Case 1 A sole proprietor public accountant called X is one of a few directors an
ID: 2545008 • Letter: C
Question
Case 1
A sole proprietor public accountant called X is one of a few directors and sole shareholder of a tax and corporate advisory firm (TCA). They are considered network firms as defined in the Code of Professional Conduct and Ethics (the Code).
TCA provides book keeping services to approximately ten of X’s audit clients. X says that the accounting records of the clients are prepared by TCA’s staff and sent directly to the clients for review and approval. There is no conclusive evidence to say whether X signed off the accounting / book keeping work. Therefore, the question is whether X is responsible for the sign off of both the independent auditor’s reports and the accounting / book keeping work together with the compilation of unaudited accounts, such that a “self review threat” is created as per paragraph 100.10(b) of the Code;
X has responded that:
Accounting assignments are managed by executive staff of TCA.
TCA accounting staff take instructions directly from the clients.
The client signs a letter of representation (LOR) when the accounts are compiled and completed. This requires the client’s financial officer to certify that he / she has reviewed all the transactions in the unaudited accounts to confirm they are in accordance with his / her instructions and that he / she has made available all documents for the accounting assignment.
The audit begins only after the accounts have been confirmed in the LOR. i.e. the accounting and audit work will not be undertaken at the same time.
X was able to provide copies of the LORs and records showing who were the staff responsible for the accounting work and the audit work.
X has also responded that there are safeguards in place against self review threat, including:
- The accounting function undertaken by independent book-keepers;
- A director or manager of TCA to take charge of the accounting function from commencement of accounting/book-keeping work up to client sign-off;
- The process / protocol initialed and filed separately in an accounting file; prior to releasing the file to the audit practice.
In addition to the above safeguards, TCA should also ensure that clients understand that the two practices are separate entities, through issuing separate engagement letters from TCA to all the audit clients of X’s audit practice for TCA’s accounting / non audit services.
1- What is the fundamental issue behind this case? Explain.
2- If you consider this issue is very important, what type of auditor opinion if any should be given for this client?
Explanation / Answer
1) The fundamental issue behind the case is the possibility of lack of independence and objectivity in the auditor's report arising due to self-review threat.
Self review threat arises when the auditor has also performed some of the accounting duties for the same client, which is the given case. The threat might result in lack of independence and objectivity, which is one of the guiding principal in the AICPA Code of professional conduct. Independence and objectivity of the auditor may be dampned if he lacks the ability to be neutral while performing audit of the client for which accounting duties were also performed by him.
2) If there are no significant misstatements in the financial statements, instead of giving a clean report, the audit report in the given case should be modified, disclosing the possibility of lack of independence and its affect on the financial statements.
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