AuditPro LLP - Independence, an Illegal Payment and Management Pressure on a Listed Audit

1. Spouse as financial controller. A financial controller is in a position to exert significant influence over the financial statements. For an immediate family member of an audit team member, the IESBA Code requires that the individual be removed from the audit team; there is no safeguard that allows the partner to remain. The familiarity and self-interest threats are so significant that removal - not disclosure or review - is the required response. The firm may continue the audit only with a different engagement partner and a documented independence reassessment.

2. Designing the transfer-pricing model. Designing and implementing the model, then auditing the numbers produced by it, creates a self-review threat: the team would be evaluating its own work. For a public interest entity, services that involve designing and implementing a system or model that is material to the financial statements are generally prohibited. Either AuditPro withdraws from the transfer-pricing work (with the model implemented by another adviser) or it ceases to be auditor. An engagement quality review by a partner outside both teams is a minimum, not a cure.

3. Fee dependence at 22%. For a public interest entity, fees above 15% of total firm revenue create a self-interest threat. Where the level persists, the firm must disclose the fact to those charged with governance, arrange an engagement quality review, and consider whether it should continue as auditor. At 22% the relationship is materially dependent on one client, and continuance requires a documented, approved decision by the firm's leadership.

Conclusion. As currently constituted, AuditPro cannot sign the 2025 report.

Nature of the matter. A payment to a public official to obtain a permit is bribery. It is illegal under Kazakhstan's anti-corruption and criminal legislation, and its recording as "permit facilitation" misdescribes the transaction. The IESBA NOCLAR provisions and ISA 250 require the auditor to treat it as a suspected instance of non-compliance with laws and regulations.

Materiality is not only quantitative. KZT 12,000,000 is below the KZT 400,000,000 overall materiality, but qualitative factors dominate: potential fines, debarment from public contracts, reputational damage, the risk that the payment disguises a broader control failure or management override, and the implication for the reliability of written representations. The auditor should assess the matter as potentially material on qualitative grounds.

Required response

1. Challenge management; obtain the supporting documents and the identity of the recipient.
2. Because the CFO is implicated, escalate directly to the audit committee or the board - communication to the CFO alone is not sufficient.
3. Consider the effect on the financial statements: possible provisions or contingent liabilities under IAS 37, and whether the payment is presented correctly.
4. Consider fraud risk factors under ISA 240 and reassess the risk of management override; extend journal-entry testing and review other payments to officials or intermediaries.
5. Consider taking legal advice; disclosure to an external authority is not generally permitted unless required or protected by law, and confidentiality obligations continue.
6. If the entity fails to address the matter, consider the effect on the opinion, whether to resign, and document all steps and judgements.

Nature of the threat. Linking the audit opinion to the company's loan covenants and to the retention of the engagement is an intimidation threat and an attempt to influence the audit conclusion. The auditor's report is not a commercial deliverable that can be traded for fee continuity or a deadline; the covenant consequence arises from the company's financial position, not from the wording of the opinion.

Required response

• State clearly to the CFO and the audit committee that the opinion will reflect the audit evidence and nothing else.
• Explain to the audit committee, in writing, that management has linked the opinion to covenant compliance and to the audit tender; this is relevant to the committee's oversight of management integrity.
• If the audit cannot be completed properly by 25 March, do not sign. Communicate the reason and a realistic timetable to those charged with governance; a late report is a management problem, a wrong report is the auditor's.
• Reassess whether management's representations can be relied upon given the attempted pressure; corroborate key representations with third-party evidence and consider the effect on fraud risk assessment.
• If the threats cannot be eliminated - for example if the board supports management's position - consider withdrawing from the engagement and whether any reporting obligation to a regulator is triggered under law.
• Document the communications, the threat assessment and the rationale for the decision in the engagement file.

The combination of a partner conflict, a self-review threat, fee dependence and management pressure means the engagement should not be signed until the composition of the team and the scope of non-audit work have been resolved.