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

Case: Kaveri Agro Foods Ltd, a listed company, has its statutory audit conducted by M/s Rao & Co. During planning, the engagement partner learns that the firm's Chief Financial Officer is the brother-in-law of the engagement quality reviewer. The company has also proposed a bonus-linked incentive for the CFO tied to reported profit. Which action by the audit firm is most appropriate regarding the reviewer?

The firm should replace the engagement quality reviewer with someone free of any close family tie to the client's CFO. Such a relationship creates a familiarity threat to objectivity that is not reducible to an acceptable level by other safeguards, so the reviewer cannot remain on the engagement.

  1. AContinue with the same reviewer, since a family tie with the CFO is not a threat when the reviewer is a firm partner
  2. BReplace the engagement quality reviewer with someone having no close family relationship with the client's CFO, as the relationship creates a familiarity threat that is not reduced to an acceptable levelCorrect
  3. CRetain the reviewer but ask the CFO to waive the incentive
  4. DInform the audit committee after signing the report and then continue

Explanation

A close family relationship between a reviewer and a key management person of the client creates a familiarity threat to objectivity. The reviewer must be objective, so the firm should appoint another reviewer. Continuing and merely informing later does not remove the threat; the CFO incentive is a separate matter and does not cure the relationship.

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