In Table 3.3 we suggested pressures against independence in respect of small audit firms and small auditees. To what extent do you believe that the IFAC Code and FRC Ethical Standard have been successful in dealing with the special circumstances of small audit firms and small entities? 

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TABLE 3.3 Size and independence Company Small Large Small Large Two pressures against independence: 1 Recurring audit fee loss often serious as related to economic survival and may be difficult to replace. 2 Close personal relationship with company, often providing many management services because of lack of resources/expertise in small company. But public interest not so high? Therefore, review not audit? Major pressure against independence: fear of losing a substantial audit fee from a large client company. Principle is to be seen to be indepen- dent. Note that the IFAC Code of Ethics and FRC Ethical Standard give guidance where total fees generated from one client represent a large pro- portion of the total audit fees of the audit firm, and set limits on the percentage of fees obtained from one client. These limits are more stringent where an audit client is a public interest entity. In this case, the audit firm will probably be pro- viding a high degree of management services. Firm may not be independent of systems installed by them. The IFAC Code and FRC Ethical Stan- dards state that there may be a threat to inde- pendence and suggests safeguards. There is little likelihood that the fee limits from one client will be breached. On the face of it fewer problems but note: 1 Management advisory services likely. 2 Continuous auditing may breed familiarity and the treatment of audit staff almost as employees. Audit firm Small Smail Large Large In interpreting the data in Table 3.3 remember that in small companies many shareholders are frequently not remote from management, as directors may be important shareholders. In large companies, the directors often do hold shares in their company, but these holdings are likely to be small in relation to the total shares in issue. Most shareholders of large companies will be remote from the directors. Remoteness, of course, is one reason why independence on the part of the auditor is important.