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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Quality management (firm and engagement level)

Aldridge & Partners is auditing Tessara plc, a PIE. During the year, the firm identified that its audit manager's spouse bought a significant shareholding in Tessara that is material to the spouse. The firm learns of this only at the completion stage. Which response is most consistent with ISQM 1 and the IESBA Code?

The firm must treat the spouse's material shareholding as a significant self-interest threat, remove the manager from the team, require the interest to be disposed of, communicate with those charged with governance, evaluate whether independence is compromised, and record and remediate the breach under ISQM 1. Late discovery or KAM disclosure is not an adequate response.

  1. AEvaluate the threat, recognise it as a self-interest threat that is likely to be significant (the spouse's holding is an immediate family financial interest), take action to eliminate it such as removing the manager from the team and disposal of the holding, and consider with those charged with governance whether safeguards suffice and whether the engagement can continue; the firm should also record the breach in its system for identifying and responding to non-complianceCorrect
  2. BIgnore the matter, because holdings of immediate family members are not covered by independence requirements
  3. CContinue unchanged, because the issue was identified after fieldwork, so it cannot affect the audit opinion
  4. DDisclose the holding in the audit report as a key audit matter and take no further action

Explanation

A material financial interest held by an immediate family member of a team member creates a self-interest threat that is generally not capable of being addressed by safeguards alone. The firm must take action such as removing the individual and requiring disposal of the interest, communicate with those charged with governance, and evaluate whether independence is compromised. The firm's ISQM 1 processes must also capture and remediate the breach. Timing does not remove the threat, and a KAM is not the mechanism for dealing with independence breaches.

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