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Audit and AssuranceSection ASyllabus Area AEthicsNon-Audit Services

ACCA · Question 02 · Audit and Assurance

CASE 1: AQUAPURE UTILITIES CO

AquaPure Utilities Co is a listed water treatment company. Your firm, Stream & Co, has been the auditor for 6 years. The audit engagement partner, Sarah Jenkins, has been in place for the entire 6 years. AquaPure has requested Stream & Co to provide internal audit services regarding their new environmental compliance system. The Finance Director of AquaPure recently offered the audit team a weekend stay at a luxury spa resort owned by the company. AquaPure's audit committee consists of three executive directors and two independent non-executive directors.

QUESTION:
How should Stream & Co respond to the request to provide internal audit services regarding the environmental compliance system?

Answer options:

A.

Accept the engagement, provided separate teams are used for the external and internal audits.

B.

Decline the engagement because external auditors are legally prohibited from providing any non-audit services to their clients.

C.

Accept the engagement, as environmental compliance does not impact the financial statements.

D.

Decline the engagement if the firm would be assuming a management responsibility or if the system significantly impacts financial reporting.

How to approach this question

Evaluate the nature of the non-audit service (internal audit) against the client type (listed). Identify the self-review threat and the prohibition on assuming management responsibilities.

Full Answer

D.Decline the engagement if the firm would be assuming a management responsibility or if the system significantly impacts financial reporting.✓ Correct
Providing internal audit services to an external audit client creates a self-review threat. For listed entities, the Code prohibits the provision of internal audit services that relate to a significant part of the internal controls over financial reporting. Furthermore, an audit firm must never assume a management responsibility for any audit client.

Common mistakes

Assuming that 'separate teams' (Chinese walls) can cure all ethical threats for listed companies.
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