Beaumont Limited ("BL") is a Montreal-based private company established thirteen years ago. BL operates a laboratory that manufactures eyeglass lenses. All ten shareholders of BL are relatives of the founder and Chief Executive Officer, Jacques Beaumont. Six shareholders (including Jacques) are active in the company and are responsible for a different aspect of the business - accounting, finance and administration, manufacturing, distribution/sales, product development, and purchases. The remaining four shareholders are passive investors and are not involved in any aspect of the business. Until recently, financing for the business was obtained from family members, as well as a significant line of credit from the local branch of an international bank. The line of credit is secured by a lien on BL's building and equipment's fair market value as well as the inventory balance. As part of the line of credit agreement, BL is required to maintain a minimum quick ratio of 1.2 and a positive net income.

 

In 2015, due to increased demand for BL's products, BL decided to expand and purchased modern facilities and equipment. To finance the purchases, BL obtained private equity financing from The Northern Group (Northern), a local investment firm, in exchange for a 25% ownership in BL. Northern invests with the goal of obtaining regular cash flow returns as well as appreciation in the value of its investments. The Beaumont family including Jacques still owns the remaining 75% of BL. As a condition of its investment, Northern required that BL obtain an audit opinion for its financial statements starting with the year ended December 31, 2015. Further investment to expand BL may be required in the future. As a result Jacques has had recent discussions with a local brokerage firm about a possible initial public offering.

 

On December 1, 2015, Kevin Bastian, BL's shareholder in charge of accounting, finance and administration, expressed interest in selling his shares and leaving the company to start a new business. Pierre Timmons was hired on December 15, 2015 as BL's Chief Financial Officer to facilitate Kevin's transition. Pierre's mandate was to bring in a greater emphasis on controls around financial reporting and monitoring. After his initial assessment of the current state of BL's accounting department, Pierre informed Jacques that there was no formal assessment of internal controls and business risks conducted in 2015 and in his opinion the current internal controls at BL might not be effective. Additionally, BL had not adopted any formal accounting policies to prepare financial statements. Pierre has initiated the first steps to conduct risk assessments and design better internal controls. Pierre informed Jacques that it was a huge task and is scheduled to complete by mid-2016. Pierre has requested the hiring of an assistant controller to provide more resources to help him formulate and document job descriptions and update, develop and document internal controls.

 

Waller and Co., a small CPA firm managed by its partner, Marvin Waller, had performed review engagements for BL since its inception. Marvin Waller, CPA, is a very close friend of Jacques. It is now January 2016. Jacques has requested of Waller and Co. that it conduct a financial statement audit by the end of March 2016. Jacques also asked that Marvin limit the audit fee to what was charged for the 2014 review. Marvin agreed, suggesting that as most small to medium sized businesses have so few controls, he has been able to provide low cost audits in the past because he focuses solely on tests of details and analytical review.

 

Marvin set up an audit team to be led by his niece Elia Jones who obtained her CPA designation in 2010 while working at Waller and Co. Elia had left the firm in January 2014 and joined BL as a senior sales representative, which was very financially lucrative for her. After about a year Elia realized that she really missed public accounting and in March 2015 she rejoined Waller and Co. Marvin personally selected Elia to lead BL's audit due to Elia's extensive understanding of BL's business, which would be of great value during the audit.

 

Elia was supported by two assistants, Hang Li and Maria Ferraro, both of whom are currently University students. Elia thought that on-the-job training was one of the best forms of professional development. Elia decided to let Hang and Maria perform all of the audit field work and resolve all audit issues by themselves. Elia decided not to provide any direction to them until the audit was completed, at which time she planned on reviewing the file and providing her feedback. Elia was confident that they were ready for this type of work as they had both done well in their auditing courses at University.

As Pierre was struggling with getting the 2015 accounting records and financial statement details organized, he telephoned Marvin and asked if Hang and Maria could be loaned to BL for two weeks to assist with closing the financial statements. Marvin was very sympathetic to the situation and considered that this help would expedite the audit process. Therefore, he agreed to contract out Hang and Maria to help.

 

There have been disputes between BL and its largest customer, which used to be one of Elia's accounts when she was working at BL. Jacques reached out to Elia to attend a meeting that was organized to resolve the disputes. Elia attended the meeting and assisted in resolving the issue. After the analytical review and tests of details testing was completed, Elia asked Maria and Hang if there were any observations that had a significant impact on the financial statements. They indicated that there were none noted. Based on these conversations, Elia did not review the audit working papers. Instead, she examined the analytical procedures completed that were similar to those completed for last year's review and decided that an unqualified audit opinion was appropriate for BL's 2015 financial statements. Marvin was very happy that Elia was able to complete the audit within the deadline and signed the unqualified audit report.

 

Question: Explain four specific independence threats that exist for the auditors of BL. For each independence threat, explain why it is a threat and describe a potential mitigating strategy?

Answer rating: 100% (QA)

Answer Auditors Independence A Explain four specific causes of information risk relating to the financial statements of BL and explain how the conduct of an audit reduces each risk a The remoteness of ... View the full answer