CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesMedium
A CPA firm is engaged to perform an audit of a private company. During the planning phase, the auditor discovers that the client's CEO has a significant personal investment in a key supplier, and the client's purchasing manager is the CEO's spouse. The auditor assesses this situation as creating a significant threat to independence. What type of threat is most directly exemplified by this scenario?
- ASelf-review threat
- BUndue influence threat
- CFamiliarity threat
- DAdvocacy threat
Show answer & explanationAnswer & explanation
Correct answer: C. Familiarity threat
A familiarity threat arises when a close relationship exists between the auditor and the client. The CEO's significant investment in a key supplier, combined with their spouse (the purchasing manager) being in a position to influence transactions with that supplier, creates a close relationship that could lead the auditor to be too accepting of the client's financial statements.
Why the other options are wrong
- A. A self-review threat occurs when the auditor reviews their own work or work performed by their firm. This scenario doesn't primarily involve the auditor reviewing their own work.
- B. An undue influence threat occurs when a client attempts to coerce or unduly influence the auditor. While there might be potential for influence, the primary threat described here is the result of existing close relationships.
- D. An advocacy threat occurs when the auditor promotes the client's position to the point where independence is compromised. This scenario is about a close relationship, not promotion.
Familiarity Threat
A familiarity threat to independence arises when a close relationship exists between the CPA and the client, making the CPA too sympathetic to the client's interests or too accepting of the client's work.
- Can result from long association with client personnel.
- Can arise from family or close personal relationships.
- Requires safeguards to mitigate, such as rotation or independent review.
Memory trick: SAFE IS AIM.