You are an experienced audit manager at Samway Baker Fitzgerald (SBF), an accounting firm with offices in Orange, Wagga Wagga, Tamworth, Port Macquarie and Albury in NSW, Toowoomba in Queensland and Ballarat in Victoria. Although a medium-sized firm by national standards, SBF includes Australia’s largest regionally-based auditing practice. Most of SBF’s audit clients are in the manufacturing and service industries.
It is a late summer afternoon in February 2019 and you are meeting with your audit team to discuss the 30 June 2019 year-end audit for Bletchington Limited, an innovative defence industry manufacturing company based in Orange, listed on the Australian Stock Exchange (ASX), and one of SBF’s largest clients by fee revenue. Bletchington often has to go through a competitive market tender process to win large government contracts and only does business with countries that have a recognised democratically elected government. Its main product is a highly specialised light armoured vehicle known as the Bush-Basher. Given the sensitive nature of its designs and clients, Bletchington maintains a highly secure environment.
William Albanese has been the engagement partner on the Bletchington audit for the last 5 years. Andrew is a specialist in the defence industry and intends to remain as the review partner when the audit is rotated next year to Skye Larke, who is to be promoted to partner in early 2020 to enable her to sign off on the 30 June 2020 Bletchington audit.
In September 2018, Bletchington installed an off the shelf costing system. The new system replaced a system that had been developed ‘in-house’ but could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulties with the company’s broader reporting requirements. Bletchington’s information technology (IT) department, together with the consultants from the software company, implemented the new manufacturing costing system. There were no customised modifications. Key operational staff and the internal audit team from Bletchington were heavily involved in the selection, testing, training, and implementation stages.
Bletchington has a small internal audit department which is headed by an ex-partner of SBF, Kev Kevanna. Kev joined Bletchington after leaving SBF 6 years ago. He is assisted by three junior internal auditors, all of whom are completing Bachelor of Accounting studies at Charles Sturt University.
Write a memo to William Albanese, the current Bletchington engagement partner, that advises him on the following:
Question 1 (4%)
The expectations gap that could exist for the audit of Bletchington, including the existence of any special users of Bletchington’s financial reports.
Question 2 (6%)
With reference to relevant legislation and the auditing standards:
- threats to independence for SBF in its audit of Bletchington
- safeguards against any potential threats to SBF’s independence.