SCENARIO:

Mr. X has been offered a high salary at Internal Audit firm in return of leaving his job at Men Corporation. Mr. X collects
information from the client and enter it into their accounting system. He's also responsible for preparing the client’s
financial statements.
However, he only performed these duties for three months during the year. During the other months, Mr. X is now part of
the audit firm’s audit team. However, he gets assigned to the client for whom he prepared the financial statements.
Usually, firms conduct a review to identify these threats.
This time, however, the firm ignores it and let the Mr. X join the team. When this member examines the financial
statements, he finds some misstatements in the financial statements. However, he's also the one who prepared it.
Therefore, there's a cause of this misstatement. If the Mr. X discloses these misstatements, their work may come under
scrutiny and face adverse actions.
However, if he don’t disclose it, it will affect all the stakeholders and users of the financial statements. This example
constitutes what the self-review threat is about and how it works. When an auditor becomes responsible for reviewing
their previous work for a client, they face the self-review threat. This threat causes them to relinquish their independence
and objectivity.
1. Tasked-related threats (Self-Review Threat)

- Mr. X examined and prepared financial statements on Men Corporation. He found misstatements in the financial
statements and decided not to disclose these misstatements.

2. Assess Significance of Threat.

• Mr. X performed job at Men Corporation 3 months ago.

• Firm decided not conducts a review to identify the threat and let Mr. X join the team.
• Mr. X joined the audit firm and gets assigned to the audit team for previous employer which is the Men Corporation.

3. Mitigating Factors
• Elapsed Time/Changed Circumstances
- Internal Audit firm let Mr. X joined the team after at least one year had past. It is to ensure that no self-review threat
arises.

• Environment - Strong Organizational Governance System

• Internal Consultations
- The firm should have a supportive environment that will reduce failures and threats. When a firm has a strong
organizational governance system, it is assured that auditors retain objectivity and professionalism.
- Internal Consultations is a must to because the firm let Mr. X on the job even though he worked there before. As an
internal auditor, he must voluntarily initiate to seek consultation to avoid threats on his objectivity.

• Segregation of teams
- Internal Audit firm must have a proper segregation of teams to avoid circumstances that will result to self-review threat.

4. Assess Residual Threat

  Elapse time/Change in circumstances
- There's a probability that even though the firm implemented a reasonable amount of time before letting Mr. X
audit his previous employer, there's a chance that there's still a threat that may occur. One of the threat that may
arise will come from impairment of the objectivity of Mr. X. That's why it is important to assess the auditor to
ensure that his judgements won't be bias.

 Internal consultations
- Even if under supervision of professional colleague, Mr. X is still part of the auditing unit. Therefore, there's a
residual threat that he can still impair his objectivity.

5. Proactively Manage Residual Threat

 Elapse time/Change in circumstances

- Mr. X shouldn't audit his own work that's why it's important to have "safeguards" to proactively manage the
residual threat. In order to avoid this circumstance, it is a must for auditors of the firm to adopt a policy where it
promotes their commitment that abides with the Code of Ethics.

 Internal consultations
- Staff assignment of internal auditors should be rotated periodically whenever it is practicable.

6. Assess Presence of Unresolved Threats to Objectivity

 Internal consultations
- Mr. X found misstatements on the financial statements yet he chose not to disclose it.
7. Consider the Reporting and Documentation Implications
• Mitigating Factors
- Reasonable amount of time elapsed
- Strong Organizational Governance System
- Peer review
- Segregation of duties

• Manage threats to Objectivity

- Close supervision to auditors
- Quality Assurance Reviews
- Reassignment
- Outsourcing

• Disclose unresolved threats

- Mr. X found misstatements on the financial statements yet he chose not to disclose it.

8. Ex post Review and Monitoring

Ex post Review

 Did Mr. X violate the code of Ethics? Yes.

 Did Mr. X impair his objectivity? Yes.
 Is Mr. X allowed to perform consultation activity on his previous employer?
  Is Mr. X accountable for the outcome of his actions?
 Why does Mr. X doesn't disclose his previous assurance engagement?

Monitoring
- The chief audit executive will conduct an overall review on every assurance engagement in terms of whether they
comply with the Code of Ethics as well as to Standards for members of IIA.