Final answer:
When an audit firm identifies threats to independence in an audit engagement, the IFAC Code of Ethics requires the firm to implement safeguards or, if these are not sufficient, to decline or discontinue the engagement.
Step-by-step explanation:
If an audit firm discovers threats to independence with respect to an audit engagement, the IFAC Code of Ethics for Professional Accountants indicates that the firm should apply appropriate safeguards to eliminate the threats or reduce them to an acceptable level.
If the threats cannot be eliminated or reduced to an acceptable level, the firm must decline or discontinue the audit engagement. The IFAC Code of Ethics provides a framework for professional accountants, which includes requirements for recognizing, evaluating, and responding to threats to independence, as well as potential conflicts of interest.