Self review threats in preparing audit clients' accounts

Q: How does this work on a small audit?

Illustration only. A firm audits a small manufacturing company and also prepares its statutory accounts from a trial balance kept by the company's bookkeeper. The managing director is commercially experienced but not an accountant. The firm proposes the depreciation charge, a stock provision and the deferred tax calculation, and explains each in a meeting note. The managing director reviews the proposals, changes the stock provision after discussing slow moving lines, and approves the journals in writing. The audit file records why the managing director counts as informed management and links to the approvals. The firm relies on paragraph 6.7 for the self review threat and includes the engagement in its inspection population. If the managing director had simply signed whatever was put in front of them, the firm would struggle to show informed management, and the safeguards in paragraph 5.131 or a decision to stop one of the services would be needed.

Q: What mistakes do firms make?

Making the judgements for the client and recording them as approved after the event. Assuming PAASE removes the need to think. It removes specific safeguards on conditions; the conditions must be met and evidenced. Omitting the audit report disclosure required when the 6.11 management threat exemption is used. Forgetting PAASE limits. It does not apply to public interest entities, and a group or charity must meet the criteria of every category it falls into. Not revisiting threats when a client grows beyond the small company thresholds. For the general framework see the threats and safeguards framework. For review engagements and other assurance work see independence in non audit assurance work, and for whether an audit is needed at all see audit exemption for small companies. Many small audited companies prepare accounts under FRS 102 Section 1A. Solar Protect runs fee protection schemes for accountancy and bookkeeping practices. See how our accountant schemes work or read fee protection schemes for accountants.

When a firm prepares the accounts it then audits, the audit team may end up checking its own firm’s work and judgements, which is a self review threat. The FRC Ethical Standard bans accounting services for listed audit clients, limits them for others to routine work with safeguards, and gives smaller non public interest entities an alternative route that depends on the client having “informed management”.

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Which rules apply to a UK audit?

For audits under ISAs (UK), ICAEW has adopted the FRC’s Ethical Standard for auditors, and the ICAEW Code does not require Part 4A of the Code to be applied as well if the Ethical Standard is followed. The current version is the Revised Ethical Standard 2024, effective from 15 December 2024. Section 5 deals with non audit services and Section 6 contains the Provisions Available for Audits of Small Entities, often called PAASE.

Why does preparing the accounts create a self review threat?

The Ethical Standard says a self review threat arises when the results of non audit services are reflected in the amounts in the financial statements the firm audits. It gives maintaining the accounting records as an example. Because the firm is associated with preparing those figures, the auditor may be, or may be seen to be, unable to take an impartial view of them.

The significance depends on two questions the standard sets out:

does the service involve a significant degree of subjective judgement; and
will it have a material effect on the financial statements?

Where both apply, the standard says it is unlikely that any safeguard can reduce the threat to an acceptable level. Posting coded invoices is low risk. Deciding the bad debt provision, the stock write down or the useful lives of assets is not.

Accounting services also create a management threat, because the auditor may slip into making decisions that belong to the directors.

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What does the Ethical Standard allow?

“Accounting services” means maintaining accounting records or preparing financial statements that are then audited (paragraph 5.121). Advice on applying accounting standards is not an accounting service. Paragraph 5.124 then says the firm must not provide accounting services where:

the audited entity is listed, or a significant affiliate of a listed entity; or
for any other entity, the services would involve the firm taking part of the role of management or initiating transactions, or are anything other than routine or mechanical work needing little or no professional judgement.

For non listed entities, paragraph 5.128 allows routine accounting services if appropriate safeguards reduce the self review threat to a level where independence is not compromised. Paragraph 5.129 lists things the firm must never do in that role: authorise or approve transactions, prepare originating data including valuation assumptions, or change journals or account classifications without management approval.

Examples of acceptable routine work in paragraph 5.130 include posting transactions that management has coded, posting management approved entries to the trial balance, payroll processing, and helping prepare financial statements where management has prepared the records and takes all judgemental decisions.

Paragraph 5.125 adds that ordinary advice arising from the audit, such as pointing out errors or weaknesses in records, is a by product of the audit and is not treated as creating a threat.

What safeguards are expected?

Paragraph 5.131 gives examples:

the accounting work is done by partners and staff who have no involvement in the audit;
the accounting work is reviewed by a partner or senior staff member with relevant expertise who is not on the audit team;
the audit is reviewed by a partner with relevant expertise who is not involved in it, to check the accounting services were properly assessed.

Small practices often struggle with the first two because the same team does everything. That is the gap PAASE is designed to fill.

How do the small entity provisions help?

PAASE is not available for public interest entity audits. A “Small Entity” includes a company that is not UK listed or an affiliate of one and qualifies as small under section 382 of the Companies Act 2006, a small group under section 383, and charities with income below the small company turnover threshold, among others listed in paragraph 6.4.

For these entities:

Self review threat (paragraph 6.7). The firm need not apply safeguards to the self review threat if the audited entity has informed management and the firm extends its cyclical inspection of completed audits to include a random selection where non audit services were provided. The inspectors must not have worked on the audit, and small firms may use a suitably qualified external person or another firm.
Management threat (paragraph 6.11). The firm need not follow the Part B prohibitions on non audit services that involve undertaking part of the role of management, provided it discusses objectivity and independence with those charged with governance, confirms that management accept responsibility for decisions taken, and makes the required disclosure.

Where the firm uses the 6.11, 6.12 or 6.13 exemptions, paragraph 6.15 requires the audit report to say so, and either the accounts or the audit report must disclose the type of non audit services provided. Paragraph 6.16 says this goes in a separate paragraph and does not affect the opinion.

What is informed management?

The FRC glossary defines informed management as a member of management, or senior employee, who has the authority and capability to make independent management judgements and decisions on the non audit services, based on information provided by the firm. In an owner managed company this is usually a director who understands the accounts well enough to question them. Where a management threat is identified, paragraph 5.34 says the documentation will include the assessment of whether there is informed management, and the PAASE inspection checks for documentary evidence that informed management made the judgements on presentation and disclosure.

How does this work on a small audit?

Illustration only. A firm audits a small manufacturing company and also prepares its statutory accounts from a trial balance kept by the company’s bookkeeper. The managing director is commercially experienced but not an accountant.

The firm proposes the depreciation charge, a stock provision and the deferred tax calculation, and explains each in a meeting note.
The managing director reviews the proposals, changes the stock provision after discussing slow moving lines, and approves the journals in writing.
The audit file records why the managing director counts as informed management and links to the approvals.
The firm relies on paragraph 6.7 for the self review threat and includes the engagement in its inspection population.

If the managing director had simply signed whatever was put in front of them, the firm would struggle to show informed management, and the safeguards in paragraph 5.131 or a decision to stop one of the services would be needed.

What mistakes do firms make?

Making the judgements for the client and recording them as approved after the event.
Assuming PAASE removes the need to think. It removes specific safeguards on conditions; the conditions must be met and evidenced.
Omitting the audit report disclosure required when the 6.11 management threat exemption is used.
Forgetting PAASE limits. It does not apply to public interest entities, and a group or charity must meet the criteria of every category it falls into.
Not revisiting threats when a client grows beyond the small company thresholds.

For the general framework see the threats and safeguards framework. For review engagements and other assurance work see independence in non audit assurance work, and for whether an audit is needed at all see audit exemption for small companies. Many small audited companies prepare accounts under FRS 102 Section 1A.

Solar Protect runs fee protection schemes for accountancy and bookkeeping practices. See how our accountant schemes work or read fee protection schemes for accountants.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.

Self review threats in preparing audit clients’ accounts