could you please help me (auditing)?

Question

Philip is an auditor whos client is SMFL, could anyone plase tell me from reading the small article if there is any breach of professional ethics or if there is something wrong with the auditrors actions or the clients actions ?

On reviewing the files for the firm's largest client, Specialist Metal Fabrications Limited ( SMFL )( annual recurring fees having risen steadily over the last five years to £90,000 pa ), she noted that , due to cash flow problems, the prior year's audit and other fees were still unpaid. Philip, who has been the engagement partner since SMFL was established some ten years ago, has now started to attend the regular monthly board meetings of SMFL and to advise the directors on the
financial position as shown in the management accounts ( also prepared by a separate member of the Braithwaite staff ). From the various file notes, it is evident that SMFL's bank is taking a close interest in it's performance

Answer 1

There are several infringements of the Code of Ethics.

On reviewing the files for the firm's largest client, Specialist Metal Fabrications Limited ( SMFL )( annual recurring fees having risen steadily over the last five years to £90,000 pa ),
{one has to look at what proportion fees from SMFL form in Mr Braithwaite's audit firm. Most countries have a limit, e.g. no one client group can comprise more than 15% of an audit firm's income}

she noted that , due to cash flow problems, the prior year's audit and other fees were still unpaid.
{auditors should not start one year's audit if the previous year's audit fee is not paid. This is to prevent an intimidation threat - the client may insist that the auditor give a clean audit report or else he won't get paid}

Philip, who has been the engagement partner since SMFL was established some ten years ago,
{To remove familiarity and objectivity threats, partners should be rotated. The period is determined by the audit firms internally, but it is not uncommon to rotate partners every 5 yrs and audit mgrs every 7 yrs}

has now started to attend the regular monthly board meetings of SMFL and to advise the directors on the financial position as shown in the management accounts
{auditors should not take on a mgt role. This is an outright conflict of interest}

( also prepared by a separate member of the Braithwaite staff ).
{Auditors have to decide whether they want to take on outsourced bookkeeping work or audit work but not both, the principle being that you can't audit your own work}

From the various file notes, it is evident that SMFL's bank is taking a close interest in it's performance
{All the more all those things discussed above shouldn't happen. When the co. fails and the bank moves in, the audit firm's conduct will be examined by all authorities from all angles and it would fail every test}

Answer 2

There is no breach of ethics as long as Philip is advising (and billing) the client seperately for the advice.
Close working relationships with clients are frowned upon by the CCAB, but they are not unusual.
They should not let the fee remain outstanding beyond the next AP as this might colour their true and fair opinion.
Next time do your own homework!