Question Tag: Advocacy Threat

i) Ethical threats

1. Self-interest threat – Staff membership rates at Ablordey:
   Such a benefit could cause a self-interest threat to the audit, because the recipients may not want to lose their benefit, and therefore be biased in their audit work or not seek adjustments where there are material issues in the financial statements.
2. Familiarity threat – Partner invited to sit on the board:
   If the partner were to sit on the board of directors, there is a risk that the partner could lose their audit objectivity as they may start identifying too closely with the company and its other directors. There is also a risk that the audit partner may start taking management responsibility at Ablordey Co.
3. Advocacy threat – Assurance re insurance claim:
   Audit firms must always ensure that accepting other services does not impact on audit objectivity, whether due to the amount of fees relating to the service or as a result of the nature of the service itself.
4. Conflict of interest – Competing audit engagement:
   Adjaye-Gyamfi & Co has been invited to tender for an audit which will involve Ablordey’s major competitor, Gyms Ltd. It can be appropriate for audit firms to audit competitors, but the clients involved might feel that there is a threat to client confidentiality and may prefer to seek other auditors in such a situation.

(4 points well explained @ 1 mark each = 4 marks)

ii) Management of threats

1. Self-interest threat:
   Auditors are not allowed to accept such benefits unless their value is trivial and inconsequential. In this case, the value of a reduced membership of a spa is unlikely to be trivial and inconsequential to audit staff members, and therefore Adjaye-Gyamfi & Co should reject this offer.
2. Familiarity threat:
   Auditors are prohibited by the Code of Ethics from acting as a director for their clients. You should explain this to the Managing Director and politely decline the invitation.
3. Advocacy threat:
   The partners should discover more about the size and nature of this engagement to determine whether it will affect independence. In particular, they should determine whether such an engagement would put the firm in the position of advocating Ablordey’s position to the insurance firm, as this could cause an insurmountable barrier to independence. They should also monitor the level of fee income this would earn Adjaye-Gyamfi & Co from all work performed for Ablordey Co to ensure it does not cause a self-interest threat.
4. Conflict of Interest:
   Adjaye-Gyamfi & Co should therefore disclose to Ablordey that they are in the process of tendering for the audit of a competitor. If either Ablordey Co or Gyms Ltd is unhappy with this situation, then Adjaye-Gyamfi & Co will need to decide which audit they want to secure. If Adjaye-Gyamfi & Co performs both audits, they must ensure that they use separate audit partners and teams and set up “Chinese walls” to maintain confidentiality.

(4 points well explained @ 1.5 marks each = 6 marks)