The National Metal Works Limited manufactures and retails door and window frames. The company recently dismissed their external auditors. The directors have approached your firm of accountants to act as their auditors and the directors have proposed a fee of KShs. 1, 000, 000 plus a bonus of 1% of profits after tax. Required: Explain the implications of fixing the audit fee by negotiation between the directors and the external auditors on the independence of the auditor

Maintaining the auditors‘ independence is clearly essential if the audit opinion is to have credibility and the confidence of users of financial statements.

There are various ways in which the auditor‘s independence is preserved, even given the situation that audit fees are generally fixed by negotiation between the directors of a company and the auditors. Ethical guidance sets out various guidelines to safeguard the auditors‘ independence.    These include a restriction on the percentage of total fees which a practice can obtain from a single client (15%) and restrictions preventing auditors from holding shares in the client company or otherwise being personally interested in the client‘s performance.

It is undeniable that auditors would be more independent of the client if they were not dependent on the client for fees.

The accounting profession takes the view that the best safeguards of auditor independence is provided by professional ethics and an objective attitude on the part of the auditors. It remains to be seen whether the public and the government will continue to concur with this view.