Reference no: EM132774710

You are the audit manager of Foo & Tan LLP who has been providing audit assurance services to Sound Advice Pte Ltd, a listed company that provides loans and financial advice to individuals and companies. The audit engagement partner for Sound Advice has been in place for approximately six years and her son has just accepted a job offer from Sound Advice as a sales manager; this role would entitle him to shares in Sound Advice as part of his remuneration package.

• The directors have invited the engagement partner to attend meetings with potential investors in the hope of raising funds to finance its expansion programs. In addition, as the finance director of Sound Advice is on maternity leave, the chief executive officer (CEO) has asked if Foo & Tan can produce the financial statements for the current year.

• During the year, the assistant finance director of Sound Advice left and joined Foo & Tan as a partner and he has been asked to provide an independent partner review for the audit. Sound Advice is planning to acquire substantial shares in a rival company and has approached Foo &Tan to provide valuation services, on the conditions that the audit team complete the external audit quickly and with minimal questions asked.

• The CEO has suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the profit after tax of the company as they feel that this will align the interests of Sound Advice and Foo & Tan. In addition, he has offered a senior member of the engagement team a short-term loan at a significantly reduced interest rate.

• The CEO has offered the audit team the free use of his yacht for three weeks after the audit, as a reward for the team's hard work. He also bought lunch for the audit team on most days.

Required:

Problem 1: Explain ethical threats which may affect the independence of Foo & Tan's audit of Sound Advice. For each threat explain how it might be reduced to an acceptable level.