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Auditor's Independence

Auditor's Independence

It has been years since I was in audit. That was in internal audit. 

In a small practice, which has an audit license, can they involved both in accounts production and audit review. This clearly would be a breach of auditors independence?

I interviewed a candidate today who works in a small practice with one partner. She said they do both for the same client. Is this allowed? 

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02nd Mar 2016 22:20

Another option?
Perhaps they used an external firm (another practice or Mercia etc) to perform a hot file review? A junior member of staff often doesn't know all the firms procedures.
But otherwise, I would say it would be difficult for a small firm, even if the client didn't represent a significant fee percentage, and there was informed management, to be perceived as independent in those circumstances.

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03rd Mar 2016 08:19

The answer as with everything is it depends...

The ethical standards include provisions for work on smaller audit clients under ES-PASE so they may well have been doing everthing correctly.

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By JimFerd
03rd Mar 2016 09:56

As is said above, smaller companies can definitely have the same auditor/accountant.

I can't remember the thresholds though.

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03rd Mar 2016 10:14

I work for a firm which does this with smaller clients who require audits for bank covenants but are below the audit threshold. We also have a few larger clients who prepare their own accounts and we audit them in the more traditional sense.

If it helps, look on it as the client submitting their underlying records as accounts then as auditors we make all the recommendations to turn those in to accounts required by statute. We're no less thorough or independent when the first set of proper accounts comes from us rather than from the clients. As with any audit, the work done is reviewed by multiple people which is not the case with many of the jobs we do which are just accounts.

 

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03rd Mar 2016 20:09

Independence

Thanks for the response. 

My understanding was the same practice cannot do both. Clearly this is not the case since they are other checks and balances. 

Though I cannot see the same practice giving a qualified audit report on the accounts completed by its employees. Independence is affected where the same practice does the accounts and audit. 

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04th Mar 2016 08:47

It's not impossible

Clearly on matters of account preparation a firm will not put out a qualified report on their own accounts because they can just change the accounts to suit. However, you have to bear in mind that the directors need to sign off on the accounts and if they were to make demands that the firm didn't agree with then ultimately the only options are to not file accounts or to file accounts with a qualified report.

In practice this has never happened to us as nobody wants a qualified report so the treatment of various items has always so far been done the way we would require it as auditors. This is true in most audit cases though, the accounts are not audited without any thought of amending the accounts, an auditor will report back and in most cases have their issues dealt with, the accounts changed and an unqualified report issued.

Preparing the accounts and doing the audit just streamlines the process as the audit is done on the underlying records and the accounts we produce are the accounts that ought to be produced based on those records.

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By JimFerd
04th Mar 2016 08:52

Thinking a little more about it - rather than a threshold, I think it's fine for all sized Ltd Co's to have the same accountant & auditor, as long as safeguards etc are put in place.

I think the rules only prohibit PLCs from having the same accountant & auditor.

My knowledge is quite old and goes back to my studies though, so could well be very out of date, or just being remembered wrongly by me!

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