2. Self – interest threat

1. Recent service with an audit client

If an individual had been closely involved with the client before the period covered by the audit report, the audit firm should consider the threat to independence arising and apply appropriate safeguards, such as:

• Obtaining a quality control review of the individual's work on the assignment

• Discussing the issue with the audit committee

2. Provision of non – audit services in general

Providing non-assurance services to audit clients may create threats to the independence of the firm or members of the audit team. Audit firms must evaluate any threat arising and decline to provide a non-audit service if the application of safeguards will not reduce the threat to an acceptable level.

Provision of some non-audit services to audit clients will not create an insurmountable threat and can be provided when certain safeguards are in place. Depending on the nature of the other service safeguards may not even be necessary.

3. Preparing accounting records and financial statements

Audit firms must therefore analyse the risks arising and put safeguards in place to ensure that the risk is at an acceptable level. Safeguards include:

Using staff members other than audit team members to carry out work

If non-audit services are performed by a member of the audit team, using an independent partner or senior staff member (not part of the audit team) to review the work performed

Obtaining client approval for work undertaken

The rules are more stringent when the client is listed or public interest. Except in emergency situations, a firm must not provide to an public interest audit client accounting and bookkeeping services, including payroll services, or prepare financial statements on which the firm will express an opinion. The same rule applies to financial information which forms the basis of the financial statements.

4. Valuation services

If the valuation is for an immaterial matter, the audit firm should apply safeguards to ensure that the risk is reduced to an acceptable level. Matters to consider when applying safeguards are the extent of the audit client's knowledge of the relevant matters in making the valuation and the degree of judgement involved, how much use is made of established methodologies and the degree of uncertainty in the valuation.

Safeguards include:

• Second partner review

• Confirming that the client understands the valuation and the assumptions used

• Ensuring the client acknowledges responsibility for the valuation

• Using separate personnel for the valuation and the audit

5. Internal audit services

For internal audit services that are permitted but still create a threat it may be appropriate to use safeguards such as using personnel not involved in the audit, ensuring that an employee of the client is designated responsible for internal audit activities and ensuring that the client approves all the work that internal audit does.

3. Advocacy threat

Where advocacy threats arise and the work or actions are permitted by the Code then relevant safeguards might include using different departments to carry out the work and making disclosures to the audit committee. Remember, the audit firm has the option to withdraw from an engagement if the risk to independence is too high.

4. Familiarity

Possible safeguards include:

• Rotating the senior personnel off the audit team

• Having a professional accountant who was not a member of the audit team review the work of the senior personnel

• Regular independent internal or external quality reviews of the engagement

5. Intimidation threat

Generally, audit firms should seek to avoid such situations arising. If they do arise, factors to consider are:

• The materiality of the litigation

• The nature of the audit engagement

• Whether the litigation relates to a prior audit engagement

The following safeguards could be considered:

• Disclosing to the audit committee the nature and extent of the litigation

• Removing specific affected individuals from the engagement team

• Involving an additional professional accountant on the team to review work

However, if the litigation is at all serious, it may be necessary to resign from the engagement, as the threat to independence may be too great.