7. compliance with ethical requirements

Question 1

What happens if law prevents from complying any provision?

Answer 1

If the law prevents from complying any provision of code, the law prevails.
If the auditor believes in a specific case that complying code will not be in the public interest, he shall consult a professional or a regulatory body.

Question 2

What is integrity?

Answer 2

Integrity means truthfulness and fair dealings. A CA should be straightforward and honest in all business and personal relationships.

Question 3

Which things a CA should not be associated with?

Answer 3

A CA shall not be associated with any reports, returns, or other communication if he believes that these:
omit necessary information
are false, misleading or prepared recklessly.
If a CA becomes aware of being associated, he should take steps to disassociate himself from that information.

Question 4

Explain objectivity?

Answer 4

Objectivity means not to compromise professional judgments because of:
undue influence of others or
bias or
conflict of interest.
A CA shall not perform a service if a relationship or circumstance may unduly influence his judgment.

Question 5

What is confidentiality?

Answer 5

A CA shall ensure the confidentiality of information acquired in the course of business or professional relationship.
He shall not disclose this information to any third party or use it for personal or third party’s benefit. He should also ensure that individuals working under him ensure confidentiality of information.

Question 6

What does the confidentiality principle apply to?

Answer 6

It applies to information acquired from ex-clients and prospective clients. It also applies within the firm and in social environment.

Question 7

When confidential information may be disclosed?

Answer 7

If the disclosure is:
authorized by client
required by law/court
When there is professional right or duty to disclose.

Question 8

What are the factors to consider while disclosing confidential information?

Answer 8

The following factors:
whether the interest of third party could be harmed
whether all information is known and substantiated
the proposed type of communication
who are the addresses and whether they are appropriate recipients or not.

Question 9

What does professional competence and due care require?

Answer 9

It requires:
to attain and maintain professional knowledge and skills at all the levels
to act diligently
In complying with this principle, a CA shall ensure proper training and supervision of staff and make the clients aware of inherent limitations of this service.

Question 10

What is professional behavior?

Answer 10

A chartered accountant should:
comply with all relevant laws and regulations
and avoid actions that may discredit the information.

Question 11

What is the approach of Code of Ethics?

Answer 11

1. Identify threats to compliance with fundamental principles
2. Evaluate threats
3. Apply safeguards to eliminate or reduce threats to an acceptable level

Question 12

What is self-interest threats?

Answer 12

Threat that judgment or behavior of a team member will be inappropriately influenced by financial interest held by that team member.

Question 13

What is familiarity threat?

Answer 13

Threat that an assurance team member will be too sympathetic to the interest of client or too accepting work of client because of long or close relationship.

Question 14

Define:
Self-review threat
Intimidation threat
Advocacy threat?

Answer 14

Self -review: Threat that an assurance team member will not appropriately evaluate result of previous work performed by himself or another member of his firm.
Intimidation: Threat that an assurance team member is deterred from acting objectively because of threats, undue influence or pressure.
Advocacy: Threat that an assurance team member will promote client’s position on a matter and compromise his own objectivity.

Question 15

What are the relevant factors to be considered while evaluating the threats?

Answer 15

CA should consider quantitative and qualitative factors in evaluating threats. Certain policies and procedures established by the profession can help to identify and evaluate threats.
For Example:
corporate governance requirements.
educational, training and experience requirements
effective complaint systems
professional monitoring

Question 16

How to address the threats?

Answer 16

CA shall:
apply safeguards to reduce the threats to an acceptable level OR
eliminate the circumstances that are creating the threats OR
decline the engagement.

Question 17

What are the advantages of professional skepticism?

Answer 17

It helps in achieving:
professional competence and due care
integrity
objectivity.

Question 18

What happens when fee less than predecessor auditor is offered?

Answer 18

CA should not accept fee lower than the previous auditor unless scope and quantum or work is materially different from pervious year.
Level and nature of fee creates Self-interest threat. So we can evaluate the threat knowing whether the client is aware of terms of engagement or whether the fee is set by an independent third party.
Safeguards:
Adjust level of fees or scope of engagement
Appoint appropriate reviewer

Question 19

What would happen if there is overdue fee?

Answer 19

In case of initial audit, the predecessor auditor’s fee should be paid before the acceptance of engagement.
In case of recurring audit, self-interest threat is created if a significant part of fee has not been paid before issuance of next year’s audit.

Question 20

What are the safeguards for overdue fee?

Answer 20

Safeguards:
Obtain partial payment of overdue fee.
Appoint appropriate reviewer who did not take part in engagement for advice.
If the significant part remains unpaid for a long period of time, then the firm shall determine:
whether this amount is equal to loan
or it is appropriate to continue engagement or to be re-appointed.

Question 21

What is contingent fee? Why is it not allowed?

Answer 21

Contingent fee means the fee based on outcome. A fee will not be regarded as being contingent if established by court or other public authority.
This creates self-interest threat and it is of the level that no safeguard can reduce it to an acceptable level.
Contingent fee is not allowed for assurance engagement and for non-assurance engagement.

Question 22

What happens in case of compensation?

