Text PAQ 2.32 Provision of non-audit services to audit clients

Required:

(a) Comment on Elise’s belief that increasing non-audit service fee revenue from her audit client would increase her reputation in the audit firm.

(b) Which non-audit services would you advise Elise to avoid trying to sell to Hertenstein Ltd because of their potential ethical issues for the audit firm?

(c) Would it make any difference to your answers if Hertenstein Ltd was a proprietary company, not a listed public company?

(a) It is possible that increasing the profitability of the audit firm would increase Elise’s reputation within the firm. However, if the growth in revenue creates any conflicts of interest or other ethical problems it could damage Elise’s reputation. See APES 110.600 (post 2018) or, 290.154 (pre 2018) – if the provision of non-assurance services creates a threat to the auditor’s independence, safeguards would need to be applied to eliminate or reduce the threat.

(b) See s. 290.159 of APES 110 (pre 2018) or APES 110.R600.7 A1-A4 (post 2018) for a guide to which services to avoid. This section states that the auditor should avoid acting as an executive of the client company. The auditor should not be involved in transactions, making decisions about the audit firm’s recommendations, management reporting to directors, or acting as manager of the client within the previous two years.

s. 290.161 (pre 2018) discusses less significant threats, which should only be offered after careful consideration because they could create self-review or self-interest threats. These include having custody of a client’s assets, supervising client employees, and preparing source documents. The section also discusses examples of safeguards, such as making arrangements so that personnel providing such services do not participate in the audit, and gaining additional advice on the impact of such services.

(c) Yes. Auditors can provide more non-audit services to a proprietary company than to a listed company.

See APES 110.R601.5 and 601.4A1 (post 2018) or s. 290.170 (pre 2018) The Firm, or a Network Firm, may provide an Audit Client that is not a Listed Entity with accounting and bookkeeping services, including payroll services, of a routine or mechanical nature, provided any self-review threat created is reduced to an acceptable level.

Examples of such services include:

• Recording transactions for which the Audit Client has determined or approved the appropriate account classification;
• Posting coded transactions to the Audit Client's general ledger;
• Preparing Financial Statements based on information in the trial balance; and
• Posting the Audit Client approved entries to the trial balance.

The section continues by explaining that the significance of any threat created should be evaluated and, if the threat is other than Clearly Insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level.