(a) The IESBA International Code of Ethics for Professional Accountants states that the provision of non-audit services can create a threat to independence. Consequently, it is necessary to evaluate the significance of any threat created by the provision of other services. The significance of any threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce it to an acceptable level.

On-going consultancy services
Consultancy services is a very broad term and so it would depend on exactly which services the MD would want the audit firm to provide. There are however two main threats arising from this:
(i) A self-interest threat. The auditor may therefore be tempted to issue an unmodified report when a modified report should be issued for fear of losing the audit/consultancy fees.
(ii) A self-review threat. This threat arises where the audit team is required to audit the consultancy work that has been done for HealthTrend by colleagues in the audit firm. It might be difficult for them to find faults with the work that has been done by other employees of the firm.
An additional issue arises when the firm takes on work which involves making judgments/taking decisions which are the responsibility of management. Assuming a management responsibility is prohibited by the IESBA and may create self-review, self-interest, familiarity, and advocacy threats. Possible safeguards against these threats include:

• Monitor the level of fees generated from HealthTrend as a percentage of the firm’s total fee income to ensure that the firm is not perceived to be dependent on the client.
• Where independence may be threatened, the firm should consider refusing additional consultancy work.
• Ensure that there is an independent partner review of the audit.
• Ensure that the audit firm does not perform management functions or make management decisions by confirming:
  • The client acknowledges their responsibility for designing, implementing, and maintaining internal control and for preparing the financial statements.
  • The client authorises all transactions and amendments to records.
  • The client decides whether or not to implement the firm’s recommendations/decisions.
• Use a separate team for the other work.

Taxation
The MD has requested that your firm assists with the preparation of HealthTrend’s tax computation. Preparing the tax computation for an audit client creates a self-review threat because part of the audit will require you to verify the amounts for taxation which is a figure your firm has prepared. It is likely that safeguards can be put in place to mitigate the self-review threat. Such safeguards will include using staff who are not members of the audit team to perform the work and have the tax calculations and audit work reviewed by an independent manager or partner.

Appointment as non-executive director
If a partner or employees of an audit firm serves as a director or officer (for example a company secretary) of an audit client, this would create both a self-interest and a self-review threat. There is a self-interest threat because the partner would have a direct interest in the performance of the client since the partner would probably be remunerated by the client. A self-review threat exists because a partner from the audit firm would have had influence over the company the firm is auditing. These threats are so significant that no safeguard could reduce the threats to an acceptable level, and the partner should refuse the offer to join the board.

(b) Adequacy of resources

• There must be sufficient staff of appropriate calibre (expertise and experience) to enable the audit to be completed on a timely basis.
• The firm must have the ability to provide a professional service without jeopardising its service to other clients.
• There must be sufficient staff available so that different teams can be used for HealthTrend Co and any of its competitors in the same line of business.
• Partner availability must be considered to ensure there are separate audit partners on each type of engagement.

Integrity of client identification procedures

• Consider the potential for money laundering/other unlawful acts.
• Investigate any history of management/changing advisors/failed companies.
• Review the latest financial information having regard to unusual accounting policies, reported problems regarding proper accounting records, liquidity, and trading position.
• Review prior years’ financial statements to identify any previously modified auditor’s reports/differences between HealthTrend and its auditors.
• Undertake a company search on HealthTrend and other companies with which the directors are associated.
• Review any comments in the press/local hearsay and (with the prospective client’s permission) obtain references.

Professional clearance

• The client’s permission should be obtained to contact the retiring auditor to ascertain whether there is any professional reason not to accept the appointment.
• If permission is refused, the appointment should not be accepted.
• If the outgoing auditors fail to reply, the appointment may be accepted.

Confidentiality

• Obtain informed written consent from any clients in the healthcare sector who are competitors of HealthTrend