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Threat to Compliance with Fundamental Principles on Auditing

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Threats to Compliance With The Fundamental Principles 1. Self-interest threat – the threat that a financial or other interest will inappropriately influence the professional accountant’s judgment or behavior. Examples of the circumstances that may create self-interest threat include:

a. A direct financial interest or material indirect financial interest in a client b. A loan or guarantee to or from a client or any of its directors or officers c. Undue independence on total fees from a particular client d. Concern about the possibility of losing the engagement e. Having a close business relationship with a client f. Potential employment with a client g. Contingent fees relating to an engagement

2. Self-review threat – the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed in forming a conclusion about the subject matter of the engagement. Examples of the circumstances that may create self-review threat include:

a. A member of the engagement team being, or having recently been, a director or officer of the firm. b. A member of the engagement team being, of having recently been, an employee of the client in a position to exert direct and significant influence over the subject matter of the engagement. c. Performing services for a client that directly affect the subject matter of the engagement. d. Preparation of original data used to generate financial statements or preparation of other records that are the subject matter of another engagement. e. Reporting on the operation of financial systems after being involved in their design or implementation. f. The discovery of a significant error during re-evaluation of the work of the professional accountant in public practice.

3. Advocacy threat – the threat that a professional accountant will promote a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised. Examples of the circumstances that may create advocacy threat include:

a. Dealing in, or being a promoter of, share or other securities in a client. b. Acting as an advocate on behalf of certain in litigation or in resolving disputes with third parties.

4. Familiarity threat ─ the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work. Examples of the circumstances that may create familiarity threat include:

a. A member of the engagement team having an, immediate family member or close family member who is a director or officer of the client. b. A member of the engagement 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 engagement. c. A former partner of the firm being a director, officer of the client or an employee in a position to exert direct and significant influence over the subject matter of the engagement. d. Long association of a senior member of the engagement team with the client. e. Acceptance of gifts or preferential treatment, unless the value is clearly insignificant, from a client, its directors, officers or employees.

5. Intimidation threat – the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the professional accountant. Examples of the circumstances that may create intimidation threat include:

a. Being threatened with litigation. b. Being threatened with dismissal or replacement over a disagreement with the application of an accounting principle. c. Being pressured to reduce inappropriately the extent work performed in order to reduce fees.

The table summarizes the independence requirements of different assurance engagements.

| Members of assurance team | Firm | Network Firm | Audit | Yes | Yes | Yes | Non-audit (not restricted) | Yes | Yes | No | Non-audit (restricted) | Yes | No | No |

Engagement team B can still audit PLDT because a direct connection has never occurred between the two parties. However, strict independence must be followed by team B to formulate neutral and fair presentation of report.

Bachelor of Science in Accountancy - III
St. Paul University Philippines…...

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