Threats

Self-interest: auditor’s judgment or behaviour compromised due to financial or other interest in the client.

Self-Review- auditor will not appropriately evaluate the results of a previous judgment made/or service performed by him (i.e.
when he reviews his own work, he won’t identify or report errors in his work)

Familiarity: auditor’s judgment compromised due to a long or close relationship with a client. The auditor will be too sympathetic
to their interests or too accepting of their work .

Advocacy: auditor will promote a client’s position to the point that his objectivity is compromised.

Intimidation: the threat that the auditor will not act objectively because of actual or perceived pressures, including attempts to
exercise undue influence over the auditor

Gifts and hospitality Need to check if allowed by local laws and regulations
Can only accept if trivial and no intention to influence
Threats to integrity, objectivity and professional behavior behavior

 self-interest
 familiarity .

Compensation and evaluation: When an audit team CANNOT evaluate or compensate a key audit partner based
member is evaluated on or compensated for selling non- on that partner’s success in selling non-assurance services to
assurance services to that audit client, the partner’s audit client. .

Threat: QCR: Have an appropriate reviewer review the work of the

 self-interest audit team member.

Fee dependence Listed clients:

If gross recurring fee from one client greater than 15% of the firm’s
When the total recurring fees from an assurance client revenue for two consecutive years,
represent a large proportion of the total fees of the firm, Tell client’s TCWG
firm will be worried about losing the client
Independent QCR or external QCR before OR after issuing 2nd
Threats: year’s opinion
 self-interest
 intimidation
Other clients:
Try to reduce dependence ( increase client base)

External QCR

Overdue fee: QCR

Perceived as a loan to the client if it remains unpaid for a At least partial recovery or recovery plan before starting new
long time work

Threats: If outstanding for a long time, consider not accepting

 self-interest reappointment as the auditor
 intimidation
Professional & Ethical Considerations---Page 1 of 10
Contingent fee Not permitted for audit
Contingent fees are fees calculated on a predetermined
basis relating to the outcome of a transaction or the result
of the services performed.

Threats:
 self-interest
 advocacy

Serving as a Director or Officer of an Audit Client No allowed.

Threats:
 self-interest
 self-review

Long association Listed entity

The engagement partner-not more than 7 cumulative years
When an individual is involved in an audit engagement over with 5 years cooling off period
a long period of time Quality control reviewer- not more than 7 cumulative years
with 3 years cooling off period
Threats:
 self-interest
 familiarity CAN be extended to an extra year IF rotation is not possible for
genuine reasons. Need to inform client’s TCWG about this and the
safeguards that are being implemented to manage this.

In the cooling off period, CANNOT participate in the audit or, provide
quality control for the engagement, or consult with the engagement
team or the client regarding technical or industry-specific issues or
have significant or frequent interaction with senior management etc.

Private clients

Depends on the firm’s structure and seniority of the people

involved
Rotate members
QCR, External QCR

Recent Service with an Audit Client Consider the position he was at and the role he now has in
the team
If an audit team member has recently served as a director
or officer, or employee of the audit client. Remove from team if worked at the client in the year being
audited at a position to exert significant influence over the
subject matter. (remember, the F/s contain comparatives as
Threats: well so the same safeguard would apply if he has worked in
 self-interest the previous year as well)
 self-review
 familiarity
QCR if he has already done some work at the client

Professional & Ethical Considerations---Page 2 of 10

Temporary staff assignments(secondment): Lending of
staff to the client Ensure
- only for a short period of time
Threats: - seconded staff should not assume management
 self-review responsibilities
 familiarity
- the audit client is responsible for directing and supervising
 advocacy
the activities of the personnel.
 management threat

Should ideally then not be made a part of the audit team

when he comes back to the firm after secondment (Not
including the loaned personnel as an audit team member
might address a familiarity or advocacy threat).

Employment with the client: the director or a senior

member of the audit client has been a member of Ensure no significant connection remains between the firm
the audit team or partner of the firm in the past and the individual ( e.g. material amounts owed by the firm
to the individual, participation in firm’s professional activities
Threats: etc)
 self-interest Modify the audit plan;
 familiarity Assign individuals to the audit team who have sufficient
 intimidation experience in relation to the individual who has joined the
client; or
QCR of the former member of the audit team.

Considering a job offer at the client

Removing the individual from the audit team; or

A review of any significant judgments made by that
individual while on the team.

Family and personal relationship Remove from team if the relationship is with a senior person at the
client with influence over the f/s.
Threats:
 self-interest If not, consider work allocated to the team member(Structuring the
 familiarity responsibilities of the audit team so that the professional
 intimidation does not deal with matters that are within the responsibility of the
immediate family member.)

