Session 5

[Acid]

Q: Can you explain with examples the followings :


Advocacy threat
Self-Review threat
Intimidation threat
Self-Interest
Familiarity threat
Note : Talk about in which category would each threat goes . Also , Give examples.

[Annie]

Example 1:
Rex is an accountant who has been recently recruited by an organisation to prepare a grant claim. The firm has been claiming the grant from a number of years. While reviewing the previous claims, Rex discovers that some expenditure amounts included were inappropriate and which increased the claim amount; this was a consistent feature. Rex also found that the previous auditor and the manager are the members of the same golf club. Rex needs to decide if he should bring this to light.

Principles that apply: Integrity, objectivity, professional competence & due care

Threats: Self interest and Familiarity

Suggestion: Rex should report it to her manager so that he is aware of the previous mistakes in the claims. This should be raised with the external auditor. Rex should ensure that the manager's friendly relations with the auditor should not prevent the issue being addressed.

This will show that Rex is not intimidated to raise difficult issues.

Integrity: by being open and honest about the issue to the manager & auditor
objectivity: by recognising the previous claims were based on inappropriate expenses & making the relevant authorities aware of them

Professional competence and due care: By understanding that the previous errors cannot be resolved by him alone and to ensure that the manager and auditor make the final decision on the issue.

Example 2:
The accounts of a small enterprise is prepared by a practising ACCA member for the first time. He noticed some mistakes in the previous accounts which were noted. He also observed that they were based on incomplete records (e.g. some costs were not included) due non maintenance of records. The entity wants some additional complex tax issue work which is refused by the member as he is not confident to do that work. The entity wants him to provide an audit opinion to present to its bank for a loan as an additional assurance.

Principles involved: Integrity, Professional competence and due care and professional behaviour

Threats: Self - review & intimidation

Suggestion: The accountant should bring the issue to the clients notice and raise concern on such a practice. He should either update or maintain the previous methodolgy.

He should take up the tax assignment only if he feels he is competent to do so

He should not give an opinion on the accounts he cannot do so as it should come from an independent examiner and not from the one who prepares it.

Integrity: raising concern

Professional competence and due care: reviewing one's own ability

Professional behaviour: refusing to express opinion.



Annie

[Vivienne]

When an auditor is auditing financial statements he/she must approach his work with intergrity and objectivity.however there are a number of matters taht may threaten or appear to threaten the independence of the auditors.
these are

Self review threat
it is customary for auditors to provide other services as well as the audit.the services that an auditor is allowed to offer are advise on secretarial services,obtaining staff,management consultancy etc.an auditor should never prepare accounting records for public companies,the problem that may arise here is that he will be required in the end to review these statements.

advocacy threat
an auditor may be seen to defend their clients position or opinion.for example in a legal battle between their client and a third party.they will be seen to support their client by maybe producing its financial statements in court while they may have had limited independence in auditing those statements.

familiarity threat
if there is a close relationship between the client and the auditor,the auditor may be seen not to be independent in his opinion.for example if an auditor is auditing a client where he has a close personal connection maybe with the employees of the client he may fail to question certain decisions and as a result may not be independent from the client

self interest
an auditor may have a personal interest in the client.this may arise due to the auditor having shares in the client company.the other self interest could be when family member are employed at a client.an auditor maybe allowed to have a qualifying share holding meaning that it should be held at a minimum and should be disclosed in the accounts

intimidation threat
an auditor maybe threatened to be sued by a client for either negligence or other issues.this may negatively affect the independence of the auditor .


the end

[Annie]

Advocacy threat is the threat to the independence of the aduitor where he represents his client and instead of giving a independent opinion which is expected of him tries to act as a defendant of his client favouring him. An advocacy threat arises when a auditor has to make false or misleading statments or presenting judgement as fact.

For example Mark is the auditor of Blue Ltd and has been making financial statments were little manipulated with his knowledge. Now Blue Ltd is sued by a client saying that the financial statements are misleading. Now Mark has to defend Blue Ltd as if he looses the case than the ture financial position or performance of the organisation will be publicly known and they will contradict his previous statments which he has publicly made.

Principles: Integrity, Professional behaviour

Threat: Advocacy

Mark should not have in first place allowed manipulations in the financial statements and should have raised his concern.

His opinion should not be influenced just because one of the party to the litigation is his client.

Annie

[Vivienne]

well annie you couldnt have explained better than this. my answer was not so detailed because i failed to give detailed examples about the threats.i am now more than clear. after all auditing is about being practical thanks a lot and keep posting your comments.

[Vivienne]

i dont seem to know the categories that these threats should fall under.Acid where are you?

[Acid]

i dont seem to know the categories that these threats should fall under.Acid where are you?

Hey Vivie,

Would be just up wid the answers!

[Acid]

Advocacy threat
Self-Review threat
Intimidation threat
Self-Interest
Familiarity threatNote : Talk about in which category would each threat goes . Also , Give examples.


Professional accountants and auditors should always abide by the Rules of Professional conduct and Ethical priniciples laid down by the professional bodies such as the ACCA / IFAC etc.


What's an advocacy threat?... THE BIG QUESTION!


This may happen when the auditor is supposed to represent a client in any case filed against him in the court . So for example If your client has been involved in fraud and comes to you for your help and you accept to represent him in court then your aim is only to make your client win the case , so you will keep aside any evidence against your client and hence be biased in your judgement. AUDITORS SHOULDNT BE BIASED!!!
Self Review Threat... Huh? I AM THE BEST!


A self review threat occurs when an auditor have to review his own work . Now thats like prooving the high claims that the auditor is really a star! So if Mr.Auditor is invovled in making financial statements of the client and he makes a mistake which results in debit items being credited and credit items being debited and then he is appointed as the auditor of same client and finds out what he's done , then he wont be happy to show his own faults and hence manupulate things and give a false opinion!
Intimidation threat .... Theres the big black bull! !


This occurs when the auditor is being bullyed or harassed to give an unqualified opinion when a qualified opinion is appropriate. So thats like asking for a pizza when you've got just enough money to buy a bread! by the management...
Self interest Threat - Erm.. Are you sure ?


This type of threat is perhaps the most common one.. This occurs when the auditor have an interest in the clients organization whos accounts he's auditing as well. This may include .. Financial interest , or perhaps the client owes money to the auditor and giving an adverse opinion would mean that they client business will go down and the auditors fee will become a bad debt ! The Auditor certainly wont want this to happen! Auditor may also have interest if he's got shares in the company or maybe he got an I-pod as a gift for every audit or perhaps he's got a GIRLFRIEND in the company whos prepared the Financial statements!Familiarity threat.... Yes I KNOW THEM!



A familiarity threat occurs when the auditor is too sympathetic or trusting of the client because of the close relationship with them. This may happen if the auditor is working for the client since a long time and has made friends and trust thier work ..but friends arent always right , isnt? They may make errors for which the auditor must be WATCHFUL!
__________________________________________________ ____



ACID

[Vivienne]

as i had earlier said ,in every subject or paper there are those topics that are very important that which do not miss in every sitting. the important thing for every student is to identify this in every paper. in paper F8 ,professional ethics is one of the important topics and they just have to be at our finger tips.

[Annie]

Hi Acid,

I liked the way you put forth this answer by giving titles and giving good quotes to each one of them which just conveys its right sense.


Keep it up

Annie

[tracy]

Thanks for your answer Acid, I was totally confused about the Advocacy.
Cheers
Tracy

[Pixiefeet]

This particular topic came very quickly to me at first, but when I continued with the balance of the books I found that I was slowly forgeting some of the things that I had learnt, how do we overcome this??