• 1 Marks

AAA – L3 – SA – Q3.2 – Conflict of Interest

Incorrect statement about conflict of interest.

Which of the following statements is INCORRECT?

A   A conflict of interest between two clients may be resolved for the auditor by segregating certain responsibilities and duties.

B   In taking on a new client, an audit firm shall consider the potential conflict of interests with providing service to an existing client.

C   In a takeover bid, an audit firm can act as the sole adviser to both companies involved in the bid.

D   If a potential conflict of interest exists between a potential new client and an existing client, the audit firm may need to either decline the engagement with the new client or withdraw from the engagement from the existing client.

C

Explanation:
An audit firm should not act as the sole or main adviser to both parties in a takeover bid. One problem would be that the audit firm would be in possession of material confidential information relating to both clients, and it might be difficult to act in the best interests of both clients. Statements A, B, and D are correct, as they reflect proper ethical handling of conflicts. Thus, C is the incorrect statement and the correct answer.

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