15: Integrity, objectivity and independence

Question 1

Why does objectivity and independence matter

Answer 1

• Expectation of members of company is to provide objective assurance
• The public interest

Question 2

What are threats to this?

Answer 2

MASSIF

Management threat
Advocacy threat
Self review
Self interest
Intimidation
Familiarity

Question 3

What are self-interest threats?/Safeguards

Answer 3

• Financial interests
• Close business relationship
• Gifts and hospitality
• Loans and guarentees
• Overdue fees
• High percentage of fees
• Lowballing
• Percentage or contingent fees

Question 4

Explain financial interests/safeguards

Answer 4

prohibited for anyone/assurance firm to have a direct financial interest in a client.

/Dispose of interest e.g. sell shares. Remove indiviudal from team. Make client aware

Question 5

Explain close business relationships /safeguards

Answer 5

e.g. joint ventures, combining products, leases between parties.

/End assurance provision or terminate business relationship, unless immaterial and insignificant.

Question 6

Explain gifts and hospitality / Safeguards

Answer 6

• Should not be accepted unless insignificant as looks like a bribe.

/ Firm should have policy on gift acceptance e.g. nothing special given out, only what they would give to own employees.

Question 7

Explain loans and guarentees / safeg

Answer 7

• material loans require safeguards to reduce threat to independence.

/ Independent review re material loan from a lending institution.

Question 8

Explain overdue fees /SG

Answer 8

• assurance provider runs risk of essentially making a loan to client.

/ Payment should be required before assurance report can be issued.

Question 9

Explain high percentage of fees / SG

Answer 9

When total fees generated by an assurance client represebt a large proportion of a firm’s total fees. FRC states if annual fee income from all services to a client regularly exceed 10% for a listed company (PLC) and 15% for unlisted (LTD) of gross income this could constitute self interest threat. Also total non-audit fees must be no more than 70% average audit fee from last 3 years.

/ Monitor fee income - warning at 5% plc (10% ltd).
Disclose with audit committee/ICAEW.

Reduce dependency on client by increasing revenue elsewhere.

Question 10

Explain Lowballing / SG

Answer 10

When a firm quotes a significantly lower fee for an assurance service than would have been charged by the predecessor firm, may cut corners or reduce scope to keep costs down.

/ Comply with all guidlines and keep evidence to show appopriate time/staff worked on engagement.

Question 11

Explain percentage or contingent fees /SG

Answer 11

Fees based on outcome or result of the work performed. /Firm should not enter into any fee arrangement where its dependent on result.

Question 12

What are self review threats

Answer 12

• Service with an assurance client
• Internal audit services
• Preparing account records and financial statements
• Valuation services
• Tax services

Question 13

Explain service with an assurance client / SG

Answer 13

Audit firm members who have been a director or employee of client and in a position to exert significant influence over F/S.

/ These members should not be assigned to this client (until 2 years after leaving client)

Question 14

Explain internal audit services

Answer 14

Providing internal audit services to an audit client is absolutely prohibited.

Question 15

Explain preparation of accounting records and financial statements as a sef review threat. /SG

Answer 15

If firm prepares accounting records and F/S then audits them = significant risk of SR threat.

/Use staff members other than assurance team to carry out work.

Responsibility for F/S with client

Question 16

Explain valuation services as a self review threat. /SG

Answer 16

If an audit firm performs a valuation that will be included in financial statements audited by the firm. Therefore should not carry out valuations which has material effect on a listed company’s F/S.

/ Ensure client acknowledges responsibility for valuation.

Use separate personnel for valuation and audit.

Question 17

Explain tax services as a self review threat

Answer 17

Tax return prep, calculations, planning, assistance in dispute resolution

/Management must take responsibility
Calcs: Unlisted companies use separate staff, listed this is prohobited if material.
Planning advice if subjective/material is prohibited.
Assistance: unlisted use separate teams/external consultation. Listed = prohibited if material.

Question 18

What is the general services law for unlisted/listed companies

Answer 18

Listed: Cannot provide tax services for a listed company
Unlisted - use separate team for audit/tax

Question 19

What is an advocacy threat? S/G

Answer 19

Where assurance firm takes clients side in a dispute acting as their advocate e,g, defending them in a legal case.

/Use different departments in firm to carry out work.
Make disclosures to audit committee.

Question 20

What are familiarity threats? /SG

Answer 20

Long association with assurance client - over familiar and sympathetic could effect professional scepticism. S/G = Rotate senior staff off assurance team and quality control reviews. Listed companies: Audit engagement partner max 5 years, other key partners max 7 years. Unlisted: 10 years, use 3rd party test to measure objectivity.

Family/personal relationships - between assurance firm and client staff threatens independence. Depends on role of other party at assurance client and closeness of relationship. S/G = Indiviudal removed from assurance team, QC policy = members should disclose if family member employed/promoted by client.

Question 21

What is an intimidation threat? S/G

Answer 21

When the client threatens to sue or does sue the assurance firm for work done previously. risk of losing client and bad publicity if found to have been negligent. Therefore may be more lenient towards client in future if they don’t sue.

S/G - Disclose to audit comittee nature/extent of litigation. Remove specific indiviudals from engagement team. Additional pro accountant review work as second opinion.

Question 22

What is a management threat?

Answer 22

Audit firm undertakes work involving making judgements and decisions which arer the responsibility of management. Cross over with self-review threat.

S/G ensure management understands it is their decision/responsibility if ADVICE is given by audit firm.

Question 23

What factors should frims look out for when accepting new clients that could be a threat to a firm’s integrity/professional behaviour?

Answer 23

Illegal activities

Apparent dishonesty of client

Questionable accounting practices of client

Question 24

What should professional accountants consider when resolving ethical conflicts?

Answer 24

Consider PIPCO
- also relevant facts, parties, ethical issues, alternative course of action.

Question 25

What are conflicts of interest for the accountant?

Answer 25

Could be under pressure to act contrary to law/regulation, to lie, facilitate unethical or illegal earnings management strategies.

Question 26

How should accountant deal with these conflicts of interests?

Answer 26

1. Resolve internally using formal dispute resolution process or audit comittee
2. Obtain advice from ICAEW
3. Seek legal advice
4. Resign