The Finance Director of the Company informed the audit partner that the reason for appointing Add Consult as auditors was because they audit other similar companies, including the Company’s main competitor. The Finance Director doubts how Add Consult keeps information (obtained during the audit) confidential.
Required:
Explain the safeguards which your firm should implement to ensure that this conflict of interest is properly managed. (5 marks)
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- Both International Training Center and its competitor should be notified that Add Consult would be acting as auditors for each company and, if necessary, consent obtained.
- Advising one or both clients to seek additional independent advice.
- The use of separate engagement teams, with different engagement partners and team members; once an employee has worked on one audit, such as International Training Center, then they would be prevented from being on the audit of the competitor for a period of time. This separation of teams is known as building a ‘Chinese wall’.
- Procedures to prevent access to information, for example, strict physical separation of both teams, confidential and secure data filing.
- Clear guidelines for members of each engagement team on issues of security and confidentiality. These guidelines could be included within the audit engagement letters.
- Potentially the use of confidentiality agreements signed by employees and partners of the firm.
- Regular monitoring of the application of the above safeguards by a senior individual in Add Consult not involved in either audit.
(Any 5 points)