Scenario

Parramatta Auditing Services has almost completed an external audit of a regular client, Coldchain Transporters. Arya is a qualified accountant in Parramatta Auditing Services team. He has been following an audit trail on some cash payments at Coldchain Transporters and discovers an 'irregularity': a large cash payment has been recorded but with no name for the recipient and the corresponding invoice is handwritten on a scrap of paper, with a signature that is too messy to read.

Arya reports this 'irregularity' to his supervisor Suzy but she is under pressure to finish the audit that afternoon, so she advises Arya to quickly seek an explanation from Coldchain Transporters' finance manager, Xi. However, Suzy reminds Arya that this is the final day to complete the external auditing project for Coldchain Transporters. The auditing team operates under strict time/cost pressures to conclude each project. So, both Arya and Suzy need to get the external audit signed off by their supervisor, before close of business.

Then Suzy warns Arya: "Coldchain Transporters is our longstanding client.I would be very surprised if there was anything unethical or illegal about that payment. I have been auditing Coldchain Transporters for the last five years and there's never been any problem. Xi is an old friend from university and I'm sure he wouldn't approve of anything unethical or illegal. So please don't upset Xi with any unneccesary questions."

Arya decides to ask for a quick explanation from Xi, who replies: "Listen, Arya, nobody here at Coldchain Transporters can remember what that payment was for, or who signed it. You need to recognise that 'real world' audits are sometimes a bit messy. Not all audit trails end in a nice neat way, like you might like them to."

Arya tells his supervisor Suzy what Xi actually said to him. Suzy reluctantly agrees not to sign-off the audit while Arya is still investigating the irregularity but Suzy warns him again to reconsider if theirregularity is in fact aserious ethical or legal issuethat requires delaying the sign-off.

Therefore, Arya must now make a professional judgement: either extend the external audit beyond the project time-frame to clarifywhat that large cash payment was for, who signedthe handwritten note, and who was the recipient; or just get the audit signed off by the end of that Friday afternoon, with no further probing, then enjoy the weekend.

PS: The relevant Professional Skill to apply for this scenario is scepticismi.e. probing the authenticity of an 'irregular' accounting entry and questioning the veracity (truthfulness) of Xi's explanation.

Question

As you have learnt, auditor independence must be maintained in external auditor - client relationships.

A)identify which of the five ethical threats listed below could challenge Arya's auditor independenceand/or compromise his position as a loyal employee, while auditing Coldchain Transporters, and explainwhy

• Self-interest threat

• Self-review threat

• Advocacy threat

• Familiarity threat

Intimidation threat.

b)Advise Arya on the best way to resolve his ethical dilemma: scepticismof the handwritten note's authenticity versus the pressure to finish auditing Coldchain Transporters by the close of business