Suppose you have just joined an office of an accounting firm, MC Partners, that provides audit and various types of non-audit services to its clients. Within a few months of joining, you discover four pieces of information regarding one particular office client, Davey International, that could present severe threats to auditor independence. You know of the conceptual framework of the Code of Ethics that guides auditors on identifying threats to auditor independence. Required Identify the most significant threat to auditor independence likely to arise from each of the four pieces of information, summarized below. Explain your reasoning: The office earns 80 percent of its total office revenue from providing several lucrative types of non-audit services to Davey International. (1.5 marks) The taxation division of the office provides tax planning services to Davey International to increase Davey’s tax savings. The resulting tax strategies significantly affect financial reporting, including estimates of income taxes. The audit division of the office does not have significant expertise in taxation and has traditionally consulted senior staff in its taxation division to evaluate the quality of tax reporting in clients. (1.5 marks) The senior managing partner of the office met with parliamentary staff assisting government lawmakers. During this meeting the partner promoted the use of language in an upcoming bill proposing amendments to legislation that would favor the business interests of Davey International. (1.5 marks) The audit engagement teams typically interact significantly with the Chief Financial Officer (CFO) in their client firms. A long-serving and highly-respected audit partner left his position at MC Partners three years ago and recently been appointed as the new CFO of Davey International. (1.5 marks)

1. The office earns 80 percent of its total office revenue from providing several lucrative types of non-audit services to Davey International.

Threat: Self-interest threat. This arises because the office is heavily dependent on Davey International for its revenue. This could compromise the auditor's objectivity and independence as they may be influenced to issue a favorable audit opinion to maintain the client relationship and secure future revenue.

2. The taxation division of the office provides tax planning services to Davey International to increase Davey’s tax savings. The resulting tax strategies significantly affect financial reporting, including estimates of income taxes. The audit division of the office does not have significant expertise in taxation and has traditionally consulted senior staff in its taxation division to evaluate the quality of tax reporting in clients.

Threat: Self-review threat. This arises when the auditors are required to audit their own work. In this case, the taxation division of the office is providing tax planning services that affect the financial reporting of Davey International, and the audit division is relying on the taxation division to evaluate the quality of tax reporting. This could compromise the auditor's ability to objectively evaluate the quality of the tax reporting.

3. The senior managing partner of the office met with parliamentary staff assisting government lawmakers. During this meeting the partner promoted the use of language in an upcoming bill proposing amendments to legislation that would favor the business interests of Davey International.

Threat: Advocacy threat. This arises when the auditor promotes a client's interests or position. In this case, the senior managing partner is advocating for legislative changes that would favor Davey International. This could compromise the auditor's objectivity and independence.

4. The audit engagement teams typically interact significantly with the Chief Financial Officer (CFO) in their client firms. A long-serving and highly-respected audit partner left his position at MC Partners three years ago and recently been appointed as the new CFO of Davey International.

Threat: Familiarity threat. This arises when the auditor has a close or long-standing relationship with a client. In this case, the former audit partner is now the CFO of Davey International. This could compromise the auditor's objectivity and independence as they may be too sympathetic to the client's point of view or too accepting of the client's work.