(a) Holding a financial interest (such as shares) in client companies may create a self-interest threat to independence.
The audit partner in this case has no shares in the audit client and would therefore seem to be in an objective position. However, the audit manager holds 1% of the ordinary shares of Sycamore. Although this holding is not material in relation to the total shares in issue, it may be very material in relation to the total personal wealth of the audit manager.
The IESBA Code states that audit team members should not hold any direct financial interest in client companies. Therefore the only possible safeguards are to:

• require the manager to dispose of his shares, or
• remove the manager from the audit team.

(b)

Personal relationships may create self-interest, familiarity or intimidation threats to independence. The significance of these threats will depend on the individual’s responsibilities on the engagement, the closeness of the relationship, and the role of the other party at the client.

With this in mind, where an immediate family member of a member of the audit team is in a position to influence the financial statements at the client, the IESBA Code requires that the individual should be removed from the audit team. The chief accountant of Pembrooke is not an immediate family member of the partner and the partner is not involved with the audit so the Code, per se, has not been broken.

However, the firm is required by the Code to consider any other personal relationships which might have a bearing on independence and consider what safeguards need to be put in place. If the chief accountant has a very close relationship with the partner and exerts strong influence over him, and the partner in turn is in a position to exert a strong influence over the audit partner (if, perhaps, he is the senior partner) then the firm should seriously consider whether it should act as auditor for Pembrooke Ltd.

(c)

If too large a proportion of the audit firm’s fee revenue is derived from one client, the dependence on that client and concern about the possibility of losing that client may create a self-interest or intimidation threat to independence.

The IESBA Code states that where the fees for audit and other recurring work paid by one public interest entity client, or a group of connected clients, exceeds (or are likely to exceed) 15% of the revenue of the audit practice for two consecutive years, a pre-issuance review performed by an independent accountant might be a safeguard to reduce the threats to an acceptable level. If fees for audit and other recurring work are greater than 15% of the revenue of the audit practice for five years, the firm cannot be auditor after the fifth opinion is issued.

In the case of Farrow, the audit fee represents 25% of total fee revenue. Since Farrow is a listed client, a pre-issuance review will be required if this is the second year this has occurred. If it is the fifth year, then the firm must resign after issuing the auditor’s report.

(d) If the assurance client is a bank or similar institution the IESBA Code states that there is no threat to independence where a loan is made on normal terms to the audit firm or a member of the audit team. These conditions are met in this case therefore there is no threat to independence.

(e)

This is a clear case where a conflict of interest might well occur. This creates a threat to the principle of objectivity. In general, the more direct the connection between the professional activity and the matter on which the parties’ interests conflict, the more likely the level of the threat is not at an acceptable level.

This would seem to be a case where it would be undesirable for the audit firm to advise Thyme at all. The firm should carefully explain the professional reasons for not accepting the appointment and suggest that advice on the contracts be obtained from another professional firm.