Page 371 - CA Final PARAM Digital Book.

Conduct that might discredit the profession includes conduct that a reasonable and informed third party
would be likely to conclude adversely affects the good reputation of the profession.

A professional accountant shall not knowingly engage in any employment, occupation or activity that impairs
or might impair the integrity, objectivity or good reputation of the profession, and as a result would be
incompatible with the fundamental principles.

QNO Types of Threats Old Course—(N20E)
780.005 TITANIUM CNO – PE.320
The audit team is preparing to conduct audit for ABC Company for the period ending 31.3.2020. However,
the audit team has not received its audit fees from ABC Company for its audit concluded for the period
ended 31.3.2019. The audit team might be tempted to issue a favourable report so that ABC Company

is able to secure a loan to settle the fees outstanding for their 31.3.2019 audit. The audit team is not
complying the fundamental principles of auditing hence hindering the Auditor's Independence. Explain
the types of threats that may hinder Auditor's Independence while issuing Audit Report.
Answer In the given case of ABC Company, audit team is preparing to conduct its audit for the F.Y ending on
31.03.2020. Audit firm did not receive its fees for the F.Y ending on 31.03.2019. Audit team is tempted
to issue a favourable report so that auditee can secure a loan to settle auditor’s outstanding fees. The
audit team did not comply with fundamental principles of auditing and hence compromising Auditor’s
Independence.
Compliance with the fundamental principles may potentially be threatened by a broad range of
circumstances. Many threats fall into the following categories: The Code of Ethics for Professional
Accountants prepared by the International Federation of Accountants (IFAC) identifies five types of
threats. These are:
1. Self-interest threats, which occur when an auditing firm, its partner or associate could benefit from
a financial interest in an audit client. Examples include (i) direct financial interest or materially
significant indirect financial interest in a client, (ii) loan or guarantee to or from the concerned client,
(iii) undue dependence on a client’s fees and, hence, concerns about losing the engagement, (iv) close
business relationship with an audit client, (v) potential employment with the client, and (vi) contingent
fees for the audit engagement.

2. Self-review threats, which occur when during a review of any judgement or conclusion reached in
a previous audit or non-audit engagement (Non-audit services include any professional services
provided to an entity by an auditor, other than audit or review of the financial statements. These
include management services, internal audit, investment advisory service, design and implementation
of information technology systems etc.), or when a member of the audit team was previously a director
or senior employee of the client. Instances where such threats come into play are (i) when an auditor
is having recently been a director or senior officer of the company, and (ii) when auditors perform
services that are themselves subject matters of audit.

3. Advocacy threats, which occur when the auditor promotes, or is perceived to promote, a client’s
opinion to a point where people may believe that objectivity is getting compromised, and e.g. when
an auditor deals with shares or securities of the audited company, or becomes the client’s advocate in
litigation and third party disputes.

4. Familiarity threats are self-evident and occur when auditors form relationships with the client
where they end up being too sympathetic to the client’s interests. This can occur in many ways: (i)
close relative of the audit team working in a senior position in the client company, (ii) former partner
of the audit firm being a director or senior employee of the client, (iii) long association between specific
auditors and their specific client counterparts, and (iv) acceptance of significant gifts or hospitality
from the client company, its directors or employees.

5. Intimidation threats, which occur when auditors are deterred from acting objectively with an
adequate degree of professional skepticism. Basically, these could happen because of threat of
replacement over disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees.

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