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John Selwood's audit clinic

This month, John considers questions about that tricky area where the technical and the commercial aspects of auditing meet.

Question

My audit client is in financial difficulty and my audit fees from the December 2015 audit have not yet been paid. Should I start planning the 2016 audit with the fees still outstanding?

Answer

You do have an independence problem in this situation. A self-interest threat arises because the client company owes you money. From your question it appears that the fee is not in dispute, it is simply unpaid. If the amount outstanding is not trivial then you should not begin the next audit without at least having a clear, credible payment plan in place. 
Even if that is possible, you should consider the following points: If you consider that the amount outstanding might be trivial, would it be considered trivial by an objective, informed third party? If not, then it is a problem.

If it is not trivial, is the plan to clear the fee really credible? Can the client do what they say they will do? If you were to withdraw from the audit, would the client be able to fill the office of auditor? In this case it might be in the public interest for you to continue as auditor, despite the independence threats. Has a discussion taken place with your firm’s ethics partner about how the firm’s independence could be threatened and safeguarded? If you are in a position to proceed with the audit, then a good safeguard might be a second partner review. As ever, all the considerations above may need to be documented. If you proceed with the 2016 audit, risks associated with going concern will have to be considered. These are all technical considerations. But there are commercial considerations here as well. You have not yet been paid for the 2015 audit and the company is in financial distress; this suggests that there is a possibility that you might not get paid for the next audit either. In addition, the 2016 audit could be very challenging because of the company’s financial difficulties. Even if you are able to start the 2016 audit, do you want to?  

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