The familiarity threat is when an auditor allows their familiarity with the client to threaten their independence. Usually, their familiarity leads them to become too trusting of the client and can cause them to make biased decisions. Similarly, if the auditor becomes too indulged in the client’s business, they may face the familiarity threat.
What is an example of a familiarity threat?
Given below is an example of how the familiarity threat works. An auditor becomes a part of an audit engagement team for a long-term client. However, the auditor failed to disclose to the audit firm that they have a relative in the client.
What is familiarity threat in auditing?
A familiarity threat is the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work (100.12 (d)). Accordingly, what is threat in auditing? a. Self-interest threats—threats that arise from auditors acting in their own interest.
What is “familiarity” in audit?
As the word “familiarity” is not limited to the professional capacity of the auditor and can arise from personal relations. Therefore, there are certain specific safeguards underpinned by IFAC to deal with familiarity threats.
What category of threat is involved in each independent situation?
Identify category of threat involved in each independent situation as Familiarity threat, Advocacy or Intimidation Threat. Also suggest some safeguards to minimize their effects. Q.Mr.A was the audit manager during the last year’s annual audit of (FTML).
What does familiarity threat mean?
A familiarity threat is the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work (100.12(d)).
What is familiarity threat to independence?
The familiarity threat is when an auditor is familiar with his or her client. This familiarity deteriorates their independence to perform an audit and further influences the auditor's decision impacting the transparency of the audit.
How do you safeguard familiarity threat?
The familiarity threat to the independence of the auditor is when auditors let their familiarity with the client influence their decisions. This threat may stem from experiences or relationships with the client. In most cases, auditors can avoid the familiarity threat by removing the affected auditor from the team.
What is familiarity in auditing?
The relationship between the directors and the auditors has been termed the `Familiarity' or `Trust Threat' (Chartered Accountants Joint Ethics Committee, 1995). This is argued to exist where the auditor is over influenced by the personality and qualities of directors or where the auditor knows the client too well.
What is an example of familiarity threat?
A familiarity threat exists if the auditor is too personally close to or familiar with employees, officers, or directors of the client company. ABC Company has been audited by the same auditor for over 10 years and the auditor regularly plays golf with the CEO and CFO of ABC Company.
What is intimidation threat?
The intimidation threat is when the client uses its leverage position to threaten or influence auditors. Usually, auditors can use safeguards against this threat to eliminate or reduce it to an acceptable level. However, that may not always be possible.
How do you overcome self interest threats?
The threat created can be reduced to an acceptable level by the application of the following safeguards:Ask the individual to notify the firm when entering serious employment negotiations with the assurance client;Remove of the individual from the assurance engagement;More items...
What is safeguard in audit?
Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level.
What are the threats in auditing?
It is one of the critical requirements for continuing an audit objectively. However, there are some threats that auditors may face which may endanger their independence as well as objectivity. These threats include self-interest, self-review, familiarity, intimidation, and advocacy threats.
What is undue influence threat?
The undue influence threat is the threat that a member will subordinate his or her judgment to an individual associated with a client or any relevant third party due to that individual's reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member.
What does advocacy threat mean?
And that is exactly what the advocacy threat is. The IESBA Code defines it as the threat that a professional accountant will promote a client's or employing organisation's position to the point that the accountant's objectivity is compromised, and it is a very real threat.
What is self interest threat?
a. Self-interest threats—threats that arise from auditors acting in their own interest. Self-interests include auditors' emotional, financial, or other personal interests. Auditors may favor, consciously or subconsciously, those self-interests over their interest in performing a quality audit.
What is the threat of familiarity?
The familiarity threat is when an auditor allows their familiarity with the client to threaten their independence. Usually, their familiarity leads them to become too trusting of the client and can cause them to make biased decisions. Similarly, if the auditor becomes too indulged in the client’s business, they may face the familiarity threat.
How does familiarity affect independence?
The familiarity threat to the independence of the auditor is when auditors let their familiarity with the client influence their decisions. This threat may stem from experiences or relationships with the client. In most cases, auditors can avoid the familiarity threat by removing the affected auditor from the team. Additionally, auditors can also employ other safeguards.
What is the highest threat to an auditor?
The familiarity threat is the highest when auditors allow their relationship with the client or their employees to influence their decisions. Familiarity threats may also cause or stem from other threats. For example, the familiarity threat may cause self-interest threats or come from advocacy. Either way, it is crucial for auditors ...
What are the threats auditors face?
There are five threats that auditors may find during this process. These include familiarity, self-review, self-interest, advocacy, and intimidation threats . Each of these threats may come from specific sources. The safeguards that auditors employ against these depend on the type of threat they face, its severity, its impact on the assignment, etc.
What is the familiarity between an auditor and a client?
For example, an auditor having a close or immediate family member in the client’s management. Sometimes, it may also develop as a result of past transactions between both parties.
Can being too familiar with a client affect an auditor's opinion?
Similarly, having familiarity with one of the employees working at the client can also cause the familiarity threat to increase. Overall, being too familiar with the client or their personnel can cause auditors to impact their opinion.
