE. It is currently undergoing its statutory annual audit from BDO, a reputable firm of accountants that been ABC's auditors and business advisors for more than 10 years. Over this period the managing partner of BDO has become a very good friend of the chief executive officer (CEO) of ABC Plc and their families regularly holiday together. The chairman of ABC Plc is expecting the audit to be signed off, but the audit partner managing the audit has suspicions around the adequacy of a series of provisions and whether contingent liabilities noted in the accounts would not more accurately be accounted for as provisions. She also disagrees with the capitalization of research expenditure and other intangible assets on the statement of financial position, rather than treating them as expenses in the statement of profit or loss. She has questioned the financial controller, who is a professionally qualified accountant, about these matters but is getting minimal cooperation from him. It appears that the chief financial officer (CFO) has pressurized the financial controller to apply these accounting policies, as he has himself been pressurized by the CEO to ensure that profits over the next two years are presented favorably towards the time which the CEO's share options can be exercised. The audit partner herself is being pressurized by the CEO of BDO to sign off the accounts as a 'true and fair view' and not to challenge the accounting policies of the company, as the renewal of the audit contract with ABC Plc is imminent.

1. Describe the primary roles of a chief executive officer (CEO), and criticize the actions of the ABC Plc's CEO described in the scenario, recommending more appropriate behaviour.

2. Explain the threats to independence to the BDO's audit team, the financial controller and the CFO of ABC which arise from this situation.

3. Recommend suitable safeguards at ABC Plc and BDO to prevent such conflicts as identified in the scenario, and to address the threats to independence identified.