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Sycamore & Co is the auditor of Fir Co, a listed computer software company. The audit team comprises an engagement partner, a recently appointed audit manager, an audit senior and a number of audit assistants. The audit engagement partner has only been appointed this year due to the rotation of the previous partner who had been involved in the audit for seven years. Only the audit senior has experience of auditing a company in this specialised industry. The previous audit manager, who is a close friend of the new audit manager, left the firm before the completion of the prior year audit and is now the finance director of Fir Co.
Which of the following identifies the threat which could arise as a result of the finance director’s previous employment at Sycamore & Co and recommends an appropriate safeguard?
– A familiarity threat; a different audit manager should be appointed ( correct answer )
-A familiarity threat; the firm should resign from the engagementI would really appreciate it if you could tell me why the second option is the wrong answer as in my opinion, isn’t there a significant threat due to the finance director previously being a part of the audit team and thus familiarity with regard to audit plans and procedures ?
Thank you.
“Familiarity threat” is about relationship between client and auditor – it has nothing to do with a former employee’s “familiarity” with audit procedures:
Familiarity threat – 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.By your interpretation, whenever a senior member of an audit team leaves an audit firm to go to a client, the audit firm would have to “give up” that client. That clearly isn’t practical in the real world. Yes there is a threat – but the audit firm would need to change, for example, the nature, timing and extent of audit procedures – so they cannot be “predicted” by the former employee. It wouldn’t resign.
Okay yes, got it. Just one follow up, which category of threats would a senior member joining a client be classified to ?
There is a familiarity threat here because the scenario says “The previous audit manager, who is a close friend of the new audit manager” – this threat is therefore removed by replacing the audit manager.
There is also possibility of intimidation threat from the finance director – for example, he will have previously directed/supervised/reviewed the work of audit senior – he might be in a position now to exercise undue influence over the senior auditor.
Thank you so much, really really appreciate your quick and detailed responses.
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