Page 40 - AAA Integrated Workbook STUDENT S18-J19

Chapter 3

4.2 Conflicts of interest

A conflict of interest arises when the same audit firm is appointed for two companies
that interact with each other, for example:

 Companies that compete in the same market

 Companies which trade with each other

A conflict of interest may create a threat to the fundamental principles of objectivity
and confidentiality.

It may be perceived that the auditor cannot provide objective services and advice to a
company where it also audits a competitor.

Where a conflict of interest exists, the firm’s work should be arranged to avoid the
interests of one being adversely affected by those of another and to prevent a breach
of confidentiality.

In order to ensure this, the firm must notify all affected clients of the conflict and
obtain their consent to act.

The following additional safeguards should be considered:

 Separate engagement teams (with different engagement partners and team
members).

 Procedures to prevent access to information, e.g. physical separation of the
team members by using teams from different offices of the firm, and
confidential/secure data filing.

 Signed confidentiality agreements by the engagement team members.

 Regular review of the application of safeguards by an independent partner.

If adequate safeguards cannot be implemented, the firm must decline, or resign from
one or more conflicting engagements.

Illustrations and further practice

Now try TYU question 1 from Chapter 3

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