Charm Studios Inc.

Question 1:

There are three potential threats to independence that would prevent CDA from accepting Charm Studios Inc. as a client. Below is a list of each threat to independence along with an explanation of how it is a threat and ways CDA can mitigate these risks.

1) Self-interest  there is a threat to independence as Jennifer has been Tracey’s client for several years and relies on Jennifer for haircuts but is also one of the four partners at CDA, the auditing firm. Because Tracey is a client of Jennifer’s she may be inclined to help Jennifer receive a clean audit, to help her grow the hair salon as she uses this business establishment.

2) Self-review  there is a threat to independence as Jennifer has reached out to Tracey in the past for her opinion on some accounting matters, such as the correct accounting treatment for Charm’s expenditures, and has implemented some of Tracey’s recommendations. These recommendations that Tracey had previously made to Jennifer could be reflected in the amounts included or disclosed in the financial statements.

3) Familiarity  there is a threat to independence as Tracey could be predisposed to accept or insufficiently questioning of the client’s position. This is due to Jennifer and Tracey being close friends and have been long acquainted as Jennifer is Tracey’s hair stylist.

There are ways that CDA can mitigate these risks to independence, but it will require several changes to their audit plan. The first step that CDA should do is inform the engagement partner about these risks so they are aware before they accept this audit assignment. They would require Tracey to document any non-audit related advice or opinions she’s would have given Jennifer in the past which could impact the financial statements which they would be auditing. This would help them mitigate to a certain extent the self-review risk. The possible ways that CDA can mitigate