It is important that auditors are, and are seen to be, independent. Independence is at the heart of the auditing profession as auditors claim to give an impartial, objective opinion on the truth and fairness of the financial statements.
Objectivity
A family relationship between an auditor and the client can substantially affect the objectivity of the auditor, so auditors are advised not to build close personal relationships with audit clients and should not audit a company where a family member is employed in a capacity that is sensitive to the accounts, for example, in the finance department. However, this is not prohibited by law unless the auditor’s ‘partner’ is an employee of the company.
In this instance, the partner was not the reporting partner for the audit client in which his brother-in-law was a finance controller. According to generally accepted ethical practice, the firm appeared to be independent of the audit client if the related partner did not have anything to do with the audit.
Resolution
The regulatory body required the auditor to move 400 miles. This presumably implies that the partner was requested to change offices within the firm he employed. However, given current levels of computer networking and other communications common in business, this would appear to be an arbitrary distinction. As a partner in an office, Glasgow could have similar access, and influence over a single audit carried out by the firm as a partner in London.
Independence in appearance
However, in this situation, the regulatory body to be concerned that the public will not perceive the distinction between a partner and a partner who reports on a specific engagement. This may or may not be fair.
Arguably, it is only in publicising the problem that the public is likely to have a perception at all.
Also, given the comments made about modern communications above, the public is unlikely to be convinced that moving a staff member to a different office will solve this independence problem if they perceive that there is one.
Split of audit firm
The decision of the firm to split into three divisions could enhance the public perception of the independence of the audit department. While there might be underlying scepticism about the reasons behind the split (which could merely be for marketing purposes or to enable non-audit divisions to raise capital more efficiently), the underlying benefit for objectivity still exists. However, the move would respond to the requirements of the new Companies Act, 2019 (Act 992), which prohibits audit firms from offering other services to an audit client.

• The provision of any other services to an audit client has the potential to create threats such as those identified by the International Ethics Standards Board for Accountants (IESBA). On the other hand the provision of such services is nearly universal in practices from the very smallest to the largest.
• In terms of threats identified by IESBA the ones that nearly always have some relevance are self-interest and familiarity. So we should always consider our level of dependence on fees from the client and be aware that if more than 15% of the gross recurring fee income of our practice comes from any one client (or group of closely related clients) then there is a presumption that our independence is impaired. Also, heavy involvement with a client can impair our objectivity and so lead to a familiarity threat.
• There is nothing in the scenario to suggest that either of these situations are especially applicable in this case. The most relevant threat in relation to the advice on the price to charge for certain extra services is a threat recognised by IESBA as an Advocacy threat. Advocacy threat exists when “the audit firm undertakes work that involves making judgements and taking decisions that are properly the responsibility of management”. The important point here is that the audit firm may provide advice but that any decisions are left entirely to management.
• That would also apply to advice about the possibility of setting aside the contract with the Nigeria based chairs supplier. On top of the other issues mentioned this would also raise the question of competence. This would appear to be more in the nature of a legal issue so we may not be competent to advise on it. Obviously, if we do advise any decision must be unambiguously left to the client.          (Any 2 points @ 2 marks = 4 marks)

The following may give rise to ethical issues for Abdulai Afriyie and Co:
i) The preparation of accounts as well as auditing them.
ii) The request to deal with the failure to pay royalties and
iii) The offer of a gift from the client to members of the audit team.

These issues are addressed below: Accountants producing and then auditing the financial statements of companies is a near-universal practice in the case of private, unlisted entities. Similarly conducting specific extra assignments on behalf of the client would not be unusual. However these situations are not without ethical difficulties. In particular the following threats arise:

• Staff membership rates at Ablordey – self-interest threat
  Such a benefit could cause a self-interest threat to the audit, because the recipients may not want to lose their benefit, and therefore be biased in their audit work or not seek adjustments where there are material issues in the financial statements.
• Partner invited to sit on the board – familiarity threat
  If the partner were to sit on the board of directors, there is a risk that the partner could lose their audit objectivity as they may start identifying too closely with the company and its other directors. There is also a risk that the audit partner may start taking management responsibility at Ablordey Co.
• Assurance re insurance claim – advocacy threat
  Audit firms must always ensure that accepting other services does not impact on audit objectivity, whether due to the amount of fees relating to the service or as a result of the nature of the service itself.
• Conflict of interest
  Adjaye-Gyamfi &Co has been invited to tender for an audit which will involve Ablordey’s major competitor, Gyms Ltd. It can be appropriate for audit firms to audit competitors, but the clients involved might feel that there is a threat to client confidentiality and may prefer to seek other auditors in such a situation

