Contrasting Audit Partner Rotation Rules in New Zealand with Long association Rules in ED - Case Study Example

Long Association With An Audit Or Assurance Client Student’s Name Institutional Affiliation Contrasting Audit Partner Rotation Rules in New Zealand with Long association Rules in ED In New Zealand, the PES-1 is concerned with providing direct level of guidance on the immediate level of application of all conceptual frameworks to matters related to independence in cases of possible long term association of audit personnel with public-based companies (Cheung & Hay, 2004). The country’s auditor-general possess distinctive requirements that relate to the immediate rotation of fundamental audit partners as well as members of the entire assurance teams involved with conducting annual audits. It ascertained that there should be maintenance of individual audit staff in a more objective manner. It thus means that all appointed auditors tasked with the process of conducting annual audits are not, in audits of 150 budgeted hours or more; engage in a similar audit job for a period of six consecutive years (Cheung & Hay, 2004). In fact, after completion of these six years, the former auditor shall not be eligible to act again in the previous position of being an appointed auditor or in any other capacity that relates to the process of auditing until a collapse of two consecutive annual audits in conjunction to the previous audits. It is noted that the eligibility of any other future appointment after the elapsing of the aforementioned two-year consecutive audits will require the former auditor to cease from engaging in conducting professional or consulting engagements with the public firm in the course of the period. Notwithstanding, other fundamental persons that are associated with the audits are required to desist from continuing their relationship with an audit for a period of more than consecutive six years (Cheung & Hay, 2004). After the elapsing of this timeframe, the person shall not be associated with the underlying engagement team. In essence, the OAG is tasked with the responsibility of choosing to extend the rotation period in the event that it serves the interests of sustaining audit quality. Another important point to note lies in the fact that the application date for the for the rotation provision on key audit partners operating in New Zealand is January 1, 2014 (Cheung & Hay, 2004). The data is subject to the underlying provisions stipulated within PES-1(Revised). On the contrary, Exposure Draft states that senior auditing personnel shall not be a KAP for a period exceeding seven consecutive years and thus, after the elapsing of this period then the personnel cannot continue to be a member of KAP engagement team or a KAP for the customer for two consecutive years, which are basically portrayed as the cooling-off-period (IESBA, 2014). Even after intensive review of the time-on period, the IESBA refuted pressures to shorten the seven year consecutive period. Significantly, just like the rotation rules in New Zealand, the ED ascertains that in the course of the cooling-off period, the former senior auditor personnel shall not impose any levels of pressure or influence in regards to the engagement teams or the immediate end result of an audit (IESBA, 2014). A proposed three-year cooling-off period seeks to ensure that the underlying KAP stays away from the audit for a minimal period of more than two full audit cycles since the senior partner might choose to embark on other activities after rotating off the engagement process. Subsequently, in a similar level with New Zealand’s audit rotation policies, an individual senior auditor is prohibited from engaging in such activities as engaging in auditing, providing quality control services and engaging in any level of consultation with the engagement team or the customer in relation to the technical or industry-specific matters (IESBA, 2014). In regards to the application dates, the IESBA proposes that the aforementioned provisions should take effect for all audits of financial instruments for years beginning or ending in December 15, 2017 (IESBA, 2014). Potential Threats to Audit Independence & Benefits of a Familiar Audit Team to an Auditing Engagement There are numerous threats that might be posed to hinder the independence of auditors within a given auditing scenario. These threats are summarised as follows; First, auditors might face threats posed by interferences from public management so that they try to hinder access to certain personnel or information or going ahead to exert undue management influence in matters related to the nature, timing and scope professional support or appropriate processess (IESBA, 2014). Secondly, the auditors might face threats related to cases where conducting any other work task for a given public firm might conflict with the senior auditing personnel’s responsibility to parliament. Thirdly, auditors might experience threats related to financial interest in from immediate family members, public entities at hand or OAG leadership teams (IESBA, 2014). Fourth, the level of auditor’s independence might also arise from existing or potential loans or guarantees. Fifth, auditor’s independence might also be limited by business relationships with a given public company. Benefits of a Familiar Audit Team to an Auditing Engagement The aspect of a public entity maintaining a familiar auditing team might assist it in a greater level so that it might enjoy reduced fees imposed for the process of auditing the firm. The firm also stands to gain a consistent auditor’s feedback or recommendation since almost similar accounting rules and policies have been adhered to that makes it easy to review and make an effective position. Significantly, the process of valuing and assessing taxes impositions are done in a correct and timely manner hence saving a company substantial resources that will have been used in executing the task. Familiar audit team also benefits from ready positive relationship and cooperation with management team hence crucial procedures and information are availed as when it is needed. In essence, due to the familiarity concept, it is possible for the audit team to impose effective internal controls that will use in the future to detect any possible level of fraudulent behaviours amongst the management or other junior employees. Responses to the Proposed Changes: Professional Accounting Bodies & Business Professionals The SMP Committee, which is a business professional body tasked with providing accounting, assurance and business advisories to small and medium-sized entities made a significant level of responses. As much as the body supports a significant portion of the draft, it does not agree to matters related to; extending the general provisions to all individual members of the auditing team, extending the current cooling-off period to five consecutive years for the future engagement partner on the audits of Public Interest Entities (PIEs) and, also, placing additional hindrances on all activities that can be executed by a Key Audit Partner in the course of the cooling-off period (IFAC, 2014). The professional bodies have ascertained that due to the recent global developments in regards to obligatory audit firm rotation should also be considered into the assessment of long term association with auditing personnel. For instance, examples of the European Regulation on Statutory Audit of Public Interest Entities as well as the recently formed Companies Act 2013 in India have gone ahead to create requirements necessary for the rotation of individual auditing team and audit firms (IFAC, 2014). The bodies agree that the IESBA should ensure to provide a reasonable and extensive response to distinctive regulatory alterations and thus, ascertain that there are references within the Exposure Draft whose developments frameworks fall outside the immediate area of the project at hand. In my opinion, I do support the proposed alterations made in regards to the long association regulation with the Exposure Draft. This is because the proposed changes are reasonable and robust in nature since all propositions made fall within the internal with global recommendations of long association. All of the developments related to the setting of standards by the IESBA Code of Ethics for Professional Accountants have been conducted while ensuring to strike a balance between domestic business needs with that of international operations. Most importantly, the rationale provided by the proposed changes within the Exposure Draft has been set to strengthen the immediate level of independence and the for the Code to be reviewed in the future to allow better services to the entire public entities at hand. These proposed alterations have improved the level of quality of all audits and other assurance engagements. Thus, the proposed change to the Code has effectively simplified the application in practice hence proving useful to adoption in almost all jurisdictions at hand. References Cheung, J & Hay, D. (2004). Auditor independence: The voice of shareholders. Business Review, 67-75. IFAC. (2014). IFAC Small and Medium Practices (SMP) Committee Response to the International Ethics Standards Board for Accountants (IESBA) Exposure Draft Proposed Changes to Certain Provisions of the Code Addressing the Long Association of Personnel with an Audit or Assurance Client. Retrieved on April 2, 2015 from www.ifac.org IESBA. (2014). Exposure Draft: Proposed Changes to Certain Provisions of the Code Addressing the Long Association of Personnel with an Audit or Assurance Client. Retrieved on April 2, 2015 from www.ethicsboard.org Read More