Question

What consulting or nondash audit services are prohibited for auditors of public​ companies? Explain why it is generally agreed that prohibitions on consulting and​ non-audit services will improve​ auditors' professional judgment and professional skepticism. What consulting or nondash audit services are prohibited for auditors of public​ companies? ​(Select all that​ apply.)

1.

Tax services to audit clients

2.

Legal and expert services unrelated to the audit

3.

Security of electronic information

4.

Test the effectiveness of internal control over financial reporting

5.

Internal audit outsourcing

6.

Financial information systems design and implementation

7.

Management or human resource functions

Explain why it is generally agreed that prohibitions on consulting and​ non-audit services will improve​ auditors' professional judgment and professional skepticism. ​(Select all that​ apply.)

.

Consultation can help overcome the effects of past experience with the client​ and, therefore, improve objectivity.

2.

Prohibitions on consulting and​ non-audit services are not relevant to professional judgment and professional skepticism.

3.

Consulting with others can enhance objectivity and avoid judgment traps because it brings in different perspectives and a different way of framing the problem. It can reduce the effects of ethical blind spots and help the decision maker see the wider implications of the problem at hand.

4.

Consulting and​ non-audit services are helpful and will

considerably

enhance an​ auditors' ethical blind spot.

Answer 1

Non-audit services provided by auditors to their clients fall into three categories:

1. Services required by legislation or contract to be undertaken by the auditors of the business. These include:

regulatory returns e.g. to the Prudential Regulation Authority

legal requirements to report on matters such as share issues for non-cash consideration, expenditure for grant application purposes, etc

contractual requirements, for example to report to lenders or vendors on net assets, covenant requirements, etc.

2. Services that it is most efficient for the auditors to provide because of their existing knowledge of the business, or because the information required is a by-product of the audit process. These include:

services such as those listed in category (1) above that the auditors are not required by law to undertake, but where the information largely derives from the audited financial records

tax compliance, where much of the information derives from the audited financial records

'short form' or other reports in acquisition or reorganisation situations where completion is necessary in a very short time.

3. Services that could be provided by a number of firms. In this case, the fact that the firm is the auditor is incidental and it would generally only be chosen because, for example, it had won a tender process. Examples of such services include:

management consultancy

tax advice

human resources consultancy.

It is generally agreed that prohibition helps because.

When a company fails, the quality of the audit is often called into question. Typically, the accusation is made that the auditors have allowed inappropriate accounting treatments because their independence has been compromised, either because they have become too close to the company they are auditing (the "familiarity" threat) or, more directly, because their objectivity is challenged by over-reliance on income from a single source. Those who hold that view believe that the only solution is for auditors to be prohibited from providing any services other than audit, to their audit clients.

How the existing arrangements provide safeguards against the provision of non-audit services compromising independence.