Chapter 5 Flashcards
(18 cards)
Fundamental principles that professional accountants should comply with
Integrity - be straightforward and honest in professional relationships
Objectivity - Not to compromise professional or business judgments because of bias, conflict of interest or undue influence of others
Confidentiality - to respect the confidentiality of information acquired in professional relationships
Professional behaviour - comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession
Professional competence and due care - attain and maintain professional knowledge and skill at the level required to ensure that a client receives competent professional service based on professional standards. To act diligently and in accordance with applicable professional standards.
Self interest threat
the risk that a client will inappropriately influence the professional accountant’s judgment or behaviour. Eg. receiving gifts from an audit client and owning shares in an audit client
Threats to fundamental principles
circumstances, relationships and situations that could threaten the professional accountant’s ability to satisfy the fundamental principles
Self review threat
where a professional accountant performs work for the client and this work is later reviewed by the same person or another professional accountant/auditor from the same firm to arrive at a judgment on the subject matter
Advocacy threat
when the auditor promotes or supports a client’s position or interests, to the point where their objectivity and independence are compromised. Eg. Promoting a client’s shares or financial products (e.g., helping them raise capital).
Familiarity threat
familiarity threat in audit arises when the auditor becomes too close or too trusting of the client or its employees, which can impair professional skepticism and objectivity.
Why is self interest a threat
If the auditor has something to gain or lose—such as fees, investments, or relationships—they might be tempted to overlook issues or not challenge the client, especially if doing so could hurt their own interests.
Why is advocacy a threat?
The auditor might become too emotionally or financially invested in the client’s success. This can impair their professional skepticism, making them less likely to critically evaluate the client’s financial statements or disclosures.
Why is self review a threat
If an auditor reviews something they were involved in creating, preparing, or recommending, they may be biased—consciously or unconsciously—toward not finding faults or errors in it.
Why is familiarity a threat
Over time, personal relationships, long association, or repeated interactions can lead an auditor to:
Be less questioning of management’s decisions.
Overlook errors or misstatements.
Avoid challenging the client to preserve the relationship.
Intimidation threat
occurs when the auditor is discouraged from acting objectively because of actual or perceived pressure from the client or others.
Why is intimidation a threat
If the auditor feels threatened, whether by loss of the client, legal action, or personal consequences, they may:
Soften their judgment to avoid conflict.
Fail to report misstatements or issues.
Give in to client demands out of fear.
Intimidation threat safeguards
Use strong ethical and firm policies to handle client pressure.
Involve senior firm leadership or external legal counsel.
Withdraw from the engagement if pressure is too great.
why is intimidation threat a risk
The auditor might compromise audit quality or fail to maintain independence out of fear, rather than professional judgment.
Safeguards against familiarity threat
Rotate key audit partners regularly.
Assign fresh team members to the audit.
Enforce firm policies to manage personal relationships.
Have independent reviews by someone not connected to the client.
Risk of familiarity threat
The auditor might compromise their independence and fail to act objectively, which undermines the reliability of the audit.
