THREATS AND

SAFEGUARDS TO THE
AUDIT PRINCIPLES
Topic 3
 • Threats may be created by a broad range
of relationships and circumstances . When
a relationship or circumstance creates a
threat ,such a threat could compromise , or
could be perceived to compromise , a
member’s compliance with the
INTRODUCTION fundamental principles.
• A circumstance may create more than one
threat and a threat may affect compliance
with more than one fundamental principle.
Threats fall into one or more of the
following categories.
 THREATS

Advocacy

Self-Review Familiarity

Self-Interest Independence Intimidation

 • Independence is potentially
INDEPENDENCE affected by self-interest, self-review,
advocacy, familiarity and
intimidation threats.
 SELF-INTEREST THREAT

• Occurs when a financial or other self-interest will inappropriately

influence the professional accountant’s judgement or behaviour for
example where the professional accountant holds shares in a
exporting entity or where the audit firm has undue dependence on
the fees from an audit client.
• It can be as a result of the financial or other interests of a
professional accountant or of an immediate or close family member.
• Financial or other interests of members or their close family.
• This is whereby an auditor puts their interests above the interest of
the client’s and shareholders example auditor receives excessive
gifts from clients.
 A direct financial interest or material indirect
financial interest in an assurance client;

A loan or guarantee to or from an assurance client

or any of its directors or officers;*

Undue dependence on total fees from an assurance

client;

SELF-
INTEREST Concern about the possibility of losing the
engagement;
THREAT
EXAMPLES Having a close business relationship with an
assurance client;

Potential employment with an assurance client;

and

Contingent fees relating to assurance

engagements.
 SELF-REVIEW THREAT

• The threat that auditor will not appropriately evaluate the results of a previous judgment
made or service performed by the auditor, or by another individual within the audit firm, on
which the auditor will rely when forming a judgment as part of providing a current service;
• Occurs when
(1) any product or judgment of a previous assurance engagement or non-assurance
engagement needs to be re-evaluated in reaching conclusions on the assurance
engagement or
(2) when a member of the assurance team was previously a director or officer of the
assurance client, or was an employee in a position to exert direct and significant
influence over the subject matter of the assurance engagement or
(3) when the professional accountant relies on information prepared by the professional
accountant or another individual in the professional accountant’s firm for example
where the professional accountant prepares a set of financial statements for a
reporting entity and then audits the same financial statements.
 EXAMPLES
• A member of the assurance team being, or having recently
been, a director or officer of the assurance client;
• A member of the assurance team being, or having recently
been, an employee of the assurance client in a position to
exert direct and significant influence over the subject
matter of the assurance engagement;
• Performing services for an assurance client that directly
affect the subject matter of the assurance engagement;
and
• Preparation of original data used to generate financial
statements or preparation of other records that are the
subject matter of the assurance engagement.
 ADVOCACY THREAT
• Occurs when a firm, or a member of the assurance team,
promotes, or may be perceived to promote, an assurance
client’s position or opinion to the point that objectivity may, or
may be perceived to be, compromised.
• Such may be the case if a firm or a member of the assurance
team were to subordinate their judgment to that of the client.
• This may also occur when the auditor fail to take a balance
view of their client and are perceive to be either taking their
client’s side or are biased against their client.
 EXAMPLES

