Question

you are the auditor partner for the AAA audit firm, tendering for the audit of Howard Ltd for the 2019 financial year. During your review of an Australian Securities and Investments Commission (ASIC) company extract for your client Howard Ltd, you note that AAA audit firm holds an interest in Howard Ltd. The interest is material to AAA audit firm.

Required: 1. What is the threat to compliance with the fundamental principles?

2. Explain whether any safeguards could be put in place to reduce the threat to an acceptable level.

Answer 1

1)

As per the IFCA Code, Threats are created by a range of circumstances and relationships. Such threat that has arisen from certain circumstances and relationship can be percieved as compromise of a professional accountant's compliance with the fundamental principles. The nature and significance differ depending on whether they have arisen in a relation from the provision of services of any audit client. A circumstance or relationship may create more than one threat and a threat affect compliance with more than one fundamental principle.

The threats fall into either one or all of the following category-

a) Threat of Self Interest- A threat where the financial and other interest influences the professional's behaviour or judgement.

b) Threat of Self Review- Threat of inappropriate evaluation of results based on previous judgement made by the professional

c) Threat of Advocacy- Threat where a professional's objectivity is compromised when a professional promotes a employer's position.

d) Threat of Familiarity- Threat of being too sympathetic of the employer's interest or too accepting of the employer's work when having a close relationship with the employer.

e) Threat of Intimidation- Threats of discouraging the professional to act objectively because of the actual pressure that includes attempts of under influencing the professionals.

As in the case given that AAA audit firm holds an interest in Howard Ltd, The threat to compliance will be of Self Interest and Self Review.

2) Safeguards that can reduce or eliminate the threat to an acceptable level are categorised as-

a) Safeguards created in the work environment.-

This may include-

(i) The firm's leadership that stresses on the importance of compliance with respect to fundamental principles.

(ii) Implementation of policies and procedures and monitoring quality control of engagements.

b) Safeguards created by such professionals.-

This may include-

(i) Having competent employees with experience and seniority to make managerial decisions.

(ii) Having a corporate governance structure that provides better communication regarding the firm's services.