IdealProtect Limited (IdealProtect) has been an audit client of Celestia & Associates (C&A) for the past 15 years. IdealProtect is based in Toowoomba, where it manufactures high-tech armour-plated personnel carriers. IdealProtect often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Territory Grappler, is highly specialised and IdealProtect does business only with nations that have a recognised, democratically elected government. IdealProtect maintains a highly secure environment because of the sensitive and confidential nature of its vehicle designs and its clients.

Myah Roberts has been the engagement partner on the IdealProtect audit for the last five years. Myah is a specialist in the defence industry and intends to remain as review partner when the audit is rotated next year to a new partner (Theo Luna, who is to be promoted to partner to enable him to sign-off on the audit).

In September 2019, IdealProtect installed an off-the-shelf costing system to support the highly sophisticated and cost sensitive nature of its product designs. The new system replaced a system that had been developed in-house as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulty with the company’s broader reporting requirements.

IdealProtect’s information technology (IT) department, together with the consultants from the software company, implemented the new manufacturing costing system. There were no customised modifications. Key operational staff and the internal audit team from IdealProtect were significantly engaged in the selection, testing, training and implementation stages.

The manufacturing costing system uses all of the manufacturing unit inputs to calculate and produce a database of all product costs and recommended sales prices. It also integrates with the general ledger each time there are product inventories movements such as purchases, sales, wastage and damaged stock losses.

IdealProtect has a small internal audit department which is headed by an ex-partner of C&A, Ruby Elle. Ruby joined IdealProtect after leaving C&A six years ago after completing her Chartered Accountants qualifications. Ruby is assisted by three junior internal auditors, all of whom are completing Bachelor of Business studies at Yakyakistan University. 

IdealProtect’s end of financial year is 30 June.

Required

1. (a) Are there any threats to independence for C&A in its audit of IdealProtect?

2. (b) Can you propose any recommendations to safeguard C&A against the potential independence threats you have identified? Explain.