Business relationship If material to the firm/individual, not allowed

- Commercial relationship
- Common financial interest Buying goods/services is okay if normal course of business
and arm’s length transaction
Examples:
❖ joint venture with the client or a controlling
owner/ director;
❖ formal marketing of each other’s product;
❖ combine the services of the firm with those being
offered by client and market the package

Threats:
 self-interest
 intimidation (due to actual or perceived pressure
about losing the audit assignment)
Professional & Ethical Considerations---Page 3 of 10
Loan and guarantees Okay ONLY IF in normal course of business under normal
(Taking a loan from the client or giving a guarantee for the lending conditions
client’s loan) QCR

Threat:
 self-interest

Financial interest
Team member/firm’s financial interest in a client:
Threats:
 self-interest (threat to objectivity and confidentiality) Direct- not allowed

Material indirect-not allowed

Conflict of interest In general, the more direct the connection between the professional
service and the matter on which the parties’ interests conflict, the
Objectivity affected. more likely the level of the threat is not at an acceptable level.
Examples of circumstances that might create a conflict of
interest include: Examples of actions that might be safeguards to address threats
created by conflicts of interest include

 Providing advice to two clients at the same time

where the clients are competing to acquire the
same company and the advice might be relevant to Notify all parties( disclose the nature of the conflict of
the parties’ competitive positions. interest and how any threats created were addressed to the
 Advising a client on buying a product or service relevant parties)
while having a royalty or commission agreement
with a potential seller of that product or service. Get Written consent from the affected clients to act

Segregation of teams

Confidentiality guidelines and agreement

Regular QCR

Lowballing Quality to be ensured (ensure ISAs followed and sufficient

appropriate evidence gathered)
Where audit firms offer reduced (or unrealistic) fees to sign
new audit clients QCR

Threat:
 self-interest (threat to compliance with the
principle of professional competence and due
care)

Professional & Ethical Considerations---Page 4 of 10

 Non-assurance services to audit clients

Assuming Management responsibility for an audit client Generally, the threat is so significant that no safeguard is possible.
They involve responsibilities involve controlling, leading and
directing an entity, including making decisions regarding the If not related to decision making ( eg routine and administrative like
acquisition, deployment and control of human, financial, filing returns), ensure client management makes all judgments and
technological, physical and intangible resources. decisions that are the proper responsibility of management.

Threats

 Self-review
 self-interest threats
 familiarity threat

Accounting and bookkeeping services

Audit Clients that are Listed- Not allowed.
Accounting and bookkeeping services comprise a broad
range of services including: Other clients: may provide accounting and bookkeeping
- Preparing accounting records and financial services if a routine or mechanical if safeguards are
statements. implemented.
- Recording transactions.
Safeguards for routine and mechanical services:
- Payroll services.
Threat
- Segregation of teams: Using professionals who are not audit
 Self-review team members to perform the service.
- QCR: Having an appropriate reviewer who was not involved
Accounting and Bookkeeping Services that are Routine or Mechanical in providing the service review the audit work or service
Accounting and bookkeeping services that are routine or mechanical in
performed
nature require little or no professional judgment. Some examples of these
services are:
- Preparing payroll calculations or reports based on client
originated data for approval and payment by the client.
- Recording recurring transactions for which amounts are easily
determinable from source documents or originating data, such
as a utility bill where the client has determined or approved the
appropriate account classification.
- Calculating depreciation on fixed assets when the client
determines the accounting policy and estimates of useful life
and residual values.

Valuation
Audit Clients that are Listed: not allowed if the valuation
service would have a material effect on the F/S.
Threats
Audit Clients that are Not Listed: not allowed if the valuation
 Self-review involves a significant degree of subjectivity and the valuation
 Advocacy will have a material effect on the financial statements on
which the firm will express an opinion.

(Certain valuations do not involve a significant degree of subjectivity. This is likely to be

the case when the underlying assumptions are either established by law or regulation,
or are widely accepted and when the techniques and methodologies are prescribed by
law or regulation).

Safeguards to be implemented to address threats if immaterial and

doesn’t involve significant degree of judgment:
- Segregation of teams
- QCR

Professional & Ethical Considerations---Page 5 of 10

Internal audit
Audit Clients that are Listed: Not allowed if they relate to a
Internal audit services involve assisting the audit client in significant part of the internal controls over financial
the performance of its internal audit activities. reporting or relate amounts/disclosures that are material

Threat
Safeguards for self-review and management threats for
 Self-review (the results of internal audit service might clients that aren’t Listed or for internal audit service that
be used in conducting the external audit). don’t relate to financial reporting:
 Performing a significant part of the client’s internal
audit activities increases the possibility that firm will
assume a management responsibility. - Segregation of teams
- The client designates an appropriate and competent senior
management to be responsible at all times for internal audit
activities
- The client acknowledges responsibility for designing,
implementing, monitoring and maintaining internal control.
- The client evaluates and determines which
recommendations resulting from internal audit services to
implement and manages the implementation process
IT systems Audit Clients that are Listed: NOT Allowed to if relate to the
internal control over financial reporting
Services related to IT systems include the design or
implementation of hardware or software systems. For pvt clients/other IT systems not related to financial
reporting:
Threat: - Segregation of teams
 Self-review - The client has to acknowledge its responsibility for
 Assuming management responsibility establishing and monitoring a system of internal controls
- The client should make all management decisions with
respect to the design and implementation process;

Recruitment services to an audit client For ALL audit clients

Cannot act as a negotiator on the client’s behalf

Threats
 Self-interest, Cannot provide a recruiting services (related to searching for
 Familiarity candidate and conducting reference checks) to an audit
 intimidation client with respect to the following positions:
 assuming management responsibility - A director or officer of the entity; or
- A member of senior management in a position to exert
significant influence over the preparation of the F/S

For other positions (excluding the above)

- The client makes all management decisions with respect to

the hiring process, including determining the suitability of
prospective candidates and selecting suitable candidates for
the position and determining employment terms and
negotiating details, such as salary, hours and other
compensation.

