Page 337 - CA Inter Audit PARAM

CA Ravi Taori

In this case, Chartered Accountant is already rendering accounting and book keeping services to an NGO. If
he accepts audit, he would be involved in reviewing own work. Therefore, the same constitutes “self-review”
threat.

QNO— Self Interest Threat - Undue Dependence of Audit Fees New Course – (SM25)
ETH.55 Bhaskar CNO - ETH.080
A Chartered accountant receives about 40% of his total audit fees from a single client. Discuss how it could
affect independence of Chartered accountant as auditor of this client. What are such types of threats
referred to as?
Answer Self Interest Threat
• Self-interest threats, which occur when an auditing firm, it’s 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.
Like, in case an audit firm unduly relies on fees from a client, it may result in threat to self- interest
of auditor and he may not work objectively for the fear of losing client.
Therefore in the above case, the threat is being referred to is self-interest threat.

QNO— Self Interest Threat & Safeguards for Distant Relative Holding Shares New Course – (SM25)
ETH.60 Bhaskar CNO - ETH.100
CA Raman Gupta is offered appointment as auditor of a company. One of his distant uncles held some
shares in the same company. Holding of such shares, by a distant relative, is not prohibited under
provisions of law nor does it affect his independence. Before he could accept appointment, he received
unfortunate news of death of his uncle who had died without any children. He came to know that he
was nominee of these shares having substantial value. It landed him in a tricky situation. What should
be proper course of action for him?
Answer Safeguards
When threats to independence exist, the auditor should either desist from the task or eliminate the threat
or at the very least, put in place safeguards which reduce the threats to an acceptable level.
Circumstances
Holding of shares involves financial interest in the company and is in nature of self-interest threat. He has
come to hold shares due to nomination made by his distant relative before accepting the appointment.
Course of action
Considering above, he should take steps to eliminate the threat by selling shares immediately before
accepting appointment. Holding of shares of the same company for which he is offered appointment as
auditor constitutes threat to his independence.

QNO-- Familiarity Threat - Free Holiday to Auditor New Course – (M24M)
ETH.70 Bhaskar CNO – ETH.080

CA Tripad (engagement partner) based at New Delhi is external auditor of Lap of Nature, a firm, since last
three years. The firm is engaged in business of providing tourism services including holiday packages to its
club members. It has also provided auditor including his team members free holiday for a week every year

in one of its premium resorts in Ooty in the State of Tamil Nadu. The company has also booked free air
travel for engagement team members during all these years. Discuss why Chartered Accountant is not
acting ethically. How are familiarity threats created in above situation?
Answer The firm is providing free hospitality to engagement team members including engagement partner. In such
circumstances, fundamental principles governing professional ethics are violated. Such acts of free
hospitality are capable of impairing objectivity of auditor.

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