The following situations have arisen in your audit firm:
1) The directors of Howley plc have approached your firm and requested that it tender for the audit of Howley plc. The directors have indicated that there will be additional consultancy work which is likely to be on-going.
2) The directors of Gibs Ltd, an existing audit client, have requested that an employee of your firm, who has been involved in the audit of Gibs Ltd in previous years, is seconded to the company to assist with the preparation of the monthly management accounts and the annual financial statements while the company accountant is on maternity leave.
3) The Directors of Jenkins plc, a listed company, wish to outsource the company payroll function and have requested that the business services department of your firm processes the payroll and one of the partners assumes cheque signing and payroll authorisation powers on the company behalf.
Requirement:
a)Explain the significance of the concept of independence to auditing. (5 marks)
b)Identify the potential threats to independence and suggest how the firm might deal with them. (7 marks)
c) Identify the benefits to a client of having non-audit services provided by its auditor. (3 marks)
Answers to above:
a) Significance of the concept of independence to auditing:
-S/holders are interested in F/S that potray as closely as possible the true financial position, result of operations and cash flow of the company.
- Management, knowing that it is being evaluated by the s/holder on the basis of F/S , desires to show the results of its stewardship in the most favourable light.
-Companies Act & Guide to Prof. Ethics require auditors to be independent in order to protect the s/holder.
- Auditors need to be free from prejudicial influences to maintain an :
- Obejctives(unbiased) state of mind (be independent) or should i say "independent in fact"
- Appearance (be seen to be independent)
- If users do not perceive auditor to be independent there will be a :
- Lack of credibility of financial information
- Loss in confidence in the audit process/function.
b) - Howley plc
Threat
- Self-interest/ fee dependency
- Fear of losing fee may make auditor reluctant to report adversely
- Self review in the future - may be reluctant to challenge any product or judgement of consultancy work.
Dealt with: only accept if
- Fees do not exceed recommended threshold and
- Different teams available.
- Gibbs Ltd
Threat
- self review
- Familiarity
- Too trusting of colleague and less rigorous in testing
Dealt with : Accept, as a private company but ,
- Person seconded to the company must not be a member of the audit team
- Careful consideration as to separate audit procedures.
- Jenkins plc.
Threat
- Self review - too trusting of colleagues resulting in less rigorous testing
- Payroll preparation- as a public/listed company threat may be considered too great
- Cheque signing and authorisation functions is a management function.
Dealt with: If wish to act as auditor
- Do not assume responsibility for cheque signing and authorisation function and
- If threat considered too great do not accept payroll preparation.
c) Benefit to a client having non audit services provided by its auditor
- Auditor has greater insight into clients operations and can provide a higher quality service.
- Greater degree of comfort having service provided by a trusted party
- Provide services at lower overall costs as the background information is available.
-sorry for any grammar/spelling mistakes, sleepy- :)
For Paper 3.1 June 2007:
Accounting problems/issues (the usual Q3) - Important areas include leases,
deferred tax, related parties, earnings per share, provision, government grants,
impairment, investment property, going concern.
new tips for 3.1 www.nik-tips.blogspot.com
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