Explain the external auditors' responsibilities in relation to the prevention and detection of

fraud and error.

(4 marks)

You are the audit manager of Currant & Co and you are planning the audit of Orange Financials

Co (Orange), who specialise in the provision of loans and financial advice to individuals and

companies. Currant & Co has audited Orange for many years.

The directors are planning to list Orange on a stock exchange within the next few months and

have asked if the engagement partner can attend the meetings with potential investors. In

addition, as the finance director of Orange is likely to be quite busy with the listing, he has asked

if Currant & Co can produce the financial statements for the current year.

During the year, the assistant finance director of Orange left and joined Currant & Co as a

partner. It has been suggested that due to his familiarity with Orange, he should be appointed to

provide an independent partner review for the audit. Once Orange obtains its stock exchange

listing it will require several assignments to be undertaken, for example, obtaining advice about

corporate governance best practice. Currant & Co is very keen to be appointed to these

engagements; however, Orange has implied that in order to gain this work Currant & Co needs

to complete the external audit quickly and with minimal questions/issues.

The finance director has informed you that once the stock exchange listing has been completed,

he would like the engagement team to attend a weekend away at a luxury hotel with his team,

as a thank you for all their hard work. In addition, he has offered a senior member of the

engagement team a short-term loan at a significantly reduced interest rate.

Required

(b)

(i) Explain SIX ethical threats which may affect the independence of Currant & Co's audit of

Orange Financials Co; and

(ii) For each threat explain how it might be reduced to an acceptable level.

(12 marks)

(c) Orange is aware that subsequent to the stock exchange listing it will need to establish an

audit committee and has asked for some advice in relation to this.

Required

Explain the benefits to Orange of establishing an audit committee.