ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement
Halden & Co is the continuing auditor of Orsino Ltd. During the year the firm learns that the chair of Orsino was convicted of fraud in another country and there are press reports questioning the integrity of management. The engagement partner is deciding on continuance. Which action best reflects ISQM 1 and ISA 220 (Revised)?
The partner should reassess the engagement in light of the integrity concerns, deciding whether the firm can continue within ethical requirements. If it continues, the firm should respond to the higher risk with extra risk assessment and consultation. Neither automatic continuance, reduced testing nor immediate resignation without evaluation is appropriate.
- AContinue automatically, since the firm accepted the client in prior years
- BResign immediately without further consideration to avoid any association
- CConsider the information obtained, including management integrity, evaluate whether the firm can continue to perform the engagement, and if continuing, ensure appropriate responses such as increased risk assessment and consultation, while considering legal and ethical resignation requirements if appropriateCorrect
- DContinue but reduce audit testing since management integrity is a matter for regulators
Explanation
Under ISQM 1 the firm's acceptance and continuance policies must consider the integrity and ethical values of the client's principal owners, management and those charged with governance. New information requires reassessment and an assessment of whether the firm can comply with ethical requirements and has the capability to continue. If the firm continues, it must respond to the increased risk, for example in risk assessment, fraud inquiries and consultation, rather than reduce work. Immediate resignation without evaluation is not required, and automatic continuance ignores the requirement.
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