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AUDITOR INDEPENDENCE

   Why is it important?

   Rules - Companies Acts/Ethical Rules

   Problems

   Recommendations re improvement
INDEPENDENCE AND THE COMPANIES
ACTS

   S385 1985 - Shareholders appoint auditors
   S25 1989 - Prohibits an officer or servant
    from becoming an auditor
   S389A 1985 - Right of access to all books
    and records etc
   S391 1985 - Rights associated with attempts
    at removal
   S392 1985 - Rights/duties associated with
    resignation.
ACCA/IFAC FUNDAMENTAL
PRINCIPLES
   Integrity – straightforward & honest
   Objectivity –not be biased / influenced
   Professional competence and due care –
    maintain competence and act diligently
   Confidentiality – not disclose info or use for
    personal advantage
   Professional behaviour – comply with
    laws/regs and avoid action that discredits the
    profession
POTENTIAL THREATS
ACCA RULES OF PROFESSIONAL CONDUCT
INDEPENDENCE

 Independence and the audit
 Objectivity can only be assured if the member is,and

  is seen to be independent.
 Threats to independence

 Undue dependence on an audit client

Total fee income from a client should not exceed 15%
  of gross practice income (PIE - limit is 10%)
 Overdue fees

 Family and other personal relationships

 Beneficial interest in shares or other investments
ACCA RULES OF PROFESSIONAL CONDUCT
INDEPENDENCE (CONT’D)

   Beneficial interests in trusts
   Trustee investment
   Loans and guarantees to or from
   Goods and services / hospitality
   Provision of other services to audit clients
   Specialist valuations
   Threatened litigation
APB –ETHICAL STANDARDS
   ES1 integrity,objectivity&independence- firms
    appoint ethics partner ;
   ES2 –financial,business,employment &
    personal relationships – if lend staff must not
    be involved in audit ; partner to client 2yr
    cooling off period ;
   ES3 –long association with audit client –
    engagement partner rotation for listed clients
    after 5 yrs
APB –ETHICAL STANDARDS
 ES4 Fees,remuneration,gifts,hospitality- 10%
  listed/15% others – applied more rigidly
 ES5 Non-audit services – no internal audit if
  rely on int. audit / no IT if place reliance on
  systems – no tax on contingency basis &
  can’t appear before tribunal on behalf of client
 ES Provisions available for smaller entities –

Audits below threshold get relief from some
  provisions of ES1-5 (Provisions available for
  small entities)
CONFIDENTIALITY
Reporting Fraud/Illegal Acts
  Management - directors/audit committee
  Shareholders – if material – audit report
  Third Parties
a) Disclosure permitted – client’s permission;
   in the public interest; to protect member’s
   interests e.g. ACCA disciplinary action
b) Disclosure required – bylaw; treason etc;
CONFLICT OF INTEREST
Client v Auditor
 Other services - total fee income

 Fees/ commissions disclosed

Client v Client
 Can act for clients in same industry

 Should not advise clients re competitive

  tenders
 Safeguards!
Independence - Safeguards
ACCEPTANCE OF NEW APPIONTMENT


BEFORE ACCEPTANCE
 Practical/ethical issues

 Agree fee/tender process

 References for the directors

 Consult existing auditors

AFTER ACCEPTANCE
 Ensure outgoing auditor removal/resignation

 Copy of resolution re appointment

 Letter of engagement
LETTER OF ENGAGEMENT
Objectives – clarify terms of engagement and
  responsibilities of auditors and directors
Contents:
 Responsibilities of auditors & directors

 Scope of audit (refer to planning regarding

  fraud)
 Other services

 Fees

 Agreement of terms
AUDITOR REPONSIBILITY FOR
      REPORTING FRAUD

To members:
a) Refer to in audit report if:
   Alter T/F view
   Do not comply with Companies Act
   Proper A/c records kept
   All info & explanations received

b) In extreme circumstances could resign –
    “statement of circumstances”
AUDITORS REPONSIBILITY FOR
REPORTING FRAUD
To Third Parties:
a) Freedom to Disclose
  Can override duty of confidence if in public
   interest
  Inform non-exec directors first – ask to
   disclose
  If unwilling report to appropriate authority
  May seek legal advice first
AUDITORS RESPONSIBILITY TO
REPORT FRAUD
To Third Parties
b) Obligation to disclose
 If ordered to by court

