Answered: What are the threats to independence?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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What are the threats to independence?

Expert Solution

Step 1

Given below are the seven threats to auditor’s independence:

Self-review threat: It occurs when an auditor also provides some non-audit services to the same client. It threatens independence as an auditor will review the work which was done by the auditor only. For example preparation of original data which serves as evidence for the preparation of financial data.

Advocacy threat: It occurs when the auditor supports the client’s interest. It threatens auditor’s independence as it seems that the auditor is more concerned about the client than that of external users of the financial information. For example: representing the client in front of tax authorities.

Adverse interest threat: It occurs when the client and the auditor are in opposition to each other. It threatens independence as an auditor may opt for actions which are in the interest of audit firm and not relevant for users of the financial statements. For example instigation of litigation by one on other.

Familiarity threat: It occurs when the auditor holds a long-standing relationship with the person who is in association with the client. It threatens independence as the auditor may take some steps in favor of that person ignoring the external users at large. For example, the key managerial person in the client’s management is in relation to the partner of the audit team.

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