Threats to Auditor Independence
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Questions and Answers

What kind of threats to independence may be involved in accepting an engagement when a Chartered Accountant is already rendering accounting & book keeping services to an NGO, and is also offered audit of the accounts of the NGO? Explain.

In this case, accepting the audit engagement would constitute a "self-review" threat. The Chartered Accountant is already providing accounting and book-keeping services to the same NGO, and accepting the audit would involve reviewing their own work. This directly threatens the independence of the audit.

What is lacking on part of the auditors in a situation where auditors rely only on a management representation letter regarding the treatment of certain tax matters under appeal by the company, without conducting any other audit procedures to verify the treatment?

In this situation, the auditors lack "professional skepticism". They are not questioning the management's representation and are not performing sufficient independent verification. Professional skepticism requires auditors to have a questioning mind and to critically assess audit evidence, not simply rely on management representations.

What is the scope and objective of SA 210?

SA 210 deals with the auditor's responsibility in agreeing the terms of an audit engagement with management, and, where appropriate, those charged with governance. It aims to ensure the preconditions for an audit are present, and that there is a shared understanding between the auditor and management regarding the terms of the audit engagement.

Explain the pre-conditions for an audit.

<p>Preconditions for an audit refer to the use of an acceptable financial reporting framework by management in preparing the financial statements, and the agreement of management and, where appropriate, those charged with governance, to the premise upon which the audit is structured. The auditor needs to ensure the financial reporting framework is acceptable and the management acknowledges and understands its responsibility in fair presentation of financial statements, internal control, and providing the auditor with access to information and personnel.</p> Signup and view all the answers

Should the auditor accept the engagement if the pre-conditions for an audit are not present, or if management is imposing limitation on the scope of work?

<p>No, the auditor should not accept the engagement if the preconditions are not met or if management is imposing limitations on the scope of work. The auditor should only accept the engagement when they are confident in the framework and have unrestricted access to information necessary for a thorough audit.</p> Signup and view all the answers

Which fundamental principle governing professional ethics is disregarded when a Chartered Accountant fails to reply to a letter from ICAI, despite reminders?

<p>Professional Behaviour (D)</p> Signup and view all the answers

Which fundamental principle governing professional ethics has been violated when a Chartered Accountant in practice issued a certificate showing the original cost of plant and machinery installed in the premises of a client as Rs. 9 crore, to save some regulatory fees for his client, when the actual original cost was Rs. 15 crore?

<p>Integrity (C)</p> Signup and view all the answers

What does independence of auditors mean?

<p>Independence implies that an auditor's judgment is not compromised by influences that could bias their opinion. This means their judgment is not influenced by the wishes or direction of anyone who engages them, and they act with integrity and objectivity in providing an unbiased opinion.</p> Signup and view all the answers

What are the two interlinked perspectives of independence of auditors?

<p>The two interlinked perspectives of independence of auditors are Independence of Mind and Independence in Appearance.</p> Signup and view all the answers

Explain the threats to an auditor's independence and provide examples.

<p>Threats to auditor independence can arise from various factors, including self-interest threats, self-review threats, advocacy threats, familiarity threats, and intimidation threats. Examples include a direct financial interest in a client, performing a non-audit service that is subject to audit, actively promoting a client's opinions, or being influenced by a close relationship with a client.</p> Signup and view all the answers

What are safeguards to independence?

<p>Safeguards to independence are measures taken by auditors to eliminate or reduce threats to independence to an acceptable level. They can include policies and procedures, such as rotating audit partners, having a clear separation of duties within the audit firm, and disclosing and mitigating any potential conflicts of interest.</p> Signup and view all the answers

What is professional skepticism?

<p>Professional skepticism is an attitude of questioning mind, being alert to unusual situations, and having a critical assessment of audit evidence. It involves a willingness to question the reliability of information and to seek corroborating evidence before accepting statements at face value.</p> Signup and view all the answers

CA Raman Gupta is offered an appointment as auditor of a company, however, he later finds out that he is a nominee of shares having substantial value in the same company, due to the death of his distant uncle. What should be his proper course of action?

