- This topic has 8 replies, 2 voices, and was last updated 5 years ago by
.
- Posts
whenever a firm provides non audit service, can i say self interest threat may arise(assuming the audit client is non listed, existing audit client and permissible) ? saying in the answer
“self interest threat may arise because firm will generate additional income by providing additional service of _____ e.g forensic investigation
also, i know advocacy threat arise if an audit firm provides to existing audit client, forensic accounting but this is inevitable since it’s a scope of engagement where auditors may support the audit client due to fact finding exercise (nature of forensic investigation).
However, this is acceptable for the audit firm ? because i thought audit firms can’t provide non audit service when ethical threats are compromised ? or this is safeguarded to a certain extent through thorough planning where auditors only provide evidence what they gathered not providing opinion whether to prosecute or not ?
Yes that would be a correct statement.
It doesn’t matter that the forensic assignment will report facts and not an opinion – if the financial statements are affected by the matter that is subject to forensic investigation (e.g. cash/inventory/other assets will be written off as expense), there will be a self-review threat. (Safeguard different engagement teams, etc.)
You have to consider each scenario according to the information provided. E.g. a firm has an audit client X co and undertakes a fraud investigation for Y Co (not an audit client). If staff of X Co are implicated in the fraud on Y Co there would be a potential threat to duty of confidentiality. You cannot learn every possible scenario that the examiner might invent but have to be able to read into a given scenario what are the implications.
1. then whenever a question is asking about ethical issue and if a firm provides non audit service to an existing audit client, self interest threat automatically arises mainly because firm gets additional income and this additional income can impair her objectivity performing both audit and non audit service ?
2. sorry kim but i was asking about advocacy threat… but i’m not sure why you are explaining about self review threat.
or did i misunderstood. what you mean is that whether it’s advocacy threat or self review threat, as long as there’s proper safeguards ( assuming non listed, obviously prohibited for listed), then non audit service can be provided ?
3. for safeguard for advocacy threat, can planning with the client and ascertaining scope of the engagement will prevent the advocacy threat ? like clearly indicating that auditors will not express their opinion and only provide evidence based on the investigation they have done ?
1. If the non-audit service does not require an opinion it does not require objectivity. We are concerned that the additional fees for the non-audit service may ‘cloud’ our judgement/create bias in giving the audit opinion.
2. Yes – that’s what I meant. This is what it says in the Code: “Litigation support services may include activities such as acting as an expert witness, calculating estimated damages, [etc]. These services may create a self-review or advocacy threat.” It goes on to say “If the firm provides a litigation support service to an audit client which involves estimating damages or other amounts that affect the financial statements … the provisions that apply to valuation service provisions shall be followed.”
3. This isn’t a safeguard because it’s the objectivity of the audit opinion that is threatened – it does not matter that no opinion will be expressed on the investigative work.
There is a prohibition for ALL clients if the amounts involved are MATERIAL to the financial statements i.e. no safeguards could reduce the threat to an acceptable level. If not material, then the “usual” safeguards (e.g. separate teams) apply.Hello Kim, i really have difficulties understanding number 2
it’s a bit hard to understand why we still agreed to provide litigation support service even when advocacy threat arises ? because assuming the client is non listed (if listed prohibited to provide service), self review threat can be avoided by using different engagement team but why we still provide service when advocacy threat arises ?
You seem to be suggesting that there is a general prohibition on anything that gives rise to an advocacy threat. This is not the case. Like any other threat – familiarisation/self-interest/self-review/intimidation – it has to be assessed.
If any threat is “so significant that no safeguards could reduce it to an acceptable level” – it is effectively prohibited – e.g. if the matter is MATERIAL to the financial statements. If the matter is NOT material it can’t affect the audit opinion anyway.1. Kim, what you mean is that if the question were to ask “assess the ethical and professional implication and recommendation any actions if possible”
i just need to assess meaning i need to state there is “advocacy threat explain why such arises ” regardless of whether it is permissible or not since the question asks for it
Am i correct ?
I don’t know which 1. you are referring to now. As per your other current thread of posts, I think you would be asked to discuss implications – rather than assess/evaluate implication.
Please read Part 1 of the exam technique articles here https://www.accaglobal.com/uk/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles.html
I cannot give you rules to learn how to answer questions at this level – on the day you have to answer the Q set. There will be more points that could be made than need to be made for the marks available – so you need to think what points make sense. Things to think about when reading and planning – what fundamental principle is at risk? what is the nature (category) of the threat? how great is the threat? (identify relevant factors – listed/non-listed) … you do not write down these questions – this should be part of the thought process to help you come up with points for your answer plan which you then write as an answer. 5 marks need only 5 good sentences.
- You must be logged in to reply to this topic.