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Audit Framework and RegulationEthicsFinancial InterestImmediate Family

ACCA · Question 02 · Audit Framework and Regulation

SECTION A - CASE 1: QUANTUMLEAP AI

SCENARIO:
You are an audit manager at Sterling & Co. You are reviewing the client portfolio and ethical considerations for a prospective new client, QuantumLeap AI, a rapidly growing tech startup developing machine learning algorithms for healthcare. The CEO of QuantumLeap AI has offered Sterling & Co a 15% equity stake in the company in lieu of audit fees for the first three years, citing cash flow constraints. Furthermore, the audit partner's spouse recently purchased a small number of shares in QuantumLeap AI. QuantumLeap has also requested that Sterling & Co provide valuation services for their proprietary algorithms, which are highly subjective and material to the financial statements.

QUESTION:
Regarding the audit partner's spouse purchasing shares in QuantumLeap AI, which of the following statements is true?

Answer options:

A.

Because the shares are held by a spouse and not the partner, no ethical threat exists.

B.

It creates a self-interest threat. The shares must be disposed of immediately, or the partner must be removed from the engagement.

C.

It creates an intimidation threat. The partner should be allowed to remain on the engagement provided an independent review is conducted.

D.

It creates a familiarity threat. The firm must resign from the audit engagement entirely.

How to approach this question

Recall the definition of 'immediate family member' in the ethical code and how their financial interests are treated.

Full Answer

B.It creates a self-interest threat. The shares must be disposed of immediately, or the partner must be removed from the engagement.✓ Correct
The IESBA Code defines a spouse as an 'immediate family member'. The financial interests of immediate family members are treated exactly the same as if they were held by the audit team member themselves. Therefore, it is a direct financial interest creating a self-interest threat, requiring immediate disposal of the shares or removal of the partner.

Common mistakes

Assuming that because the partner doesn't own the shares directly, the threat is lessened or non-existent.
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