7102AFE Auditing

Case Study: HEM Audiology Services Ltd
The client: HEM Audiology Services Limited
HEM Audiology Services Ltd (‘HEM’) was founded in 1996 by Hayden Pounder and Emily Peters and is headquartered in the Gold Coast town of Coolangatta. HEM specialises in manufacturing hearing aid technologies and also provides audiology services to customers. Their signature hearing aid, Sonica, is sold throughout Australia. Hayden Pounder, CEO, is a member of Australian Audiology, while Emily Peters, with her degree in Commerce, is the current Chief Financial Officer. With family ingrained in HEM’s DNA, Hayden’s son, Zane Pounder, and Emily’s daughter-in-law, Laura Dean, are now also directors of the business, bringing fresh perspectives to HEM through their leadership. The financial year of HEM ends on 31 December each year.
The external auditors: Hawthorne & Partners (HAW)
Hawthorne & Partners (HAW), is a medium-sized audit firm providing audit, advisory and taxation services to several mostly Gold Coast-based clients. The audit firm has developed a reputation for their insights and high-quality audits which builds trust in financial markets and business. Nevertheless, 2020 was a challenging year for them as they sought new ways of conducting audits remotely and adapted their audit procedures to suit the COVID climate in which firms operate. As a result, the firm found that, on average, audits were taking longer to complete. To ensure that the firm can continue to provide high quality audits, the partners required all staff to undertake additional training on appropriate audit considerations. All members of the audit firm are required to know and understand the current laws and regulations introduced under COVID that have any implications for business operations and accounting functions.
HEM has been a client of HAW for the past 14 years. Mr Nigel Hawthorne, the senior partner of Hawthorne & Partners, has always been involved with HEM, first as the Engagement Partner and later as a tax advisor. Clyde Stobie has served as the engagement partner on HEM audits since 2013. Caryn Connor is the audit manager on the current 2020 HEM audit engagement and leads two trainee accountants – Shoba Ahern and Mike Stegan. Caryn has worked on several audit engagements during the COVID pandemic and is regarded by her peers as having a good understanding of appropriate COVID-related audit procedures, and has even been invited by other audit firms to give presentations on key audit procedures to pay attention to, with an emphasis on assessing control risk and controls testing for remote working arrangements and on matters around going concern issues.
Shoba Ahern joined the audit firm ten months ago after graduating with her business degree. She is really excited about the opportunity to work with Caryn and learn from her. Whilst at university, she secured part-time administrative and bookkeeping work for HEM over the summer holidays. Shoba ceased working for HEM when she was accepted into HAW for her traineeship. During her time working there, she met Kate Peters, the youngest daughter of Emily Peters, who was also doing some casual work for the firm. They quickly became close friends, even moving into a house share together. However, three months before Shoba started her traineeship at HAW, Kate was offered a position at Citi Australia, based in Sydney. They remain good friends and often hang out on her frequent visits to family in Brisbane. When the borders between NSW and Queensland opened again after the COVID shutdowns, Shoba joined Kate and her family on a holiday to North Stradbroke Island. Shoba did not disclose to the partners her friendship with Kate as she no longer works for HEM Audiology Services, and she did not want to jeopardise her chance to work with Caryn.
Background and understanding of the entity
HEM relies heavily on loans for financing of their various construction projects. Two of their loan contracts are due to expire at the end of March 2021, and HEM wishes to re-negotiate these contracts. Therefore, they are anxious for the audit firm to complete the audit in a timely manner so that they will be able to present a set of audited financial statements to the lenders by the end of February and allow them sufficient time to renegotiate the contracts. They also wish to have time in hand should their negotiations be unsuccessful, in which case they will need to find alternative funding. They have explained the timeframes to Clyde Stobie, who has advised HEM that this will not be a problem and that they will be able to complete the audit within the required timeframes.
Required:
Evaluate the professional conduct of Hawthorne & Partners and its members in terms of APES 110 Code of Ethics for Professional Accountants, and prepare a report addressed to the Audit Partners, discussing your evaluation. The report should specifically include the following:

An executive summary that outlines the purpose of the report, summary of the evaluation of professional conduct and recommendations made.

A discussion of the relevant fundamental principle contained within the Code of Ethics that relates to the case. Using your knowledge of the Code of Ethics forProfessional Accountants (APES 110), discuss the regulations that are applicable to the issue and evaluate the circumstances of the case. Be specific in your answer in terms of both the source of rules (i.e. include reference to specific sections and/or sub-sections of the regulation in your answer, e.g APES 110 s600.4*) and in terms of what the rules stipulate about the issue you are discussing.

Discuss appropriate actions and or safeguards that Hawthorne & Partners  could implement to resolve any potential concerns identified.

Provide a brief conclusion that summarises your overall recommendation, based on the discussion in part and on whether Hawthorne & Partners should accept the audit engagement or not.