Self review threat in auditing is when a professional reviews their work or decisions; here, judgment errors can swiftly enter through the biased forms of judgment. Threats arising from self-review are not uncommon in the audit environment. The auditors must be independent while auditing the financial statements on which they have input. A loss of objectivity can also arise when auditors review their work. This threat to self-review arises in auditing when an auditor audits financial statements that they have previously contributed.
This threat can damage the financial reporting process and erode stakeholder trust. The auditor has a primary responsibility to provide an independent and unbiased opinion on the financial position of an entity; however, when assessing their work, there is a likelihood of the auditor being induced to disregard any errors or allow himself to be swayed by past involvement.
What Is Self Review Threat in Auditing?
Self review threat arises when an auditor reviews the work they have done or work being affected by the team they work with. This atmosphere can sway the auditor from being objective. They sit atop a quandary. They audit the mistakes they find, which could lead to professional embarrassment or liability. On the other, they may avoid the errors noticed when there is self-interest in reporting them.
Auditors must do everything possible to keep their work above board. An auditor who influences the preparation of financial statements by working in a company has to avoid any actions or motives that prevent him or her from being unbiased concerning that work. Even unintentional bias on behalf of such an auditor may lead to financial misstatement.
Types of Self Review Threat in Auditing
Appreciating the threat of self-review in auditing is necessary since high ethical standards bind these individuals. Reviewers must guarantee that their assessments are free and independent from influences. Strong internal policies, external review, and firm observance of the professional code of ethics are essential to mitigate this threat.
- Provision of bookkeeping and audit services: If an auditor prepares and audits
- Internal audit service: When an auditor is involved in an internal audit and performs external audit services, the self-review threat will be interfered with.
- Consulting and advisory services: There is a risk of self-review threat when underhandedly auditors offer advisory services to a client and then audit its financial statements.
Threats Within the Auditing Realm
Threats can vary and arise from independent auditors who find themselves compromised. In addition, besides self review threats in auditing, other threats are:
- Self interest threat: Financial or personal interest in the business being audited can represent an actual threat. For example, holding shares in the client’s business could conflict with audit judgment.
- Advocacy threat: The role of an auditor is to protect the client’s interests, but this could contravene the auditor’s role to remain objective. Conflict arises if, for example, the auditor represents the client in court.
- Familiarity threat: If an auditor enjoys familiarity with the client, this closeness may impart an excessive amount of sympathy with the auditor, causing the auditor to not critically evaluate the client’s view of the fairness of certain financial statements.
- Intimidation threat: Pressure can be applied from the client to coerce the auditor towards accepting irregularities in the audit; otherwise, they would replace him or her or not renew the business contract with the firm.
How to Avoid Self Review Threat?
The core principle is that self-review threats in auditing be overcome for integrity to be maintained. Hence, five strategies for eliminating this threat are as follows:
Distinction of Duties
Firms should distinguish auditing from accounting. When one person is both, the self-review threat in auditing then becomes a big risk. Different teams should prepare the financial statements and audit those same statements.
External Audits
The review of financial statements should be independent of internal employees. External auditors have no prior role in their preparation and are thus free to judge impartially.
Rotation of Auditors
Mandatory auditor rotation speaks against long engagements that may lead to bias. It means that auditor rotation would ensure independence and protect against self-review threats in auditing.
Adhere to Ethical Guidelines
Auditing is preserved by laws that govern such conduct set by the International Ethics Standards Board for Accountants (IESBA) and other regulatory boards. Firms must live by those rules to eliminate self-review threats in auditing.
Difference Between Self Review and Advocacy Threat
The firms should conduct internal quality control mechanisms, including independent peer reviews. A second auditor will perform this type of review to ensure that the first auditor maintains objectivity and stays away from self-review threats
| Aspect | Self Review Threat | Advocacy Threat |
| Definition | Arises when an auditor evaluates their work. | It occurs when an auditor supports a client’s position, compromising independence. |
| Example | An auditor audits financial statements that they help prepare. | An auditor defends a client in court or promotes their shares. |
| Risk Level | High, as auditors may overlook errors. | High, as auditors may prioritize client interests over facts. |
| Prevention | Segregation of duties, rotation of auditors, external audits. | Avoiding promotional roles, strict ethical compliance. |
Relevance to ACCA Syllabus
The self-review threat is critical in the ACCA syllabus, particularly in the Ethics and Professional Skills module.It leads to compromised objectivity and independence. ACCA emphasizes professional ethics, and understanding self-review threats is essential to ensuring audit quality and compliance with the ACCA Code of Ethics and Conduct.
Self Review Threat ACCA Questions
- What is a self-review threat in auditing?
A) When an auditor provides consulting services to a client
B) When an auditor reviews their previous work
C) When an auditor is influenced by management to overlook errors
D) When an auditor refuses to accept an audit engagement
Ans: B) When an auditor reviews their previous work - Which of the following situations is most likely to create a self-review threat?
A) An auditor advising on internal controls and later auditing their effectiveness
B) An auditor working on a different department within the same firm
C) An auditor accepting a gift from a client
D) An auditor rotating clients annually
Ans: A) An auditor advising on internal controls and later auditing their effectiveness - Which safeguard can best reduce the self-review threat?
A) Increasing audit fees
B) Using separate teams for consulting and audit services
C) Extending the audit engagement period indefinitely
D) Allowing auditors to perform non-audit services
Ans: B) Using separate teams for consulting and audit services - Which of the following scenarios does NOT create a self-review threat?