Professional & Ethical Considerations---Page 6 of 10

Taxation services to an audit client Tax return preparation- no threat!
ALL audit clients

Threats Allowed. Ensure management takes responsibility for the return

 Self-review (Preparing calculations of current and
deferred tax liabilities (or assets) for an audit client Providing tax return preparation services does not usually create a
for the purpose of preparing accounting entries threat.
that will be subsequently audited by the firm,
Providing tax planning and other tax advisory Tax return preparation services are usually based on historical
services ) information and principally involve analysis and presentation of such
historical information under existing tax law, including precedents
 Advocacy (Providing tax planning and other tax and established practice. Further, the tax returns are subject to
advisory services, assistance in resolution of tax whatever review or approval process the tax authority considers
disputes) appropriate.

Tax Calculations for the Purpose of Preparing Accounting Entries-

self-review

Audit Clients that are Listed

NOT allowed if material to the F/S.

Audit Clients that are Not Listed

- Segregation of teams
- QCR

Tax Planning and Other Tax Advisory Services self-review and

advocacy

Tax planning or other tax advisory services comprise a broad range of

services, such as advising the client how to structure its affairs in a tax
efficient manner or advising on the application of a new tax law or
regulation.

Allowed if immaterial and the advice provided as a result of the tax

planning and other tax advisory services:
- Is clearly supported by a tax authority or other precedent.
- Is an established practice.
- Has a basis in tax law that is likely to prevail.

Safeguard to be put in place:

- Segregation of teams
- QCR

Professional & Ethical Considerations---Page 7 of 10

 Assistance in the Resolution of Tax Disputes-advocacy
A tax dispute might reach a point when the tax authorities have
notified an audit client that arguments on a particular issue have
been rejected and either the tax authority or the client refers the
matter for determination in a formal proceeding, for example, before
a public tribunal or court.

Not allowed if relates to material amounts and/or the services

involve acting as an advocate for the audit client before a public
tribunal or court in the resolution of a tax matter

Otherwise:

- Segregation of teams
- QCR

LEGAL SERVICES Not allowed if relates to material amounts and involve judgment

Threats

 Self-review
 Advocacy

Some intimidation examples-

Being asked to reduce extent of work to reduce fee
Team members feels pressured to agree with client’s judgment as client has more expertise

Some advocacy examples

Being asked to accompany the client to a meeting with the bank/lender

Being asked to promote the client at a conference
Providing legal services to the audit client
Providing tax planning and other tax advisory services etc.

Professional & Ethical Considerations---Page 8 of 10

 A summary

Self-interest Self-review Familiarity Intimidation Advocacy Management

threat

Gifts and Gifts and hospitality

hospitality

Compensation and
evaluation
Fee dependence Fee dependence

Overdue fee Overdue fee

Contingent fee Contingent fee

Serving as a Serving as a
Director or Officer Director or Officer
of an Audit Client of an Audit Client

Long association Long association

Recent Service Recent Service Recent Service with

with an Audit with an Audit an Audit Client
Client Client

Temporary staff Temporary staff Temporary staff Temporary staff

assignments(secon assignments(second assignments(seco assignments(secon
dment) ment) ndment) dment)
Employment with Employment with Employment with
the client the client the client
Family and Family and personal Family and
personal relationship personal
relationship relationship

Business Business
relationship relationship

Loan and
guarantees

Financial interest

Accounting and
bookkeeping
services to an audit
client

Valuation services Valuation services

to an audit client to an audit client

Internal audit Internal audit

services to an audit services to an audit
client client

Professional & Ethical Considerations---Page 9 of 10

Self-interest Self-review Familiarity Intimidation Advocacy Management
threat
IT systems IT systems
design/implement design/implement
ation services for ation services for
an audit client an audit client

Recruitment Recruitment services Recruitment Recruitment

services to an to an audit client services to an services to an audit
audit client audit client client

Tax Calculation for

an audit client
Tax Planning and Tax Planning and
Other Tax Advisory Other Tax
Services to an audit Advisory Services
client to an audit client
Assistance in the
Resolution of Tax
Disputes to an
audit client ( legal
services)
Legal services to an Legal services to
audit client an audit client

Some intimidation Some advocacy

examples- examples
-Being asked to
reduce extent of -Being asked to
work to reduce fee accompany the
client to a meeting
-Team members with the
feels pressured to bank/lender
agree with client’s -Being asked to
judgment as client promote the client
has more expertise at a conference

Professional & Ethical Considerations---Page 10 of 10