Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients

Question:

Fellowes and Associates Chartered Accountants is a successful mid-tier accounting firm with a large range of clients across Canada. During the 2011 financial year, Fellowes and Associates gained a new client, Health Care Holdings Group (HCHG), which owns 100 percent of the following entities:
• Shady Oaks Centre, a private treatment centre
• Gardens Nursing Home Ltd., a private nursing home
• Total Laser Care Limited (TLCL), a private clinic that specializes in the laser treatment of skin defects. Year end for all HCHG entities is June 30.
TLCL owns two relatively old laser machines used in therapy. Recently, staffs using these machines have raised concerns that they have adverse impacts on patients.
The CEO of TCCL, Betty Raman, has approached Tania Fellowes, the audit partner responsible for the financial statement audit, about undertaking an engagement with respect to the laser machines. Betty has asked Tania to provide an opinion that the machines are fit for use. Betty pointed out that the auditor for TLCL has not been appointed for the following year and suggested Fellowes and Associates might like to take on the laser machines engagement without charging a fee as a gesture of goodwill.
Prior to the appointment for the 2011 financial year of Fellowes and Associates as the auditor for HCHG, the group that controls TLCL, some preliminary analysis by Tania Fellowes identified the following situations:
1. One of the accountants who intended to be part of the 2011 audit team owns shares in HCHG. The accountant's interest is not material to him.
2. Fellowes and Associates was previously engaged by HCHG to value its intellectual property. The consolidated (statement of financial position) as at June 30, 2011 includes of $30 million, which were valued by
Fellowes and Associates on March 1, 2011, following HCHG's acquisition of the subsidiary Shady Oaks Centre. The intangibles are considered material to HCHG.
Required
(a) Identify and explain the potential type of threat to Fellowes and Associates' independence in situations (1) and (2) above.
(b) What action should Fellowes and Associates take to eliminate the potential threats to independence in situations (1) and (2) above? What safeguards should be instituted to reduce the risk of similar independence threats occurring in the future?
Intangible Assets
An intangible asset is a resource controlled by an entity without physical substance. Unlike other assets, an intangible asset has no physical existence and you cannot touch it.Types of Intangible Assets and ExamplesSome examples are patented... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...