F8 Study Group # 1-Scenario(2) on Professional Ethics!

[KayPee]

Hi guys another scenario here.


1. One of Kelly Foster & Partners’ clients, a private company that owns several drugstores, is in trouble: the company’s regular accountant was admitted to hospital right before the end of the fiscal year. The client asks one of the audit firm’s partners if he could lend the company some staff to enter the transactions for the last month of the year, make adjusting entries, prepare the financial statements and, as usual, compile the company’s financial statements. Would the partner be violating the independence rules by accepting the compilation engagement?

[Suze]

Once the auditing firm appoints another partner and staff other than the ones that performs the audit for the drugstores and keep it separate (building the chinese wall) then it would not violate the independence rules.

Once they can use the "chinese wall" then it would be ok to accept.

[Kelly]

Other Services are regularly provided by audit companies to their clients.
Such as:- Internal Audit assistance
Tax advice
Assistance in preparation of Financial Statements - As mentioned in the above scenario.
The Partner of the audit firm needs to be careful:-
Although it is not considered a violation in accepting the compilation agreement, there are rules in place to ensure independence, objectivity and integrity are not violated especially of the same audit firm are to carry out the annual audit of the drugstores.

The main threat to independence would be a self review threat.

This would be if the same auditor who prepares the financial statements - reviews his own work.
Any authorisation, execution or consumating a transaction is not allowed. This would be a self interes threat.

The main point to consider is that auditors may assist a company in preparing the financial statements, as long the company is not listed so long as they do not take on any management functions, make decisions on behalf of the company. The Directors mut agree that they are responsible and accountable for the management of their company.

As Suze has mentioned above that if the same company are carrying out the annual audit then there would have to be a different team to carry out that audit. They would have to be physically separated. I.E. different office location, no contact between either team. The concept of "internal chinese walls".

Final conclusionto "would the partner be violating the independence rules by accepting the compilation engagement?"
My answer would be a calculated NO..
- Because the staff are required to enter transactions for last month of the year, make adjusting entries, prepare and compile the FS.

-As long as the same staff were not reviewing the work done.
-As long as none of the staff take on any management function or make any decisions which may affect the outcome of the FS.
-And there was a totally different team involved in the annual audit of the drugstore company.
-Kelly Foster and Partners must be and seen to be independent.

[KayPee]

Model Answer

No. A compilation engagement is not an assurance engagement. Therefore, the partner from Kelly Foster may perform all the tasks mentioned in the example without worrying about the prohibitions set out in the independence rules. There is nonetheless a perceived conflict of interest because the firm will be compiling data that it processed. In the interest of transparency, the partner must disclose, in the notice to reader, the role that would normally have constituted a threat to independence in an assurance engagement.[/I]