You are an audit supervisor at Flack Mitchell, a large, reputable accounting firm with offices across the UK. Your client is Newbuild Limited, a large and diversified group operating in the housing sector. Your firm recently won a competitive tender to provide extensive internal auditing services to Newbuild. The fee quoted in the tender was 50 per cent of standard charge rates. Flack Mitchell also performs internal auditing work for Jensons Limited, which is Newbuild’s major competitor. Flack Mitchell operates distinctly separate internal and external audit divisions. The objectives and scope of Newbuild’s internal audit were set by its audit committee after detailed advice given by Flack Mitchell. The work performed by the Internal Audit Division of your firm began two months before the end of the financial year and was extensive. It included:

reviewing controls surrounding all major transaction flows and reporting to the audit committee on improvements;

performing creditors’ circularisation, and preparing a list of adjusting journals for processing by accounts payable staff; and rewriting branch stocktake instructions and attending branch stocktakes.

Required

(a) Discuss from the perspective of a small shareholder of Newbuild whether Flack Mitchell is independent in fact and appearance.

(b) Identify specific independence issues that need to be addressed by Flack Mitchell and discuss what they should do about them.