3102AFE Governance, Auditing and Analytics
Refer to the TDG Construction Ltd case on the next page and answer the questions that follow.
Case Study: Tdg Construction Ltd
The client: TDG Construction Limited
TDG Construction Ltd (‘TDG’) was founded in 1996 by Trystin Gordon and Derek Griffin and is headquartered in the Bayside suburb of Wynnum in Brisbane. TDG specialises in building houses, mainly through land and house packages, and operates in four states: Victoria, Queensland, New South Wales and South Australia. Each state has its own state head office, a diverse range of displays, and teams familiar with their local environment. Trystin Gordon, CEO, holds a degree in Architecture, while Derek Griffin, with his degree in Civil Engineering, is the current Chief Operating Officer. With family ingrained in TDG’s DNA, Trystin’s daughter, Zoe Smith, and Derek’s son-in-law, Dean Alexander, are now also directors of the business, bringing fresh perspectives to TDG through their leadership. The financial year of TDG ends on 31 December each year.
The external auditors: Stewart Jones & Partners (SJP)
Stewart Jones & Partners (SJP), is a medium-sized audit firm providing audit, advisory and taxation services to a number of mostly Brisbane-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.
TDG has been a client of SJP for the past 12 years. Ms Christine Stewart, the senior partner of Stewart Jones & Partners, has always been involved with TDG, first as the Engagement Partner and later as a tax advisor. Tommy Jones has served as the engagement partner on TDG audits since 2013. Amy Barnes is the audit manager on the current 2020 TDG audit engagement and leads two trainee accountants – Cameron Deck and Emma Francis. Amy 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.
Emma Francis joined the audit firm ten months ago after graduating with her business degree. She is really excited about the opportunity to work with Amy and learn from her. Whilst at university, she secured part-time administrative and bookkeeping work for TDG over the summer holidays in her second and third year. During her time working there, she met and dated Grant Griffin, the youngest son of Derek Griffin, who was also doing some casual work for the firm. Their relationship ended amicably three months before she started her traineeship at SJP, when Grant was offered a position at Credit Suisse in Sydney. They remain good friends and often hang out on his frequent visits to family in Brisbane. When the borders between NSW and Queensland opened again after the COVID shutdowns, Emma was invited to join Grant and his family on a holiday to Hamilton Island. Emma did not disclose to the partners her former relationship with Grant as he no longer works for TDG Construction, and she did not want to jeopardise her chance to work with Amy.
Background and understanding of the entity
TDG 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 TDG 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 Tommy Jones, who has advised TDG that this will not be a problem and that they will be able to complete the audit within the required timeframes.
Cameron Deck at the Golf Event
Cameron Deck loves golf. He is a member of the prestigious ‘The Grand Golf Club’ based at the Gold Coast, having inherited his membership from his grandfather. Cameron frequently visited the Club as a guest of his Grandfather during his teenage years and feels right at home, fitting in with the elite members, many of whom are Captains of Industry. At a recent club tournament, followed by an awards evening, Cameron found himself talking with Mike Smith, the Chief Financial Officer of ZBank. Asked about his traineeship, Cameron mentioned that he was really excited to be working with a good audit team on the TDG Construction audit. Mike congratulated him and added that TDG was a client of ZBank. Cameron revealed that TDG was needing to renegotiate some of their loan contracts, and Mike responded by saying that any bank would be taking a very close look at the financials before renewing loans. He went on to say that there were a lot of jitters in the banking sector after the construction industry was battered in 2020 by COVID, citing several construction firms that went into liquidation. Earlier in the evening, Cameron had overheard someone say that several people, including Trystin Gordon, had lost a substantial amount of private equity through nosediving stocks on the New York stock exchange. Cameron was very alarmed about this and asked Mike if he was aware of Gordon’s personal financial position and whether it would affect the loan negotiations for TDG. They discussed the implications at length. Cameron left the event that evening with a bad feeling about their client.
- Discuss the threats to Stewart Jones & Partners’ independenceand identify appropriate actions (safeguards) Stewart Jones & Partners should consider to mitigate the threats, so as to ensure its partners and staff comply with the independence requirements of APES 110 Code of Ethics for Professional Accountants.
- Discuss, with reference to APES 110 Code of Ethics for Professional Accountants, any concerns you may have in relation to Cameron’s attendance and conduct at the Golf Tournament & Awards evening.
- Evaluate the professional conduct of Stewart Jones & Partners and its other members (excluding Cameron) in terms of the APES 110 Code of Ethics for Professional Accountants. You do not need to discuss any threats to independence, but rather focus your discussion on the evidence that indicates how the auditors have complied with and/or breached the fundamental principlescontained within APES 110 Code of Ethics for Professional Accountants.