- 15 Marks
AAA-L3 – Q6- Rules of Professional Conduct
Question
(a) Impact of the three pieces of information
- Major service provider to your firm
- Acrimonious parting with the previous auditors
- The firm already represents the Tarkwa Investigations Group (TIG), a company involved in a hostile take-over of Vega. (b) Other factors to consider in making a decision as to whether to accept Vega as a client (c) Steps to take in accepting nomination
Answer
(A) Impact of the three pieces of information
Major service provider to your firm
Vega Investigations (Vega) is therefore potentially an important element of the firm’s business. In deciding whether to accept the nomination as Vega’s auditors, a decision needs to be made as to how this current business relationship could impair objectivity and business judgements.
If Vega provided a material level of income to the firm, this could be seen as a clear case in which the independence of the auditor may be in question. However, the situation here is different in that the income is being derived by Vega, who is employed by the firm. It is important to understand how close and important this connection is. If the firm is heavily reliant on Vega for the provision of such services, that could be said to have an influence in the way that the audit is conducted and must be a factor in deciding on whether or not to accept the appointment.
The IESBA Code states that purchasing goods and services from a client would not generally cause a threat to independence provided that it was at arm’s length and in the normal course of business.
Acrimonious parting with the previous auditors
It is important to understand the situation relating to this because it will impact on the decision as to whether or not to accept the nomination. The suggestion is that Vega was unhappy with the competence of the auditors concerned. However, more detailed evaluation may show that there were underlying problems such as the auditors challenging accounting policies.
Where the previous auditors feel aggrieved by proposed removal, they have a statutory right to make representations to the shareholders.
Vega are also withholding fees from the previous firm – this will be a factor in agreeing to take on the appointment, since this suggests an issue over payment for professional services received and may be an indication of other issues relating to recovery of fees.
The firm already represents the Tarkwa Investigations Group (TIG), a company involved in a hostile take-over of Vega.
This could give rise to a conflict of interest if the firm were to undertake the audits for both entities. It may also lead to concerns over confidentiality since information relevant to one audit could be identified from the other entity’s audit process.
(B) Other factors to consider in making a decision as to whether to accept Vega as a client
- Whether a partner or anyone closely connected with a partner has a beneficial interest in Vega. This may be particularly relevant in view of the existing relationship with Vega.
- Whether there are any other factors that together mean that the firm would have undue dependence on Vega. This would mean looking at the expected fees from the audit relative to other fee income.
- Practical considerations such as the relative size of the firm and client, expertise required and geographical issues.
- Consideration of any relevant legal requirements.
- Whether the prospective client is one that the firm would wish to deal with. The implication in the question is that since the firm already use Vega to provide services it must consider Vega to be reputable. However, if Vega had a poor reputation and image within the industry, the firm may be less willing to take on the audit.
- Fit with current business, for example, if the firm has chosen to specialise in certain types of audit. The firm already represents TIG which may mean that this is a niche that it is keen to represent.
- The level of risk associated with the client, in particular, the level of potential audit risk. Since Vega has parted company from its previous auditors, this may be an indicator of a level of risk to the audit with potential concerns over fee recoverability. The current uncertainty relating to Vega (i.e. the takeover bid) may also represent an audit risk.
- There may be opportunities for other services to be provided to Vega, particularly since the firm already has an effective business connection.
(C) Steps to take in accepting nomination
- Request Vega’s permission to communicate with the current auditors by way of a professional etiquette letter. This would be to inform the auditors of the firm’s nomination as a matter of professional courtesy and to ascertain whether there are any circumstances concerning the change of auditor that might affect the firm’s decision. The firm would also need to obtain reasonable handover information from the previous auditors including a trial balance reconciled to the last set of financial statements.
- Send a letter of engagement in accordance with ISA 210. The contents of this letter should already have been agreed with Vega and receipt of the letter should be acknowledged by Vega.
- Accept the nomination and be appointed by resolution of shareholders or directors.
- Meet with the client to agree the scope of the audit and basis for fees.
- In taking on the client, the firm needs to have established the risks associated with Vega and to have confirmed the planning approach and skills required. In accepting the appointment, the firm has taken the decision that the issues raised did not present an insurmountable barrier. The firm therefore has to ensure that mechanisms are in place to avoid conflicts of interest and breaches of confidentiality in the conduct of audit. This will include ensuring that the same partner and staff are not involved in the audit of the two rival firms (TIG and Vega) and that ‘Chinese walls’ operate between the two areas. Both firms should have been made aware of the potential conflict.
- The firms will also ensure that the auditor relationship did not impact on the consultancy services relationship and, again, that conflicts of interest were avoided, with no undue pressure on the auditors arising from the heavy use of Vega services.
- In accepting the appointment the firm should encourage payment of the fees to the previous auditor.
- Uploader: Salamat Hamid