Familiarity threat arises when:

A familiarity threat arises when an auditor has a long-standing relationship with a client because it may impair the auditor's objectivity and professional skepticism. Over time, the auditor may develop a level of familiarity that could lead to biased judgments or less rigorous scrutiny during the audit process. This threat is particularly concerning since the auditor's role is to provide an independent assessment of the client's financial statements. If an auditor knows the client too well, they might overlook issues or become less critical of the client's practices, which ultimately could affect the integrity of the audit.

This concept is crucial in maintaining the integrity of the audit process, as independence is a fundamental principle in auditing. The presence of a familiarity threat highlights the importance of regular evaluations of auditor-client relationships and the need for measures to mitigate this threat, such as rotation of audit partners or firms.