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Here is the scenario, hope it is clear
The existing audit client(listed), X has introduced the auditor a potential new client (non listed ) Y of doubtful reputation, ie. it has commited the pension fund misappropriation and the breach of employment laws
X requested the auditor to perform a limited assurance review for Y as Y intended to apply a bank finance (the bank is unaware of its doubtful reputation).
X also requested the auditor to reduce audit fee.
If the auditor cannot fulfill the requirements stated by X, X intimidated to dismiss the existing audit engagement together with the potential client Y.
Note: The examiner report has mentioned: A customer due diligence procedure (CDD) is required rather than a pre-condition acceptance procedures.
My questions:
(i)What is the difference between these two types of procedures? Should only one of them be performed? or both? for this case(ii)If the auditor accepts Y and performs the requested limited assurance review, could it be considered as “advocacy” threat? (“intimidation” threat is surely present)
(iii)Who determines the type of assurance service should be made for the bank loan application?
Bank or auditor?(iv) What are the consequences of the auditor if accepts the engagement of limited assurance review for bank loan application of Y?
(i) CDD (also referred to as KYC – know your client) gets a specific mention in the syllabus in the context of money laundering. It is essential to ensure that the professional accountant knows who its clients are and does not unknowingly accept clients outside his risk tolerance. It must be conducted when establishing any business relationship. Establishing “preconditions” goes beyond (mere) CDD – the relevant standard is ISA 210 (which is specifically about audit engagements). You would have to be happy with CDD procedures before embarking on establishing preconditions, if relevant – which it seems it is not in the scenario you outline as the proposed assignment for Y is not an audit.
(ii) Is this a limited assurance review of the financial statement’s of Y or PFI? An ethical consideration is surely, why is another firm being asked to perform this rather than Y’s audit firm? Both audit firms are being exposed to intimidation. The examiner’s report does not refute the potential advocacy issues but comments that tendency to diverge into the “was beyond the scope of the question”.
(iii) The bank would dictate its requirements as a condition for granting a loan (e.g. last audited financial statements and reports, review of more recent financial statements, prospective financial information, personal guarantees of directors or others, etc, etc).
(iv) If a professional accountant accepts any assignment he accepts the risk associated with it. A conclusion for a limited assurance engagement is expressed in the “negative” form (“nothing has come to our attention”), which of course can be qualified. So if he gives unqualified negative assurance when he should have expressed reservations, that will be negligent – and he will most likely to be found liable to the bank if the bank suffers loss. He also risks his reputation.
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