Question

Grove Clark is a ten-partner accountancy firm. It has been approached by five potential audit clients and the partners are considering the independence and ethical risks associated with taking on these audits.

Client A is a company in the financial services industry. Grove Clark have no experience in this industry but they would like to build up some expertise in this industry. The chief financial officer of Client A used to be a Grove Clark partner.

Client B has been recommended to Grove Clark by Client H. Clients B and H are both in the manufacturing industry and have worked together on several large contracts. If Grove Clark accept Client B, Company H expect a discount on its next audit as commission for making the recommendation.

Client C is a new company with ambitious plans for growth and stock market listing. Whilst Client C is currently exempt from statutory audit, the directors wish an audit to be conducted to make it easier to negotiate lending arrangements with its bank. A meeting with the bank has been scheduled for three months after the year-end and the directors insist that the audited financial statements with an unmodified report be available before the meeting.

Client D is a start-up company owned and managed by a couple of scientist/inventors who have discovered a way of converting insects into food fit for human consumption. They need to be associated with a reputable accounting firm in order to approach large corporations for the finance needed to develop their scheme and as a result they are happy to pay a higher fee.

Client E is a medium-sized I.T. company which has developed a new app for down-loading music from the internet. The CFO resents having to pay an audit fee and suggests instead that the audit fee could be taken either as new shares issued by Client E or by the firm agreeing to accept 5% of the profits generated by the new app

For each potential client highlight any independence or ethics risks the partners should consider and why. In addition, suggest safeguards that could be considered to mitigate the relevant risks.

Explain what is meant by ‘professional scepticism’ and how it is relevant to the conduct of an audit of financial statements.

Answer 1

Answer:

1.

Client A :

Threats: The board cooperation threat and commonality Threat. For this situation, because of a business or employment relationship, freedom will be broken.

Safeguards:

Worked by profession, enactment and guideline: If this commitment is to be taken inside a time of employment, the commitment ought to be assessed by a certified proficient to close whether the commitment team members can keep the reasonable degree of skepticism while surveying the representations and performance of the previous firm member.

Executed by firm: Training and education of laborers concerning moral prerequisites, an administration sythesis inside the firm.

Client B :

Threats: Undue Influence Threat and Self Interest Threat. Freedom might be broken here, as the firm may encounter income misfortunes because of the rebate or free its old just as possible customers in this condition.

Safeguards:

Executed by Firm: At the origin of the commitment itself, the terms of charges and limits/discounts ought to be conceded upon morally.

Designed by profession, enactment and guideline: Specific sort of Financial connections are restricted by the guideline/regulation.

Client C :

Threats: Undue Influence Threat. The customer is representing that a specific sort of opinion ought to be given, regardless of what was really finished up.

Safeguards:

Executed by firm: acknowledgment and continuation techniques that are proposed to constrain relationship with customers that represent a threat that isn't at a pleasant level to the part's consistence with the laws.

Created by profession, enactment and guideline: Professional assets, for example, hotlines, education and preparing/training.

Client D :

Threats: None can be recognized from the given information.

The new business wish to connect with trustworthy accounting firm so they can gain money. This is a typical work on, Associating with legitimate firm gives a reasonable and trust commendable picture of the organization, so they effectively get financed. There is no moral or in-dependency issue for Auditor.

Client E:

Threats: Familiarity Threat and Self interest danger. For this situation, charges being reliant on the share price of the customer or the benefits of the customer, harms the autonomy totally.

Safeguard:

Formulated by profession , enactment and guideline: Acceptance of expenses in such structure might be restricted under the important rules and guidelines. Financial relations like possessing shares and profit sharing is prevented.

Made by firm: Discussion of freedom matters by audit advisory group, systems of the firm and commitment/engagement contract with the customer.

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2.

Professional skepticism : According to ICAEW, "Professional scepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence."

How it is important for conduct of Audit:

Professional skepticism assumes an on a very basic level significant job in the audit, and structures a basic part of the auditor's range of abilities. It encourages the proper exercise of expert judgment, especially with respect to decisions about:  

i) The nature, timing and degree of audit systems to be performed to diminish the risk to a suitable level;

ii) Regardless of whether adequate appropriate proof has been gotten and whether all the more should be done to accomplish the goals of the applicable affirmation standards;

iii) The evaluation of the executives' decisions (especially with respect to the use of the entity's fiscal reporting structure with regards to a yearly audit);

iv) The drawing of determinations dependent on the audit proof acquired.

The utilization of professional skepticism upgrades the viability of a audit strategy and of its application and diminishes the possibility that we may choose a wrong audit system, twist a proper audit procedure, or confound the audit results.