In: Finance
Members in public practice (MIPPs) shall be independent when performing attest services. Discuss and analysis the four threats to independence: Financial relationships; Employment relationships; Family relationships; and Consulting relationships. Please provide an example for each threat. How does the appearance of lack of independence impact the Attest service?
Self Interest Threats: A self-interest threat exists if the Member in Public Practice holds a direct or indirect financial interest in the company or depends on the client for a major fee that is outstanding.
Example: The audit team is preparing to conduct its audit for a Company. However, the audit team has not received its audit fees from the Company for its services in previous years.The audit team might be tempted to issue a favorable report so that the company is able to secure a loan to settle the outstanding fee.
Self Review Threat: A self-review threat exists if the auditor is auditing his own work or work that is done by others in the same firm.
Example:The auditor prepares the financial statements for Company while also serving as the auditor for the same Company. By having the auditor review his or her own work, the auditor cannot be expected to form an unbiased opinion on the financial statements.
Advocacy Threat: An advocacy threat exists if the auditor is involved in promoting the client, to the point where their objectivity is potentially compromised.
Example: The auditor is assisting in selling of Company while also serving as the auditor for the company.The auditor may issue a favorable report to increase the sale price of that Company.
Familiarity Threat: A familiarity threat exists if the auditor is too personally close to or familiar with employees, officers, or directors of the client company.
Example: Company has been audited by the same auditor for over 10 years and the auditor regularly plays golf with the CEO and CFO of the Company.The auditor may have become too familiar with the client and, thus, lack objectivity in their work.