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ACCA Audit and Assurance > 5: Ethics and Acceptance of a Client > Flashcards

5: Ethics and Acceptance of a Client Flashcards

1
Q

What are the three benefits of good ethics?

A

▪ Confidence
▪ Reassurance
▪ Credibility

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2
Q

Are Ethics more like rules or guided principles?

A

Guided principles

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3
Q

What are the two main sources of ethical guidance?

A

▪ IFAC Code of Ethics – governs audits carried out under ISAs.
▪ ACCA Code of Ethics – to be followed by ACCAs, but is practically identical to the IFAC code.

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4
Q

What can refusal to comply with the Codes of ethics result in?

A

▪ Fines
▪ Suspension of membership
▪ Withdrawal of membership

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5
Q

What are the three steps in the conceptual framework when Identifying and mitigating an ethical threat?

A
  1. Identify - What is the threat
  2. Evaluate - What type
  3. Mitigate - Auditors response
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6
Q

What are the five fundamental ethical principles?

A

OPPIC

Objectivity
Professional Competence & Due Care
Professional Behaviour
Integrity
Confidentiality
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7
Q

Briefly describe…

Objectivity

A

Members should not allow bias to over-ride professional or business
judgements

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8
Q

Briefly describe…

Professional Competence & Due Care (2)

A
  • Maintain knowledge and skills to give good service

- Act in accordance with professional standards

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9
Q

Briefly describe…

Professional Behaviour (2)

A
  • Should act in accordance with laws and regulations

- Avoid action that discredits the profession

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10
Q

Briefly describe…

Integrity

A

Be straightforward and honest in all business relationships

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11
Q

Briefly describe…

Confidentiality

A

Members should not disclose information to third parties

without proper and specific authority from client.

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12
Q

When can a member disclose information to third parties without the client consent?

A

When there is a legal or professional right or duty to disclose

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13
Q

What are the two types of disclosures?

A
  • Obligatory

- Voluntary

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14
Q

Describe Obligatory disclosures

A

There is a statutory right or duty to disclose

Auditor suspects

  • Money laundering
  • Terrorism or;
  • Drug trafficking.
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15
Q

Describe Obligatory disclosures

A

There is a statutory right or duty to disclose

Auditor suspects

  • Money laundering
  • Terrorism or;
  • Drug trafficking.
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16
Q

Describe Voluntary disclosures

A

An auditor may disclose information which would otherwise be confidential if disclosure can be justified in the ‘public interest’.

Auditor suspects
-Fraudulent activity

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17
Q

What is the definition of Conflicts of interest? (2)

A
  • Difficult situations to manage, with no obvious “correct” solution.
  • If you are under pressure to do something that you think is unethical, or against your principles.
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18
Q

What is a safeguard to be used in terms of client notification when there is a conflict of interest? (2)

A
  • Both clients notified

- Consent obtained

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19
Q

What is a safeguard to be used in terms of “Advice” when there is a conflict of interest?

A

Advise one or both clients to seek additional independent advice

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20
Q

What is a safeguard to be used in terms of “Separate engagement teams” when there is a conflict of interest?

A

Use separate engagement teams.

This separation of teams is known as building a ‘Chinese wall’.

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21
Q

What is a safeguard to be used in terms of “Physical separation of teams” when there is a conflict of interest?

A

Procedures to prevent access to information, for example, strict physical separation of both teams, confidential and secure data filing.

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22
Q

What is a safeguard to be used in terms of “Guidelines” when there is a conflict of interest?

A

Clear guidelines for members of each engagement team on issues of security and confidentiality (could be in engagement letter)

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23
Q

What is a safeguard to be used in terms of “Agreement” when there is a conflict of interest?

A

Use a confidentiality agreement signed by employees and partners of firm

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24
Q

What is a safeguard to be used in terms of “Monitoring” when there is a conflict of interest?

A

Regularly monitor the application of the safegaurds

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25
Q

What are the five general threats to objectivity?

A
  • Self-interest threat
  • Self-review threat
  • Familiarity threat
  • Intimidation threat
  • Advocacy threat
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26
Q

What is self-interest threat?

A

Can occur as a result of your own or your close family interests, financial or otherwise

o Undue dependence on fee income from one client
o Close personal or business relationships
o Financial interest in a client owning shares
o Outstanding fees

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27
Q

What are self-review threats?

A

Occur when you are required to evaluate your own previous work or judgement

o Member of assurance team being or recently having been employed by the client in a position to influence the subject matter being reviewed
o Involvement in implementation of financial system and subsequently reporting on the operation of said system
o Same person reviewing decisions or data that prepared them
o An analyst, or member of a board, audit committee or audit firm being in a position to exert a direct or significant influence over the financial reports
o The discovery of a significant error during a re-evaluation of the work undertaken by the member
o Performing a service for a client that directly affects the subject matter of an assurance engagement.

28
Q

What are Familiarity threats?

A

Can be present when you become so sympathetic to interests of others

o Long association with a client
o Acceptance of gifts or preferential treatment (significant value)
o Over familiarity with management
o Former partner of firm being employed by client
o A person in a position to influence financial or non-financial reporting or business decisions having an
immediate or close family member who is in a position to benefit from that influence.

29
Q

What are intimidation threats?

A

Occur when you are deterred from acting objectively by actual or perceived threats

o Threat of litigation
o Threat of removal as assurance firm
o Dominant personality of client director attempting to influence decisions
o Pressure to reduce inappropriately the extent of work performed in order to reduce fees.