Answer 22

A self-interest threat is created if an audit team member is evaluated or compensated on the basis of selling non-assurance services to audit client.
Actions to be taken:
Revise the compensation plan
Remove the individual from audit team

Question 23

What are the examples of inducements?

Answer 23

Inducements can be in different forms: Gifts, hospitality, entertainment, donations, appeals to friendships, etc

Question 24

Explain threats and safeguards which arise from inducements?

Answer 24

Threats:
Self interest, familiarity or intimidation threat.
Safeguards:
Offer of discount should not be accepted.
Offer should be disclosed to senior management of the firm and documented.
If the offer is accepted by the team member:
Inducement or its cost should be returned
Team member should be removed and his work should be reviewed.

Question 25

How to evaluate threats from financial interests and what are the safeguards?

Answer 25

Holding financial interests in an audit client by team members or his relatives create self-interest threat.
Evaluation:
1. Role of the individual holding the financial interest.
2. Nature of relationship
3. Materiality of financial interest.
Safeguards:
Members should notify the firm about the financial interests.
Members shall dispose off the interest.
Removal of team member from the team
Appoint appropriate reviewer to review the work.

Question 26

What to do if loan is taken from the audit client if its a bank and if its not a bank?

Answer 26

If audit client is a bank:
Loan can be accepted only if it is under normal lending procedures and terms and conditions. If the amount is material, independent reviewer should be appointed.
If the audit client is not a bank:
Loan can be accepted if it is immaterial to both the client and the firm. If material, loan should be repaid and the member should be removed.

Question 27

Threats and Safeguards of Business Relationships?

Answer 27

A close business relationship with an audit client or its management may create Self-interest or Intimidation threat.
Safeguards:
If insignificant, no action is required.
If significant, it should be removed to an insignificant level or remove the individuals or the firm should withdraw.

Question 28

Evaluate threats and explain safeguards in purchase of good and services from audit client?

Answer 28

Purchase of good and services from audit client create self-interest threat.
Evaluation:
whether the transaction is in normal course of business or at arm’s length basis.
whether proper tendering process was followed.
whether undue favors were accepted or not
Safeguards:
If the threat is significant, eliminate or reduce the size of transaction OR remove the individual from the team.

Question 29

Threats, their evaluation and safeguards of Family and Personal Relationships?

Answer 29

Threats: Self-interest, Familiarity or Intimidation threat.
Evaluation: Nature of relation, position of individual at the client and role of audit team member.
Safeguards: Restructure the responsibilities so that the team member doesn’t deal with matters which are responsibility of related individual. Engage an independent reviewer or remove the relevant audit team member.

Question 30

What will happen if the audit team member has recently served as Director or Employee of the client?

Answer 30

Threat: Familiarity, Self-Review, Self-Interest.
If the individual served during the period covered in the audit report, then he should not be included in the team.
If not then evaluate the position of individual at the client, role and the length of time since this person left.
Safeguards:
Remove the person, restructure the responsibilities, engage an appropriate reviewer.

Question 31

What if someone is serving the audit client as an officer?

Answer 31

It will create self-interest or self-review threat. And it is not allowed to serve as director or officer at the client while working at the audit firm too.

Question 32

Explain employment with an audit client?

Answer 32

If the former member of the firm joins the client as director or officer, it creates self-interest threat, familiarity or intimidation threat.
Evaluation:
Current position in the client
Former position in the firm
Length of time passed
Level of involvement this person will have with the audit team
Safeguards:
There should be no significant connection between the person and team. Modify the audit plan. Assign individuals who have sufficient experience. Conducting an additional review.

Question 33

What if someone is entering employment negotiations with the client?

Answer 33

Threat: Self-interest threat.
Safeguards: Member should tell about his willingness. Remove the concerned member from the audit team. Appoint appropriate reviewer.

Question 34

What if the personnel is lent to the audit client?

Answer 34

Threat:
Self-review, Advocacy or Familiarity Threat.
Safeguards:
The firm shall not loan the personnel to the client unless:
It is for a short period of time
Client will be responsible
Personnel will not take management responsibilities.
If the personnel is lent to the audit client then:
he should not be in the assurance team, if included then restructure responsibilities, conduct an additional review.

Question 35

What to do if there is long association of personnel?

Answer 35

If some person in involved in an audit engagement for a long period of time, Familiarity threat and self-interest threat will arise.
Evaluation:
Length of time, role of individual, closeness of individual with the management.
Safeguards:
Rotate the person and determine cooling-off period.
Restructure responsibilities.
Appoint appropriate reviewer.
Independent QCR of the engagement.

Question 36

What are the threats created by providing Accounting and book keeping services to client?

Answer 36

It creates self-review threat but no threat is created if there are normal discussion between firm and the audit team.

Question 37

What are the safeguards for accounting and book keeping services to client?

Answer 37

If the client is a listed company, these services cannot be provided to the audit client.
If the client is an unlisted company, services of routine or mechanical nature can be provided.
Safeguards:
Firm uses professionals who are not on the audit team.
Appoint appropriate reviewer who didn’t take part in the engagement.