Other services to an audit client
Which non-assurance services, such as preparing the statements, threaten independence for an audit client, what safeguards apply and how to record them.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
In many small practices the audit client is also a bookkeeping client, a tax client and a payroll client. The firm knows the business inside out, which is useful. The independence question is whether knowing it that well, and having produced the figures, leaves the firm able to audit them objectively.
This article covers the threats non-assurance services create, the special case of preparing the statements and keeping the books, public interest entities, the options of separate teams or another firm, and how to record the evaluation.
Self-review and management threats
The independence standards in the IESBA Code, on which most national codes for auditors are built, identify several threats. Two dominate non-assurance services to audit clients:
- Self-review threat. The firm audits figures it produced, or relies on judgements it made, and is unlikely to challenge its own work.
- Management responsibility. The firm makes decisions that belong to the client's management, such as approving journals, setting policies or authorising transactions. A firm must not assume management responsibility for an audit client.
Other threats arise too: self-interest where non-audit fees are large compared with the audit fee, and advocacy where the firm represents the client in a dispute.
The IESBA tightened these provisions when it revised the Code's sections on non-assurance services and fees. Its announcement, Global Ethics Board Takes Major Step Forward in Strengthening Auditor Independence, explains the revisions, including the ban on services that create a self-review threat for public interest entity audit clients.
Preparing statements and keeping books for an audit client
Accounting and bookkeeping, including preparing the financial statements the firm will audit, is the commonest case in small practices.
For an audit client that is not a public interest entity, the Code generally permits such services where they are routine or mechanical, the client's management takes responsibility for the results and the firm addresses the self-review threat. In practice:
- Management makes the decisions: it approves journals, chooses policies and takes responsibility for the statements.
- The firm does not originate transactions or hold the client's assets.
- People who did not prepare the figures carry out the audit work on them, or the work is reviewed by someone outside the team.
Company law can add restrictions of its own on who may audit a company the firm also keeps books for, so check the Act in the client's country as well as the code.
Public interest entities
For public interest entity audit clients, the rules are much stricter. Accounting and bookkeeping services, including preparing the financial statements on which the firm will express an opinion, are prohibited, and so are other services that would create a self-review threat. Which entities count as public interest entities depends on the code that applies and, in some countries, on national rules, so confirm the classification client by client.
Separate teams, or another firm
Where the firm wants to keep both roles, the safeguards available are mostly about people:
- Separate teams. The people who prepare the statements are not on the audit team, and the audit team does not rely on the preparers' judgements without testing them.
- An engagement quality review, or another independent review of the audit work on the areas where the self-review threat is greatest.
- Moving one role elsewhere. Sometimes the cleaner answer is for another firm to do one of the jobs.
Achekam supports the last option in two ways. One firm can pass a frozen set to another firm on Achekam, or e-mail a link to an outside practitioner, for an ISRE 2400 (Revised) review or an audit; whatever that reviewer signs is bound to the frozen version. Alternatively, an officer from another firm can compile the prepared statements under ISRS 4410 (Revised), or sign them as accounting officer, and only the version that officer released can be issued. The second route is explained in an external officer signing off.
When creating engagements, staff choose each one's type, such as annual financial statements compilation, independent review or statutory audit. Keeping the preparation and the audit as separate engagements, with different people named on each, makes the separation visible on the record.
Recording the evaluation
The Code expects the firm to identify, evaluate and address threats, and to document its conclusions. For each audit client receiving other services, the file should show the services provided, the threats identified, the safeguards applied and the conclusion reached.
The independence register in Achekam holds each person's annual declaration and any interest, relationship or gift involving a client, and anyone can look up whether a person has an active exception for a given client. Hard evaluations can go through a technical consultation, from question to conclusion and closure, with any difference of opinion recorded alongside each party's position, escalation and resolution.
There are gaps to plan around. Declarations cannot be approved in Achekam: each one sits waiting for the quality partner. Nor does putting someone on an engagement trigger a check against the register. So the firm needs a step of its own, before an audit is staffed, that compares the team with the register and with the list of other services the firm provides to that client. What the register does and does not do is set out in independence declarations today.
The aim is not to stop serving clients well. It is to make sure that when the firm audits figures it helped produce, it can show who checked them and why that check was objective.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
