FINANCIAL INTEREST

Financial interest in an audit client creates self interest threat.

What is self-interest threat?

A self-interest threat may be created if the firm or a member of the audit team, or a member of that individual's
immediate family, has a financial interest in an entity and an audit client also has a financial interest in that entity.

Existence and significance of threat depends on…

-Role of the person holding financial interest
-If financial interest is direct and indirect, also if it is material.

Financial interest may be held through intermediary… ex. Collective investment vehicle
-Direct financial interest-has influence over investment decisions
-indirect financial interest

SELF-INTEREST THREAT CREATED IS SO SIGNIFICANT THAT NO SAFEGUARDS COULD

REDUCE THE THREAT TO AN ACCEPTABLE LEVEL
1. Audit team member, his close family or firm has direct or material indirect financial interest in the audit client
2. Financial interest of the 3 to an entity that has controlling interest in the audit client
3. Other partners or their immediate family members in the office where the engagement partner practices audit
engagement has financial interest in the audit client
4. Other partners and managerial employees (also their close family members) who provide non-audit services to
audit client has financial interest to the audit client, except those whose involvement is minimal
(last 2: Does not compromise independence if the financial interest of close family members is received from
employment rights…ex. Through pension or share option plans. However, if the family member obtains the right to
dispose financial interest, in case of stock option, the right to exercise it, financial interest shall be disposed as soon
as practicable.)
5. If both 3 and the audit client has financial interest in an entity. ( If such interest is material to any party and the
audit client has significant influence over the entity) kung hindi hindi makocompromise yung independence.

Significance depends on: nature of relationship of the audit team member and close family member and materiality
to them of financial interest

Significance of any threat shall be evaluated and apply safeguards if necessary to reduce threat at an
acceptable level
SAFEGUARDS:
Disposal of financial interest of close family member (hindi pwede kay no. 6)
Review the work of audit team by a professional accountant
Removal of audit team member
Disposal of interest or at least sufficient to make the remaining interest no longer material. . NUMBER 55555 lang

6. SELF INTEREST, FAMILIARITY, INTIMIDATION threat may be created if both the 3 and director, officer or
controlling owner of the audit client has financial interest in an entity. The existence and significance of any threat
will depend upon factors such as:
-role of the professional on the audit team
-whether ownership of the entity is closely or widely held
-Whether the interest gives the investor the ability to control or significantly influence the entity
-Materiality of the financial interest