• Dealing in, or being a promoter of, shares or other securities

in an assurance client; and
• Acting as an advocate on behalf of an assurance client in
litigation or in resolving disputes with third parties.
 FAMILIARITY THREAT
• Occurs when, by virtue of a close relationship with an
assurance client, its directors, officers or employees, a firm or
a member of the assurance team becomes too sympathetic
to the client’s interests.
A professional accountant can become disproportionately
close or familiar with the client to the extent that he may be
too sympathetic to their interests.
When the auditor is too sympathetic or trusting of the client
because of a close relationship with them.
 EXAMPLES
• A member of the assurance team having an immediate
family* member or close family member who is a director or
officer of the assurance client;
• A member of the assurance team having an immediate
family member or close family member who, as an employee
of the assurance client, is in a position to exert direct and
significant influence over the subject matter of the
assurance engagement;
• A former partner of the firm being a director, officer of the
assurance client or an employee in a position to exert direct
and significant influence over the subject matter of the
assurance engagement;
• Long association of a senior member of the assurance team
with the assurance client; and
• Acceptance of gifts or hospitality, unless the value is clearly
insignificant, from the assurance client, its directors, officers
or employees.
 INTIMIDATION THREAT
• Occurs when a member of the assurance team may be
deterred from acting objectively and exercising
professional scepticism by threats, actual or perceived,
from the directors, officers or employees of an assurance
client.
The professional accountant is put under pressure by a
client or employer to the extent that the professional
accountant may be deterred from acting objectivity.
Intimidates the auditor to give an unqualified opinion
otherwise not re-appoint him.
 EXAMPLES
• Threat of replacement over a disagreement with the
application of an accounting principle.
• Pressure to reduce inappropriately the extent of work
performed in order to reduce fees.
 SAFEGUARDS
• The firm and members of the assurance team have a
responsibility to remain independent by taking into account
the context in which they practice, the threats to
independence and the safeguards available to eliminate the
threats or reduce them to an acceptable level.
• When threats are identified, other than those that are clearly
insignificant, appropriate safeguards should be identified and
applied to eliminate the threats or reduce them to an
acceptable level. This decision should be documented.
• The nature of the safeguards to be applied will vary
depending upon the circumstances. Consideration should
always be given to what a reasonable and informed third
party having knowledge of all relevant information, including
safeguards applied, would reasonably conclude to be
unacceptable.
• The consideration will be affected by matters such as the
significance of the threat, the nature of the assurance
engagement, the intended users of the assurance report and
the structure of the firm.
SAFEGUARDS CATEGORIES:

Safeguards created by the profession, legislation or regulation

Safeguards within the assurance client

Safeguards within the firm’s own systems and procedures

 SAFEGUARDS CREATED BY THE PROFESSION,
LEGISLATION OR REGULATION,
• Educational, training and experience requirements for entry
into the profession.
• Continuing education requirements.
• Professional standards and monitoring and disciplinary
processes.
• External review of a firm’s quality control system.
• Legislation governing the independence requirements of the
firm.
 SAFEGUARDS WITHIN THE
ASSURANCE CLIENT
• When the assurance client’s management appoints the firm,
persons other than management ratify or approve the
appointment.
• The assurance client has competent employees to make
managerial decisions.
• Policies and procedures that emphasize the assurance
client’s commitment to fair financial reporting.
• Internal procedures that ensure objective choices in
commissioning non-assurance engagements.
• A corporate governance structure, such as an audit
committee, that provides appropriate oversight and
communications regarding a firm’s services.
 SAFEGUARDS WITHIN THE FIRM’S OWN
SYSTEMS AND PROCEDURES: FIRM-WIDE
• Firm leadership that stresses the importance of independence and the
expectation that members of assurance teams will act in the public interest.
• Policies and procedures to implement and monitor quality control of
assurance engagements.
• Documented independence policies regarding the identification of threats to
independence, the evaluation of the significance of these threats and the
identification and application of safeguards to eliminate or reduce the threats,
other than those that are clearly insignificant, to an acceptable level.
• Internal policies and procedures to monitor compliance with firm policies and
procedures as they relate to independence.
• Policies and procedures that will enable the identification of interests or
relationships between the firm or members of the assurance team and
assurance clients.
 SAFEGUARDS WITHIN THE FIRM’S OWN
SYSTEMS AND PROCEDURES:
ENGAGEMENT SPECIFIC

• Involving another firm to re-perform the non-assurance service to the extent necessary to enable it to
take responsibility for that service.
• Removing an individual from the assurance team, when that individual’s financial interests or
relationships create a threat to independence.
• Involving an additional professional accountant to review the work done or otherwise advise, as
necessary. This individual could be someone from outside the firm or network firm, or someone within
the firm or network firm who was not otherwise associated with the assurance team.
• Consulting a third party, such as a committee of independent directors, a professional regulatory body
or another professional accountant;
• Rotation of senior personnel.
• Discussing independence issues with the audit committee or others charged with governance.
• Disclosing to the audit committee, or others charged with governance, the nature of services provided,
and extent of fees charged.
• Policies and procedures to ensure members of the assurance team do not make, or assume
responsibility for, management decisions for the assurance client.
 RECRUITING (SEC 150.10)

A registered auditor shall not, directly or indirectly, offer

employment to an employee of another registered auditor
without first informing the latter.
 FEES AND OTHER TYPES OF REMUNERATION (SEC
240)

When entering into negotiations regarding professional services, a

registered auditor may quote whatever fee is deemed appropriate. The
fact that one registered auditor may quote a fee lower than another is
not in itself unethical.

