CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesHard
A CPA firm has been asked to provide litigation support services to an existing audit client in a dispute with a former supplier. These services would involve assisting the client's legal counsel in analyzing financial documents and preparing expert witness testimony. Which of the following best describes the threat to independence posed by these services?
- AFamiliarity threat.
- BManagement participation threat.
- CSelf-review threat.
- DAdvocacy threat.
Show answer & explanationAnswer & explanation
Correct answer: D. Advocacy threat.
Providing litigation support services that involve assisting the client's legal counsel and preparing expert witness testimony places the CPA firm in the position of advocating for the client's position in a legal dispute. This creates an advocacy threat, as the firm's objectivity in the audit could be compromised by its role as a proponent for the client.
Why the other options are wrong
- A. A familiarity threat arises from a long or close relationship; while the firm is an existing auditor, the specific services described are advocacy in nature.
- B. A management participation threat arises when the CPA performs management functions or makes management decisions for the client, which is not the primary function described here.
- C. A self-review threat arises when the firm audits its own work; this scenario involves supporting a legal case, not auditing prior work.
Advocacy Threat
The threat that a CPA will promote a client's interests or position to the point that their objectivity or independence is compromised.
- Often arises in litigation support or tax advocacy.
- Can occur when representing a client in negotiations.
- Requires safeguards or declining the service if unmitigable.
Memory trick: SAM FInancial Interest Management Advocacy