The Small Client With the Big Deadline
You are the engagement partner on the audit of a small charity, Riverbank Trust, with income of £450k. The audit is required by the charity's funding agreement. The trustee board includes a local accountant, Priya, who is a partner at your firm's sister practice in the same town. Priya prepared the trust's management accounts for the year and sits on the finance sub-committee. The audit fee is £6,000, fixed three years ago; the trust is now 40 days overdue on last year's invoice. Your firm also provides bookkeeping services to the trust. The deadline for the audit report is in three weeks, and your manager has just resigned, leaving the file with incomplete planning documentation.
1. Identify the ethical and independence threats and evaluate whether the engagement can continue.
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Several threats arise:
- Self-review and self-interest: the firm provides bookkeeping, and the audit then reviews its own work. For a small entity, this is a significant self-review threat; safeguards such as independent review may be insufficient.
- Familiarity and intimidation: Priya, a partner at a sister practice, is on the trustee board and prepared management accounts. She is a related party to the firm, creating familiarity and possible undue influence.
- Fee dependence and overdue fees: £6,000 is small in absolute terms but the overdue invoice creates a self-interest threat; unpaid fees from a prior year can be a threat to independence if they resemble a loan.
- Competence and resources: the manager has resigned and planning is incomplete, raising quality management concerns.
The firm should apply the conceptual framework: identify, evaluate and address. Likely conclusion: the bookkeeping and the trustee's role together mean the firm cannot act as auditor unless it resigns from bookkeeping and Priya steps down from the finance sub-committee, or unless the firm concludes safeguards reduce the threats to an acceptable level (unlikely for a small charity). The overdue fee must be settled or the firm should decline reappointment. The engagement should not proceed until these are resolved.
2. What quality management actions should the firm take before the report is signed?
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Under ISQM 1 the firm must have policies over engagement performance and resources. Actions:
- Escalate to the firm's ethics partner and document the independence conclusion.
- Assign a replacement manager or another qualified individual to complete planning and review the file; the partner cannot rely on incomplete documentation.
- Perform an engagement quality review if the firm's policies require it for this risk profile, or at least a second-partner review given the independence issues.
- Confirm the bookkeeping arrangement is terminated or ring-fenced, with a documented transition plan.
- Obtain the overdue fee or agree a payment plan in writing.
- Reassess the budget and deadline; if the three-week deadline cannot be met with adequate evidence, discuss an extension with the trustees rather than cutting corners.
- Document all conclusions and communications.
If the threats cannot be eliminated, the firm should resign and notify the charity regulator as required.