Question

Able & Co. is evaluating its independence relative to its audit of the City of Baker's self-insurance fund using the conceptual framework for independence included in Government Auditing standards. During the course of the review of the work performed, the audit partner notes that virtually no audit procedures were performed on an actuarial valuation of the fund's unpaid claims liabilities conducted by consultants from Able & Co's actuarial group. The actuarial valuation was performed as part of a separate non-audit engagement.

The unpaid claims are material to the fund.

Discuss the situation above represents which threats (familiarity threat, OR self-interest threat OR A self-review threat)?

(PROVIDE EXPLANATION)

THIS IS AUIDITING COURSE ( FROM BUSINESS COLLAGE )

Answer 1

The situation above presents a self review threat.

It is a threat faced by an auditor when he/she is doing work performed by him/her or by others from the same firm. Here, the actuarial valuation was done by consultants from the same firm. He may overlook errors in the valuation since it was done by his firm and it will be like admitting their faults. Hence, the threat faced by the auditor is self review threat.

I shall also explain the other threats mentioned in the question:
Familiarity threat: It is the threat faced by the auditor when he is too familiar with the entity being audited - like its employees, directors, clients, etc. He may be forced to consider these relations while auditing the company and hence affect his independence.

Self interest threat: It is the threat faced by the auditor when he or his firm has financial interest in the company and that may affect his independence. He may provide a favorable opinion about the company's financial position in order to protect his financial interest..

Hope this helps :)