<p>In this situation, CA Raman Gupta should take steps to eliminate the threat to his independence by selling the inherited shares before accepting the audit appointment. Holding shares in the company he is being considered as auditor for creates a conflict of interest and threatens his objectivity in auditing the company.</p> Signup and view all the answers

Discuss how a Chartered Accountant receiving 40% of his total audit fees from a single client could affect his independence as the auditor of that client.

<p>This situation raises a concern about undue dependence on the client's fees, which can threaten the auditor's independence. The auditor might be hesitant to raise critical points or challenge the client's practices for fear of losing a significant revenue source. This type of threat to independence is referred to as a self-interest threat.</p> Signup and view all the answers

Write a short note on the Audit Engagement Letter.

<p>The Audit Engagement Letter is a formal document sent by the auditor to the client outlining the terms and scope of the audit, responsibilities of both parties, and the expected form and content of the audit report. It helps to minimize misunderstandings and ensures both parties are on the same page regarding the audit process.</p> Signup and view all the answers

Why is it crucial for the management of an entity to explicitly inform the auditor in writing that they understand their responsibilities in preparing the financial statements in accordance with applicable financial reporting frameworks? What should the auditor do if management refuses to provide this confirmation?

<p>It's crucial for management to acknowledge their responsibility for accurate and reliable financial reporting. Without this confirmation, the auditor cannot be assured that management understands their role in the audit process, which can compromise the audit's validity. If management refuses to provide this confirmation, the auditor should not accept the engagement, unless required by law or regulation.</p> Signup and view all the answers

Explain the circumstances when it would be appropriate to send a new engagement letter in recurring audits.

<p>A new engagement letter should be sent in recurring audits if there are significant changes in circumstances, such as a change in the entity's business or management, a change in regulatory requirements, or a misunderstanding of the scope or objectives of the audit. The auditor should also ensure that the existing terms of the engagement are clearly understood by the client.</p> Signup and view all the answers

What are the objectives of the engagement partner in taking overall responsibility for maintaining audit quality in an audit engagement?

<p>The engagement partner's objectives in taking overall responsibility for audit quality are to ensure that the work complies with professional standards and regulatory requirements, that the firm's quality control policies and procedures are followed, that the auditor's report is appropriate, and to create an environment where the engagement team feels comfortable raising concerns.</p> Signup and view all the answers

What are the responsibilities of the engagement partner in relation to ethical requirements in an audit engagement?

<p>The engagement partner is responsible for identifying any threats to independence that may exist, implementing safeguards to mitigate those threats, and reporting any unresolved threats to the appropriate persons within the firm. They must ensure that the team complies with ethical requirements throughout the audit process.</p> Signup and view all the answers

What are the responsibilities of the engagement partner in relation to accepting and continuing a client relationship and audit engagements?

<p>The engagement partner is responsible for gathering sufficient information to assess a new client or continue with an existing one, including evaluating their integrity, competence, and compliance with ethical requirements. They should also consider potential conflicts of interest and take appropriate action to address any issues before accepting or continuing an engagement.</p> Signup and view all the answers

What are the responsibilities of the engagement partner in relation to the assignment of engagement teams?

<p>All of the above (D)</p> Signup and view all the answers

What are the responsibilities of the engagement partner in relation to engagement performance?

<p>The engagement partner is responsible for directing and overseeing the audit process, ensuring it is conducted in accordance with professional standards, and for issuing the final report. They are also responsible for reviewing the audit documentation before the report is issued and for ensuring that sufficient appropriate audit evidence has been obtained to support the conclusions reached.</p> Signup and view all the answers

Explain the need for consultation in difficult or contentious matters during an audit.

<p>Consultation is crucial in resolving difficult or contentious matters. It allows the engagement team to discuss issues with individuals who have specialized expertise, both inside and outside of the firm, helping to reach a consensus and ensure that the best possible course of action is taken.</p> Signup and view all the answers

Explain the importance of engagement quality control review.

