What Is Self-Review Threat to Auditor and How to safeguard against it?

When auditors encounter the risk of assessing their own work, this is known as the self-review threat. Apart from their basic services, audit firms frequently offer other services. Accounting, valuation, taxation, and internal audit are some of its examples.

When an auditor is required to review work that they previously completed, a self-review threat may arise. For instance, if the external auditor performs the accounting work and then audited the financial statements.

There’s a chance that the auditor won’t see any flaws in their own work because they’re afraid of being penalized (either financial or reputational).

When an audit company offers non-audit services, such as drafting management or year-end accounts and then functions as an auditor, self-review threats may occur.

If auditors are involved in these services with a customer, the threat of self-review arises:

  • Recent service with assurance client
  • Preparing accounting records and financial statements
  • Valuation services
  • Tax services
  • Internal audit services
  • General other services
  • Corporate finance
  • Other services

The financial statements are affected when auditors perform any of the foregoing services to a client. Typically, audit firms include accountants who are experts in their field.

However, they are prone to making errors that lead to misstatements. The risk emerges when the same people who made the mistakes are also the ones who review them.

Occurrence of Self-Review Threat:

It can happen when the auditor in charge of the judgment needs to re-evaluate a previous decision.

  • A serious inaccuracy is discovered during a re-evaluation of the auditor’s work in practice.
  • Following involvement in the design or deployment of financial systems, evaluating their operation.
  • Preparing the original data that was used to create the records that are the topic of the engagement.
  • A member of the assurance team currently serving as, or previously serving as, a director or officer of that company.
  • A member of the assurance team who is currently or has recently been hired by the client and has direct and considerable control over the engagement’s subject matter.
  • Providing a service to a client that has a direct impact on the assurance engagement’s subject matter.
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How Does The Self-Review Threat Work?

Apart from their basic auditing services, auditors may offer a variety of other services to their clients. Each task is usually assigned to a team by an audit company. In an ideal world, audit companies would separate their departments.

For example, the audit team will be separated from those who provide accounting or taxes services. However, in other circumstances, this may not be achievable. An example below would be the best approach to explain the threat of self-review.

A client hires an audit firm to perform accounting services. The team consists of two persons that collect data from the client and enter it into their accounting system. These two people are also in charge of preparing the financial statements for the client. However, they only carry out these responsibilities for three months of the year.

These two people work as part of the audit firm’s audit team throughout the other months. One of these members, however, is allocated to the client for whom the financial statements were generated. To identify these hazards, most businesses perform a review. The firm, on the other hand, ignores it this time and allows the team member to join the team.

Whenever this member reviews the financial statements, he or she discovers some inconsistencies. They were, however, the ones who prepared it. As a result, they are to blame for the error. If a team member reports these inaccuracies, their work may be scrutinized and they may face repercussions.

If they do not disclose it, however, it will have an impact on all stakeholders and users of financial statements. This is a good example of what the self-review threat is and how it works. When an auditor is in charge of examining their previous work for a customer, they are exposed to the risk of self-review. They give up their independence and objectivity as a result of this threat.

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Aside from that, there are a few more instances in which the threat of self-review exists. For example, someone joins an audit company and is assigned to the former employer’s audit team. However, for a danger of self-review to exist, that person must have influenced the financial statements.

What Are Some Safeguards Against The Self-Review Threat?

When auditors detect challenges to their objectivity and independence, they must take the appropriate steps to protect themselves. These precautions, however, are contingent on a number of conditions.

To begin with, the type of threat they confront influences the countermeasures they employ. Furthermore, the severity of these dangers determines the measures used to protect against them.

The most effective defense against the threat of self-review is team separation. Non-audit services provided by audit companies must be handled by separate members for each assignment. They will never have to review their own work if they do it this way. Every member of the team is involved in an engagement, from the partner to the audit associates.

Most non-audit services cannot be provided to listed customers, according to the International Auditing Standards. This is due to the fact that the risks for these clients are larger.

However, as long as these non-audit services do not have an impact on the financial statements or the actions that affect them, they may be permitted. Audit firms can do so for non-listed clients. They must, however, ensure that their objectivity and independence are not jeopardized.

Audit firms can utilize a variety of various precautions to shield themselves from the threat of self-review. If auditors are unable to ensure impartiality despite the safeguards, they will be forced to terminate the contract. These instances, however, are uncommon. In the vast majority of audit engagements, auditors can use measures to prohibit them from continuing their work.

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In short, possible precautions to address the hazard of self-review include:

  • Making sure that the accounting service is not provided by an audit team member.
  • Engaging a second, adequately qualified person to examine the work or provide further advice as needed. This might be someone from within the company who isn’t on the audit team, or someone from outside the company.
  • Speaking with the board of directors or the audit committee about concerns of independence
  • Making the nature of the services supplied and the amount of fees collected known to the board of directors or audit committee. Include a part in the letter of engagement.


Mr. A recently joined a Chartered Accounting business. The firm wishes to delegate him to ABC Company’s audit. Prior to joining the firm, Ahmed worked as a consultant for ABC Company, offering accounting and taxes services for many years.

Mr. A’s previous provision of accounting and taxation services to ABC Company, as well as his long affiliation with the company, will prompt self-reflection and familiarity. Hazards must be assessed for their significance, and if they are not clearly negligible, measures must be implemented to decrease the threats to an acceptable level.

If Mr. A is included in the audit, the following safeguards may be in place:

  • Involving a second chartered accountant to assess Mr. A’s work or provide further advice as needed.
  • Internal quality reviews that are conducted independently.
  • Ahmed should not be part of the assurance engagement team if the dangers are serious.

Auditors may also provide non-audit services to clients in addition to auditing services. In these conditions, however, they face a threat of self-reflection. When audit firms use the same staff for non-audit and audit services, they risk self-review. In most circumstances, the threat of self-reflection may be avoided.

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