Self-interest threat

• Auditors are not allowed to accept such benefits unless their value is trivial and inconsequential. In this case, the value of a reduced membership of a spa is unlikely to be trivial and inconsequential to audit staff members and therefore Adjaye-Gyamfi &Co should reject this offer.

Familiarity threat

• Auditors are prohibited by the Code of Ethics from acting as a director for their clients. You should explain this to the Managing Director and politely decline the invitation.

Advocacy threat

• The partners should discover more about the size and nature of this engagement to determine whether it will affect Independence. In particular they should determine whether such an engagement would put the firm in the position of advocating Ablordey’s position to the insurance firm, as this could cause an insurmountable barrier to independence. They should also monitor the level of fee income this would earn Adjaye-Gyamfi &Co from all work performed for Ablordey Co to ensure it does not cause a self-interest threat.

Conflict of Interest

• Adjaye-Gyamfi &Co should therefore disclose to Ablordey that they are in the process of tendering for the audit of a competitor. If either Ablordey Co or Gyms Ltd is unhappy with this situation then Adjaye-Gyamfi &Co will need to decide which audit they want to secure If Adjaye-Gyamfi & Co performs both audits, they must ensure that they use separate audit partners and teams and set up “Chinese walls” to maintain confidentiality.

• The appointment will have to be defined very clearly in the letter of engagement. The company will have to confirm a detailed description of the limits of FFAF’s responsibility for the preparation of the bookkeeping records and the audit of the financial statements. The terms of the engagement should make it clear that the audit firm will take no direct part in the preparation of financial statements.
  The responsibility for selecting accounting policies and making significant accounting estimates and judgements should remain with company’s management.
• The company’s management should agree that it will accept full responsibility for all matters of judgement, including the preparation of journal entries. Audit firm staff will only undertake work of a routine and mechanical nature.
• The audit firm should ensure that the staff members responsible for the work undertaken have nothing to do with the audit itself. They will have had no prior connection to the company because this is a new audit. The supervision of the bookkeeping work might also be made the responsibility of a different partner from the person responsible for the audit.
•  The bookkeeping staff should not be granted access to audit working papers. The audit staff should treat them with no more trust and familiarity than they would other members of the company’s staff.
• Any assertions made by the bookkeeping staff should be subject to the same degree of checking as would be the case if made by a direct employee of the company.
• The company should be asked to agree in writing that it will appoint the bookkeeping staff appointed by the audit firm in the event of the firm being removed from office. The only proviso might be that the individual employees’ performance must be deemed satisfactory by the company.        (Any 5 points)

(i) In relation to Good Life Insurance Ltd., there is a threat of self-interest arising, as a member of the audit team has an indirect financial interest in the client.
The relevant factors are:

• The interest is unlikely to be material to the client or Sally, as the investment is recent and Sally’s interest is in a pool of general investments made by the pension scheme on her behalf.
• Sally is the audit junior and does not have a significant role on the audit in terms of drawing audit conclusions or identifying audit risk areas.
• The risk that arises to the independence of the audit here is not significant. It would be inappropriate to require Sally to divest her interest in the audit client. If all the elements of risk in this situation are to be eliminated, then the junior assigned to the team could be simply changed. However such a step is not vital in this situation.
  (ii) In relation to Solar Electricals, two issues arise. The first is that the firm appears to be providing multiple services to Solar Electricals, which could raise self-interest threat. The second is that the manager assigned to the due diligence assignment wants to engage in a personal relationship with a person connected to the subject of the assignment, which could create familiarity or intimidation threat.
  With regard to the issue of multiple services insufficient information is given to draw a conclusion as to the significance of the threat. Relevant factors would be matters such as the nature of the services, the fee income and the team members assigned to each. Safeguards could include using different staff for the two assignments. The risk is likely to be significant only if one of the services provided is audit, which is not indicated in the scenario.
  In relation to the second issue, the relevant factors are these:
• The assurance team member, David, has a significant role on the team as second in command.
• The other party is closely connected to a key staff member at the company being reviewed.
• Timing.
  In this situation, the firm is carrying out a one-off review of the company, and timing is a key issue. Presently David does not have a personal relationship which would significantly threaten the independence of the assignment. Therefore, the safeguard is to request that David does not take any action in that direction until the assignment is completed. If he refuses, then his removal from the team should be considered.

