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The Auditing Practices Board (APB) is an associated body which regulates the auditing profession in the UK and act as a kind of licensing authority. They set out standards of auditing for individual to achieve in order to be a licensed auditor (Gray and Manson, 2008). The purpose of this is to enhance the public confidence of trusting the audit process of the qualified audit firms to perform work for them. APB set out five Ethical Standards in December 2004, which 'cover the integrity and independence for auditors and apply in the audit of financial statements' shown on APB's website (2010). This is to provide guidance on circumstances which might badly threatening auditors' independence. The risks to independence is a very important issue in carrying out an audit, the reason for this is although the auditors may have found a major misstatement in the financial statement which would affect the users in making significant decisions, but auditors may still fail to report such a misstatement because of lack of independence (Konrath, 1999). Therefore being an audit manager in a firm of Chartered Certified Accountants called Cuthbert & Co, there would be necessary to identify the risks to independence arising when carrying out the audit of Irelands for the year ending 30 June 2010, additionally, suggestions of mitigating each risk would shown in this piece of work.
There are slightly different guidelines from the Ethical Standards for listed and non-listed companies, so that it is essential to know Irelands is a public limited company, in other words, it is a listed company where its shares can be traded on the stock exchange (Elliott & Elliott, 2009). As a result of Irelands' rapidly grown, it has become a important clients of the company, in Ethical Standards 1 suggested, when an audit firm is providing service for a client, auditors should act in a way with 'integrity, objectivity and independence'. This is to eliminate or to reduce the threat in order for the auditors to carry out the services which contain honesty, non-bias and freedom to report for the audit client. Ethical Standards 1 also suggested that audit firms should establish policies and procedures to control the firm's environment, if the audit firm is performing an audit services for a client as well as a non-audit service, then the firms should be monitoring on their staff's compliance along with their policies and procedures. In addition, Ethical Standard 1 stated that auditors should not be 'making or assuming responsibility for management decisions for the audit client'. In the situation of Cuthbert & Co, audit team should only be giving management advices to the client to make decisions (Gray and Manson, 2008) and not making decisions for the client. Moreover, audit members should not be expected to 'sell non-audit service' (Gray and Manson, 2008), Ethical Standards 4 stated in paragraph 12, that any contingent fee arrangement for non-audit work should be informed and communicated with the audit committee (Ethical Standards 4 - Paragraph 14). Furthermore, paragraph 35 of the Ethical Standards 5 required the reasons for a decision to be undertaken a non-audit service engagement in a written document along with the safeguards which has been adopted. A suggestion of mitigating this risk is to consider not to undertake the non-audit work if possible or to withdraw from the audit engagement.
Another risk that could be affecting the independence of the auditing is that the client has an outstanding taxation fee from last year; a self-interest threat to the audit firm's objectivity and independence could be created (Ethical Standards 4). By way of illustration, the audit firm could be provided an 'unqualified audited report', hence to insurance the outstanding payment of the client would be pay. Such risk could be mitigating by arranging agreements of the auditing service before accepting the appointment as auditor of the client. If the outstanding fees has regarded as essential to the firm, then the audit engagement partner should consider resigning if necessary. Other than to resign, the audit engagement partner could apply for a review by an independence audit partner who is not involved in such engagement.
The audit partner of Irelands, Mr. Cole, has been auditing the client's company for the past eight years, in other words, it has been a long association with the audit engagement. In Ethical Standards 3, it suggested that when audit staff involved in a long association with the audited entity, threats might be arise and reduce the integrity, objectivity and independence of the auditors, for instance self-interest threat, self-review threat and familiarity threat. In paragraph 12 of the Ethical Standards 3, it says that audit engagement partner should not continuously to review an audited entity's accounts for a period more than five years. In short, Mr. Cole is three years outride the limit, so safeguards should be apply to reduce the threats to an acceptable level. These could be to appoint other members of the engagement team to continuously work for the audited entity, to have a review by an additional partner who has not be involved with the client or to have 'independent internal quality reviews' of the engagement team as to appraise if independence of auditors be affected. However, if appropriate safeguards could not be applied, then the firm should consider resigning if necessary.
The financial director at Irelands is found to be Mr. Cole's daughter, Cheryl, therefore a family relationship has been created between the auditor and the client. In Ethical Standards 2, paragraph 27 stated that if an individual who had entered into the business relationship is found to be a close family member of the auditor and is likely to influence the outcome of the auditing, then auditor must report the circumstances to the audit engagement partner in order to take apposite actions. But generally speaking, auditors should not be entering into a business relationship with immediate or close family members (ES2 - Paragraph 38). Ways that could eliminate this threat is to apply appropriate safeguards or to consult advices from the ethics partner.
The final risk that arise when carrying out the audit for Irelands is that the financial director of Irelands would like to take all of the audit staff out to an expensive restaurant, Ethical Standards 4 paragraph 48 suggested that hospitality is very common and which could improve the communication between the client and auditors for the purpose of understand the business of the audited entity. However, in paragraph 45 stated that audit firm should not accept hospitality from client, but only if it is 'reasonable in terms of its frequency, nature and cost'. The word 'expensive' suggested the cost of the hospitality is not reasonable as it might create self-interest threats to the auditors' independence which would affect their behavior on the audit services. Yet the risk could be improved by applying a test on whether the hospitality would be damage the auditor's integrity and independence in a non-involving third parties' view, if independence of auditors would be impaired, then guidance should be given to assist the member of the team and further doubt could be discuss with the audit engagement partner and then they will report the situation to the ethics partner if action should be taken for further consideration.
In conclusion, the risks of carrying out the audit of Irelands are that it had became one of Cuthbert & Co's most important clients, who they do not only provide audit services but also non-audit service and which have not been pay for the previous year's taxation fee. There has been a business relationship between the audit partner and Irelands for eight years, and is the father of the recently appointed financial director of Irelands who is willing to offer the members of engagement team a dinner in a expensive restaurant. Suggestion of eliminating the risks has been recommended throughout.