Question

Accounting Ethics - Comprehensive Problems

Your college friend has always respected your financial acumen as a CPA. As a result, when your college friend formed his business in February, he asked you to serve on the company's Board of Directors. You gladly served on the Board of Directors for one month, without compensation, and then resigned in March when the company appointed an experienced venture capitalist to replace you. During the time you served on the Board, you successfully promoted the firm's business model to prospective investors. As compensation, the company awarded you 300 long-term stock options. Toward the end of the year, the company's Board of Directors selected you to audit the company's calendar-year financial statements for its first year of operation. Your college friend did not participate in that decision. Rather, the other Board members unanimously selected you based on your prior experience in their industry. Your friend did help you celebrate your selection by buying an extremely expensive bottle of aged wine. What threats exist to your ability to serve as the lead auditor on this client engagement?

Answer 1

Following two threats exist to my ability to serve as the lead auditor on this client engagement-

1. Independency threat-Normally these threats exist when a previous employee of the business performs audits to former employer(Which is found in given case). Due to familiarity between previous employee and client (employer), auditor will not be independent in his working of audit.

2. Relationship threat-Normally these threats exist when a relationship threats are found between  previous employee and client (employer). If we have a close relationship with a client as per previous basis (Which is found in given case)., we can not perform our audit work properly.

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