30
Q

What are Advocacy threats?

A

Threats occur when you are promoting or been seen to represent someone or something

o Acting as an advocate on behalf of a client in litigation or disputes
o Promoting shares in a listed audit client
o Commenting publicly on future events in particular circumstances
o Where information is incomplete or advocating an argument which is unlawful.

31
Q

What are some safeguards to Professional, legal and regulation?

A 
✓ Education and training
✓ Corporate governance 
requirements
✓ Disciplinary procedures
✓ External reviews
32
Q

What are some safeguards to protect the work environment?

A 
✓ Internal control systems
✓ Recruit the right staff
✓ Whistle blowing procedures
✓ Disciplinary process
✓ Leadership that drives ethical behaviour
✓ Second partner review
33
Q

What are some safeguards to an individuals actions?

A

✓ Maintaining records of
contentious issues
✓ Ethical conflict resolution
✓ Seek legal advice

34
Q

What kind of threat is Offering discount to audit staff

A

Familiarity threat

35
Q

Should an offer of discount to audit staff be declined?

A

If significant - Yes

If not - No

36
Q

What kind of threat is review of own work?

A

Self review threat

37
Q

Why is review of own work a threat and what is the safegaurd?

A

Auditor may cover up own errors.

Use separate teams to avoid self review

38
Q

Why is hospitality or other benefits a threat

What is the safegaurd?

A
  • Can be seen as bribe and want to be seen as independent
  • Lose professional scepticism

Should be modest or decline. Or have company policy

39
Q

Why is representing a client a threat?

What is the safegaurd?

A

Being perceived as taking the client viewpoint losing professional
scepticism and integrity

Resign from appointment (court) or not accept offer

40
Q

Why is Advised on the systems that should be in place and then reviewing the effectiveness of the systems a threat?

What is the safegaurd?

A

Self-review threat as if we as the individual review our work and
we find an error we may hide those errors to save face, or lose professional scepticism.

Get someone else to do the work

41
Q

Why is dependency on fees a threat?

What is the safegaurd?

A

Self-interest and the firm may become too reliant on the income coming in.

Ltd: If recurring fees are in excess of 15%
Assess whether still independent, maybe stop some of
the services provided, and decline further work on top of
the audit

Plc: If recurring fees are in excess of 10%

42
Q

Why is partner is friend with client a threat?

What is the safegaurd?

A

Familiarity threat

Rotate the partner off this engagement and replacing
with an alternative partner.

43
Q

Why are outstanding fees a threat?

What is the safegaurd?

A

Self-interest

Obtain payment before further commencement of work.
Organise a payment plan option for the client.

44
Q

What is tendering?

A

Client approaches asking you to bid for work

45
Q

Describe fee negotiation

A

Deciding on a fixed or flexible amount

46
Q

Describe lowballing

A

Giving the client a low initial fee in hopes of gaining more work in long term

47
Q

What should a firm consider before taking on work for a client? (3)

A

Whether they are competent to perform the work
Whether they would have appropriate resources available
Whether they have specialist skills or knowledge

48
Q

What must the prospective firm do with the outgoing auditor?

A

Communicate with the outgoing auditor to assess if there are any ethical or professional reasons why they should not accept appointment

49
Q

Does the audit firm have to gain permission from the client to contact the existing auditor?

A

Yes

50
Q

If the client refuses to allow the firm to contact the existing auditor, what should the firm do?

A

They should refuse the engagement

51
Q

What should the prospective firm do with information obtained by existing auditor?

A

Carefully review the response for any issues that could affect acceptance

52
Q

What should the prospective firm screen for?

A

Considering management integrity and assessing whether any conflict of interest with existing clients would arise

53
Q

What are the three things the auditor must obtain an agreement from the management that they will do?

A

▪ Preparation of the financial statements in accordance with the applicable financial reporting framework,

▪ For such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error;

▪ To provide the auditor with access to all relevant information for the preparation of the financial statements

54
Q

If the auditors cannot obtain the management agreement what must they do?

A

Not accept the proposed audit engagement

55
Q

What is the purpose of the engagement letter?

A

Provides a written agreement of the terms of the audit engagement between the auditor and management or those charged with governance.

56
Q

What does the engagement letter help to avoid?

A

Misunderstandings with respect to the audit

57
Q

Will the below be included in the engagement letter?

▪ The objective and scope of the audit

A

Yes

58
Q

Will the below be included in the engagement letter?

The responsibilities of the auditor

A

Yes

59
Q

Will the below be included in the engagement letter?

The responsibilities of management

A

Yes

60
Q

Will the below be included in the engagement letter?

▪ Identification of the financial reporting framework for the preparation of the financial statements;

A

Yes

61
Q

Will the below be included in the engagement letter?

▪ Expected form and content of any reports to be issued

A

Yes

62
Q

Will the below be included in the engagement letter?

▪ The fact that some material misstatements may not be detected

A

Yes

63
Q

Will the below be included in the engagement letter?

▪ Arrangements regarding the planning and performance of the audit, including the composition of the audit team

A

Yes

64
Q

Will the below be included in the engagement letter?

▪ The expectation that management will provide written representations

A

Yes

65
Q

Will the below be included in the engagement letter?

▪ The basis on which fees are computed and any billing arrangements

A

Yes

66
Q

Will the below be included in the engagement letter?

▪ A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement.

A

Yes

ACCA Audit and Assurance (12 decks)

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