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Audit Framework and RegulationEthicsNon-Audit ServicesSelf-Review Threat

ACCA · Question 03 · 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:
How should Sterling & Co respond to the request to provide valuation services for QuantumLeap AI's proprietary algorithms?

Answer options:

A.

Accept the engagement, as providing non-audit services to audit clients is always permitted if separate teams are used.

B.

Decline the engagement, as it creates a self-review threat that cannot be reduced to an acceptable level due to the subjectivity and materiality.

C.

Accept the engagement, provided the valuation is disclosed in the notes to the financial statements.

D.

Decline the engagement, as it creates an advocacy threat which is prohibited for tech startups.

How to approach this question

Evaluate the nature of the non-audit service (valuation), its materiality, and its subjectivity to determine the level of self-review threat.

Full Answer

B.Decline the engagement, as it creates a self-review threat that cannot be reduced to an acceptable level due to the subjectivity and materiality.✓ Correct
Providing valuation services to an audit client creates a self-review threat. According to ethical standards, if the valuation involves a significant degree of subjectivity and the resulting amounts are material to the financial statements, the threat cannot be reduced to an acceptable level by any safeguard. The firm must decline the non-audit service.

Common mistakes

Believing that using separate teams (Chinese walls) is a universal fix for all non-audit service threats.
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