F8-Enquires

[meikhim]

Can anyone advice on what is the meaning of breakup basis & advocacy/ intimidation threat? Thanks.

[bluewednesday]

Break up basis is where the accounts cannot be prepared under the going concern basis i.e. it is forseen that the company will not be trading for longer than a year. In practice this means that there will be no non current assets or non current liabilities as there will be no use after one year. This happens when the company is insolvent or is going to cease trading for another reason.

Advocacy threat is where the auditors are contacted already by the client i.e. acting on their behalf in a legal claim. The threat is that they are not unbiased as they are already appearing on their behalf.

Intimidation threat is where the auditors are threatened by the client, either physically or verbally. This is usually in the form of 'if you qualify the audit report then we will sack you'.

Advocacy is the hardest threat to explain and the least common.

[Dazy]

Hi,

Going concern is the fundamental assumption for every business. It means that it is always assumed that company will continue with its normal business environment in the foreseeable future. When this assumption is affected, the financial statements are prepared on the break-up basis. Under this method, the assets and liabilities of the company are recorded at their net realisable value at the balance sheet date resulting in no difference between the two bases. Accordingly, company needs to make full provision in its financial statements for all the known liabilities and anticipated losses on realisation of assets.

Client advocacy threat occurs where auditor act as an advocate for its client disturbing his independence. As bluewednesday has already mentioned, it is a hardest threat to explain and to prove.

Intimidation threat might occur when the auditor is sued for an actual or threatened litigation, when there is a risk of replacement, or when there is a high pressure to decrease the work performed in order to reduce fees. Whenever there is risk of replacement, it is likely that auditor will have financial interest in client and in such a situation; auditor’s independence might be compromised of both a self-interest threat and intimidation threat.