# Threats to Independence & Safeguards

## The Five Threats

### 1. Self-Interest Threat

Auditor benefits from a financial interest in the audit client.

Examples:

Direct or significant indirect financial interest in client
Loan or guarantee to or from client
Undue dependence on client's fees
Contingent fees for audit
Close business relationship with audit client
Potential employment with client

### 2. Self-Review Threat

Auditor must review work previously done by himself or his firm.

Examples:

Auditor was previously a director or senior officer of the company
Auditor performs services that are themselves the subject matter of the audit (e.g., bookkeeping + audit)
Member of audit team was previously a senior employee of client

### 3. Advocacy Threat

Auditor promotes the client's position to a point where objectivity is compromised.

Examples:

Dealing in shares of client
Becoming client's advocate in litigation

### 4. Familiarity Threat

Due to close relationship with client, auditor becomes too sympathetic to client's interests.

Examples:

Close relative of audit team working in senior position in client
Former partner of audit firm being a director/senior employee of client
Long association between specific auditors and specific clients
Acceptance of significant gifts from client, directors or employees
Mitigation: Rotation of auditors

### 5. Intimidation Threat

Auditors are deterred from acting objectively with professional skepticism, due to:

Threat of replacement over disagreements
Pressure to disproportionately reduce work in response to reduced audit fees

## Safeguards to Independence

Definition: Safeguards are actions that reduce threats to an acceptable level to comply with fundamental principles.

### Guiding Principles

1. For public confidence, auditors must always be — and appear to be — independent of audit entities

2. Before accepting work, the auditor must conscientiously consider if it involves any threat to independence

3. When threats exist, the auditor should:

Desist (refuse) the task, OR
Eliminate the threat, OR
Put safeguards in place that reduce threats to an acceptable level

4. If safeguards cannot be implemented → the auditor must NOT accept the work

## Memory Aid: "SSAFI"

Self-interest · Self-review · Advocacy · Familiarity · Intimidation

Worked example

### Example 1

Example — Self-Interest:

Firm A's audit fee from Client X represents 35% of total firm revenue.

Threat: Self-interest due to fee dependence.

Safeguard: Reduce dependence by acquiring other clients; or have engagement reviewed by another partner; or in extreme case — decline the engagement.

### Example 2

Example — Self-Review:

CA Y prepared FS as accountant for Client Z and then his firm was appointed as statutory auditor of Z.

Threat: Self-review — auditing one's own work.

Safeguard: Independent partner review; or decline statutory audit appointment since the threat may not be reducible.

### Example 3

Example — Advocacy:

Audit firm represents the client in a tax appeal against the IT Department, defending the same tax treatment used in the FS.

Threat: Advocacy — promoting client's position publicly.

Safeguard: Separate teams for audit and representation; or decline one of the two engagements.

### Example 4

Example — Intimidation:

Client threatens to replace auditor unless the auditor agrees to remove a qualification regarding inventory provisioning.

Threat: Intimidation.

Safeguard: Auditor should NOT bend — escalate within firm; communicate with Those Charged with Governance; document and stand firm on the qualification.

⚠️ Common exam mistakes

Confusing Self-Review with Familiarity — Self-Review is about reviewing one's own work; Familiarity is about close relationships
Listing only 4 threats and missing Intimidation, or merging Advocacy with Self-Interest
Believing safeguards always eliminate threats — they reduce to acceptable level; sometimes the only option is to decline the engagement
Forgetting that 'long association' is a Familiarity threat addressed specifically by rotation of auditors

Reference:

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Threats to Independence and Safeguards

Worked example

⚠️ Common exam mistakes