Auditor\'s independence threats PDF

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Independence threats...

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The ‘Potential Threats’ to independence, or what types of issues could ‘potentially threaten’ an Auditor from issuing an objective, unbiased opinion on the Financial Statements they have audited. The FINANCIAL REPORTING COUNCIL (FRC) are the organisation who oversee the Accountancy and Auditing Profession in the UK, and in their REVISED ETHICAL STANDARD (2019) they restated the potential threats to an auditor’s independence: 1. 2. 3. 4. 5. 6.

SELF-INTEREST THREAT SELF-REVIEW THREAT MANAGEMENT THREAT ADVOCACY THREAT FAMILIARITY (OR TRUST) THREAT INTIMIDATION THREAT

HOW THE AUDITOR INDEPENDENCE

COULD

REDUCE

THE

THREATS

TO

THEIR

1. SELF-INTEREST THREAT The auditor and its employees should not hold shares in any audit client.The auditor should not have a financial (self) interest in the performance of the companies they are auditing. 2. SELF-REVIEW THREAT The auditor should only assist the client in maintaining their financial records in exceptional (or emergency) circumstances. The auditor should, in most circumstances, not be auditing (and reviewing) work undertaken by their own staff. 3. MANAGEMENT THREAT The auditor should not be involved in making decisions on behalf of the companies they audit – this is the Directors’ responsibility. For example: If Tesco’s directors were considering whether to start a new product line (selling Cars) or to buy another company. The auditor should highlight the different Legal Responsibilities of Directors and Auditors (Per the Companies Act 2006) which are detailed in the Auditor’s Report within the Financial Statements (Directors’ report). 4. ADVOCACY THREAT The auditor should not act as a supporter or advocate of an audit client in a legal dispute the client is involved in with another party. The auditor should not act as a public witness or supporter of the client’s management in order that they remain free from bias and are able to issue an ‘honest and objective’ opinion on the financial statements to the members of the company.

5. FAMILIARITY (OR TRUST) THREAT To avoid ‘over familiarity’ with the client’s Management (Directors) the Auditor could: Rotate the audit ‘engagement’ partner every number of years (five years is recommended). Where an Audit Partner (or Senior Member) of the ‘Audit Team’ has a close personal or family relationship with a senior member of the client’s management then the auditor would simply replace the member of their own team with someone who had no personal connection with any of the client’s management. 6. INTIMIDATION THREAT The auditor should report the behaviour of a Director who is acting in an ‘unreasonable’ or ‘threatening manner’ to the company’s AUDIT COMMITTEE who have the authority to deal with such matters within the company. If there is no significant change in the behaviour of the Director, after reporting to the Audit Committee, then the auditor may have to resign their position as company auditor. The auditor must be able to perform their work without undue pressure or intimidation from the directors of the company. If the Audit Committee does not take action to deal with the matter then the auditor will not be able to undertake their work properly, and, as noted above, would resign as company auditor. The auditor would also inform the Shareholders the reason they have resigned at a General Meeting of the company....