THREATS AND SAFEGUARDS

SELF INTEREST THREATS

(1) FINANCIAL INTERESTS

It exists where an audit firm has a financial interests in a
client's affairs.
The parties listed below are not allowed to own a direct
financial interest or an indirect material financial interests
in a client.
Assurance firm
Member of assurance firm
An immediate family member of a member of the
assurance team.

SAFEGUARDS
Disposing of the interests
Removing the individual from the team.
Keeping the client's audit committee informed of the
situation.
Using an independent partner to review work carried
out if necessary.
 Judgment is required in these matters.
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 can be identified timely.

(2) CLOSE BUSINESS RELATIONSHIPS

Examples :
Having a material financial interests in a joint venture
with the assurance client.
Arrangements to combine one or more services or
products of the firm with the clients' and to market
the package with reference to both parties.
Distribution or marketing arrangements under which
the firm acts as distributor or marketer of the
assurance client's products or services.

Materiality of the interests will be judged by the partners.

Unless the interest is clearly insignificant, an assurance
provider should not participate in such a venture with an
assurance client.

SAFEGUARDS
To end the assurance provision.
To terminate the other business relationship.
Individual member should be removed from the audit
team.
Purchasing goods and services from an assurance
client on an arm's length basis does not constitute a
threat to independence.
If there are substantial number of such transactions,
there may be a threat to independence and safeguards
may be necessary.

(3) TEMPORARY STAFF ASSIGNMENTS.

Staff may be loaned to an audit client but only for a short

period of time.
Staff must not assume management responsibilities.
The audit client must be responsible for directing and
supervising the activities of the loaned staff.
POSSIBLE SAFEGUARDS
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.
Not including the loaned staff in the audit team.

(4) PARTNER ON CLIENT BOARD

A partner or employee of an assurance firm should not

serve on the board of an assurance client.

(5) COMPENSATION AND EVALUATION

POLICIES

When a member of the audit team is evaluated on selling

non assurance services to the client.
The significant of the threat depends on :
The proportion of the individual's compensation or
performance evaluation that is based on the sale of such
services.
Whether promotion decisions are influenced by the sale of
such services.

SAFEGUARDS

Revise the compensation plan or evaluation services.

Removing the member from the audit team.
Having the team member's work reviewed by a
profession accountant.

A key audit partner shall not be evaluated based on their

success in selling non assurance services to their audit
client.

(6) GIFTS AND HOSPITALITY

A firm or a member of an assurance team should not

accept a gift or hospitability of high value.
(7) LOANS AND GUARANTEE

The advice on loans and guarantee falls into two

categories :
The client is a bank or other similar transactions.
Other situations.

Immaterial amounts by lending institution clients to audit

firm or member of the assurance team on normal
commercial terms, there is no threat to independence.
If the loan is material, it would be necessary to apply safe
guards (independent review by a partner from another
office in the term) to bring the risk to an acceptable level.
Loans to members of the assurance team from a bank or
other lending institution client are likely to be material to
the individual, but provided that they are on commercial
terms, these do not constitute a threat to independence.
An audit firm or individual on the assurance engagement
should not enter into any loan or guarantee arrangement
with a client that is not a bank or similar institution.
(8) OVERDUE FEES

The auditor will run the risks of in effect making a loan to

a client, whereupon the guidance above becomes relevant.
The firms should guard against fees building up and being
significant by discussing the issues with those charged
with governance.
They should consider the possibility of resigning if
overdue fees are not paid.

(9) CONTINGENT OR PERCENTAGE FEES

A firm shall not enter into a contingent fee arrangement in

respect of an assurance engagement.
No safeguards can reduce it to an acceptable level.

(10) HIGH PERCENTAGE OF FEES

When a firm receives a high proportion of its fee income

from just one audit client, there is a self interest or
intimidation threat as the firm will be concerned about
losing the client. This depends on :
The structure of the firm
Whether the firm is established or new
The significant of the client to the firm.

POSSIBLE SAFEGUARDS :

Reducing the dependence on the client.

External quality control reviews or
Consulting a third party on key audit judgments.

For audit clients that are public interest entities, the Code
states that where total fees from the client represents more
than 15% of the firm's total fees for two consecutive years
The firm shall
Disclose this to those charged with governance.
A review will be conducted. This review can be either
before the audit opinion on the second year's financial
statements is issued ( pre -issuance review ) or after it is
issued ( a post issuance review )
If total fees significantly exceed 15, then a post issuance
review may not be sufficient, and a pre issuance review
will be required.
(11) LOWBALLING

When a firm quotes a significantly lower fee level for an

assurance service than would have been charged by the
predecessor firm, there is significant self interest threat.
SAFEGUARDS :
Maintaining records
Complying with all applicable assurance standards,
guidelines and quality control procedures.

