# Threats to Auditor Independence

## Why This Matters

Independence is the cornerstone of auditing. When independence is compromised — in fact or in appearance — the audit opinion loses credibility. Identifying the type of threat is the first step toward applying the right safeguard.

## The Five Threats (Remember: SS A F I)

### 1. Self-Interest Threat (covered in prior section)

Arises when the auditor has a financial or other interest that could influence judgment (e.g., holding client shares, fee dependence).

### 2. Self-Review Threat

Occurs when the auditor reviews their own prior judgment or work.

Triggers:

Previous audit or non-audit engagement (management services, internal audit, investment advisory)
Audit team member was previously a director or senior employee of the client
Auditors perform services that are themselves the subject matter of the audit

> Core principle: You cannot objectively evaluate what you yourself created.

### 3. Advocacy Threat

Occurs when the auditor promotes a client's position to the point where objectivity appears compromised.

Triggers:

Dealing in shares or securities of the audited entity
Acting as the client's advocate in litigation or third-party disputes

### 4. Familiarity Threat

Occurs when a close relationship leads to excessive sympathy for the client's interests.

Triggers:

Close relative of audit team working in a senior position at the client
Former partner of the audit firm becoming a director or senior employee of the client
Long association between specific auditors and specific client counterparts
Acceptance of significant gifts or hospitality from the client, its directors, or employees

### 5. Intimidation Threat

Occurs when auditors are deterred from acting objectively due to actual or perceived pressure.

Triggers:

Threat of replacement over disagreements with accounting principles
Pressure to disproportionately reduce work in response to reduced fees
Being threatened with litigation

## Safeguards to Independence

Principle	Detail
Confidence requirement	The public must believe auditors are independent AND appear to be independent — both dimensions matter
Pre-engagement duty	Before accepting any work, the auditor must conscientiously consider whether it involves threats to independence

Worked example

### Example 1

Self-review threat scenario: An auditor who previously worked as Finance Manager at ABC Ltd for three years is now appointed as its statutory auditor. Which threats arise?

→ Familiarity threat (former senior employee of the client) AND Self-review threat (will be reviewing work done during their own tenure). Both threats exist simultaneously.

### Example 2

Advocacy threat scenario: XYZ & Co. audits Blue Star Ltd and simultaneously acts as its legal representative in an ongoing tax dispute with the revenue authorities. Identify the threat.

→ Advocacy threat — the firm is actively promoting the client's position in a dispute, creating the perception that objectivity is compromised.

### Example 3

Familiarity threat — gifts: An audit partner receives luxury holiday packages worth ₹5 lakhs from a client every year as a 'token of appreciation.' Which threat arises?

→ Familiarity threat — acceptance of significant gifts or hospitality from the client.

### Example 4

Intimidation threat scenario: A client threatens to replace the auditor unless the auditor removes a qualification from the audit report regarding a disputed accounting treatment.

→ Intimidation threat — threat of replacement over disagreements with the application of accounting principles.

⚠️ Common exam mistakes

Confusing Self-review and Familiarity threats: Self-review is about reviewing your OWN prior work; Familiarity is about being too sympathetic due to a long or close relationship — these are distinct.
Missing that a former audit firm partner becoming a client director creates a Familiarity threat — students often only flag 'employees' and miss 'former partner.'
Thinking Advocacy threat is limited to litigation — it also applies to dealing in the client's shares or securities.
Believing that being independent is enough — the standard requires the auditor to BOTH BE and APPEAR to be independent; perception matters.
Overlooking that 'significant' gifts trigger Familiarity threat — not every small gift qualifies, but large or recurring gifts do.

Reference:

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