Independence threats and safeguards
Securimax Limited has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, where it manufactures high-tech armour-plated personnel carriers. Securimax often has to go through a competitive market tender process to win large government contracts. Its main product, the small but powerful Terrain Master, is highly specialized and Securimax only does business with nations that have a recognized, democratically elected government. Securimax maintains a highly secure environment, given the sensitive and confidential nature of its vehicle designs and its clients.
Clarke Field has been the engagement partner on the Securimax audit for the last five years. Clarke is a specialist in the defence industry and intends to remain as review partner when the audit is rotated next year to a new partner (Sally Woodrow, who is to be promoted to partner to enable her to sign off on the audit).
In September 2015, Securimax installed an off-the-shelf costing system to support the highly sophisticated and cost-sensitive nature of its product designs. The new system replaced a system that had been developed in-house, as the old system could no longer keep up with the complex and detailed manufacturing costing process that provides tender costings. The old system also had difficulty with the company’s broader reporting requirements.
Securimax’s information technology (IT) department, together with the consultants from the software company, implemented the new manufacturing costing system. There were no customized modifications. Key operational staff and the internal audit team from Securimax were significantly engaged in the selection, testing, training, and implementation stages.
The manufacturing costing system uses all of the manufacturing unit inputs to calculate and produce a database of all product costs and recommended sales prices. It also integrates with the general ledger each time there are product inventory movements such as purchases, sales, wastage, and damaged inventory losses.
Securimax has a small internal audit department that is headed by an ex-partner of KFP, Rydell Creek. Rydell joined Securimax after leaving KFP six years ago after completing his chartered accountant’s qualifications. Rydell is assisted by three junior internal auditors, all of whom are completing bachelor of commerce studies at the University of Waterloo.
Securimax’s end of financial year is December 31.
Source:Adapted from the Institute of Chartered Accountants Australia’s CA Program’sAudit and Assurance Exam, May 2008. Provided courtesy of Chartered Accountants Australia and New Zealand.
Required
(a)
Are there any threats to independence for KFP in its audit of Securimax?
(b)
Can you propose any recommendations to safeguard KFP against the potential independence threats you have identified? Explain.
