Auditing and EthicsQuestion 5698 of 212

5. Undue dependence on the fees from GHB Ltd. creates which threat of independence for the auditors?

Options

AIntimidation threat

BFamiliarity threat

CSelf-interest threat

DAdvocacy threat Case Scenario 2 M/s KRISH & Company is a firm of Chartered Accountants based in Punjab, CA K, CA R, CA I, and CA SH are the partners of the firm. The firm is engaged in various audit assignments. The engagement partners, who were handling their respective assignments for the financial year 2023-24, dealt with the following issues raised during the course of their respective audits. M/s KRISH & Co. is appointed as the joint auditor along with M/s. PK. and Associates and M/s. RS and Associates for the audit of a large manufacturing company for the financial year 2023-24. CA K is in charge of this audit. They have divided their audit areas and have also identified the common audit areas, which will be applicable to all the joint auditors. While forming the opinion, CA K had a different opinion whereas, the other two audit firms shared the same opinion. Both of them contended that as they were forming a majority, M/s KRISH & Co. will have to agree with their opinion. CA R is conducting the statutory audit of PAWAN Ltd. He observed that, during the year, the company has issued shares at premium and has transferred the amount 4 SUGGESTED ANSWER received as premium to securities premium account. He wants to ensure that PAWAN Ltd. has utilised the amount available in the securities premium amount for the purposes permitted under the Companies Act, 2013. Registrar of Co-operative Societies has appointed M/s KRISH & Co. as the statutory auditor of NAND Co-operative Society for the financial year 2023-24. CA I is looking after the audit of the said registered society. During the year, in terms of Section 34 of the Cooperative Societies Act, with the sanction of the Registrar, Society has contributed for charitable purposes as defined in section 2 of the Charitable Endowments Act, 1890. CA I is ensuring whether requirements, as regards contribution made, have been complied with. All the engagement partners and the audit team of M/s KRISH & Co. have deliberations and discussions every week through google meet to review the progress of their respective assignments. During last such meet, CA SH, the managing partner, briefed to the team about the form, content, and extent of audit documentation in terms of SA 230, while citing examples of records to be excluded as well as to be included as a part of audit documentation. Based on the above facts, answer the following Q. Nos. 6 to 9.

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Correct Answer

✅ Option C — Self-interest threat

All Options:

AIntimidation threat
BFamiliarity threat
CSelf-interest threat ✓
DAdvocacy threat Case Scenario 2 M/s KRISH & Company is a firm of Chartered Accountants based in Punjab, CA K, CA R, CA I, and CA SH are the partners of the firm. The firm is engaged in various audit assignments. The engagement partners, who were handling their respective assignments for the financial year 2023-24, dealt with the following issues raised during the course of their respective audits. M/s KRISH & Co. is appointed as the joint auditor along with M/s. PK. and Associates and M/s. RS and Associates for the audit of a large manufacturing company for the financial year 2023-24. CA K is in charge of this audit. They have divided their audit areas and have also identified the common audit areas, which will be applicable to all the joint auditors. While forming the opinion, CA K had a different opinion whereas, the other two audit firms shared the same opinion. Both of them contended that as they were forming a majority, M/s KRISH & Co. will have to agree with their opinion. CA R is conducting the statutory audit of PAWAN Ltd. He observed that, during the year, the company has issued shares at premium and has transferred the amount 4 SUGGESTED ANSWER received as premium to securities premium account. He wants to ensure that PAWAN Ltd. has utilised the amount available in the securities premium amount for the purposes permitted under the Companies Act, 2013. Registrar of Co-operative Societies has appointed M/s KRISH & Co. as the statutory auditor of NAND Co-operative Society for the financial year 2023-24. CA I is looking after the audit of the said registered society. During the year, in terms of Section 34 of the Cooperative Societies Act, with the sanction of the Registrar, Society has contributed for charitable purposes as defined in section 2 of the Charitable Endowments Act, 1890. CA I is ensuring whether requirements, as regards contribution made, have been complied with. All the engagement partners and the audit team of M/s KRISH & Co. have deliberations and discussions every week through google meet to review the progress of their respective assignments. During last such meet, CA SH, the managing partner, briefed to the team about the form, content, and extent of audit documentation in terms of SA 230, while citing examples of records to be excluded as well as to be included as a part of audit documentation. Based on the above facts, answer the following Q. Nos. 6 to 9.

Detailed Solution & Explanation

The question requires the identification of the threat to independence that arises when auditors have an undue dependence on fees from a particular client, in this case, GHB Ltd.
To answer this question, we need to consider the different types of threats to independence that are identified in the auditing standards, which include self-interest threat, intimidation threat, familiarity threat, and advocacy threat.
The self-interest threat arises when an auditor has a financial or other interest in the client, which could influence their professional judgment.
In the given scenario, the undue dependence on fees from GHB Ltd. creates a self-interest threat because the auditors may be motivated to act in a way that will ensure they continue to receive fees from the client, rather than acting solely in the public interest.
This could lead to a lack of objectivity and a failure to report any issues or problems that may be present in the client's financial statements.
The intimidation threat, on the other hand, arises when an auditor is intimidated by a client or is pressured to act in a certain way.
While this could potentially be a factor in the given scenario, it is not the most direct threat that arises from undue dependence on fees.
The familiarity threat arises when an auditor becomes too comfortable with a client and fails to maintain their professional skepticism.
Again, while this could potentially be a factor, it is not the most direct threat that arises from undue dependence on fees.
The advocacy threat arises when an auditor acts as an advocate for a client, rather than maintaining their independence.
This could potentially be a factor in the given scenario, but it is not the most direct threat that arises from undue dependence on fees.
Therefore, the most appropriate answer is the self-interest threat, as it is the most direct threat that arises from undue dependence on fees from a particular client.
Hence, **Option C** is the correct answer.

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