A familiarity threat exists if the auditor is too personally close to or familiar with employees, officers, or directors of the client company. ABC Company has been audited by the same auditor for over 10 years and the auditor regularly plays golf with the CEO and CFO of ABC Company.
What is familiarity threat to independence?
Definition: The familiarity threat is when an auditor is familiar with his or her client. This familiarity deteriorates their independence to perform an audit and further influences the auditor’s decision impacting the transparency of the audit.
How do you safeguard familiarity threat?
Examples of safeguards that can be applied include:
Changing the role of the senior personnel on the attest engagement team or the nature and extent of the tasks the senior personnel perform.Having a professional accountant who was not included on the attest engagement team review the work of the senior personnel.
What is familiarity in auditing?
The relationship between the directors and the auditors has been termed the `Familiarity’ or `Trust Threat’ (Chartered Accountants Joint Ethics Committee, 1995). This is argued to exist where the auditor is over influenced by the personality and qualities of directors or where the auditor knows the client too well.
What happens if an auditor is not independent?
If this happens, the auditors can no longer be said to be independent and the shareholders cannot rely on their opinion. Accounting firms sometimes engage set audit fees at less than the market rate and make up for the deficit by providing non-audit services, such as management consultancy and tax advice.
What is intimidation threat?
The intimidation threat is when the client uses its leverage position to threaten or influence auditors. Usually, auditors can use safeguards against this threat to eliminate or reduce it to an acceptable level. However, that may not always be possible.
How do you overcome self interest threats?
The threat created can be reduced to an acceptable level by the application of the following safeguards:
Ask the individual to notify the firm when entering serious employment negotiations with the assurance client;Remove of the individual from the assurance engagement;
What is a self-review threat?
When auditors encounter the risk of assessing their own work, this is known as the self-review threat.
Which of the following is an example of a self-review threat?
An example of a self-review threat is: Preparing source documents used to generate the clients financial statements.
What does professional skepticism mean?
Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.
What are five types of threats to independence?
6 key threats to auditor independence
Self-review threat. These occur when the auditor has also prepared some of the accounting for the fund. Self-interest threat. Multiple referrals threat. Ex-staff and partners threat. Advising threat. Relationships threat.
What is safeguard in audit?
Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level.
Can an auditor hold shares in a client company?
18 March 2011 As per Companies Act and CA Act, statutory auditor cannot purchase shares of auditee company.
Can an auditor ever be truly independent?
Ultimately, as long as audit appointments and fees are determined by the company being audited, the auditor can never truly be economically independent of the client. That is why there are broader codes of conduct which govern the relationship between both parties.
What is ethical threat?
An ethical threat is a situation where a person or corporation is tempted not to follow their code of ethics. An ethical safeguard provides guidance or a course of action which attempts to remove the ethical threat. Ethical threats apply to accountants – whether in practice or business.
Can you have a bank account with an audit client?
Under SEC rules, accountants aren’t considered independent if they maintain bank accounts with an audit client with balances greater than FDIC or similar depositary insurance limits.
What goes wrong when accounting firms become consultants?
The shift toward consulting can lead to conflicts of interest which could cause the firms to go soft on holding their audit clients to account. Critics fear the emphasis on consulting may mean the firms aren’t paying as much attention to their core auditing business, which could hurt the quality of audits.
Can an auditor be an accountant?
It is also possible for an accountant to study further and to become qualified as an auditor later on in their career.
