Page 339 - CA Inter Audit PARAM

CA Ravi Taori

➢ Many different circumstances, or combination of circumstances, may be relevant and accordingly it
is impossible to define every situation that creates threats to independence and specify the
appropriate mitigating action that should be taken. In addition, the nature of assurance engagements
may differ, and consequently different threats may exist requiring the application of different
safeguards.

➢ The Code of Ethics for Professional Accountants prepared by the International Federation of
Accountants (IFAC) identifies five types of threats. These are:

Circumstances that may create self-interest threats
• A financial interest in a client or jointly holding a financial interest with a client.
• A loan to or from an assurance client or any of its directors or officers
• Having a close business relationship with a client. Concern about the possibility of losing
a client.
• Potential employment with a client
• Undue dependence on total fees from a client.
• Contingent fees relating to an assurance engagement.

Examples of circumstances that may create self-review threats
• Reporting on the operation of financial systems after being involved in their design or
implementation.
• Having prepared the original data used to generate records that are the subject matter
of the engagement.
• Performing a service for a client that directly affects the subject matter of the
assurance engagement.
• A member of the assurance team being, or having recently been, a director or officer
of that client.
• A member of the assurance team being, or having recently been, employed by the
client in a position to exert direct and significant influence over the subject matter of
the engagement.
• The discovery of a significant error during a re-evaluation of the work of the
professional accountant in public practice.

Examples of circumstances that may create advocacy threats:
• Promoting shares in a listed entity when that entity is a financial statement audit client.
• Acting as an advocate on behalf of an assurance client in litigation or disputes with third
parties.

Examples of circumstances that may create familiarity threats
• A member of the engagement team having a close or immediate family relationship
with a director or officer of the client.
• A member of the engagement team having a close or immediate family relationship
with an employee of the client who is in a position to exert direct and significant
influence over the subject matter of the engagement.
• A former partner of the firm being a director or officer of the client or an employee in
a position to exert direct and significant influence over the subject matter of the
engagement.
• Accepting gifts or preferential treatment from a client, unless the value is clearly
insignificant.
• Long association of senior personnel with the assurance client

Examples of circumstances that may create intimidation threats
• Being threatened with dismissal or replacement in relation to a client engagement.
• Being threatened with litigation.
• Being pressured to reduce inappropriately the extent of work performed in order to
reduce fees.

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