Under which circumstance could a familiarity threat be created?

The familiarity threat in auditing arises when an auditor develops a relationship with a client that may unduly influence their judgment or actions, potentially compromising their objectivity and independence. The correct circumstance that creates a familiarity threat is when senior personnel have a long association with the assurance client.

Long-term relationships can lead to familiarity, where the auditor becomes overly sympathetic to the client's interests, reducing their ability to remain impartial. This situation can erode the professional skepticism required in the auditing process, making it difficult for the auditor to challenge management assertions effectively.

While accepting inconsequential gifts might appear harmless, it does not generally create a significant familiarity threat when compared to the risk presented by longstanding associations. Similarly, a director or officer of the client recently serving as the engagement partner and having close family members employed by the client can lead to conflicts of interest and potential independence issues, but these situations are more aligned with other types of threats rather than purely familiarity.