Independence

• What is Independence???
• How does Independence relate to other principles?
• Threats to independence
• The auditor`s objectivity must be beyond question if he is to report as
an auditor.
• The objectivity can only be assured if the auditor is seen to be
independent.
•Independence may be threatened or
appear to be threatened in the following
circumstances :
1. Undue dependence on an audit client

 The auditor’s objectivity is likely to be jeopardised where the fees for

audit and other recurring work paid by one client or group of clients
exceeds 15% of the gross practice income or 10% of the gross
practice income in the case of listed and other public interest
companies.
 A new practice seeking to establish itself or an established practice
seeking to reduce its activities may not be able to comply with this
criteria.
2. Overdue fees

 The existence of significant overdue fees from an

audit client or a group of connected clients may be a
threat to objectivity similar to that of a loan.
3. Actual or threatened litigation

 Litigation between the auditor and the client is likely

to represent a breakdown in the relationship of trust
between them.
4. Family and other personal relationships

 Problems may arise where a practice or anyone

closely connected with it has a mutual business
interest with a client, and an officer or an employee of
a client or where an officer or employee is closely
connected with a partner or staff member.
• 
5. Beneficial interests in shares and other investments

 
 A practice should ensure that it should not have as an audit
client a company in which a partner or employee or anyone
closely connected with a partner or employee who is a
holder of a beneficial investment nor should it employ on the
audit a member of staff, if that member of staff or a person
closely connected with him is a beneficial holder of such
investment.
• 
6. Loans

 A practice or anyone closely connected with it should not, either

directly or indirectly or by way of a trust or other intermediary:
 Make a loan to or guarantee borrowings by a company or
organisation audited by the practice.
 Accept a loan from such a company or organisation.
 Have borrowings guaranteed by such a company or organisation
 This rule is not intended to preclude a loan, overdraft or home
mortgage being accepted from an audit client financial institution in
the normal course of business and on normal commercial terms by a
partner or staff member.
• 7. Goods and Services:Hospitality
 Goods or services should not be accepted by a practice or anyone
closely connected with it unless the value of any such benefit is
modest.
 Acceptance of undue hospitality poses a similar threat.
• 
8. Provision of other services

• 
• There is no objection in principle to a practice providing to a client, services additional to
the audit.
 However, care must be taken not to perform management functions or make management
decisions.
 In the case of many audit clients, it is common to provide a range of accountancy
services, which may include participation in the preparation of accounting records.
 In the case of a listed company or public interest company audit client a practice should
not participate in the preparation of accounting records except in :
 (a) In relation to assistance of a mechanical nature for example consolidations and tax
provisions.
 (b) In emergency situations.
Conflict of interests

 There is, on the face of it, nothing improper in having two or more clients whose interests may be in conflict
provided that the work that the auditor undertakes is not in itself, likely to be the subject of conflict between the
clients.
 Where the acceptance or continuance of an engagement would even with safe guards, materially prejudice the
interests of a client, the appointment should not be accepted or continued.
 Where the auditor becomes aware of possible conflicts between the interests of two or more clients, all reasonable
steps should be taken to manage them.
 These steps may include some or all of the following safeguards :
 The use of different partners and teams for different engagements.
 Standing instructions to prevent the leakage of confidential information between different teams and sections
within the audit firm.
 Regular review of the situation by a senior partner or compliance officer not personally involved with either client.
 Advising one or both clients to seek additional independent advice.
You are the manager responsible for the annual review of your firms audit
engagements to identify situations where independence may be at risk and
where the appropriate safeguards should be applied.
From your review of your firms files relating to APPLE shop plc you ascertain
the following:
The company is expanding rapidly following a number of acquisitions and
preparing to apply for admission to the Stock Exchange and to offer a
proportion of its shares to the public. As a result of the special investigations
undertaken, total fees from APPLE shop Plc amount to 17 per cent of your
firms gross practice income for the current year.
The company is about to undertake a feasibility study, on a proposal to
expand into Europe, which is to be kept secret from employees. To keep the
initial costs of the APPLE shop team’s European travel expenses a secret, a
partner (who is not the engagement partner) has offered to have them put
onto his credit card. They would then be billed as professional fees.
Required
• Explain the risks you would consider in deciding whether or not the
appointment should continue . [8]
• Briefly describe the safeguards available.[8]
• Come to a conclusion on whether you consider the appointment
should continue.[4]