Ch 2 Audit ethics THREATS TO OBJECTIVITY (A4D) Flashcards
ACCA dedicate a whole section of their code to threats to objectivity and independence. Any threat must be avoided, but ACCA pick out the following in particular:
= Self-Interest = Self – Review = Familiarity = Intimidation = Advocacy = Management
Self-interest
The threat that auditors act in their own personal interests (or are believed to be doing so).
Examples include:
= owning shares in their client
= receiving excessive gifts or hospitality from clients
= receiving excessive fees from a single client
= having personal or business relationships with clients
= audit fees that are calculated in a way that might encourage unethical behaviour by the auditor.
Self-review
The threat that if auditors do certain tasks for clients, their audit work may result in checking their own work.
Examples:
= giving advice on accounting or control systems, then auditing them
= preparing the accounting information, then auditing it
= helping with calculations of numbers in the Financial Statements, then auditing them.
Familiarity
The threat that if auditors are too familiar / friendly with a client, they might deliberately or accidentally put too much trust in their client and not be sceptical enough, leading to under-auditing.
Examples include:
= auditing companies where the auditor’s relatives or friends work
= auditing the same company for many years in a row
= if a client is offering a lot of hospitality, this may be a clue that there is too close a relationship with the auditor
= there are people working at the client who are recent ex-employees of the audit firm.
Intimidation
The threat caused by a client being in a position to put pressure on an auditor.
Examples are the same as Self-Interest … the difference here is that the presumption is that the client is being a bully – rather than the auditor is being nice
to their client out of their own choice.
Advocacy
The threat caused when auditors are asked to do other work that means they are taking their client’s position on something. By taking this position, they may be
seen to be “on the client’s side”, rather than being independent.
Examples include:
= representing an audit client in a legal case or tax enquiry
= taking legal action against a client, or being sued by a client.
Management
The threat that auditors may agree to do other services that result in them making decisions for clients. If they take on management functions, their independence is
likely to be questioned. In the ACCA F8 syllabus management is combined with advocacy. So the combined rule is that auditors must neither be part of decision making (management) nor appear to be part of decision making (advocacy).
