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Give situations where the auditor’s independence may be impaired.

      

Give situations where the auditor’s independence may be impaired.

  

Answers


Wilfred
a) Fees
It is undesirable for a practice to receive a significant proportion of recurring fee income from
one client or group of connected clients. A new or old practice is exempted from his provision
because in the case of a new practice, he has not yet built a sufficient client base and an old
practice may be in decline. Therefore, when a member finds himself with such a client, he does
not resign immediately but first look for opportunities to reduce the significance of that client by
looking for more work.
Where practice is deriving a significant portion of its professional fees from one client, the practice
will be hesitant to do anything that could result in losing the client i.e. an auditor may be hesitant
to qualify his report for fear of losing such a client.
b) Personal and family relationship
A family of personal relationship can affect objectivity therefore an accountant should take step
to ensure that this does not interfere with his objectivity in approach to auditing e.g. a problem
may arise when a person in practice has a mutual business with an officer of the client company
or has close friendship with one of the officers.
c) Beneficial shareholding
A practice should ensure that he does not have as an audit client, a company in which a partner
in practice, the spouse or minor child of such partner is the beneficial holder of shares nor should
it employ on the audit, any member of staff who is a beneficial holder of such shares. Shares in
an audit client may be involuntarily acquired e.g. where a partner inherits such shares or marries
a shareholder. In such cases, the shares should be disposed off at the earliest practicable date.
If the company’s articles of association require that the auditors should have a minimum number
shares, then the member should take minimum number allowed. The shares cannot be used
by the member in an annual general meeting to vote on the appointment of the auditor and his
remuneration.
d) Trustee shareholding
A practice should not have as an audit client a company, if a partner in the practice or the spouse
of a partner is a trustee of trust holding shares in that company and the holding is in excess of
10% of the issued share capital of the company or of the total assets comprised in the trust.
e) Practice loan
A practice should not make a loan to a client or guarantee a client’s borrowings or accept a
loan from a client or have a borrowing guaranteed by a client. This does not apply to a practice
having a current account with a client commercial bank or a similar financial institution. A firm
may however accept a loan from a client if it is in that client’s ordinary course of business to give
loans. Loan therefore should not be accepted on terms more favorable than those available to
others.
f) Goods and services
Acceptance of goods or services from a client may be a threat to independence. This should not
be accepted by a partner, his spouse or minor child or by the staff of practice except on terms no
more favorable than those available to the generality of the client’s employees. Acceptance of
undue hospitality poses a similar threat.
g) Commission
Where advice is given to client in such that if acted upon it would result in a commission being
earned by the practice or anyone on it, special care should be taken to ensure that the service is
in fact in the best interest of the client. The client should be informed in writing both on the fact
that commission would be received and as soon as practicable the amount and terms of such
commission.
h) Conflict of interest
• Provision of other services to clients. A member should be alert to the danger posed to his
independence by providing accounting and other services which place him in an executive
position to his client. A member should use different staff for those services and also ensure
that the client takes full responsibility for that work.
• Competing clients: A member should frankly disclose to both clients and advice them to
choose another auditor and then disengage one of the appointments. However, he can also
advise to resolve the conflict. An example of competing clients would be where a practice
advises one client upon the figures on which to base a tender for a contract and if knowingly
became involved in advising another rival company tendering for the same contract.
• Receiverships and liquidation: If a company a member is auditing goes into receivership,
the member should not accept an appointment as a receiver manager unless at least two
years have elapsed. Where a practice, his partner or his employee has during the previous
two years has had a continuing professional relationship with the company which goes into
liquidation, he should not accept an appointment as liquidator of that company.
• Previous employment: A member who has been an employee of a company having left that
employment should not accept appointment as an auditor of that company until at least two
years have elapsed.
Wilfykil answered the question on April 11, 2019 at 09:04


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