a) For each potential client highlight any independence or ethics risks the partners should consider and why.

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Question:

a) For each potential client highlight any independence or ethics risks the partners should consider and why. In addition, suggest safeguards that could be considered to mitigate the relevant risks.

b) Explain what is meant by 'professional scepticism' and how it is relevant to the conduct of an audit of financial statements.

Grove Clark is a ten-partner accountancy firm. It has been approached by five potential audit clients and the partners are considering the independence and ethical risks associated with taking on these audits. Client A is a company in the financial services industry. Grove Clark have no experience in this industry but they would like to build up some expertise in this industry. The chief financial officer of Client A used to be a Grove Clark partner. Client B has been recommended to Grove Clark by Client H. Clients B and H are both in the manufacturing industry and have worked together on several large contracts.

If Grove Clark accept Client B, Company H expect a discount on its next audit as commission for making the recommendation. Client C is a new company with ambitious plans for growth and stock market listing. Whilst Client C is currently exempt from statutory audit, the directors wish an audit to be conducted to make it easier to negotiate lending arrangements with its bank. A meeting with the bank has been scheduled for three months after the year-end and the directors insist that the audited financial statements with an unmodified report be available before the meeting.

Client D is a start-up company owned and managed by a couple of scientists/inventors who have discovered a way of converting insects into food fit for human consumption. They need to be associated with a reputable accounting firm in order to approach large corporations for the finance needed to develop their scheme and as a result they are happy to pay a higher fee. Client E is a medium-sized I.T. company which has developed a new app for downloading music from the internet. The CFO resents having to pay an audit fee and suggests instead that the audit fee could be taken either as new shares issued by Client E or by the firm agreeing to accept 5% of the profits generated by the new app.