Question 3 10 Marks APES 110 Code of Ethics for Professional Accountants identifies five key threats to audit independence. Ten examples of threats to audit independence are listed below. Required: Complete the following table by classifying each threat as either a self-interest, self- review, advocacy, familiarity or intimidation threat. Threats to Audit Independence (1) Self-interest (2) Self-review (3) Advocacy (4) Familiarity (5) Intimidation i. ii. iii. iv. V An audit team member was a director of the audit client during the previous two years. An audit partner accepts significant gifts from the client. The client has indicated that the audit firm will not be awarded a planned non-assurance contract if it continues to disagree with the client's treatment of an accounting issue. The audit firm enters into a contingent fee arrangement relating to an assurance engagement. The audit partner spoke at a press conference designed to support the merits of a client's proposal to launch a new product line. The audit firm receives 30% of its total audit fees from one audit client. The audit firm issues an assurance report about the effectiveness of the operation of the client's financial systems after designing and implementing the systems. The audit partner acts as an expert witness in support of the client in a dispute with a third party. The audit partner has just found out that his brother has taken on a senior job at the audit client. The audit firm is being pressured by the client to reduce the extent of work in order to reduce audit fees. vi. vii. viii. ix. X. Page 5 of 11 Question 1 12 Marks (a) Explain the 'audit expectation gap? Why do you think auditors do not give users what they want? (3 Marks) (6) Explain the difference between an adverse opinion, a qualified opinion and a disclaimer of opinion. (6 Marks) Question 1 continued over next page Question 1 continued (c) List the three conditions that must be proven for an auditor to be found negligent under tort law