Question

Assume that a CPA has an opportunity to bid on a new audit client. The accounting firm is being considered because the CPA's best friend from college is the CFO of the potential client. Apply the conceptual framework for members in public practice to this situation. Explain any threats involved and whether any safeguards can be applied to reduce the threat to an acceptable level.

Answer 1

Under the conceptual framework approach, users follow the following steps:

• Step 1: Identify threats to compliance with the rules. If no threats, then proceed with service. If threats are identified, then proceed to Step 2. In the given case, there is a familiarity threat due to close relationship between CPA and CFO of the potential client.
• Step 2: Evaluate the significance of the threats to determine whether the threats are at an acceptable level. If threats are at an acceptable level, then proceed with service. If threats are not at an acceptable level, then proceed to Step 3. Significance of threat in the present situation depends upon how close the relation is between CFO and CPA.
• Step 3: Identify safeguards that can be applied. Safeguards can be existing safeguards or new safeguards. Safeguards that can be applied in the current scenario are listed below
  • Changing the role of the professional accountant on the attest engagement team or the nature and extent of the tasks the senior personnel perform.
  • Having another professional accountant who was not included on the attest engagement team review the work of the CPA having relation with CFO.
  • Performing an independent internal or an external quality review of the engagement.
  • Rotating the professional accountant off the engagement team for an appropriate period based on the significance of the threats.
• Step 4: Evaluate the safeguards to determine if they eliminate or reduce threats to an acceptable level. Where you conclude that threats are at an acceptable level after applying safeguards, proceed with service. In some cases, an identified threat may be so significant that no safeguards will eliminate it or reduce it to an acceptable level, or you may be unable to implement effective safeguards. Under such circumstances, providing the specific professional services would compromise your compliance with the rules, and you would need to determine whether to decline or discontinue the professional services or resign from the engagement.

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