<p>An engagement quality control review is a vital step in the audit process. It involves a review of significant judgments made during the audit by an independent, qualified professional to ensure the report is appropriate and unbiased. This review helps to maintain the overall quality of the audit process.</p> Signup and view all the answers

What are the objectives of SA 220?

<p>SA 220 aims to ensure that the auditor implements quality control procedures at the engagement level that provide reasonable assurance that the audit complies with professional standards and regulatory requirements, and that the auditor's report is appropriate in the circumstances.</p> Signup and view all the answers

Explain the significance of the engagement letter in the context of changing the terms of an audit engagement.

<p>The engagement letter is crucial when changing the terms of an audit engagement. If the terms need to be modified due to changes in circumstances, the new terms should be agreed upon and documented in a new engagement letter, ensuring clarity and agreement between the auditor and client.</p> Signup and view all the answers

When is it necessary to send a new engagement letter in recurring audits?

<p>A new engagement letter should be sent in recurring audits if there are significant changes in circumstances, such as a change in the entity's business or management, a change in regulatory requirements, or a misunderstanding of the scope or objectives of the audit. The auditor should also ensure that the existing terms of the engagement are clearly understood by the client.</p> Signup and view all the answers

What is the importance of having a system of quality control?

<p>A system of quality control is crucial for any auditing firm. It provides reasonable assurance that the firm and its personnel comply with professional standards and regulatory requirements, and that the reports issued by the firm or engagement partner are appropriate in the circumstances.</p> Signup and view all the answers

What elements should a firm's system of quality control include?

<p>All of the above (H)</p> Signup and view all the answers

Explain the significance of leadership responsibilities in fostering a culture of quality within an audit firm.

<p>Strong leadership plays a crucial role in establishing a culture of quality within an audit firm. The firm's top leaders should set the example by demonstrating their commitment to quality. They must also ensure that appropriate policies and procedures are in place, that personnel are properly trained and empowered, and that quality concerns are promptly addressed.</p> Signup and view all the answers

How does SQC 1 ensure that independence is not breached by an audit firm?

<p>SQC 1 establishes policies and procedures to ensure that the firm and its personnel comply with ethical requirements. This includes maintaining independence in accordance with the Code of Ethics issued by the relevant professional accounting body. The firm should identify and evaluate threats to independence, take steps to eliminate or reduce them, and withdraw from the engagement if the threat cannot be adequately mitigated.</p> Signup and view all the answers

What are the circumstances where performing an engagement quality control review is mandatory?

<p>Engagement quality control review is mandatory for all audits of financial statements of listed entities. For other engagements, the firm should establish criteria to determine when a review is warranted based on the complexity of the engagement and the risk of the report being inappropriate.</p> Signup and view all the answers

What steps should be taken when differences of opinion arise during an audit?

<p>Differences of opinion should be addressed and resolved before the report is issued. The engagement partner works with the team to resolve these differences, consulting with other practitioners or firms if necessary. If the matter cannot be resolved, appropriate procedures should be followed to escalate the issue.</p> Signup and view all the answers

Explain the significance of engagement documentation.

<p>Engagement documentation is crucial because it provides a detailed record of the audit process. This documentation helps to maintain the confidentiality, integrity, and retrievability of the work performed. It also helps to ensure the firm's compliance with quality control procedures and can be used to support the auditor's opinion in the event of a dispute.</p> Signup and view all the answers

Explain why it is essential for the firm to have policies and procedures for the assembly of engagement files on a timely basis?

<p>Having a system in place for assembling engagement files on a timely basis is essential for maintaining an orderly and organized process. It helps to ensure that the files are complete and accurate, and that they are readily available if needed. This ensures that the appropriate documentation is preserved for future reference and review.</p> Signup and view all the answers

What are the objectives of monitoring with respect to a firm's system of quality control?

<p>Monitoring ensures that the firm's quality control policies and procedures are relevant, adequate, operating effectively, and complied with in practice. The firm conducts a periodic review of completed engagements to assess the effectiveness of its quality control system.</p> Signup and view all the answers

What are the key matters that should be considered when a firm is accepting or continuing a client relationship and specific engagements?

