During the statutory audit of Cee Manufacturing Ltd. for the financial year ended 31st March 2026, CA Karan, the engagement partner of Karan &…

In the given case, both self-interest threats and self-review threats to auditor's independence are present. Self-interest threats occur when an auditing firm, its partner or associate could benefit from a financial interest in an audit client. In the present case, holding shares in Cee Manufacturing Ltd. by a partner of the audit firm creates a direct financial interest in the client and therefore constitutes a self-interest threat. Similarly, granting a loan to a director of the company also creates a financial relationship affecting auditor independence. Further, undue dependence on the fees received from the client gives rise to a self-interest threat because the auditor may become reluctant to issue adverse findings due to fear of losing the engagement. Self-review threats occur when during a review of any judgement or conclusion reached in a previous audit or non-audit engagement, or when a member of the audit team was previously a director or senior employee of the client. In the given case, the audit firm had undertaken internal audit and management consultancy services for the company, which are now subject matters of statutory audit. Thus, the auditor would be reviewing work performed by the firm itself, resulting in a self-review threat. Further, one of the audit team members had recently served as Finance Manager of the company. Since such person may be required to examine accounting records and decisions made during his own tenure, a self-review threat also arises in this situation. Accordingly, these circumstances impair the independence and objectivity of the auditor and appropriate safeguards should be implemented to reduce the threats to an acceptable level.