Question

The GAO standards list several threats to independence. The threat of familiarity is defined as:

a. A situation where the auditor is too familiar with the client's industry
b. A situation where the auditor has a close personal relationship with a client's employee
c. A situation where the auditor lacks familiarity with the client's operations
d. A situation where the auditor is overly familiar with the client's personnel or activities

Answer 1

The GAO standards consider the threat of familiarity as a situation where the auditor has a close personal relationship with a client's employee, which can compromise the auditor's independence.

Step-by-step explanation:

The Government Accountability Office (GAO) standards concern the professional conduct of auditors and outline several threats to their independence. One such threat is the threat of familiarity, which refers to a situation where an auditor may develop relationships that could appear to impair their judgment or objectivity. Specifically, it is defined as:

• A situation where the auditor is too familiar with the client's industry
• A situation where the auditor has a close personal relationship with a client's employee
• A situation where the auditor lacks familiarity with the client's operations
• A situation where the auditor is overly familiar with the client's personnel or activities

Correct answer: b. A situation where the auditor has a close personal relationship with a client's employee. This can lead to the auditor becoming sympathetically inclined towards their interests, potentially compromising the independence required for an unbiased audit.