<p>When a firm is considering accepting or continuing a client relationship or a specific engagement, it should obtain information about the integrity of the client, their competence (including capabilities, time and resources), and their compliance with ethical requirements. The firm should also consider any potential conflicts of interest or limitations on the scope of work and take appropriate action if needed.</p> Signup and view all the answers

What are some examples of matters that a firm might consider regarding the integrity of a client?

<p>Matters that a firm might consider when assessing a client's integrity include their concerns about maintaining low fees, the identity and business reputation of key management personnel, the presence of inappropriate limitations on the scope of work, potential involvement in illegal activities, the nature of the client's operations, and information about their attitudes towards such matters as aggressive interpretation of accounting standards and the integrity of their internal control environment.</p> Signup and view all the answers

What are some of the key responsibilities of the engagement partner in relation to human resources?

<p>The engagement partner is responsible for ensuring that the firm has sufficient personnel with the capabilities, competence, and commitment to ethical principles to perform engagements in accordance with professional standards. The firm's policies and procedures should address key human resources issues such as recruitment, compensation, training, career development, and performance evaluation. There should be an emphasis on the continuing professional development of the firm's personnel.</p> Signup and view all the answers

What is the significance of engagement performance within the context of an audit?

<p>Engagement performance is the core of the audit process. It includes the direction, supervision, and performance of the audit work in accordance with professional standards, as well as the issuance of the auditor's report. The engagement partner is responsible for ensuring that the audit work is properly performed and that sufficient appropriate evidence is obtained to support the audit findings.</p> Signup and view all the answers

What are some examples of situations where a firm might consult with individuals outside of the firm?

<p>A firm might consult with individuals outside of the firm when encountering difficult or contentious matters, particularly when they lack the necessary expertise within their team. This includes consulting with individuals who have specialized knowledge or expertise in specific areas of accounting or auditing. Consulting with external professionals can provide valuable insights and technical expertise to help resolve complex issues during the audit process.</p> Signup and view all the answers

Explain the importance of withdrawal from an engagement.

<p>Withdrawal from an engagement may be necessary if the terms of the audit engagement are unacceptable to the auditor or if the auditor is unable to obtain the necessary information or access to required information. The auditor must carefully consider their obligations and report the circumstances to the appropriate parties if necessary.</p> Signup and view all the answers

What are some of the key responsibilities of the engagement partner when conducting a recurring audit?

<p>In recurring audits, the engagement partner should assess whether circumstances require changes to the terms of the engagement and remind the entity of their existing responsibilities. They should also consider factors such as misunderstandings about the audit scope, changes in legal or regulatory requirements, changes in the financial reporting framework, and recent changes in management or the entity's business. If a new engagement letter is required or the existing terms are not acceptable to the auditor, the engagement partner should not accept the engagement.</p> Signup and view all the answers

Flashcards

Ethics

Moral principles that guide a person's behaviour in an activity. It's a state of mind to act ethically.

Need of ethics for CA

Professional ethics protect the profession's interests and build trust with users of services.

Principles-based approach to ethics

Focuses on adhering to the spirit of ethical principles, requiring professional judgment for each situation.

Rules-based approach to ethics

Strictly follows established rules and guidelines, providing clear standards for ethical conduct.

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Integrity (Professional Ethical Principle)

Honesty and fair dealing in all professional relationships. It prohibits knowingly associating with misleading information.

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Objectivity (Professional Ethical Principle)

Not compromising professional judgment due to bias, conflicts of interest, or undue influence. It requires avoiding situations that may impair judgment.

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Professional Competence and Due Care (Professional Ethical Principle)

Maintaining professional knowledge and skill, acting diligently, and adhering to current standards. It emphasizes competence and responsibility.

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Confidentiality (Professional Ethical Principle)

Respecting the confidentiality of information acquired through professional relationships. Disclosure is permitted only when required by law or client consent.

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Professional Behaviour (Professional Ethical Principle)

Adhering to relevant laws, regulations, and avoiding conduct that might discredit the profession. It promotes professionalism and integrity.

