Hum and Hoo is an established audit practice in Deetown and has a large share of the audit services market among local businesses. Because Deetown is a relatively isolated area, many clients rely on Hum and Hoo for accounting and technical advice over and above the annual audit. This has meant that, over time, Hum and Hoo has also developed expertise in compliance advice, tax, strategy consulting and other professional services. Because non-audit work is important to Hum and Hoo, staff have ‘business growth’ criteria strongly linked with bonuses and promotion. This means that many of the professional accountants in the firm actively seek to increase sales of non-audit services to businesses in the Deetown area, including from audit clients. The culture of the firm is such that everybody is expected to help out with any project which needs to be done, and this sometimes means that staff help out on a range of both audit and non-audit tasks. The lines between audit and non-audit services are sometimes blurred and staff may work on either, as workload needs demand. Managing partner Cherry Hoo told staff that the non-audit revenue is now so important to the firm that staff should not do anything to threaten that source of income. Cherry Hoo said that she was thinking of beginning to offer a number of other services including advice on environmental reporting and the provision of environmental auditing services. She said she had spoken to local companies which were looking to demonstrate their environmental sustainability and she believed that environmental reporting and auditing might be ways to help with this. She said she was confused by the nature of environmental reporting and so was not sure about what should be audited. Required: (a) Explain ‘ethical threat’ and ‘ethical safeguard’ in the context of external auditing, and discuss the benefits of effective ethical safeguards for Hum and Hoo. (8 marks) (b) Explain ‘environmental audit’ and assess how environmental reporting and auditing might enable companies to ‘demonstrate their environmental sustainability’ as Cherry Hoo suggested. (8 marks) (c) Some corporate governance codes prohibit audit firms such as Hum and Hoo from providing some non-audit services to audit clients without the prior approval of the client’s audit committee. This is because it is sometimes believed to be against the public interest. Required: Explain ‘public interest’ in the context of accounting services and why a client’s audit committee is a suitable body to advise on the purchase of non-audit services from Hum and Hoo. (9 marks)