CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: CA Deepa, a practising chartered accountant, is auditor of Lotus Textiles Ltd. Lotus Textiles' managing director offers her a loan of Rs 2 lakh at a nominal rate for her personal use during the audit period. She is considering accepting it. Which threat to the fundamental principles of the Code of Ethics is most directly created? Identify the primary threat.

The main threat is a self-interest threat that impairs independence. Taking a loan from an audit client's managing director creates a financial relationship that could influence the auditor's judgment, so it should be declined as safeguards cannot reduce the threat to an acceptable level.

ASelf-review threat
BAdvocacy threat
CSelf-interest threat leading to impairment of independenceCorrect
DIntimidation threat only

Explanation

Accepting a loan from an audit client creates a financial interest or relationship with the client, which is a self-interest threat. It can impair objectivity and independence. Self-review arises from evaluating own earlier work, and advocacy from promoting the client's position.

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