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Professional Behaviour Violation

The disregard of

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Integrity Violation

The act of knowingly issuing a false certificate, violating the principle of integrity.

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Independence of Mind

A mental state of independence, allowing objective judgment without being swayed by others' wishes or self-interest.

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Independence in Appearance

Avoiding circumstances that could make a reasonable third party question an auditor's objectivity or integrity. It's about maintaining the appearance of independence.

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Self-Interest Threats

Threats arising from an auditor's financial interest in the client, potentially compromising objectivity.

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Self-Review Threats

Threats arising when an auditor performs services that are subject to audit, potentially leading to a lack of objectivity.

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Advocacy Threats

Threats arising when an auditor promotes a client's opinion to a point where objectivity might be compromised.

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Intimidation Threats

Threats arising when auditors feel pressured or intimidated to act against their professional judgment.

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Familiarity Threats

Threats arising from close personal or business relationships with the client, potentially leading to a lack of objectivity.

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Audit Engagement Letter

A formal letter sent by the auditor to the client outlining the terms and scope of the audit engagement.

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Management's Responsibility for Financial Statements

A formal agreement between the auditor and the client where the client acknowledges their responsibility for the preparation of financial statements in accordance with applicable financial reporting frameworks.

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Change in Terms of Audit Engagement

Changes to the initial terms and scope of the audit engagement, often driven by changing circumstances or misunderstandings.

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When to Send a New Engagement Letter

Sending a new engagement letter to remind the client of existing terms or reflect significant changes like management turnover or business expansion.

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Quality Controls for Firms Performing Assurance Engagements (SQC 1)

A system of quality control designed to ensure compliance with professional standards and legal requirements, resulting in appropriate audit reports.

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Leadership Responsibilities for Quality on Audits (SA 220)

The engagement partner assumes ultimate responsibility for the quality of the audit engagement, ensuring compliance with standards and ethical requirements.

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Ethical Requirements in Audit Engagements (SA 220)

The engagement partner's responsibility to ensure that the audit team is operating within ethical boundaries and addressing threats to independence.

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Acceptance and Continuance of Client Relationships and Audit Engagements (SA 220)

The engagement partner's responsibility to ensure proper information is gathered before accepting or continuing an audit engagement, focusing on client integrity and competence.

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Study Notes

Threats to Independence

  • Auditors must appear and be independent of the entities they audit.
  • Self-interest threats occur when an auditor or their firm benefits financially from the client.
  • Examples of self-interest threats include direct financial interest in the client, loans, undue dependence on their fees, close business relationships, potential employment, contingent fees.
  • Self-review threats arise when an auditor reviews their own prior work or when a team member previously held a senior position at the client.
  • Examples include reviewing previous work or being a previous director/senior officer.
  • Advocacy threats occur when the auditor promotes the client's viewpoint, potentially compromising objectivity.
  • Examples include supporting client's position in litigation or dealing with client's shares/securities.
  • Intimidation threats discourage auditors from acting objectively.
  • Examples include threats of replacement over disagreements, reduced audit fees, or threats of litigation.
  • Familiarity threats occur when auditors develop overly sympathetic relationships with clients.

Safeguards to Independence

  • Auditors must consider threats to their independence and implement safeguards.
  • Safeguards eliminate or reduce threats to an acceptable level, or the auditor should withdraw.
  • Without effective safeguards, an auditor should not accept the work.

Professional Skepticism

  • Professional skepticism is a questioning mind, alertness to unusual situations, and critical assessment of audit evidence.
  • It involves questioning existing evidence, documents, and responses.
  • It's crucial for mitigating the risks of overlooking unusual circumstances, generalizing while observing, or making inappropriate decisions about audit procedures.
  • Auditors should investigate if there is doubt about the reliability of information or indications of possible fraud.
  • A belief in management's honesty doesn't absolve the need for professional skepticism.

Fundamental Principles of Professional Ethics

  • Integrity: Honesty in all professional and business relationships.
  • Objectivity: Avoiding bias, conflicts of interest, or undue influence.
  • Professional competence and due care: Maintaining knowledge, skills, diligence, and acting carefully.
  • Confidentiality: Respecting client information.
  • Professional behavior: complying with laws and regulations, avoiding actions that could discredit the profession.

