Question

During the audit of CleanCorp, the CPA received an indication from CleanCorp's attorney that CleanCorp intends to begin litigation against the firm for alleged poor-quality tax work in the previous year. Which threat does this relate to?

1) Adverse interest
2) Undue influence
3) Self-interest
4) Advocacy

Answer 1

The litigation CleanCorp intends to begin against the CPA firm for poor-quality tax work relates to an adverse interest threat, which involves a conflict of interest affecting the auditor's objectivity.

Step-by-step explanation:

During the audit of CleanCorp, when a CPA received indications that CleanCorp intends to begin litigation against the firm for alleged poor-quality tax work, it directly relates to an adverse interest threat. This type of threat occurs when the auditor has a financial interest in the audit client or when the auditor and the audit client find themselves in opposing financial positions, such as in the case of litigation. Such a situation can present a conflict of interest or possibly affect the auditor's ability to perform the audit with objectivity.