Question 2

Tom, an audit manager in Jerry & Co.('JC'), a chartered certified accounting firm, and he is

planning the audit for the company, Best Watch Sdn Bhd ('BWSB'), a company selling

watches for the financial year ended 30 June 2021.

During the year, Janet, the wife of Tom has been employed as the Finance Head of BWSB as

the existing financial controller of BWSB was ill and hence unable to work. In addition, a

qualify audit senior of JC, Mr. Lim was seconded to BWSB for six months and assist in

preparation of financial statements. The audit partner has recommended that Mr. Lim works

on the audit as he has good knowledge of the client. The fee income derived from BWSB was

boosted by this engagement and along with the audit and tax fee, now accounts for 30% of the

firm's total fees.

From a review of the correspondence files, Tom note that the engagement partner and the

managing director have known each other socially for many years and in fact went on holiday

together last year with their families. As a result of this friendship the partner has not yet spoken

to the client about the fee from last year's audit, i.e., 75% of which is still outstanding.

BWSB has traditionally been presenting the members of the audit team with a hamper as a

welcome gift. This year, each audit member is given a hamper worth RM1,000 and the audit

team involve in the audit are entitled to purchase watches at a discount of 35%.

As a consequence of the COVID-19 crisis which quickly evolved into a global economic crisis

at a speed and magnitude, BWSB is involved in a litigation with its suppliers due to late

payment. Tom has been serving as the audit manager of BWSB for the past 5 years. Because

of his outstanding work, the managing director of BWSB had requested Tom to act on behalf

to resolve the disputes with its suppliers.

Required:

(a) Identify and explain FIVE (5) broad categories of circumstances which may potentially

affect the independence and objectivity of Jerry & Co's audit of Best Watch Sdn. Bhd..

(20 marks)

(b) For each of the identified ethical threats in part (a), recommend the appropriate action to

be taken by Jerry & Co's to safeguard against the threats. (10 marks)

(Total: 30 marks)