## Threats to Independence

The following are the five recognised threats to an auditor's independence:

### 1. Self-Interest Threat

Arises when an auditor or audit firm could benefit from a financial interest in, or other self-interest conflict with, an assurance client.

### 2. Self-Review Threat

Arises when a previous judgment or work product by the auditor (or the firm) needs to be re-evaluated in reaching current audit conclusions.

### 3. Advocacy Threat

Advocacy threats arise when an auditor promotes a position or opinion to the point where subsequent objectivity may be compromised. These occur when the auditor acts as an advocate for or against an assurance client's position.

How it can be perceived: The auditor is seen as backing and championing the client's cause rather than providing an independent opinion.

Examples of advocacy threats:

Promoting the client's shares or securities
Acting as an advocate on behalf of the client company in litigation or disputes
Representing the client before a tax authority in a contentious manner

### 4. Familiarity Threat

Arises due to a long or close association with a client, where the auditor becomes too sympathetic to the client's interests. Can occur in many ways including:

Long association with the same client or key management
Close personal relationships

> Provisions in Companies Act: The Companies Act 2013 has specific provisions limiting audit tenure (mandatory rotation) to address familiarity threats.

### 5. Intimidation Threat

Arises when the auditor is deterred from acting objectively by actual or perceived threats.

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### Safeguards Against Threats

Safeguards fall into two categories:

1. Safeguards created by the profession/legislation — education, training, CPE, professional standards, monitoring

2. Safeguards in the work environment — firm-level and engagement-level safeguards

Worked example

### Example 1

Advocacy threat example: An auditor is asked by the client to represent the company before the Income Tax Appellate Tribunal in a significant tax dispute. By advocating strongly for the client's tax position, the auditor's objectivity in the audit may be compromised — this creates an advocacy threat.

### Example 2

Familiarity threat example: An auditor has been auditing the same mid-sized company for 15 years and has developed a close friendship with the CFO. Over time, the auditor may unconsciously accept management's explanations without sufficient scrutiny — a classic familiarity threat addressed by mandatory rotation rules.

### Example 3

Identifying the threat type: A firm's tax partner who prepared the client's tax computation is asked to audit the same computation. This is a self-review threat, not an advocacy threat — distinguish carefully.

⚠️ Common exam mistakes

Confusing advocacy threat with self-interest threat — advocacy is about promoting the client's cause, self-interest is about the auditor's own financial benefit.
Thinking familiarity threat only arises from long tenure — it can also arise from personal relationships, close family connections, or employment relationships.
Not linking the Companies Act rotation provisions specifically to familiarity threats in exam answers.

Reference:

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