By the MIA Practice Review Department
Every year, MIA issues Practice Review (PR) Reports to provide an overview of PR’s assessment of the audit firm and share new initiatives and upcoming developments affecting the profession. Such communication helps firms and public accountants understand the key areas for improvement so as to meet the requirements of the professional standards.
This article highlights some of the key findings related to relevant ethical requirements gathered from PR during the period from 1 July to 31 December 2020. The findings are not meant to be an exhaustive list of all findings from PR during this period, but instead to serve as a guidance to help members understand some of the ethical requirements to be implemented within their firms in compliance with relevant professional standards, applicable legal and regulatory requirements, as well as in achieving quality audit.
Key Findings from Practice Review:
Key findings 1
In one of the engagements reviewed, we noted that the consolidation working papers had been prepared by the audit firm’s staff who was also involved in the audit of the same engagement.
The above constitutes a self-review threat as stipulated in the Institute‘s By Laws 120.6 A3(b) which defines self-review as “the threat that a professional accountant will not appropriately evaluate the results of a previous judgement made; or an activity performed by the accountant, or by another individual within the accountant’s firm or employing organisation, on which the accountant will reply when forming a judgement as part of performing a current activity”
According to R120.10 of the Institute’s By Laws, if the professional accountant determined that the identified threat to compliance with the fundamental principles is not at an acceptable level, the accountant shall address the threats by eliminating them or reducing them to an acceptable level. The accountant shall do so by
a. Eliminating the circumstances, including interests or relationships, that are creating the threats.
b. Applying safeguards, where available and capable of being applied, to reduce the threat to an acceptable level; or
c. Declining or ending the specific professional activity.
Key findings 2
In some of the engagements under PR, we observed that the company secretary of the auditee is a close family member of the signing audit partner. This may constitute a threat to professional independence as the Institute’s By-Laws 290.13 (a) states that threat to independence are created when a close family member of a member of the audit team is, inter-alia, an officer of the audit client. The significance of the threat shall be evaluated, and safeguards applied when necessary to eliminate the threat or reduce it to an acceptable level, as stipulated in By-Laws 290.130 (c).
Key findings 3
During PR, we observed that the certificate relating to an exempt private company for two engagements under review were lodged by the company secretary who shares the same contact numbers, and email address of the audit firm (as stated in the section on lodger information).
On the other hand, according to the audit firm’s annual return, the audit manager who oversees one of the office branches, also acted as the company’s secretary for one of the engagements reviewed.
The above findings are deemed to undermine the audit firm’s independence, including independence in appearance as provided for in the Institute By-Laws and Section 264 of the Companies Act 2016.
Findings of noncompliance with ethical requirements such as the above, may potentially lead to a complaint being lodged against the auditor with the Registrar.
While this article focuses on findings for relevant ethical requirements, the practitioners are advised to study all relevant professional standards and supporting implementation guidance available in order to have a full understanding of the entire text of all the relevant professional standards and regulations, including its application. Further, we recommend that the practitioners refer to MIA PR Reports for a more holistic view on the PR findings observed.
Member firms are also advised to look into ISQM 1 as the firms will be required to design and implement a system of quality management in compliance with ISQM 1 by 15 December 2022.