Question Tag: Self-Interest

Ethical threats faced by Agassi:

1. Self-Interest Threat:
   • Issue: Sampras is Agassi’s first client, and the firm may overly rely on this engagement for revenue, creating a risk that Agassi might compromise its independence to retain the client.
   • Solution: Agassi should actively seek additional clients to reduce dependence on Sampras, ensuring that future audits are performed without bias.
2. Self-Review Threat:
   • Issue: Agassi is preparing the financial statements of Sampras, which they are also auditing. This creates a self-review threat where Agassi might be less critical of its own work.
   • Solution: Agassi should consider whether it can assign separate teams for accounting and auditing to ensure that the individuals auditing the financial statements are not the same as those preparing them.
3. Familiarity Threat:
   • Issue: Agassi and Sampras intend to maintain a long-term business relationship, which may lead to a reduced level of professional skepticism and objectivity.
   • Solution: Agassi should rotate its audit staff regularly to maintain objectivity, and consider limiting the term of engagement to prevent excessive familiarity.
4. Advocacy Threat:
   • Issue: By seconding staff to Sampras, Agassi may be seen as advocating for the company, especially if the staff become involved in management decisions.
   • Solution: Agassi should ensure that the seconded staff are not involved in any decision-making processes and maintain strict guidelines to avoid any advocacy role.
5. Intimidation Threat:
   • Issue: The Managing Director of Sampras, having worked as a partner in a Big 4 firm, may intimidate Agassi’s auditors due to his expertise and seniority.
   • Solution: Agassi should assign experienced and confident auditors to the engagement and establish clear communication protocols to mitigate the intimidation threat.