The fact that the external auditors will not be able to physically inspect or examine the audit procedures does not comply with the GAAS (Standards of Field Work, No. 3). This standard explicitly requires the auditor's ability to examine, inspect, observe and confirm the accounting information obtained during the audit procedures.
Standard No. 3 of GAAS General Standards requires "mental independence" on the part of the auditor, which might not be fulfilled because the acquiring auditing firm's principal partner is a cousin to TPC's CEO. In this situation, the auditor might not be able to give a free and independent opinion and rather be under significant pressure throughout the process.
The last situation is entirely in violation of GAAS Standards of Reporting No. 1. This standard requires that the company's financial statements should be in full compliance with the Generally Accepted Accounting Principles (GAAP). However, according to the aforesaid situation, TPC's accounting records have not been prepared in accordance with the GAAP standards.
In order to bring the audit in compliance with the GAAS standards, the first action that should be taken is to provide the auditor complete mental freedom to undertake the audit process and independently obtain the information required to carry out the process. This can be done if the influence of auditor's relative is avoided. Another step which is important to be undertaken is that the auditors should be provided an opportunity to perform physical examination wherever possible. Otherwise the auditor will need to mention his inability to perform physical inspection in the report and reflect this fact in his final opinion to bring the audit in compliance with the GAAS standards. Also any corrections in TPC's accounts and financial recording should be made, where possible, so as to