You are a senior manager in Bunk & Co, a global audit firm with offices in more than 3

0 countries. You are responsible for monitoring audit quality and ethical situations which arise in relation to audit clients. Wire Co is an audit client whose operations involve haulage and distribution. The audit report for the financial statements of Wire Co for the year ended 31 December 2014 was issued last week. You are conducting a review of the quality of that audit, and of any ethical issues which arose in relation to it. Relevant information obtained from a discussion with Lester Freeman, the audit engagement partner, is given below.

(a) Wire Co’s audit committee refused to agree to an increase in audit fees despite the company’s operations expanding into new locations. In response to this, the materiality level was increased during the audit, and some review procedures were not carried out. To reduce sample sizes used in tests of detail, the samples were selected based on judgement rather than statistical methods. In addition, only parts of the population being tested were sampled, for example, certain locations were not included in the sample of non-current assets selected for physical verification. (6 marks)

(b) Some of the audit work was performed by an overseas office of Bunk & Co in an ‘off-shoring’ arrangement. This practice is encouraged by Bunk & Co, whose managing partners see it as a way of improving audit efficiency. The overseas office performs the work at a lower cost, and it was largely low-risk, non-judgemental work included in this arrangement for the audit of Wire Co, for example, numerical checks on documentation. In addition, the overseas office read the minutes of board meetings to identify issues relevant to the audit. (5 marks)

(c) In July 2014, Russell Bell, Wire Co’s former finance director, joined Bunk & Co as an audit partner, working in the same office as Lester Freeman. Although Russell was not a member of the audit team, he did update Lester on some business developments which had taken place at the company during the period before he left. Russell held a number of equity shares in Wire Co, which he sold in January 2015. Since joining Bunk & Co, Russell has been developing initiatives to increase the firm’s income. One initiative is that audit team members should be encouraged to cross-sell non-audit services and references to targets for the cross-selling of non-audit services to audit clients is now included in partner and employee appraisal documentation. (9 marks)

Required:

Comment on the quality control, ethical and professional issues raised in respect of the audit of Wire Co and the firm-wide policies of Bunk & Co, and recommend any actions to be taken by the audit firm.

Note: The split of the mark allocation is shown against each of the issues above.