What are the main threats to auditor independence, and how are they managed?

What the interviewer wants to hear

• Self-interest threat
• Self-review threat
• Advocacy, familiarity and intimidation threats
• Safeguards such as rotation, separate teams, reviews
• Some services are prohibited under the Companies Act

Model answer

The code of ethics describes five main threats. Self-interest, when the auditor has a financial or other interest, such as owning client shares or depending heavily on one client’s fees. Self-review, when the auditor checks work their own firm did, like preparing the books. Advocacy, when the auditor promotes the client’s position, for example in a dispute. Familiarity, from long or close relationships with client staff. Intimidation, when the client pressures the auditor, for example by threatening to change auditors over a disagreement. They are managed with safeguards: partner and firm rotation, using separate teams for any permitted non-audit service, independent quality reviews, and declining work that creates threats that cannot be reduced. In India, Section 144 of the Companies Act prohibits certain services, such as bookkeeping and internal audit, for the statutory auditor, and Section 141 sets out who cannot be appointed as auditor.

More easy Auditor questions

• What is a financial statement audit, and why do companies need one?
• What are financial statement assertions? Give examples for a balance and for a class of transactions.
• What are internal controls, and why do auditors care about them?
• How would you explain materiality to a client, and how do you set it?
• What types of audit opinion can an auditor give, and when is each used?
• What is the difference between tests of controls and substantive procedures? Give an example of each.
• What procedures can an auditor use to obtain audit evidence?
• What does professional skepticism mean to you? Give an example of applying it.
• What does an audit engagement letter contain, and why does it matter?