4 You are an audit manager in NAB & Co, a large audit firm which specialises in the audit of retailers. The firm currently audits Goofy Co, a food retailer, but Goofy Co’s main competitor, Mickey Co, has approached the audit firm to act as auditors. Both companies are highly competitive and Goofy Co is concerned that if NAB & Co audits both companies then confidential information could pass across to Mickey Co.

Required:

(a)  Explain the safeguards that your firm should implement to ensure that this conflict of interest is properly managed.                                                                                                      

Goofy Co’s year end is 31 December, which is traditionally a busy time for NAB & Co. Goofy Co currently has an internal   audit   department   of   five   employees   but   they   have   struggled   to   undertake   the   variety   and   extent   of   work required by the company, hence Goofy Co is considering whether to recruit to expand the department or to outsource the   internal   audit   department.   If   outsourced,   Goofy   Co   would   require   a   team   to   undertake   monthly   visits   to   test controls at the various shops across the country, and to perform ad hoc operational reviews at shops and head office.

Goofy Co is considering using NAB & Co to provide the internal audit services as well as remain as external auditors.

Required:

(b)  Discuss the advantages and disadvantages to both Goofy Co and NAB & Co of outsourcing their internal audit department.                                                                                                         

(c)  The audit engagement partner for Goofy Co has been in place for approximately six years and her son has just accepted a job offer from Goofy Co as a sales manager; this role would entitle him to shares in Goofy Co as part of his remuneration package. If NAB & Co is appointed as internal as well as external auditors, then Goofy Co has suggested that the external audit fee should be renegotiated with at least 20% of the fee being based on the profit after tax of the company as they feel that this will align the interests of NAB & Co and Goofy Co.

Required:

From the information in (c) explain the ethical threats which may affect the independence of NAB & Co in respect of the audit of Goofy Co, and for each threat explain how it may be reduced.