A) Preparing financial statements and auditing them
B) Performing tax advisory services and conducting the audit
C) Reviewing financial statements prepared by management
D) Providing an independent audit opinion
Ans: D) Providing an independent audit opinion - What is the primary concern of the self-review threat?
A) Lack of independence and objectivity in the audit process
B) High audit fees
C) The complexity of financial statements
D) The requirement to follow audit regulations
Ans: A) Lack of independence and objectivity in the audit process
Relevance to US CMA Syllabus
The self-review threat is highly relevant to the US CMA (Certified Management Accountant) syllabus, particularly in areas related to Ethical Considerations for Management Accountants. CMAs often provide financial reporting and decision-making support, and understanding self-review threats helps them maintain professional integrity when evaluating financial data they have prepared.
Self Review Threat US CMA Questions
- What ethical concern does the self-review threat primarily address in management accounting?
A) Misclassification of financial transactions
B) Bias in financial decision-making
C) Impairment of objectivity when reviewing one’s work
D) Failure to follow internal controls
Ans: C) Impairment of objectivity when reviewing one’s work - Which of the following scenarios is an example of a self-review threat for a management accountant?
A) Recommending cost-cutting measures
B) Preparing financial forecasts and later auditing them
C) Evaluating vendor contracts for a new project
D) Overseeing budget allocations
Ans: B) Preparing financial forecasts and later auditing them - How can a CMA mitigate the risk of self-review threats?
A) Refusing all financial reporting assignments
B) Seeking independent review of financial reports they prepared
C) Delegating all work to subordinates
D) Avoiding direct communication with stakeholders
Ans: B) Seeking independent review of financial reports they prepared - Which ethical standard of the IMA (Institute of Management Accountants) is most relevant to the self-review threat?
A) Confidentiality
B) Integrity
C) Objectivity
D) Competence
Ans: C) Objectivity - Why is self-review threat a major concern in management accounting?
A) It increases the risk of financial manipulation
B) It leads to unnecessary external audits
C) It makes cost control difficult
D) It violates tax regulations
Ans: A) It increases the risk of financial manipulation
Relevance to US CPA Syllabus
The self-review threat is a crucial topic in the US CPA (Certified Public Accountant) syllabus, particularly within the “Auditing and Attestation (AUD)” and “Ethics, Professional Responsibilities, and General Principles” sections. CPAs must ensure independence when auditing or providing assurance services.
Self Review Threat US CPA Questions
- Which of the following best defines the self-review threat for a CPA?
A) Reviewing the work performed by another CPA
B) Reviewing financial statements that the CPA helped prepare
C) Conducting tax planning for a client
D) Performing an audit engagement for a publicly listed company
Ans: B) Reviewing financial statements that the CPA helped prepare
- Which action by a CPA would create a self-review threat?
A) Preparing journal entries for a client and auditing them later
B) Performing a risk assessment for an audit client
C) Providing payroll processing services
D) Conducting an independent review of a firm’s compliance policies
Ans: A) Preparing journal entries for a client and auditing them later
- Which of the following is a recommended safeguard against self-review threats for CPAs?
A) Engaging a separate audit team
B) Increasing audit fees
C) Limiting audit work to one industry
D) Accepting gifts from audit clients
Ans: A) Engaging a separate audit team
- Which regulatory framework provides guidelines to mitigate self-review threats in the US CPA profession?
A) The Securities Act
B) The Sarbanes-Oxley Act
C) The Dodd-Frank Act
D) The Federal Tax Code
Ans: B) The Sarbanes-Oxley Act
- Why is self review threat particularly concerning in external audits?
A) It may lead to biased financial reporting
B) It increases financial costs for clients
C) It results in tax penalties
D) It makes financial statements more complex
Ans: A) It may lead to biased financial reporting
Relevance to CFA Syllabus
The self-review threat is essential in the CFA (Chartered Financial Analyst) curriculum, especially in the “Ethical and Professional Standards” section. CFAs often provide financial analysis and valuation services and must ensure independence when assessing financial data.
Self Review Threat CFA Questions
- Why is self-review threat relevant in investment analysis?
A) It leads to market inefficiencies
B) It creates bias in financial modelling and valuation reports
C) It affects interest rate calculations
D) It increases trading volumes
Ans: B) It creates bias in financial modeling and valuation reports
- Which situation creates a self-review threat for a CFA professional?
A) Analyzing financial reports they previously prepared
B) Conducting due diligence on a competitor firm
C) Managing client investment portfolios
D) Preparing client newsletters on market trends
Ans: A) Analyzing financial reports they previously prepared
- Which standard of the CFA Institute’s Code of Ethics relates to self-review threats?
A) Loyalty to Clients
B) Independence and Objectivity
C) Communication with Clients
D) Performance Presentation
Ans: B) Independence and Objectivity
- How can an investment analyst mitigate the self-review threat?
A) By relying solely on past financial data
B) By seeking independent verification of financial models
C) By limiting stock recommendations
D) By using proprietary trading strategies
Ans: B) By seeking independent verification of financial models
- Which of the following best describes the main risk of self-review threats in investment management?
A) Misleading investment recommendations
B) Increased tax liabilities
C) Limited portfolio diversification
D) Increased trading commissions
Ans: A) Misleading investment recommendations
