You currently work for a firm of Chartered Certified Accountants and Auditors (The firm), working on the audit team for

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You currently work for a firm of Chartered Certified Accountants
and Auditors (The firm), working on the audit team for the firm’s
client, Company X (The audit client). You are responsible for the
identification and mitigation of ethical issues. Your firm has a
total fee income of £6,200,000. You have collected the following
information which requires consideration in relation to the ethical
threats that may be present together with some going concern issues
which will also need to be communicated to the audit partner. The
audit partner responsible for the audit of Company X has been in
position for the previous 7 years and has been requested to
continue as audit partner for an extra year. Company X are a
publicly listed company. The total fee income for this audit client
in respect of the current financial year, 2022 is likely to exceed
15% of the overall fee income for your firm. Company X have
approached your firm to act for them in helping to secure a large
loan with a bank they have started using. Company X have been
unsuccessful in securing a loan with other financial institutions
and they believe your firm would be able to convince the bank to
enter into a loan agreement with them. Company X have approached
your firm to re-design and monitor the internal audit department.
The finance manager has explicitly expressed that they want the
monitoring of the internal controls over the financial reporting of
the company to be carried out by your firm. A senior member of the
audit team selected to work on the current audit of Company X has
disclosed the following information: • That they own shares in
Company X but are willing to sell the shares on completion of the
audit. • That they have a close personal relationship with the
finance manager of the audit client. Company X owe your firm
outstanding fees for the previous year’s audit. The finance manager
of Company X has informed your firm that cashflow has been
problematic due to the recent loss of a major customer which
accounts for approximately 25% of their turnover. The customer in
question has transferred their business to a new competitor. In
addition, it is anticipated that due to an economic downturn, two
medium sized customers of Company X will go out of business in the
next month. Both customers have outstanding receivables balances.
Your firm have agreed a payment plan for the outstanding fees with
Company X, however your firm have yet to receive any payments. The
finance manager of Company X has stated that if they are able to
secure the loan with the new bank that the fees would be paid in
full prior to commencing the current audit.
Required: a) Identify and discuss FIVE ethical issues that would
threaten the independence of your firm auditing Company X. For each
ethical issue, recommend two safeguards that should be put in place
to mitigate or eliminate the threat identified. (15 marks)