Self-Interest Threat - Essay Sample

Introduction

If any managerial employee or partner providing non-audit services to a client has an immediate family member holding a material indirect or direct financial interest in the audit client, then as per APES 110.290.110, a self-interest threat is created. In this case, Andrew Ferguson's wife is planning to purchase shares from Kaplan Limited, which Ferguson is a partner in charge of providing non-audit services APES 110.290.110 stipulates that if an immediate family member has a direct or material indirect financial interest in with an audit client, the self-interest threat present is so considerable such that no precautions can minimize the risk to an acceptable level. In this scenario, independence will be compromised if Michelle is successful in buying Kaplan shares since the shares are a direct financial benefit for Michelle and an indirect pecuniary interest for Abraham. Therefore, the risks are very significant in such a way that no safeguards can be applied to reduce them to a tolerable level.

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Self-Interest or Intimidation Threat

According to paragraph APES 110.290.217, if fees accrued from an audit client and its related entities for two consecutive years exceed 15% of total revenue of an audit firm, then a threat of intimidation or self-interest is created. In this case, SCA has collected 20% of its total fees from DML for two years. APES 110.290.217 states that if for two successive years, the total revenue from an audit client and its allied entities is more than 15% of the total funds accrued by the firm conducting the audit, the firm shall report to Those charged with Governance of an Audit Client concerning the situation and discuss one appropriate safeguards to apply from the following

A professional who is not a member of the auditing firm conducts an Engagement Quality Control Review of the relationship, or a professional regulatory body conducts a review equivalent to an Engagement Quality Control Review before the issuance of the second year's financial statements audit opinion.

A professional who is not a member of the auditing firm conducts an Engagement Quality Control Review of the relationship, or a professional regulatory body leads a review equivalent to an Engagement after the issuance of the second year's audit opinion and before issuance of the third year's financial audit opinion Given that the total fees are 20%, which significantly surpasses 15%, examining the type of relationship between DML and SCA will determine if the threats are significant and can be reduced to an acceptable level by a Post-issuance review. If a post-issuance review would not mitigate the risk, a pre-issuance review will be performed to minimize the risks to an acceptable level (APES 110.290.217).

Self-Interest Threat

APES 110.290.218 stipulates that a self-interest threat may arise if an audit client does not pay overdue fees for a long time, especially if a part of the amount is not paid before issuance of audit opinion of the following year. In the given situation, STL has not paid SCL overdue audit fees for the last three years If the charges remain unsettled after reports have been issued, the significance and presence of shall be assessed and an appropriate safety measure from the following will be applied

An additional member who was not involved in the audit gig should review or provide advice concerning the work performed (APES 110.290.218)

The firm decides whether the overdue amount can be regarded as a loan to the audit client and if it is appropriate for the firm to continue with the audit activities or be re-appointed The threats can be identified as substantial since the audit partner Grant Richardson does not want to lose the long-term client; therefore, creating a self-interest risk (APES 110.290.218 ). Independence can be achieved through:

• SCL deciding whether to regard the overdue stipends as a loan to Super Tech Limited
• SCL may also establish the significance of the credit to decide whether or not it will continue with the engagement or be re-appointed
• An external associate can provide advice concerning the scenario or review the work done

Threat to Independence

According to APES 110.290.128, a threat to autonomy arises when an audit team member has an immediate family member as an employee with considerable influence over the client's financial performance and position or cash flows.

In this case, Taylor a senior audit partner is the husband of Christina, who is JML's financial controller and responsible for preparation of the company's financial books. As per APES 110.290.128, the threat to independence will depend on the position of the immediate family member and the role of the employee on the audit team. Safeguards available include

Removing the Person From the Audit Team

Defining roles within the audit team so that the individual does not handle matters that are among accountabilities held by the immediate family member. The risks to independence are evident since Taylor is the husband of Christina, JML's financial controller. Taylor may be influenced by his wife to doctor the financial audit report to safeguard Christina's interests in the results. Independence can be achieved by:

• Removing Taylor from the audit team (APES 110.290.128)
• Reorganizing the team's roles to make sure Taylor does not handle matters that are under his wife's area of expertise.

Self-Interest, Familiarity, or Intimidation Threat

As per APES 110.290.131, a self-interest, intimidation, or familiarity risk is created by a family relationship between a partner who is not a member of the audit team and an officer or director of the audit client who is in a position to influence preparation of the client's financial records, which the firm will audit. In this scenario, Robert Durand is the husband to Rebecca Durand, a financial accountant at Yummy Donuts The significance of the risk will be contingent on the type of relationship between the partner of the audit firm and the officer or director of the client, the link between the partner and the audit team, the role of the partner within the audit firm, and the position the person holds with the client. Safeguards applied include:

• Restructuring the partners' roles to minimize their potential influence over the auditing
• Having the work audit work reviewed by a member (APES 110.290.131)
• The risks are significant since Durand is the husband to Rebecca, Yummy Donut's financial controller. The relationship between the two may influence the auditing team; hence providing inaccurate reports to safeguard the career of colleague's wife (APES 110.290.131). The following safeguards can help attain independence
• Redefining Durand's roles to minimize any potential influence over the auditing process
• Having a member conduct a review of the task done

Reference

Accounting Professional & Ethical Standards Board (APESB). (2017). Compiled APES 110 code of ethics for professional accountants. New York, NY: International Federation of Accountants.