Question

For each of the following situations, state the key threats to auditor independence (from the five threats identified in SECTION 300 of APES 110).

Situation 1: An employee of an audit client who has influence over the preparation of the financial report, resigns and takes up a position with the audit firm.

Situation 2: A member of the assurance team resigns and takes up a position as a director with an audit client.

Situation 3: A member of the assurance team serves as the company secretary of an audit client.

Situation 4: An audit firm is concerned about losing a significant client.

Situation 5: An audit partner has a longstanding friendship with the CFO of the audit client.

Answer 1

in this question, for 5 situation we have to find the key threats to auditor independence

situation1: there is a self review threat. if the employee of an audit client who has influence over the preparation of the financial report, resigns and takes up a position with the audit firm then he is reviewing same work has he did when he was in audit client.

solution: not include this employee in this audit client , instead transfer him to other assurance engagement of another audit client.

situation 2: there is self interest threat. A member of the assurance team resigns and takes up a position as a director with an audit client. this results in members of assurance engagement of knowing the director of the audit client. he may  manipulate the audit engagment process to benefit himself from the company after he resigns.

solution: there is a cooling off period in audit firm, so that members of assurance engagement are restricted from doing key jobs in the audit client for a certain period of time.

having an independent professional accoutant review the work of the former member of the audit firm.

situation 3: there is a advocacy threat. if a member of the assurance team serves as the company secretary of an audit client then they may be seen to be on the client's side rather than being independent. eg: helping a client raise finance from investors, and from their bank. representing an audit client in a legal case or tax enquiry.

solution: audit firm must politely decline the offer

situation 4: there is a intimidation threat. if  an audit firm is concerned about losing a significant client, then this put pressure on an auditor, and audit firm may do audit procedures in favour of company for not losing the audit client.

solution: involving an additional professional accountant on the team to review the work.

situation 5; there is a familarity threat. if : An audit partner has a longstanding friendship with the CFO of the audit client then he may conduct audit not in a skeptical way beleiving that his friend and his company's accounts are true and fair view.

solution: audit partner must be removed from this engagement of this audit client.