AA - Audit framework & regulation

Ethical Risks

THREATS TO OBJECTIVITY AND INDEPENDENCE:

Objectivity is one of fundamental principles given in the ethical code. An auditor should remain objective, which
means that they should not allow bias and not be influenced by others.

Types of objectivity threats:

1) Self interest - arises when the auditor has personal interest in the client, which could affect the audit;
2) Self review - arises when the auditor has to review work that they previously performed;
3) Familiarity - arises when the auditor is too sympathetic or trusting of the client because of a close
relationship with them;
4) Advocacy - arises when the auditor is asked to promote or represent their client in some way;
5) Intimidation - arises when clients put pressure on auditors in order to influence the outcome of the audit.

Note: if auditors identify any of these threats, they need to put safeguards in place to reduce the threat to an
acceptable level.

Conflicts of interest:

A conflict of interest arises when the audit firm has the opportunity to audit two connected clients. The main
issue with a conflict of interest is confidentiality as there is a risk of sensitive information being leaked.

The safeguards are as follows:

1) Discuss with both clients whether they are happy to continue with the same audit firm;
2) Separate audit partners heading up the audit teams;
3) Set up separate audit teams and offices if possible;
4) Provide training on the importance of confidentiality to all staff;
5) Sign confidentiality agreements with the audit staff;

Note: If the audit firm cannot guarantee safeguards are strong enough, they should not continue with both
audits.
BREAKING CONFIDENTIALITY:
Keeping client information confidential is it is one of the fundamental principles from the ethical code.

Confidentiality should be broken when:

- Client has given permission to disclose information;

- There is a legal duty;
- It may be in the public interest.