Professional Ethics-Scenario # 4

[KayPee]

A small, three-partner firm in northern England makes the adjusting entries and performs the annual review engagements for a private company. Because the client does not like to deal with accounting details, the members of the review engagement team prepare and enter adjusting entries in the client’s general ledger. At a recent symposium, some competitors questioned the firm’s practices, claiming they violate the independence rules. Are they right to challenge the firm?

[limit_to_infinity]

multiple services can deter an auditor from exercisiong independent judgement and rendering accounting services surely can affect independence quite badly.

however it is noteworthy that ,in practice, auditors do provide assistance regarding preparation of financial statements . But this cant be equalized to rendering an accouting service[like making adjusting entries in general ledger as in the current scenario]

Furthermore, the same member of assurance team is involved in adjusting entries and so
segregation of duties is not there . therefore their claim can succeed

[Suze]

The accounting firm is a three partner firm, therefore what they should have done is have one partner do the entries and another partner do the review.

The same partner or team that does the review does the entries and that will definitely hamper the independence of the auditor. The auditor's objective will be bias.

I owuld say their competitors would have a claim.

[Camille]

I believe the competitors have a claim. This seems like a self review threat. Auditor performs some accounting functions and then performs the audit. There are only three partners therefore there cannot really be effective segregations of duties. If the firm were larger then it would be ok to allow one team to assist the client with the accounting functions and another team to perform the audit.

[Suze]

I believe the competitors have a claim. This seems like a self review threat. Auditor performs some accounting functions and then performs the audit. There are only three partners therefore there cannot really be effective segregations of duties. If the firm were larger then it would be ok to allow one team to assist the client with the accounting functions and another team to perform the audit.

Hi Camille,

How many partners should a firm have before they are able to do both accounting and auditing ?

[Kelly]

Just because the client does not like to make accounting entries does not excuse him from his responsibilities as Director/Proprietor of his business, and responsible for the Financial Statements.

The '3 partner firm' are violating their independence, the competitors do have every right to question and report them to the Auditing authorities.
The main threat is Self review threat.
The same accounting team should not be making and reviewing the entries made in the clients ledgers.

To safeguard themselves and their client it would be better for the client firm to have the review engagement carried out by some other company.

[GEORGE]

Here the issue of self review comes in. as far as ethical issues are concern, selfreview affects the objectivty of the Auditor, since any material missstatement in the process would be seen as incompetance in the provision of other service by the partner, the partner would therefore not be willing to be seen as incompetant. his objectivty should therefore be questioned.

therefore the issue of threat, objectivity and independence is at steak.

[KayPee]

Answer: Yes. Preparing a journal entry for an audit or review client without obtaining that client’s approval is prohibited under the independence rules. However, a safeguard may be applied even with this prohibition. The client must approve each entry prepared by the firm conducting the review engagement. The ACCA member is responsible for ensuring the client understands the entries before approving them. If the client is unable to under-stand the basis for the entries, they should be reviewed by an independent member.