The threats to independence here are:

• Being auditor of the company for 15 years:
• Familiarity as we have been the auditor for many years.

Evaluation of this threat: not very serious as the firm has a means of minimizing the threat by ensuring a rotation of partners and audit team on regular basis.

The handling of the importation and clearing of the TVs for the client by the Procurement Advisory Section of our firm
The threat to independence is Self-review.

• This threat is very significant as the audit team now has to perform an audit of the acquisition and deal with the suspected tax avoidance by use of names of individuals to avoid import duties.
• Our firm uses a different team (section) to perform the function other than persons in audit department which partly eliminates the treat of self-review.This does not entirely absolve the firm from prosecution by the Ghana Revenue Authority for aiding the company to avoid tax.
• There appears to be no safeguard here except to advise the company to volunteer to pay the import duties to GRA and ensure that in future our advisory sections seek for engagements outside our audit clients.
• It is safe to assume the additional fees from the non-audit work may not pose an intimidation threat as the firm appears to be large, with various sections. If that were the case, the firm could decide whether to concentrate on Audit or rather leave audit and concentrate on non-audit work depending on the economy of scale of the profitability of the two assignments.           (Any 5 points)

• Exceeding the time and cost budgets substantially due to unforeseen difficulties associated with getting reliable information for agreeing the opening balances means our firm could possibly have engaged in lowballing when preparing our bid since this should have been anticipated.
  The Code of Ethics for Professional Accountants frowns on this and requires that firms guide against this. The effect may not be serious as it will affect the first year audit only. The firm must, however, guard against this as it could lead to compromising the quality of audit work.
• The second issue is that the Audit Manager seems to have become financially involved with the client through her husband. The threat is serious as it could affect the quality of audit work since the Audit Manager is a very important member of the audit team.
  The Audit Manager’s husband got his loan prior to our audit appointment and it is difficult to establish her personal involvement in the writ-off of the loan of her husband’s business so the firm cannot institute any disciplinary action against the Audit Manager. The Audit Manager was however aware of the loan her Husband’s business had with KMF when she was asked to become the manager on the audit.
•  If our firm has regulations for voluntarily giving this information then she could be subject to disciplinary procedures. If the firm does not have this independence declaration as part of its processes at the beginning of each year for existing clients and on acquisition of any significant audit engagement before a team is assigned then this must be introduced.
• To eliminate the treat to the independence of the firm, the Audit Manager must be removed from the audit and a review performed on the audit work she has done so far to ensure no audit quality compromises has taken place, and if so these must be rectified.
  

The ethical issues here are that the Auditor has to report to management of the company about the unsatisfactory service provided by another professional, who may also be a member of the Institute of Chartered Accountants – Ghana (ICAG).

The code of Ethics for Professional Accountants does not prohibit this but cautions that the other professional accountant involved (if he/she can be identified) must be contacted with the permission of the mutual client and be told of the need to discuss the issue with the client, due to, in this case the financial implications to the client.

This will ensure that the other professional accountant (if indeed he/she is a member of ICAG) will not think that we are deliberately destroying his reputation since this will also put our profession in general into disrepute and must be done only if absolutely essential, as in this case, the amount involved could be substantial.

The second ethical issue is that the auditor is accepting an engagement to provide a professional service on the basis of a contingent fee. The code does not frown on this except if the engagement is an assurance one in which the auditor is required to give an opinion for management to rely on. This is a tax consulting assignment and as such, the professional accountant can accept it on contingent fee basis.

The professional accountant need be aware of two issues in this case:

• Accepting this engagement (and on contingent fee basis) so early in your relationship with the new audit client could compromise the independence of the auditor.
• The auditor, if new in practice, would need to be cautious as this fee in addition to the normal audit fee, could take him/her beyond the 15% threshold for fees from one client as this could lead to intimidation threat.