 Certain info must be given to liquidators/ receivers

 DTI inspectors

 Under various legislation e.g. Money Laundering

   Regs / Pensions Act
IMPROVING AUDITOR INDEPENDENCE

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disciple

  • 1. AUDITOR INDEPENDENCE  Why is it important?  Rules - Companies Acts/Ethical Rules  Problems  Recommendations re improvement
  • 2. INDEPENDENCE AND THE COMPANIES ACTS  S385 1985 - Shareholders appoint auditors  S25 1989 - Prohibits an officer or servant from becoming an auditor  S389A 1985 - Right of access to all books and records etc  S391 1985 - Rights associated with attempts at removal  S392 1985 - Rights/duties associated with resignation.
  • 3. ACCA/IFAC FUNDAMENTAL PRINCIPLES  Integrity – straightforward & honest  Objectivity –not be biased / influenced  Professional competence and due care – maintain competence and act diligently  Confidentiality – not disclose info or use for personal advantage  Professional behaviour – comply with laws/regs and avoid action that discredits the profession
  • 5. ACCA RULES OF PROFESSIONAL CONDUCT INDEPENDENCE  Independence and the audit  Objectivity can only be assured if the member is,and is seen to be independent.  Threats to independence  Undue dependence on an audit client Total fee income from a client should not exceed 15% of gross practice income (PIE - limit is 10%)  Overdue fees  Family and other personal relationships  Beneficial interest in shares or other investments
  • 6. ACCA RULES OF PROFESSIONAL CONDUCT INDEPENDENCE (CONT’D)  Beneficial interests in trusts  Trustee investment  Loans and guarantees to or from  Goods and services / hospitality  Provision of other services to audit clients  Specialist valuations  Threatened litigation
  • 7. APB –ETHICAL STANDARDS  ES1 integrity,objectivity&independence- firms appoint ethics partner ;  ES2 –financial,business,employment & personal relationships – if lend staff must not be involved in audit ; partner to client 2yr cooling off period ;  ES3 –long association with audit client – engagement partner rotation for listed clients after 5 yrs
  • 8. APB –ETHICAL STANDARDS  ES4 Fees,remuneration,gifts,hospitality- 10% listed/15% others – applied more rigidly  ES5 Non-audit services – no internal audit if rely on int. audit / no IT if place reliance on systems – no tax on contingency basis & can’t appear before tribunal on behalf of client  ES Provisions available for smaller entities – Audits below threshold get relief from some provisions of ES1-5 (Provisions available for small entities)
  • 9. CONFIDENTIALITY Reporting Fraud/Illegal Acts  Management - directors/audit committee  Shareholders – if material – audit report  Third Parties a) Disclosure permitted – client’s permission; in the public interest; to protect member’s interests e.g. ACCA disciplinary action b) Disclosure required – bylaw; treason etc;
  • 10. CONFLICT OF INTEREST Client v Auditor  Other services - total fee income  Fees/ commissions disclosed Client v Client  Can act for clients in same industry  Should not advise clients re competitive tenders  Safeguards!
  • 12. ACCEPTANCE OF NEW APPIONTMENT BEFORE ACCEPTANCE  Practical/ethical issues  Agree fee/tender process  References for the directors  Consult existing auditors AFTER ACCEPTANCE  Ensure outgoing auditor removal/resignation  Copy of resolution re appointment  Letter of engagement
  • 13. LETTER OF ENGAGEMENT Objectives – clarify terms of engagement and responsibilities of auditors and directors Contents:  Responsibilities of auditors & directors  Scope of audit (refer to planning regarding fraud)  Other services  Fees  Agreement of terms
  • 14. AUDITOR REPONSIBILITY FOR REPORTING FRAUD To members: a) Refer to in audit report if:  Alter T/F view  Do not comply with Companies Act  Proper A/c records kept  All info & explanations received b) In extreme circumstances could resign – “statement of circumstances”
  • 15. AUDITORS REPONSIBILITY FOR REPORTING FRAUD To Third Parties: a) Freedom to Disclose  Can override duty of confidence if in public interest  Inform non-exec directors first – ask to disclose  If unwilling report to appropriate authority  May seek legal advice first
  • 16. AUDITORS RESPONSIBILITY TO REPORT FRAUD To Third Parties b) Obligation to disclose  If ordered to by court  Certain info must be given to liquidators/ receivers  DTI inspectors  Under various legislation e.g. Money Laundering Regs / Pensions Act