CAT / FIA FAU Syllabus A. Business Environment And Audit Framework - Typical threats - Notes ^{3 / 6}

Holding Shares in a client

• Don't! Here look for the nature of the interest and the degree of control the accountant has over it - obviously the more control the higher the risk 

  No member of the assurance team (or immediate family) should hold a financial interest in a client. 

  The interest should either be disposed of, or the team member removed from the engagement

Significant Income from client

• Limit the amount 10% of total fees if listed

  15% of total fees if unlisted

  In larger firms an individual office may exceed these limits as long as responsibility for signing off the audit file should be passed to a different office. 

  Overdue fees should be avoided as they are practically a loan

Separate business venture with client

• Don't! Although buying things from a client is fine if on normal commercial terms and in the normal course of business

Giving a loan to the client

This may include unpaid audit fees

• Don't

Getting a loan from a client

• If the client is a bank (or similar) and the loan is on normal commercial terms then there is no threat to independence. 

  All other loans or guarantees are a self- interest threat and should be avoided

Lowballing

• Setting a very low fee either to attract new clients or ensure further work

  Safeguard
  Auditors should not set fees in this way, the fee must be based on a pre-determined level of work required

Hospitality and Benefits

• Any such items given to the auditor by a client could be seen to be a bribe

  So do not accept

Contingent Fees

• Where auditors fees are contingent on another event happening.

  Audit Fees are not to be determined in this way

Accounting Services

• If an auditor prepares the accounts it is 100% sure that they will be reviewing their own work. They may be tempted to hide errors to save face.

  So the Auditor must not undertake accounting services for a client, if they are a LISTED company.

  No management decisions should be made in other companies and a different team should provide each service.