Question

Auditors are required to comply with the fundamental ethical principles which can be put at risk in a variety of circumstances.

Required:

1. List five threats to independence and objectivity and for EACH threat identify ONE example of a situation that may cause the threat to occur.

Answer 1

1. Self-Interest Threat

If the auditor has a direct or indirect financial or other interest in the company or a close kin of auditors has any interest in the company , it leads to occurrence of self interest threat

Example

A loan company's auditor may be tempted to give a favourable report for a loan at lower or nil rate interest.

2. Self-Review Threat

A self-review threat occurs when the judgement made by an auditor is revaluated by the same auditor.

Example

The auditor who prepares the financial statements for a Company cannot be expected to be unbiased while giving an opinion on the same financials.

3. Advocacy Threat

An advocacy threat occurs if the auditor is promoting an opinion, to the point where its objectivity is significantly. compromised

Example

The auditor is helping in selling a company while also being the auditor for the same company. He may be tempted to give a favourable report to increase the sale price

4. Familiarity Threat

A familiarity threat occurs when the auditor is really close with employees, officers, or directors of the client company that he becomes sympathetically inclined towards the company.

Example

The auditor of a company may have become too familiar with the client as they were part of same religious group which makes him lack objectivity .

5. Intimidation Threat

An intimidation threat occurs when the auditor is deterred from acting objectively . It can be actual or perceived.

Example

A company threaten it's auditor for their removal because the auditor have issued an unfavorable report.