Nevertheless, there may be threats to compliance with the

fundamental principles arising from the level of fees quoted.

For example, a self-interest threat to professional competence and due

care is created if the fee quoted is so low that it may be difficult to
perform the engagement in accordance with applicable technical and
professional standards for that price.
 FEES AND OTHER TYPES OF REMUNERATION (SEC
240)

Contingent fees
Contingent fees are widely used for certain types of non-assurance
engagements .They may, however, create threats to compliance with
the fundamental principles in certain circumstances. They may create
a self-interest threat to objectivity.

With effect from 1 March 2014. SAICA no longer allows any of its
member to charge contingent fees for tax return preparation.
 MARKETING PROFESSIONAL SERVICES (SEC 250)

When a registered auditor solicits new work through advertising or other forms of
marketing, there may be a threat to compliance with the fundamental principles.
 For example, a self-interest threat to compliance with the principle of professional
behavior is created if services, achievements, or products are marketed in a way that
is inconsistent with that principle,
Aregistered auditor shall not bring the profession into disrepute when marketing
professional services. The auditor shall be honest and
truthful andshall not:
(a) Make exaggerated claims for services offered, qualifications possessed, or
experience gained; or
(b) Make disparaging references or unsubstantiated comparisons to the work of
another.
 GIFTS AND HOSPITALITY (SEC 260)
Gifts from clients pose a threat to compliance with Fundaments principles.
The existence and significance of any threat depends on the
nature, value, and intent of the offer.
 CUSTODY OF CLIENT ASSETS (SEC 270)
Aregistered auditor shall not assume custody of client monies or other
assets unless permitted to do so by law and, if so, in compliance with any
additional legal duties imposed on registered
a auditor holding such assets.
The holding of client assets creates a self interest threat.
A registered auditor entrusted with money (or other assets) belonging to
others shall therefore:
(a) Keep such assets separately from personal or firm assets;
(b) Use such assets only for the purpose for which they are intended;
(c) At all times be ready to account for those assets and any income,
dividends, or gains generated, to any persons entitled to such accounting;
and
(d) Comply with all relevant laws and regulations relevant to the holding of
and accounting for such assets.
 CUSTODY OF CLIENT ASSETS (SEC 270)
Aregistered auditor is required to make appropriate inquiries about
the source of such assets and consider legal and regulatory
registered auditor has reason to believe that
obligations. eg, if the
the assets were derived from illegal activities, such as money
laundering, a threat to compliance with the fundamental principles
would be created.

In such situations, theregistered auditor shall not accept or hold

the client monies
 CPC ILLUSTRATIVE QUESTION

Brian Maphosa CA(Z) is a registered auditor and conducts the audit of MSU
(Pvt) Ltd, as well as acting for the company in tax matters. Barbican Bank,
which has a substantial long-term investment in MSU (Pvt) Ltd, requires, in
terms of its agreement with MSU (Pvt) Ltd, that the company’s annual
financial statements be audited by a registered auditor and submitted to
the bank. During the current year’s audit of this client, Brian discovers that
Tapiwa Kamba, a major shareholder and managing director of the company,
has been maintaining another set of accounting records which reflect the
true situation whilst he has been auditing and submitting tax returns based
on a fraudulent set of accounting records.
 CPC ILLUSTRATIVE QUESTION

When Brian confronts Tapiwa Kamba with this evidence, he admits that he has
done this for some years but indicates that he is not at all worried about it,
because he was only able to get away with it due to the inadequate audit which
Brian had conducted over the years. Kamba further states that should Brian
report the matter to anyone, he will simply state that he was a willing partner to
the fraud.

On scrutiny of correspondence from his past dealings with Kamba and of prior
audit working papers, Brian realises that he could indeed appear to have
conspired with Kamba as his audit documentation could be considered to be
inadequate and he had not followed up on a number of queries concerning the
audit. Furthermore, a large percentage of his professional fees comes from work
referred to him by Kamba.
 CPC ILLUSTRATIVE QUESTION

REQUIRED
Discuss fully the situation in which Brian finds himself in relation to the Code
of Professional Conduct (13 marks)