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Dear ma’am,
I didn’t quite understand what the question meant when it said that if the audit company guarantees a loan it causes a self interest threat. I thought it created an advocacy threat, as the company would guarantee the bank that the audit client will pay back the loan. Or is it that the client wants a loan from the auditor, I didn’t quite understand the ethical issue here. Please help if you can. Thank youIn the scenario “Our firm [AUDITOR] has been asked by the bank [LOAN CREDITOR TO THE AUDIT CLIENT] to provide a guarantee in respect of this loan extension.
So – loan $xxx is money that passes from bank to audit client.
If guaranteed (by anyone) and the client defaults on the loan (e.g. doesn’t pay interest/instalments or breaches loan covenants), the bank may be able to “call in” the loan – i.e. demand repayment.If the client doesn’t have the money – the guarantor will be liable to the bank.
So now imagine – you are the auditor and you have guaranteed a loan that has been made to your client – can you possibly be objective? Your interest in the client’s well-being is financial because it will “hit your pocket” if the loan is called in.
So let’s suppose that client’s management has kept some liabilities/provisions “off the books” at the year end because to include them means that some debt/equity ratio might be breached – are you going to request that management correct the misstatement? – or qualify the opinion if they do not?
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