Preconditions for an Audit

  • Management's use of an acceptable financial reporting framework to prepare financial statements.
  • Management's and those charged with governance (TCWG) agreement to the premise on which the audit is conducted.
  • Auditor must determine that the financial reporting framework is acceptable.
  • Management acknowledging its responsibility for the preparation of financial statements in accordance with the applicable financial reporting framework, including fair presentation.
  • Management's acknowledgment of its responsibility for internal controls to prepare financial statements free from error/fraud.
  • Management's agreement to provide auditor with necessary access to information, additional information, and individuals.

Audit Engagement Letter

  • An audit engagement letter is a written agreement between the auditor and their client, outlining the terms.
  • It includes the objective and scope of the audit, responsibilities of the auditor and management, the financial reporting framework, and the expected form and content of any reports.
  • The letter clarifies expectations to reduce misunderstandings.
  • It can include expected form and content, but also allows for modifications based upon audit findings.
  • A new engagement letter should be sent if there are significant changes in management, operations, or circumstances.

Change in Engagement Terms

  • Changing terms may arise from various circumstances (like changed circumstances, misunderstanding, scope restriction, etc.).
  • Auditors must determine if there's reasonable justification for a change.
  • A revised engagement letter must be created to document any new terms.
  • If justification isn't reasonable, the auditor should not agree to the change.
  • If a change is not accepted, or the original terms can't be maintained, auditors must withdraw from the engagement.

SQC 1- Quality Control for Assurance Engagements

  • Firms must establish quality control systems.
  • The system must provide assurance that the firm and personnel comply with professional standards and regulatory/legal requirements.
  • Reports are appropriate in the circumstances.
  • Documentation is essential for quality control policies and procedures.

Leadership Responsibilities for Quality within the Firm

  • The firms's CEO or managing partners have ultimate responsibility for the quality control system.
  • Relevant personnel with appropriate experience, ability, and authority should handle operational responsibilities.
  • The leadership should promote an internal culture recognizing quality's importance.

Monitoring

  • The firm must ensure that quality control policies and procedures are operating effectively and relevant.
  • Ongoing evaluation of the firm's quality control system, including periodic review of completed engagements.

Engagement Quality Control Review (EQCR)

  • Mandatory for listed entity's financial statement audits.
  • Engagement partner must appoint a quality control reviewer for audits.
  • Engagement partner and reviewer should discuss significant matters and ensure review completion before the report’s issuance.

Engagement Documentation

  • Engagement teams must prepare a complete engagement file (within 60 days for audits, appropriately shorter for others).
  • Files should be kept in a secure manner to ensure confidentiality, integrity, accessibility, and retrievability.
  • They are the property of the firm, but portions may be shared with clients under proper conditions.

Acceptance and Continuance of Client Relationships

  • The firm must assess the client's integrity, identifying any significant issues.
  • Factors to consider include client's aggressive fee negotiation tactics, principal owners/management, scope limitations, criminal activities (money laundering).
  • The firm must document how unresolved issues are handled before accepting or continuing an engagement.
  • Legal and professional responsibilities must be considered, plus potential reporting requirements.

Human Resources

  • The firm should ensure sufficient personnel with the necessary capabilities, competence, and commitment to ethical principles.
  • Policies should address recruitment, compensation, training, career development, and performance evaluation, including ongoing professional development.

Consultation

  • Discussion of difficult or contentious matters in an engagement requires consultation.
  • If necessary, the firm may leverage external experts' advice.

Relevant Ethical Requirements

  • Auditors must comply with relevant ethical requirements.
  • Independence is a fundamental requirement.
  • Firms should identify and address threats to independence by either eliminating the threats or implementing safeguards, and if necessary, withdrawing from the engagement.

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Description

This quiz explores the various threats to independence that auditors face while performing their duties. Topics include self-interest, self-review, advocacy, and intimidation threats. Understanding these threats is crucial for maintaining objectivity and integrity in auditing practices.

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