(a) 108 Self-interest threat
Based on APES 110.290.108, the engagement partner will try to find out about his colleague or an immediate family if they hold a direct financial interest or a material indirect financial interest that might result of a self- interest threat. For this section, no safeguards would be able to reduce the threat to an acceptable level. Thus both partners and their immediate family members are not allow to hold any such financial interest in an audit client. Since Bruce is the engagement partner for Neptune Limited, he would clash with Michelle who is his partner’s wife. She is an immediate family who has shares in the company and she is independent. Michelle has a financial interest in the company which might results in self-interest threat and no safeguard would be able to reduce the threat to an acceptance level. Hence Michelle would either have to forgo her shares or Bruce would have to quit the audit.
(b) 105 Self-interest threat
As per APES 110.290.105, this section justifies that if a member of the audit team has a close family member and the former has learned about it then this might be the beginning of the self interest threat. The self-interest threat is built upon aspect such as; the nature of the relationship between the two players namely the audit team member and the close family member and the second aspect is the materiality of the financial interest to the close family member. The safeguards for this section must be enforced when it is crucial in order to eradicate the threat or decrease it to the acceptable level. There are 3 safeguards, (1) the close family member gets rid of all of the financial interest or by disposing an ample portion of an indirect financial interest so that the rest of the interest is no longer material. (2) A party should inspect the work of the member of the audit team. (3) They should exclude the individual from the audit team. Mariah is the assurance manager of BW, and her daughter, Juliette, is a close family member. Juliette is also a shareholder in OFL where Mariah has been allocated to perform an audit. However, there will be a threat on the nature of the relationship but the material interest that the close family member that is Juliette holds the shares in the company OFL. The best safeguards might be for Juliette to discard all of the shares and a person can cross check Mariah’s work or remove her from the audit.
(c) 131 Self-interest, familiarity and intimidation threats
Self- interest, familiarity or intimidation threats might occur due to a personal or family relationship between a partner or an employee of the firm wo is not a member of the audit team and a director or officer of the audit client or an employee in a position whether they are able to control over the preparation of the client’s accounting records of the financial statements on which the firm will convey an opinion. Partners and employees of the firm should know that such relationship must comply with firm policies and procedures. Its presence and implication of any threat shall depend on factors such as; the nature of the relationship between the two players’ interaction of the concerned partner or employee of the audit team; the position of the two players within the firm and the position held by the client. In order to exclude the threat or diminish it to an acceptance level, there are 2 safeguards that are needed to evaluate. The first one is to be able to decrease any possible influence over the audit engagement, they should manage the partner’s or employee’s duties. And the second one is they should analysis the significant audit work performed by a member. Ric is a partner at BW for which he has been given the audit. Charlotte is the accountant of PL, the audit client. This relationship will cause a self-interest, familiarity and intimidation threat. In this scenario, the company BW is the one who should give an opinion about the accountant’s work as it can have an impact on the financial statement of the company, PL. However, there are two quick fix. The first one is they can make a person double-check the audit work in order to be sure and the second on is to restructure the responsibilities of Ric and Charlotte so as there is less risk of over control of the audit engagement.
(d) 123 Self -interest and intimidation threat
According to APES 110.290.123, a close business relationship between a firm, or a member of the audit team or its management, that come from a commercial relationship or common financial interest may build a self- interest or intimidation threat. Such relationships examples are as follows; Despite having an agreement with the client and the governing owner, director, officer or other member complete the senior managerial activities for the client. In this section of 123, one of the partners may forgo their shares in the company so as to avoid clash with the audit team by not carrying out the audit. Unless any financial interest is inappropriate, and the business relationship is found to be irrelevant to the firm and its client or management, there will be a threat without any safeguards to lessen it to an acceptable level. Should the above circumstances be unsatisfied, then entering into the business relationship would be ill-suited. Moreover, if this occurs, the best solution would be to reduce it to an insignificant level or abolished.
According to this section, Jack who is the auditor has a financial interest in the company of ZZ motors while the same applies for the CFO of Burj Steel Ltd. Because of a joint venture both parties have the same right to control or have an impact on the entity. The following safeguards can be applying to eradicate the threat. 1. Jack should be detached from the audit. 2. They can drop out their shares in ZZ motors. 3. Another person should cross check the work of Jack.
(e) 198 ;203 Self-Review threat
Section 198 is associated with IT services that combine the design or performance of hardware or software systems. These systems merge together to be able to form part of the internal control over financial reporting or construct information, that may affect the accounting records or the financial statements that may be unrelated. By contributing to such services, it may lead to a self-review threat that shall depend on the services and the IT services. In the section 203, if an audit client is a part of the public interest entity hence the firm will not equip them with services that include the design or implement action of IT systems as they are an important part of the internal control over the financial reporting. They also might have information that is concern for the client accounting records or financial statements on which the firm might express an opinion. AML Ltd demanded that the auditor of BW add a new software systems for internal control. The two sections outlined above and by complying by its safeguards, the auditor of BW shall not implement these services to AML Ltd as the audit company is expected to give an opinion on these IT services and with this denial it might result to a clash. Thus, for the betterment of both company they must deny the proposal.