Example 1

Providing a review of company’s systems and controls gives rise to self review threat as the audit firm
will be reviewing their own work during the audit. They will be reluctant to point out the errors or adopt
a substantive approach as this will highlight the inadequacy in firm’s work.

Developing the internal controls is the work of company management. By providing a review of controls,
the firm can be perceived as taking the role of management. This risk is very high so there are no
safeguards which can prevent it. Management responsibility can be avoided if the client takes
responsibility for reviewing and taking decisions on recommendations.

However, the client is listed so we are prohibited from taking internal audit services which relate to
control over major part of financial statements.

Conclusion: The audit work must be declined.

Example 2

Attending a meeting with bank would give rise to advocacy threat as we might be perceived as
promoting the interest of client and confirming client’s assertions in negotiations.

In addition this may give rise to legal proximity exposing the firm to potential litigations.

Attending the meeting may be perceived as firm supporting the acquisition of Red Co. These decisions
should be taken by the management. The firm might be perceived as taking up the role of management.

Self review threat may also arise later when the audit is done. The firm may be reluctant to highlight
errors and or are less skeptical about values as the due diligence was provided by the firm.

An intimidation threat exists as the client has threatened that the firm might not get next year’s audit if
the report is not completed in time. The firm might lower the quality of report in order to meet the
deadline.

Management responsibility can be avoided if the directors provide in writing that they take the full
responsibility for any decision regarding acquisition.

The firm should decline to attend the meeting with bank.

The self review threat can be reduced by having an independent partner review the audit work.

The intimidation threat should be reported to TCWG.