real v/s perceived ethical threat

Andy is an audit partner in ABC & Co - his wife is the CEO of XYZ & Co. Andy cannot be the engagement partner on the audit of XYZ & Co because there is - de facto (i.e. actual/real) familiarity threat. Even if he is not the engagement partner - a threat to the firm's objectivity would be perceived by the "man in the street", the media etc ... "Read all about it - audit partner gives clean report on wife's company ...." Perception is what is inferred, concluded or believed - it doesn't have to be true. Which is why safeguards alone cannot be enough - it would not be enough that Andy is not part of the audit team

See page 28 of the notes for the "prohibitions". There is no actual prohibition on ABC & Co being the auditor of XYZ & Co - otherwise it could be very difficult for spouses of partners to be employed in senior positions of companies (!!!) I suggest it would depend on many factors including how many partners there are in ABC & Co - how many offices it has - whether Andy is a senior partner in the office that would audit XYZ & Co - or a junior partner in another office ... etc ... etc It's for the FIRM to have policies and procedures to manage PERCEPTIONS.