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John Selwoods audit clinic

This month, John focuses on safeguards and some very common challenges that many auditors still struggle to overcome.

Question

My audit firm supplies non-audit services to most of our unlisted audit clients. The most common  services we provide are the preparation of financial statements and corporation tax, and the most common safeguard that we apply is confirming the existence of informed management and ensuring that the work does not involve making management decisions. Are we doing enough? If not, how should we approach safeguards?

Answer

There are many instances where I do not think that auditors are doing enough to address the threats to independence arising from the provision of non-audit services to unlisted audit clients.

It’s worth starting at what I consider to be the beginning of this issue. When the Auditing Practices Board (APB) Ethical Standards (ESs) were introduced in 2005, it was, to a great extent, just a continuation of the existing ICAEW Code of Ethics. However, there were some significant changes in terms of providing non-audit services for unlisted clients as well. These included:

  • the need to identify informed management;
  • the distinction between a management threat and a more general self -review threat;
  • and the specific requirement to apply safeguards when providing accountancy services.

Since then, more than a decade has passed. In the last few years we have transitioned from the old UK GAAP to FRS 102, and from APB ESs to the Financial Reporting Council Revised Ethical Standard 2016. This should have prompted firms to revisit the relevant policies and procedures, and think long and hard about threats to independence. But it seems to me that these are still not as widely understood as they should be, particularly the specific requirement to apply safeguards.

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