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Audit Framework and RegulationEthicsNon-Audit ServicesSelf-Review ThreatSyllabus Area A

ACCA · Question 02 · Audit Framework and Regulation

SECTION A - CASE 1: NEUROCLOUD ANALYTICS CO

NeuroCloud Analytics Co is a fast-growing tech startup providing AI-driven data analytics to the healthcare sector. You are an audit manager at Turing & Co, planning the audit for the year ended 31 December 20X5. NeuroCloud is not a public interest entity (PIE).

During the planning phase, you note the following:

  1. The projected audit fee from NeuroCloud represents 18% of Turing & Co's total fee income for the year.
  2. NeuroCloud has requested Turing & Co to design and implement a new IT system for their financial reporting.
  3. NeuroCloud's CEO also acts as the Chairman of the Board.
  4. An audit junior overheard confidential discussions about a revolutionary unreleased AI model and subsequently purchased shares in NeuroCloud.

Question:
NeuroCloud has requested Turing & Co to design and implement a new IT system for their financial reporting. What is the primary ethical threat this creates, and can Turing & Co accept this non-audit engagement?

Answer options:

A.

Self-interest threat; Turing & Co can accept it if separate teams are used.

B.

Self-review threat; Turing & Co should not accept the engagement as it relates to financial reporting systems.

C.

Advocacy threat; Turing & Co can accept it provided the client's management takes responsibility for the system.

D.

Familiarity threat; Turing & Co should not accept it as it creates too close a relationship with management.

How to approach this question

Identify the nature of the non-audit service. Designing an IT system for financial reporting means the auditor will later audit the figures produced by that system. This is a classic self-review threat.

Full Answer

B.Self-review threat; Turing & Co should not accept the engagement as it relates to financial reporting systems.✓ Correct
Providing IT systems design and implementation services for systems that form a significant part of the internal control over financial reporting generates a self-review threat. The auditor would be evaluating their own firm's work during the audit.

Common mistakes

Confusing self-review with self-interest (due to the extra fee) or thinking that separate teams can always solve self-review threats for financial reporting systems.
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