15 - Integrity objectivity and independence

Question 1

Why do independence and objectivity matter so much?

Answer 1

It is a professional requirement and is part of the PIPCO. If you lack these, could be punishment in the form of discipline from ICAEW or even worse the FRC

Also in the public interest we follow these as the output influences the public

Objectivity facilitates scepticism as we will be less friendly with those we are scrutinising

Question 2

What is the self interest threat?

Answer 2

This is when we act in our own interest rather than the shareholders.

Financial interests
Close business relationship
Gifts and hospitality
Loans and guarantees
Overdue fees
High % of fees
Lowballing
% or contingent fees

Financial interests:
It is prohibited that the
Assurance firm, Partner, Any person in a position to influence the assurance engagement outcome and immediate family members of such people have direct financial interest or an indirect material interest in a client. Indirect would be like you have a pension and your pension has shares of the client you are now auditing

Safeguard in place is:
Dispose of the interest - sell shares etc
Remove the individual from the team
Keep the clients audit committee informed
Use an engagement quality control reviewer

Question 3

Self interest - Close business relationship

Answer 3

Examples of when close business relationships are present:
Joint venture, Combining products and Leases between the parties.

Safeguard:
An assurance provider should not participate in such a venture with an assurance client unless immaterial and insignificant.
There should be no business relationships except for in ordinary course of business at an arms length

Question 4

Self interest - Gifts and hospitality

Answer 4

Unless the value of the gift is clearly insignificant, or hospitality is reasonable in terms of its frequency, nature and cost.

Safeguard:
The firm should have a policy on gift acceptance.
A firm or a member of an assurance team should not accept gifts

Question 5

Self interest - Loans and guarantees

Answer 5

If a lending institution client lends an immaterial amount to an audit firm or member of an assurance team on normal commercial terms, there is no threat to independence.
If the loan was material it would be necessary to apply safeguards to bring the risk to an acceptable level.