FRA Assurance ethical threats

Threats to objectivity

•Self-Review

•Self-Interest

•Familiarity

•Advocacy

•Intimidation

Self-Review Threat and safeguards

Defn: Where the auditor has provided other services which may be the subject of audit scrutiny

Examples:

-          The firm also prepare the accounts for the organisation

-          The firm also provide tax advice/consultancy/valuations

-          The clients staff transfer over to the audit firm

-          There is no segregation of duties and an individual is reviewing their own work.

-          The internal audit team are reviewing their own work.

Safeguards:

·       A different team and engagement partner for each type of service provided to ensure no team is reviewing work that they’ve completed.

·       If the clients staff transfer over to the audit firm they shouldn’t form part of the audit team for that specific client.

·       An individual should report this self-review and ask for a review from an independent person. 

Self-Interest Threat and safeguards

Defn: Where the auditor has a personal interest in a client for some reason this is likely to affect objectivity.

Examples:

-          Owning shares in the client company

-          High value gifts from clients

-          Potential employment with client

-          Dependence on fees/provision of non-audit services

-          An individual incentivised from getting a bonus payment.

-          An individual wanting to keep their job.

Safeguards:

·       Any employee who owns shares in a client should not form part of the audit team

·       ‘Excessive’ gifts should be politely declined.

·       Employees who are transferring over to the client should not form part of the audit team for that client, or if the work has already been done, the work should be reviewed again.

·       Independent review of an individual receiving a performance related bonus payment.

·       Report any pressures to directors/HR/Professional Body

 

Familiarity Threat and safeguards

Defn: The client and auditor know each other well, there is a formed relationship between them.

Examples:

-          Known the client for years

-          Personal relationship

-          The firms staff move over to the client

Safeguards:

·       (for non-listed audit clients) – The form should consider whether a change in engagement partner/senior staff is necessary if they have been working with the client for 10 years + although this is not mandatory.

·       A second partner review

·       (for listed clients) – No one can act as engagement partner for >5 years and senior teams should be reviewed after 7 years.

·       A review in the process or decision from an independent person.

Intimidation Threat and safeguards

Defn: This occurs where the auditor is being threatened in some way by the client and may therefore do as the client says out of fear of losing client or litigation proceedings.

 

Examples:

-          Large proportion of firm’s income

-          Unpaid fees from prior year

-          Threatened litigation

-          Threatened loss of client/other client/potential clients

-          Being threatened to commit fraud/money laundering

-          Being threatened with losing a job

 

Fee Rules:

• For non-listed audit clients - A clients recurring fees should not exceed 15% of an audit firms revenue. For clients who >10% <15% this needs to be monitored.

For listed audit clients – A clients recurring fees should not exceed 10% of an audit firms revenue. For clients who >5% <10% this needs to be monitored

Safeguards:

• reduce fees to prevent exceeding limits, decline aspects of work or find new clients to increase revenue.

• All fees must be paid before any other work commences

• If being threatened consider resigning as the audit firm.

·       Consider to directors/HR/Professional Body

• Consider resigning from job.

 

Advocacy Threat

Defn: Where the auditor acts on behalf of the client (or represents them) it can cause the auditor’s judgement to be in line to the wishes of the client.

Examples:

·       Promoting a share issue

·       Negotiating a bank loan

·       Representing the client legally

Safeguards:

THERE ARE NO SAFEGUARDS FOR ADVOCACY – politely decline that type of work.