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ACCA Strategic Professional · Strategic Business Leader · Audit and compliance

Kestrel Foods plc is listed. Its audit firm also provides the company with a large internal audit outsourcing service, and the audit engagement partner has worked on the account for many years. The audit committee chair is concerned about the auditor's independence. Which threat to independence is MOST directly created by the audit firm performing the internal audit function and then relying on that work in the external audit?

The most direct threat is self-review. By running the internal audit function and then relying on that work during the external audit, the firm ends up assessing its own work, which weakens objectivity. Long partner tenure creates familiarity, but that is a different threat from the outsourcing.

  1. ASelf-review threatCorrect
  2. BFamiliarity threat
  3. CAdvocacy threat
  4. DIntimidation threat

Explanation

When the firm designs or performs internal controls or internal audit work and then evaluates that same work as part of the external audit, it is reviewing its own output. This is a self-review threat. Familiarity arises from long association of the partner, which is a separate issue in the scenario, so it is not the threat created by the outsourcing.

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