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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional and ethical developments

Ostrander & Co audits Beltane Ltd, a non-PIE manufacturer. The finance director asks the firm to perform a valuation of Beltane's investment in an associate. The valuation will be used in the financial statements and the amount involved is material, with significant subjectivity. How does the IESBA Code treat this request?

The valuation should not be provided. The IESBA Code prohibits valuation services for audit clients where the result is material to the financial statements and involves significant subjectivity, because the self-review threat cannot be eliminated or reduced to an acceptable level by safeguards such as using another office.

  1. AIt is permitted as long as the valuation is performed by a different office of the firm
  2. BIt is permitted without any threat evaluation, because valuations are always routine services
  3. CIt is prohibited, because a valuation that is material to the financial statements and involves significant subjectivity creates a self-review threat that cannot be eliminated or reduced to an acceptable levelCorrect
  4. DIt is prohibited only if the audit fee is less than the valuation fee

Explanation

The Code states that a firm must not provide a valuation service to an audit client where the valuation would have a material effect on the financial statements and involves a significant degree of subjectivity. Using another office does not remove the self-review threat. Relative fee size is not the test. This is the key reason the first and last options fail.

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