Auditor Rotation and the Long-Standing Engagement
Marlowe Audit Pty Ltd has audited the Portside Superannuation Fund, a five-member SMSF with $6.8 million in assets, for nine consecutive years. The engagement partner, Denise, has signed every audit report since 2017. In 2025 the fund appointed a new trustee, Denise's former colleague from a previous firm, who now chairs the trustee board. The fund's investments include unlisted shares in a private company in which Denise's spouse holds a 4% stake. Denise has not disclosed the shareholding to the fund. The 2026 audit is due in three weeks. The fund's accountant has asked Denise to 'keep it simple' because the members are elderly and anxious about costs.
1. Assess the threats to independence and the auditor's obligations, applying the conceptual framework.
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Threats identified.
- Familiarity threat: nine years of consecutive engagement and a personal relationship with the new chair. Long association can impair professional scepticism.
- Self-interest threat: Denise's spouse holds 4% of a private company in which the fund invests. A financial interest of a spouse is treated as the auditor's own interest under APES 110. Even 4% is a direct financial interest in an audit client's investment, which is generally prohibited rather than merely disclosable.
- Intimidation/self-interest: pressure to 'keep it simple' and control costs creates an incentive to reduce procedures.
- Advocacy threat: the prior relationship with the chair may lead to advocacy for the trustee's position.
Obligations. Denise must disclose the spouse's shareholding immediately and in writing. The firm must evaluate whether the financial interest can be eliminated; typically the only safeguards are disposing of the interest or removing Denise from the engagement. Because the interest is held by a spouse, the firm should treat it as a direct interest unless it is clearly immaterial and the fund's investment is itself immaterial, which requires documented analysis.
Long association. The firm should consider rotation of the engagement partner. Under APES 110, long association safeguards include rotating the partner, independent quality review, and periodic reassessment. Nine years is a significant period, and combined with the personal relationship, the firm should rotate Denise off the engagement.
Pressure. The request to 'keep it simple' is not a basis for reducing scope. The auditor must perform procedures sufficient to obtain reasonable assurance regardless of cost concerns. Reducing work to accommodate the trustee would breach professional competence and due care.
Reporting. If the firm cannot eliminate the threats, it should decline or resign from the engagement and notify the trustee. If the audit has already been compromised, the firm should consider whether the prior reports remain appropriate and whether any matter requires reporting to the ATO or ASIC.
2. What should the firm do before the 2026 audit is signed, and what documentation is required?
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Immediate steps.
- Disclosure: Denise discloses the spouse's shareholding and the prior relationship with the chair to the firm's independence partner.
- Assessment: the firm documents the nature and extent of the interest, the fund's investment in the private company, and whether the interest is direct or indirect, material or immaterial.
- Elimination: the firm decides whether to remove Denise, dispose of the interest, or both. Given a direct spousal interest, removal of Denise is the minimum safeguard; disposal may also be required.
- Rotation: appoint a new engagement partner and consider an independent quality review.
- Communication: inform the trustee of the change and the reasons, without breaching confidentiality.
- Scope: confirm in writing that the audit will be performed to the required standard and that cost is not a basis for reducing procedures.
Documentation. The file should record: the nature of the interest and its timing; the firm's independence assessment; the safeguards adopted; the rotation decision and who approved it; the communication with the trustee; and the auditor's conclusion that the engagement can proceed. If the firm concludes it cannot proceed, document the resignation and any reporting obligations.
Prior-year considerations. The firm should assess whether the undisclosed interest affected the 2025 audit and whether the prior report needs to be revisited. If the interest existed in 2025, the firm should consider whether the prior opinion was compromised and whether the trustee needs to be informed.
Reporting obligations. If the firm identifies a contravention of the SIS Act or the fund's investment rules, it should report to the ATO. The auditor should also consider whether the trustee's conduct raises a question about the fund's compliance with the sole-purpose test. The firm should not sign the 2026 audit until the independence issues are resolved and documented.