This is a Management Participation Threat.  The CPA should not take on the role of client management or perform management functions on behalf of an attest client (p216).

 

A safeguard against this threat would be among safeguards implemented by the firm that clearly explain what defines both audit duties and management duties, and what to do when these duties conflict.  A specific safeguard in this case would be to decline to provide the advice on how to structure the business transactions, and refer the client to someone who doesn’t have a conflict of interest.

Recommend that keeping the CPA service by using their employee’s that specialize in each department, would be in everyone’s best interest to keep the departments contained. One to do bookkeeping, tax preparation, then audits will continue to keep their objectivity while their independence.

Management Participation Threat:  This threat occurs when a CPA assumes management responsibilities or exercises authority over an attest client’s business affairs or operations. 

Safeguard:  The client hires personnel with the appropriate qualifications to make managerial decisions or consults with a third party who has no affiliation with the CPA.  

The threats are self-review threats, advocacy treats, financial self-interest threat and management participation threats.

Yes safe guard can be employed to reduce the threat. Safeguard created by the profession, legislation or regulation, safeguards implemented by the client and safeguards implemented by the firm. (Page 217)

Audit should avoid involving in a loan transaction with client & ownership of stock because it creates a financial self- interest treat, if a family members hold a key position with a client that can influence the perception of the CPA in decision making, 

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