Is familiarity a threat to audit?
The longer an audit firm works with a single client, the more familiar they will become. However, being familiar is not a threat to the audit engagement as long as this familiarity does not impact the financial statements.
What is a familiarity threat?
A familiarity threat is the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work (100.12 (d)). Click to see full answer. Herein, what is threat in auditing?
What is a threat in auditing?
Herein, what is threat in auditing? a. Self-interest threats—threats that arise from auditors acting in their own interest. Self-interests include auditors' emotional, financial, or other personal interests. Therefore, a self-review threat may arise when auditors review judgments and decisions they, or others in their firm, have made.
Definition
The familiarity threat is when an auditor is familiar with his or her client. This familiarity deteriorates their independence to perform an audit and further influences the auditor’s decision impacting the transparency of the audit.
Example
Auditor James is tasked with Auditing Company XYZ, whose manager is a great friend of his. James manages to find inconsistency between some of the provided financial statements of Company XYZ.
Threats to the independence and objectivity of an Auditor
While this article focuses solely and specifically on the familiarity threat, an auditor may be subjected to five types of threats. They include:
How can the familiarity threat develop?
This threat tends to mature and advance based on previous relationships that have already manifested between the client and auditor.
Identifying the Familiarity Threat
The easiest way to see the threat coming is to understand its significance and acknowledge its impact before it even occurs. The auditor should take into consideration several factors when undertaking an auditing contract.
How to avoid this threat?
The best way to avoid this threat altogether is to employ preventive measures that ensure this threat does not come to pass. The most efficient method is to remove the affected auditor from the team.
What is a familiarity threat?
A familiarity threat exists if the auditor is too personally close to or familiar with employees, officers, or directors of the client company. Example. ABC Company has been audited by the same auditor for over 10 years and the auditor regularly plays golf with the CEO and CFO of ABC Company. Issue.
What is an intimidation threat?
An intimidation threat exists if the auditor is intimidated by management or its directors to the point that they are deterred from acting objectively. Example. ABC Company is unhappy with the conclusion of the audit report and threatens to switch auditors next year. ABC Company is the biggest client of the auditor.
What is advocacy threat?
An advocacy threat exists if the auditor is involved in promoting the client, to the point where their objectivity is potentially compromised. Example. The auditor is assisting in selling ABC Company while also serving as the auditor for the company. Issue.
What is a self review threat?
A self-review threat exists if the auditor is auditing his own work or work that is done by others in the same firm. Example. The auditor prepares the financial statements. Three Financial Statements The three financial statements are the income statement, the balance sheet, and the statement of cash flows.
What are the threats to auditor independence?
Five Threats to Auditor Independence. The following are the five things that can potentially compromise the independence of auditors: 1. Self-Interest Threat. A self-interest threat exists if the auditor holds a direct or indirect financial interest in the company or depends on the client for a major fee that is outstanding. Example.
Rotation of Key Audit Partner
- Para 290.151 of the IFAC Agenda Paperstates that an individual shall not be a key audit partner for more than 7 years. After completing 7 years, the individual shall not act as a key audit partner or be part of the engagement team for 2 years for the client. The individual cannot even take part in consultations with the engagement team, provide quality control for the engagement team or …
Rotation of Audit Firm
- Just like partner rotation, the audit firm should also rotate in some countries like Turkey, Indonesia, and Italy. However, audit firm rotation is not mandatory in most countries. This type of rotation also helps eradicate threats like familiarity and self-interest threats. The audit firm rotation is also called MFR rotation and is getting popular in various countries due to the bad rep…
Specific Safeguards For Familiarity Threat
- As the word “familiarity” is not limited to the professional capacity of the auditor and can arise from personal relations. Therefore, there are certain specific safeguards underpinned by IFAC to deal with familiarity threats. To know which safeguard we should use, you must first understand the concept of influence. Whenever you are dealing with a ...
What Is The Familiarity Threat?
- The familiarity threat is when an auditor allows their familiarity with the client to threaten their independence. Usually, their familiarity leads them to become too trusting of the client and can cause them to make biased decisions. Similarly, if the auditor becomes too indulged in the client’s business, they may face the familiarity threat. The ...
How Does The Familiarity Threat Work?
- The familiarity threat usually stems from previous relationships with the client or their management. The longer an audit firm works with a single client, the more familiar they will become. However, being familiar is not a threat to the audit engagementas long as this familiarity does not impact the financial statements. The familiarity between an auditor and a client may ex…
How to Avoid The Familiarity Threat?
- Like all other threats to auditors’ independence and objectivity, the familiarity threat is also avoidable. In most cases, auditors can employ some safeguards against such threats to avoid any adverse influences. Usually, the audit firm may remove the affected person from the audit engagement team to eliminate the familiarity threat. Similarly, regular rotation of audit personnel…
Conclusion
- The familiarity threat to the independence of the auditor is when auditors let their familiarity with the client influence their decisions. This threat may stem from experiences or relationships with the client. In most cases, auditors can avoid the familiarity threat by removing the affected auditor from the team. Additionally, auditors can also employ other safeguards.