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ACCA Applied Skills · Corporate and Business Law (Global) · Other company officers

Marta is the finance director of Orion Plc, a company with an external audit. Her brother-in-law is a partner in Kell & Co, the firm proposed as auditor. Under the usual rules on auditor independence, what is the correct view of the proposed appointment?

The relationship creates a familiarity threat to auditor independence because a partner is closely connected to the finance director of the client. The firm should act only if safeguards eliminate or reduce the threat to an acceptable level; otherwise it should decline.

  1. AIt is acceptable because a brother-in-law is not a director of Orion
  2. BIt is acceptable provided the audit fee is paid in advance
  3. CIt is acceptable if the partner's shareholding is disclosed in the annual report
  4. DIt is a threat to independence, and the firm should only act if the threat is eliminated or reduced by safeguardsCorrect

Explanation

A close family relationship between an officer of the audit client and a partner of the audit firm creates a familiarity threat. The firm must consider whether safeguards can reduce it, or decline the appointment. Disclosure or advance payment of fees does not remove the threat. Option A is wrong because the relationship with a senior officer, not a directorship held by the relative, is what matters.

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