MC Question 5
You are an audit manager of Buffon & Co, and you have just been assigned the audit of Maldini Co (Maldini). The audit engagement partner who is responsible for the audit of Maldini, a listed company, has been in place for approximately eight years and her son has just been offered a role with Maldini as a sales manager. This role would entitle him to shares in Maldini as part of his remuneration package.
Maldini’s board of directors is considering establishing an internal audit function, and the finance director has asked Buffon & Co about the differences in the role of internal audit and external audit. If the internal audit function is established, the directors have suggested that they may wish to outsource this to Buffon & Co.
The finance director has suggested to the board that if Buffon & Co is appointed as internal as well as external auditors, then fees should be renegotiated with at least 20% of all internal and external audit fees being based on the profit after tax of the company as this will align the interests of Buffon & Co and Maldini.
If the internal and external audit assignments are accepted, what safeguards, if any, are needed in relation to the basis for the fee?
A. As long as the total fee received from Maldini is less than 15% of the firm’s total fee income, no safeguards are needed
B. The client should be informed that only the internal audit fee can be based on profit after tax
C. The fees should be based on Maldini’s profit before tax
D. No safeguards can be applied and this basis for fee determination should be rejected