Self – interest threat

The following safeguards will therefore be relevant:

 

· Disposing of the interest

· Removing the individual from the team if required

· Keeping the client's audit committee informed of the situation

· Using an independent partner to review work carried out if necessary

 

Audit firms should have quality control procedures requiring staff to disclose relevant financial interests for themselves and close family members. They should also foster a culture of voluntary disclosure on an ongoing basis so that any potential problems are identified in a timely manner.

 

a) Employmentwithanauditclient

 

Safeguards could include:

• Modifying the audit plan

• Assigning individuals to the audit team who have sufficient experience in relation to the individual who has joined the client

• Having an independent professional accountant review the work of the former member of the audit team

 

b) TemporaryStaffassignments

 

Staff may be loaned to an audit client, but only for a short period of time. Staff must not assume management responsibilities, or undertake any audit work that is prohibited elsewhere in theCode.

The audit client must be responsible for directing and supervising the activities of the loaned staff.

Possible safeguards include:

· Conducting an additional review of the work performed by the loaned staff

· Not giving the loaned staff audit responsibility for any function or activity on the audit, that they performed during the temporary staff assignment; or

· Not including the loaned staff in the audit team.

 

c) Compensation and evaluation policies

There is a self-interest threat when a member of the audit team is evaluated on selling nonassurance services to the client. The significance of the threat depends on:

 

· The proportion of the individual’s compensation or performance evaluation that is based on the sale of such services;

· The role of the individual on the audit team; and

· Whether promotion decisions are influenced by the sale of such services.

 

The firm should either revise the compensation plan or evaluation process, or put in place appropriate safeguards. Safeguards include:

 

· Removing the member from the audit team; or

· Having the team member’s work reviewed by a professional accountant.

 

A key audit partner shall not be evaluated on or compensated based on their success in selling non-assurance services to their audit client.

 

d) Loans and guarantees

If a lending institution client (eg a bank) lends an immaterial amount to an audit firm or member of assurance team on normal commercial terms, there is no threat to independence. If the loan is material it will be necessary to apply appropriate safeguards to bring the risk to an acceptable level. A suitable safeguard is likely to be an independent review (by a partner from another office in the firm).

 

e) Overdue fees

 

One safeguard might be to arrange for an additional professional accountant who did not take part in the audit engagement to review the work performed.

 

f) Contingent fees

 

In other circumstances it may be appropriate to accept a contingent fee for non-assurance work if suitable safeguards are in place. Examples include:

 

· Using professionals who are not part of the audit team for the non-assurance service

· Having the relevant audit work reviewed by an independent professional accountant

 

g) High percentage of fees

 

When a firm receives a high proportion of its fee income from just one audit client, there is a selfinterest or intimidation threat, as the firm will be concerned about losing the client. This dependson:

 

· The operating structure of the firm

· Whether the firm is established or new

· The significance of the client to the firm (both quantitatively and qualitatively)

 

Possible safeguards include:

· Reducing the dependency on the client;

· External quality control reviews; or

· Consulting a third party, such as a professional regulatory body or a professional accountant, on key audit judgments.

h) Lowballing

 

When a firm quotes a significantly lower fee level for an audit service than would have been charged by the predecessor firm, there is a significant self-interest threat. If the firm's tender is successful, the firm must apply safeguards such as:

 

· Maintaining records such that the firm is able to demonstrate that appropriate staff and time are allocated to the engagement

· Complying with all applicable auditing standards, guidelines and quality control procedures