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John Selwood Audit Clinic

In this edition, John looks at a tricky independence question, refreshes your memory on auditor cessation and clarifies an issue on new audit clients

QUESTION

I have accepted an appointment as auditor (I am the engagement partner) of a fee-paying school audit. I have two independence issues: my husband is a teacher at the school; and, I have three children that I plan on sending to the school over the next few years. What do I need to do to address these issues?

ANSWER

The first point can be dealt with in some intricately worded requirements in the Financial Reporting Council’s (FRC’s) Revised Ethical Standard 2016 for auditors in para 2.59, which all boils down to the fact that the firm cannot do an audit where a close family member of a covered person can influence the accounts of the entity. From what you say, your firm is not expressly prohibited from auditing the school, provided you apply some appropriate safeguards, because your husband is on the teaching staff rather than in the accounts department.

However, auditor independence does appear to be significantly threatened. You could apply a second partner review, though I worry that this is not enough; I am more inclined to apply a more robust safeguard, such as you standing down as the engagement partner and allowing one of your partners to take over the audit. In fact, I would consider adopting a belt and braces approach of excluding you from the audit and having a second partner review.

As always, professional judgement is central to this – and in any event, I would ensure that this has been discussed with the firm’s ethics partner.

The fact you may send your children to this school might present even greater independence problems. Certainly, the threats to independence become far too great for you to continue as audit engagement partner. Para 2.29 prohibits “material transactions with audit clients” in this way. I imagine that school fees are material to most people.

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