Threats to compliance with the fundamental principles

The IESBA Code states that threats may be created by a broad range of
relationships and circumstances. A circumstance or relationship may create
more than one threat, and a threa
t may affect compliance with more than one
fundamental principle.
The threats to compliance are listed and described as follows in the IESBA
Code:

Self
interest threat

the threat that a

financial or other interest
will
inappropriately influence the pro
fessional accountants judgment or
behaviou
r.

Self
review threat

the threat that a professional accountant will

not
appropriately evaluate
the results of a previous judgment made or
service performed by the professional accountant, or by another
individ
ual within the professional accountants firm or employing
organisation, on which the accountant will rely when forming a judgment
as part of
providing a current service.

Advocacy threat

the threat that a professional accountant will

promote
a clients o
r employers position
to the point that the professional
accountant
s objectivity is compromised.

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.

Intimidation threat

the threat that a professional accountant will be

d
eterred from acting objectively because of
actual or perceived
pressures
, including attempts to exercise undue influence over the
professional accountant.

Family and personal relationships

A close personal relationship between a member of the audit team and an
employee of a client company can create self
interest, intimidation, and
familiarity threats to objectivity bec
ause the audit team member may not be
sufficiently s
c
eptical of, or sympathetic towards the employee with whom they
have a relationship. In evaluating the significance of this threat, the seniority of
the member of the audit team and of the client employee
should be
considered, as the threat is more significant for more senior personnel who
have more influence over the preparation and audit of the clients financial
statements.

The familiarity or trust threat

2.5
A threat that the auditor may become over-influenced by the personality
and qualities of the directors and management, and consequently too
sympathetic to their interest. Alternatively the auditor may become too
trusting of management representations so as to be inadequately rigorous in
his testing of them because he knows the client too well or the issue too well

or for some similar reason

Familiarity threat
Occurs when, by virtue of a close relationship with an audit client, its directors, officers or
employees, an audit firm or a member of the audit team becomes too sympathetic to the client's
interests.
For example, in an external audit context:

a member of the audit team having a close family member who, as a director, officer or
other employee of the audit client, is in a position to exert direct and significant influence
over the subject matter of the audit engagement

a former partner of the firm being a director, officer or other employee of the audit client,
in a position to exert direct and significant influence over the subject matter of the audit
engagement

long association of a senior member of the audit team with the audit client and

acceptance of gifts or hospitality, unless the value is clearly insignificant, from the audit
client, its directors, officers or employees.

In an internal audit context this is often an issue where auditors have worked within a company
for many years and have long-standing relationships with employees and management across a
number of departments.

A familiarity threat occurs when,

due to a long
or

close relationship with

a
client
or employer,
a member will be
too sympathetic to the
ir
interests
or too accepting of their work.
Examples of circumstances that may create this threat include:
a)
a member of the
engagement
team having a
close or
immediate
family member who is a
director or an officer of the client;
b)
a member of the
engagement
team having a
close
or
immediate family member who, as an
employee of the client, is in a position to exert direct and significant influence over the
subject matter of
the assurance engagement;
c)
a director or officer of the client or an employee in a position to exert significant influence
over the subject matter of the engagement
having recently been a partner of the firm
;
and
d)
accept
ing
gifts or
preferential treatment fr
om a client,
unless the value is
trivial or
inconsequential
.

If a principal or employee of the firm or a person closely

connected with
either acts as a trustee of a trust which holds shares in a
client company, a self

interest and/or familiarity threat will arise. The threat to

objectivity is patent
where the shareholding is in excess of 10 per cent of the
issued share capital of
the company or of the total assets of the trust.
Familiarity threat

Members having a close or longstanding rel

ationship with an attest client or kno
wing individuals or entities (including by reputation) who performed nonattest services for the
client.
a.
A member of the attest engagement team whose spouse is in a key position at the client, such as
the clients CE
O
b.
A partner or partner equivalent of the firm who has provided the client with attest services for a
prolonged period
c.
A member who performs insufficient audit procedures when reviewing the results of a nonattest
service because the service was perfor
med by the members firm
d.
A member of the firm having recently been a director or an officer of the client
e.
A member of the attest engagement team whose close friend is in a key position at the client