Independence of Audit Statement

Independence of Audit Statement

International Auditing Standards (NZ) place great emphasis on the independence of an auditor from the entity being audited. CCA complies with Professional and Ethical Standard 2 (Independence in Assurance Engagements).

The Standard acknowledges that threats to independence need to be mitigated to an acceptable level, but can often not be entirely eliminated.

CCA often performs other work for audit clients. Although members of the NZ Institute of Chartered Accountants are not permitted to perform any other work for audit clients, International Auditing Standards only ask to evaluate the threat to audit independence arising from this, and to mitigate this threat to an acceptable level if identified. Two threats identified in PES2 are relevant to this situation:

1. Self-interest threat.

This is the key threat that led to NZICA banning its members from undertaking any other work for an audit client. Auditing and accounting are high-end professional services incurring high fees, and PES 2(49) (c) and (d) identify “undue dependence on total fees from an assurance client” and “concern about the possibility of losing the engagement” as concerns, as well as a direct involvement in the audit client. In other words, it is very difficult to n independent audit report if the result may endanger your livelihood!

CCA is in a unique position in that only a minority share of our income is derived from client fees – the majority is from non-client sources. No individual client creates any dependence, and losing any individual client would not make any financial difference. This lack of any significant financial interest in our audit clients represents a strength of CCA that no commercial accounting firm or accountant can provide.

Where we provide other services to that same client these services are most often free, or incur only a nominal charge.

2. Self-review threat.

This is essentially the threat of ‘selective blindness’ when auditing your own work, such as excluding certain areas from an audit because one’s own work is assumed to be correct. However, PES 2 (123) also acknowledges that providing non-audit services “will often result in [the auditor] obtaining information regarding the assurance client’s business and operations that is helpful in relation to the assurance engagement”.

For small entities up to $200,000 in annual income we consider that the benefits of providing other services outweigh the threat, because:

– the accounting is not complex enough to be likely to create errors that would materially affect the Financial Statements the first time round.

– except for the very smallest organisations there is always more than one person involved in an audit at CCA, which provides quality control.

– having a good understanding about how an organisation works is very important for us in order to assess the risk of which areas in an organisation’s accounts may contain significant errors (or even deliberate omissions), which we would be unlikely to find in a short audit engagement.

For larger organisations we actively mitigate the risk by

– separating the audit role from other accounting services for that organisation.

– following a prescribed audit procedure from which no areas can be omitted.

– another person within CCA not involved with the audit client at all providing quality control (depending on overall audit risk).

PES2 (124) lists four self-review threats that must be avoided to maintain auditor independence, and CCA complies with these at all times.








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