AUDITING

ASSIGNMENT

SUBMITTED TO : SIR RASHID WAHEED QURESHI

SUBMITTED BY: MOHAMMAD IBRAHIM CHAUDHARY

ROLL NO: SP20-BBA-027

The five ethical threat which may affect the independence of Alpha & Co’s audit of Black Woods
Ltd are:
■ self-interest

■ self-review

■ advocacy

■ familiarity

■ intimidation.

Self interest:
when an auditor could benefit from a financial interest in, or other self-interest conflict with, an
assurance client. In this the a member of the assurance team having a direct financial interest in the
assurance client as total fees received by Alpha &Company last year were equal to 16% of the firm's
total fee income. According to ethics, if the audit fee exceeds 15% of the audit firm's total revenue, it is
generally considered a risk. Auditors may not want to lose clients in the future and may overlook
misstatements in the financial statements. And the fee for the current year has not been decided.
According to ethics, no work should be done, and no report should be issued until the fee is paid. In
addition, the work should be done by a third party assurance.

Self-review:
A previous engagement needs to be re-evaluated in reaching conclusions on the present
assurance engagement. Alpha & Co wiiI review the work of Black Woods Ltd themselves and
are likely to overlook their errors and misrepresentations. This occurs when the audit firm has
provided services such as internal control services, consulting, advisory, and other accounting
and taxation services to the client.

Advocacy Threat:
when a member of the assurance team promotes, or seems to promote, an assurance client’s
position or opinion .In this Blackwood's has requested that Sarfaraz assist them by attending
their audit committee meetings, as a non-executive director has recently left the company. So
that he supports Blackwood's in his financial statements.

Familiarity Threat:
when an auditor becomes too sympathetic to the client’s interests because he has a close
relationship with an assurance client, its directors, officers or employees. In this officer of the
client or an employee in a position to exert significant influence over the subject matter of the
engagement having recently served as the engagement partner so the Black wood Company
has been audited by the same auditor for over 8 years so they are very familiar with each other.

Intimidation Threat:
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. In this the client has been working with Black Woods Alpha &
Co for 5 to 7 years. The client has the power to pressure or influence the assurance provider.
This is an important threat to the objectivity of the audit.

The Threat can be reduced to an acceptable level:

The threats can be reduced by not letting the auditor to go the client by not charging high fees
because alpha and co company was looking for extra profit and charging high fees. The other
threat self-review can be reduced by not looking all the client work done by same auditor. The
third one is that paying enough or giving promotion to the auditor that he don’t join as auditor
in another company. The fourth one is that don’t have same client for more than five years
because this can lead to relation between auditor and client which is not in terms of
negotiation of fees. The last one is the client have great impact on auditor because the client
can use auditor for his work by influencing him by giving limited powers in his company in order
to reduce the auditor should be fired.