Unformatted text preview: statements.
When, as a result of a merger or acquisition, an entity becomes a related entity
of an audit client, the firm must evaluate interests and relationships with the
related entity that could affect its independence and therefore its ability to
continue the audit after the merger or acquisition.
If an inadvertent violation occurs, it generally does not compromise
independence, provided the firm has appropriate quality control policies and
procedures and the violation is corrected promptly.
In general, the independence rules for financial interests, including loans and
guarantees, stated by the IFAC Code of Ethics are similar to those of the
A close business relationship between a firm, a member of the audit team, or
a member of that individual’s immediate family and the audit client or its
management arises from a commercial relationship or common financial
interest and may create self-interest or intimidation threats. Unless any
financial interest is immaterial and the business relationship is insignificant,
independence is impaired. Copyright © 2012 Gleim Publications, Inc., and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com SU 2: Professional Responsibilities 27 a) 8) 9) 10) 11) 12)
14) The purchase of goods and services from an audit client by the firm, a
member of the audit team, or a member of that individual’s immediate
family does not generally create a threat to independence if the
transaction is in the normal course of business and at arm’s length.
Family and personal relationships between a member of the audit team and a
director or officer or certain employees (depending on their role) of the audit
client may create self-interest, familiarity, or intimidation threats. The existence
and significance of any threats will depend on a number of factors, including the
individual’s responsibilities on the audit team, the role of the family member or
other individual within the client, and the closeness of the relationship.
Familiarity or intimidation threats may be created if a director or officer of the
client, or an employee in a position to exert significant influence over the
preparation of the client’s accounting records or the financial statements, has
been a member of the audit team or partner of the firm.
The lending of staff by a firm to an audit client may create a self-review threat.
Such assistance may be given, but only for a short time and if the firm’s
personnel do not provide impermissible services or assume management
Self-interest, self-review, or familiarity threats may be created if a member of the
audit team has recently served as a director, officer, or employee of the audit
client. This would be the case when, for example, a member of the audit team
has to evaluate elements of the financial statements for which the member of
the audit team had prepared the accounting records while with the client.
Serving as a director or officer of an audit client impairs independence.
Familiarity and self-interest threats are created by using the same senior
personnel on an audit engagement over a long period.
Firms provide to their audit clients a range of nonassurance services.
Providing non-assurance services may, however, create threats to the
independence of the firm or members of the audit team.
a) b) If a firm were to assume management responsibility for an audit client,
the threats created would be so significant that no safeguards could
reduce the threats to an acceptable level.
Providing an audit client with accounting and bookkeeping services, such
as preparing accounting records or financial statements, creates a selfreview threat when the firm subsequently audits the financial statements.
i) But accounting and bookkeeping services, which would otherwise not
be permitted, may be provided to audit clients in emergency or
other unusual situations when it is impractical for the audit client to
make other arrangements.
15) Tax return preparation does not generally create a threat to independence if
management takes responsibility for the returns, including any significant
a) Tax planning or other tax advisory services may result in a self-review
threat if the advice will affect matters to be reflected in the financial
i) If the effectiveness of the tax advice depends on a material, doubtful
accounting treatment or presentation in the financial statements, the
self-review threat would be so significant that no safeguards could
reduce the threat to an acceptable level. Copyright © 2012 Gleim Publications, Inc., and/or Gleim Internet, Inc. All rights reserved. Duplication prohibited. www.gleim.com 28 SU 2: Professional Responsibilities 16) The provision of internal audit services to an audit client creates a self-review
threat to independence if the firm uses the internal audit work in the course of a
subsequent external audit. Performing a significant part of the client’s internal
audit activities increases the possibility that firm personne...
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This note was uploaded on 04/02/2013 for the course ACCT 7100 taught by Professor Swanson during the Spring '13 term at Valdosta State University .
- Spring '13