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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Professional appointments

Ashby LLP is asked to accept the audit of Zenith Retail Ltd. The firm's audit partner owns a small number of shares in Zenith Retail Ltd, which she acquired through an inheritance. The holding is material to her personal wealth. What is the most appropriate action under the IESBA Code?

A material direct shareholding in an audit client creates a significant self-interest threat that the Code says safeguards generally cannot address. The interest must be disposed of or the partner removed from the engagement team and from any influence over the audit. Otherwise the firm should decline. Disclosure or committee approval is not enough.

  1. AAccept the engagement, because the holding was inherited and was not purchased deliberately
  2. BAccept the engagement, provided the partner discloses the holding in the audit report
  3. CAccept the engagement, but ask the audit committee to approve the partner's continued involvement as the engagement partner
  4. DIdentify the self-interest threat as significant, and either eliminate the holding or ensure the partner does not act as, or influence, the engagement team; if safeguards cannot reduce the threat, decline the engagementCorrect

Explanation

A material direct financial interest in an audit client creates a self-interest threat that cannot be reduced to an acceptable level by safeguards other than disposal or removal of the individual. Inheritance does not change the threat, and disclosure in the report or committee approval does not remove it. The firm should dispose of the holding or remove the partner, or decline.

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