The ethical issue here is that it appears that a crime is suspected but the professional accountant has no evidence to confirm the suspicion. Therefore the need to override the confidentiality requirement due to public interest. Any of the suspected cases, storing of illegal narcotic drugs or storing of ammunitions are both issues of public and national security interest.

The code of ethics requires that under such circumstances, the professional accountant would need to seek legal advice as well as professional advice from the technical department of ICAG but not disclose the identity of the client to any person consulted.

Sampson Quaye & Co. has a direct interest in the audit client, which is technically forbidden by the code of conduct. However, it is a requirement of any firm auditing the company that the shares be owned by the auditors. The interest is not material. The audit firm should safeguard against the risk by not voting on its own re-election as auditor. The firm should also strongly recommend to the company that it removes this requirement from its stature as it is at odds with ethical requirements for auditors.         (3 marks)

The audit firm has an indirect interest in the parent company of a company it has been invited to tender for by virtue of its provident fund scheme having invested in Standards Group.

This is no barrier to the audit firm tendering for the audit of Akroma Ltd. Should the audit frim win the tender and become the auditors for Akroma ltd. they should consider whether it is necessary to apply safeguards to mitigate against the risk to independence on the audit as a result of the indirect financial interest.

The factors that the partners will need to consider are the materiality of the interest to either party or the degree of control that the firm actually has over the financial interest.
In this case, the audit firm has no control over the financial interest. An independent provident fund scheme administrator is in control of the financial interest. In addition, the interest is unlikely to be substantial and is therefore immaterial to both parties. Only if the threat is significant should the interest be divested.

It is likely that this risk is already sufficiently minimal so as not to require safeguards. However, if the audit firm felt that it was necessary to apply safeguards, they could consider the following;

• Notifying the audit committee of the interest
• Requiring United Fund Ltd to dispose of the shares in Standard Group.        (3 marks)

Nenebi is at present a member of the assurance team and a member of his immediate family owns a direct financial interest in the audit client. This is unacceptable.
In order to mitigate the risk to independence that this threat possesses on the audit, the audit firm needs to apply one of two safeguards:

• Ensure that the connected person divests the shares
• Remove Nenebi from the management team
  Nenebi should be appraised that these are the options and removed from the team while a decision is taken whether to divest the shares. Nenebi’s wife appears to want to keep the shares in which case Nenebi should be removed from the team immediately.
  The firm should appraise the audit committee of Minimade Ltd. of what has happened and the actions they have taken. The partners should consider whether it is necessary to bring in an independent partner to review audit work. However, given that Nenebi’s involvement is subject to the review of the existing engagement partner and he was not connected with the shares while he was carrying out the work, a partner’s review is likely to be unnecessary in this case.              (4 marks)

As the audit firm receives about 20% of its income from just one audit client, there is a self-interest or intimidation threat. This is because the firm will be concerned about losing the client.

The self-interest and intimidation threats are significant considering the nature and duration of the breach – that is the high percentage of income from a single client received for some time now; and the knowledge of the audit firm of such interest.

Secondly, the valuation services provided by the audit firm. If an audit firm performs a valuation which will be included in financial statements audited by that firm, a self-review threat arises. This threat is significant as the valuation of Land and Buildings of all branches of the bank including the head office is material to the financial statement to be audited.

• Reducing the dependence on the client
• Implementing external quality control reviews; or
• Consulting a third party, such as a professional regulatory body or a professional accountant, on key audit judgments.
• Internal quality control reviews.

As the bank is a public interest entity and the firm’s total fees has been that high for two consecutive years, the Code of Ethics provides that the firm shall:

• Disclose this to those charged with governance;
• Conduct a review, either by an external professional accountant or by a regulatory body.

Since the total fees significantly exceed 15%, a pre-issuance review shall be required. That is a review before the audit opinion on the second year’s financial statements.
The safeguards for the self-review threat from the valuation services will include:

• Second partner review
• Confirming that the client understands the valuation and the assumptions used
• Ensuring that the client acknowledges responsibility for the valuation
• Using separate personnel for the valuation and the audit.