1. Identify the independence factors, and any other issues, that you and your co-partners in Ernest Peat & Co will need to consider in order to determine whether your firm can put itself forward to act as the first auditors of Gadget limited and the measure that may be taken to resolve any perceived conflicts. The purpose of an audit is to provide an ‘independent Examination by an appropriately qualified person for the benefit of interested parties to whom the auditor reports to’.
The principle of auditor independence is established via the Companies Act, and also an ethical code. Auditors are therefore expected to be independent of those whose work they are auditing and to whom they are reporting. There are two types of audit independence 1- Practitioner independence 2- Profession independence Practitioner independence: is the state of mind of the actual auditor. There are three types of independence that may determine whether independence has been put at risk.
Michelle Bond is a substantial shareholder in Gadget Limited, however she is not a director. Her rights as a shareholder does however has some bearing on the decision making process however only on an influential not binding basis. Independence becomes an issue as to whether the objectivity of Earnest Peat & Co can be maintained. Basil Bond must be seen to be acting objectively in order to provide an independent view of the company and not on the conflicting interest of protecting his sister’s investment.
The Company’s Act 1985 does not disqualify a shareholder or debtor/creditors of the company or close relative of an officer/employee for that matter, but each RSB has an ethical code, which includes threats to independence, and objectivity which would normally disqualify the auditor in the circumstances cited. Jenny Jordan, ‘has also anticipated that she will also engage your firm to act as tax advisors’. By providing additional services as well as performing the function of auditor the issue of independence may be raised in a both positive and negative light.
The provision of other services may increase independence because of the value of the auditor to the client , i. e. due to value of service, and therefore there will be increased dependence of the client on the auditor. This essentially reduces the pressure of the client and results in the perception of greater independence On the other hand the greater the dependence of the auditor on the client because of the value of fee, thus reduces the auditors liability to withstand pressure and there independence is at risk.
Jenny Jordan ‘has enquired whether you or one of your partners could act as company secretary’ As auditor, Earnest Peat & Co. must members of an RSB as an overall prerequisite for eligibility to act as a corporate auditor. At the individual company level the CA 85 states that a person is ineligible for appointment as auditor if he or she is – an officer or employee of the company – a partner or employee of such a person – a partnership in which such a person is a partner.
In light of this is a member of Earnest Peat & Co. is appointed as company secretary, he or she couldn’t be appointed as auditor as well. Other issues that may be of some relevance Size of firm: the audit firm; Earnest Peat & Co comprises of three partners and therefore considered to be a ‘small’ audit firm as opposed to large firms comprising of large numbers of partners and professional staff spread throughout the world with many offices. Resources & Expertise Earnest Peat & Co. must ensure that there are adequate resources for example staffing the audit with staff with the necessary expertise in order to maintain the integrity of the audit independence.
Earnest Peat & Co. comprises of three partners who are registered auditors and accountants and therefore it must be questioned whether or not this is enough. This is can be used as an indication of the dependence of the audit firm on the client, as Earnest Peat & Co are of a small nature the portion of fee generated by taking on Gadget Audit may exceed 10% of the practice’s annual income, hence over reliance to obtain the contract to act as auditors will have an adverse affect independence, as Gadget may go elsewhere.