Which type of threat is particularly concerning when a firm is involved in both auditing and consulting for the same client?

The self-review threat is a significant concern for firms that provide both auditing and consulting services to the same client. This threat arises when auditors are in a position to review their own work or the work of their firm in the capacity of a consultant. If an auditor has helped to design systems, processes, or controls, their ability to impartially evaluate these systems during an audit may be compromised. This situation can lead to a conflict of interest where the auditor may have a vested interest in the outcomes of their prior work, potentially compromising the integrity and objectivity of the audit.

Employing both auditing and consulting services for the same client has the potential to blur the lines of independence. With the self-review threat, the auditor’s ability to evaluate the effectiveness of the very processes they helped implement is called into question. Maintaining objectivity is crucial in auditing, and such overlapping roles can significantly undermine the credibility of the auditor’s findings and conclusions.

This concern is particularly emphasized in auditing standards and regulatory frameworks, which aim to uphold the integrity of financial reporting and ensure that audits are performed with a high degree of independence.