(12) RECRUITMENT

Recruiting senior management for an assurance client

who are able to affect the subject matter of an assurance
engagement creates a self interest threat for the assurance
firm.
Their involvement could be limited to reviewing a
shortlist of candidates.

SELF REVIEW THREATS

General Other Services:

For assurance clients, accountants are not allowed to :

Authorise, execute or consummate a transaction.

Determine which recommendation of the company should
be implemented.
Report in a management capacity to those charged with
governance.
Custody of clients assets
Supervising client employees in the performance of their
normal duties
Preparing source documents on behalf of the client.

SAFEGUARDS
Use non-assurance team staff are used for these roles.
Involve an independent professional accountant to advise.
Quality control policies on what staff are and are not
allowed to do for clients.
Making appropriate disclosures to those charged with
governance.
Resigning from the assurance engagement.

Preparing accounting records and financial statements.

Firms should not prepare accounts or financial statements

for listed or public interest clients, unless an emergency
arises.
For any client, assurance firms are not allowed to
determine or change journal entries without client
approval or authorise or approve transactions.

SAFE GUARDS
Using staff members other than assurance team members
to carry out the work.
Obtaining client approval for work undertaken

Valuation Services
Audit firms should not carry out valuations on matters
which will be material to the financial statements.
Safeguards should be applied if the valuation is for an
immaterial matter so that the risk is reduced to an
acceptable low level.
SAFEGUARDS

Second Partner Review

Confirming that the client understand the valuation and
the assumption used.
Ensuring the client acknowledges responsibility for the
valuation.
Using separate personnel for the valuation and the audit.

Taxation Services.

Tax return preparation does not generally threaten

independence as long as the management takes
responsibility for the returns.
Tax calculations for the purpose of preparing the
accounting entries may not prepared for public interest
entities. For non-public interest entities , it is acceptable
to do so provided that safeguards are applied.
Tax planning may be acceptable in certain circumstances
Assistance in the resolution of tax disputes may be
provided.
SAFEGUARDS
Using Professionals who are not members of the audit
team to perform the service, and obtaining advice on the
service from an external tax professional.

Internal Audit Services.

A firm may provide internal audit services to an audit
client but the client should acknowledges its
responsibility for establishing, maintaining and
monitoring the system of internal controls .
An appropriate safeguard would be to ensure that an
employee of the client is designated responsible for
internal audit activities and that the client approves all the
work that internal audit does.
If the client is public interest entity, then internal audit
services must not be provided if they relate to significant
controls over financial reporting and financial accounting
systems .

Corporate Finance
Assurance firms are not allowed to promote, deal in or
underwrite an assurance client's shares.
They are also not allowed to commit an assurance client
to the terms of a transaction or consummate a transaction
on the client's behalf.
Assisting in defining corporate strategies, identification of
possible sources of capital, structuring advice may be
acceptable.
SAFEGUARDS
Use different teams of staff.
Ensuring no management decisions are taken on the
behalf of the client.

Other Services

IT Services, Litigation Services and Legal Services.

ADVOCACY THREAT.

When the assurance firms is in a position of taking the

client's part in a dispute or somehow acting as their
advocate.
Offering legal services to a client
Defending them in a legal case
Providing evidence on their behalf as an expert witness.
Advice on debt reconstruction
Negotiations with the bank on the client's behalf.

SAFEGUARDS
Use different departments in the firm to carry out the
work.
Making disclosures to the audit committee.
Withdraw from an engagement if the risk to independence
is too high.

FAMILIARITY THREAT

When the audit firm and its staff becoming over familiar
with the client and its staff.

Long association of senior personnel with audit clients.

Having an audit client for a long period of time may
create a familiarity threat to independence.
SAFEGUARDS :
Rotating the senior personnel off the audit team.
Having a professional accountant who was not a member
of the audit team review the work of the senior personnel.
Regular independent internal or external quality reviews
of the engagement.

If an individual is a key audit partner in a public interest

entity for seven years, they must be rotated off the audit
for two years during which they can't be on the audit team
and can't consult with the audit team or client on any
issue.
In serious unforeseen circumstances, the audit partner can
remain on the audit for an additional year.
If a client that was not a public interest entity becomes
one, then the seven year limit still applies, started from
the date the audit partner originally took the position for
that audit client.

Recent service with an audit client.

Individuals who have been a director or officer of the
client in the period under review should not be assigned to
the assurance team.
SAFEGUARDS
Obtaining a quality control review of the individual's
work on the assignment.
Discussing the issue with the audit committee.

Employment with an audit client.

Staff might transfer between an assurance firm and a
client. Both situations are a threat to independence.
When a member of the audit team joins an audit client
and a significant connection still remains between the
audit firm and the former employee/partner, then no
safeguards could reduce the threat to an acceptable level.

SAFEGUARDS
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.
If the audit client is a public interest entity . cooling off
periods are required.

Family and personal relationships