You are the audit manager in the audit firm of Dark & Co. One of your audit clients is NorthCee Co, a company specialising in the manufacture and supply of sporting equipment. NorthCee have been an audit client for five years and you have been audit manager for the past three years while the audit partner has remained unchanged.

You are now planning the audit for the year ending 31 December 2007. Following an initial meeting with the directors of NorthCee, you have obtained the following information.

(i) NorthCee is attempting to obtain a listing on a recognised stock exchange. The directors have established an audit committee, as required by corporate governance regulations, although no further action has been taken in this respect. Information on the listing is not yet public knowledge.

(ii) You have been asked to continue to prepare the company’s financial statements as in previous years.

(iii) As the company’s auditors, NorthCee would like you and the audit partner to attend an evening reception in a hotel, where NorthCee will present their listing arrangements to banks and existing major shareholders.

(iv) NorthCee has indicated that the fee for taxation services rendered in the year to 31 December 2005 will be paid as soon as the taxation authorities have agreed the company’s taxation liability. You have been advising NorthCee 
regarding the legality of certain items as ‘allowable’ for taxation purposes and the taxation authority is disputing these items.

Finally, you have just inherited about 5% of NorthCee’s share capital as an inheritance on the death of a distant relative.

Required:

a)Identify, and explain the relevance of, any factors which may threaten the independence of Dark & Co’s audit of NorthCee Co’s financial statements for the year ending 31 December 2007. Briefly explain how each threat should be managed. (10 Marks)

b)Explain why your audit firm will need to communicate with NorthCee Co’s audit committee for this and future audits. (4 Marks)