Chapter 14 - Codes of professional ethics and regulatory issues

Question 1

Why is it important for accountants to follow an ethical code?

Answer 1

To maintain public trust, protect the reputation of the profession, and ensure independence and objectivity in their work.

Question 2

What are the key responsibilities of professional accountants under ethics?

Answer 2

To act in the public interest, avoid personal self-interest, and ensure reliance on their expertise extends to the general community.

Question 3

What protection do ethical guidelines provide for accountants?

Answer 3

They prevent accountants from being accused of unethical behaviour, as long as they act within the framework.

Question 4

What are the main sources of ethical guidance for accountants?

Answer 4

ICAEW Code: Applies to ICAEW members and trainees.
IESBA Code: Influences the ICAEW Code and provides international ethical standards.
FRC Ethical Standards: Specific to UK auditors to ensure compliance with ethical requirements.

Question 5

Q: What is the main advantage of a principles-based framework over rules-based guidance?

Answer 5

A: It requires active consideration of ethical situations, preventing rigid or narrow interpretations of compliance.

Question 6

Q: Why is a principles-based framework flexible?

Answer 6

A: It accommodates rapidly changing environments and individual situations, such as those in assurance engagements.

Question 7

Q: Can a principles-based framework incorporate prohibitions?

Answer 7

A: Yes, where necessary, it can include specific prohibitions to guide professional behaviour.

Question 8

What are the five fundamental principles of the IESBA Code?

Answer 8

PIPCO - draw a face

Integrity: Be straightforward and honest.
Objectivity: Avoid bias, conflicts of interest, and undue influence.
Professional Competence and Due Care: Maintain skills and comply with professional standards.
Confidentiality: Respect the confidentiality of information unless legally required to disclose.
Professional Behaviour: Avoid actions that discredit the profession.

Question 9

What safeguards are created by the profession, legislation, or regulation?

Answer 9

Educational and training requirements.
Continuing professional development (CPD).
Professional standards and monitoring.
Disciplinary procedures.

Question 10

What are examples of safeguards in the work environment?

Answer 10

Involving an additional accountant to review work.
Consulting an independent third party.
Rotating senior personnel.
Disclosing the nature of services and associated fees.
Declaration of independence.

Question 11

What does the ICAEW Code require professional accountants to do?

Answer 11

The ICAEW Code implements the IESBA (IFAC) Code above so that following it ensures compliance with the IESBA (IFAC) Code.
The ICAEW Code states that ‘professional accountants are expected to follow the guidance contained in the fundamental principles in all of their professional and business activities whether carried out with or without reward and in other circumstances where to fail to do so would bring discredit to the profession.’

To follow the fundamental principles in all professional and business activities, ensuring they do not discredit the profession.

Question 12

What are the two parts of the FRC Ethical Standards for auditors?

Answer 12

INDEPENDENCE IS UNIQUE TO FRC

Part A: Covers fundamental concepts like integrity, objectivity, and independence.

Part B: Includes specific sections on:
General requirements and guidance.
Financial, business, employment, and personal relationships.
Long association with the audit engagement.
Fees, remuneration, and policies on gifts and hospitality.
Non-audit services.
Provisions for small entity audits.

Question 13

True or False A code based on a set of rules requires accountants to evaluate
and address threats to independence.

Answer 13

False

Question 14

Integrity

Answer 14

Integrity | A professional accountant should be straightforward and honest in all professional and business relationships and being uncorrupted by self-interest.

Question 15

Objectivity

Answer 15

Objectivity | A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgements.

Question 16

Professional competence and due care

Answer 16

Professional competence and due care | A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services.

Question 17

Confidentiality

Answer 17

Confidentiality | A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose.

Question 18

Professional behaviour

Answer 18

Professional behaviour | A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Question 19

4 For each of the following statements concerning professional ethics, select whether they are true or false.
Prescriptive rules of ethical guidance are beneficial because they place the onus on the accountant to actively consider independence in every given situation.
A True B False
A framework of ethical guidance allows principles to be applied to different situations, and is therefore effective in a situation that is changing rapidly.
C True D False
A framework of ethical guidance prevents accountants interpreting legalistic requirements narrowly, in order to circumvent ethical requirements.
E True
F False
LO 4b

Answer 19

Correct answer(s): B False
Correct answer(s): C True
Correct answer(s):
E True
The first statement is false as following prescriptive rules of ethical guidance may become a mechanical process without due consideration given to the ethical principles of each case. The other
statements are true.

Question 20

7 For each of the following threats, select whether they are identified by the IESBA Code only, the
FRC’s Ethical Standard only or both the IESBA Code and the FRC’s Ethical Standard. Self-interest threat
A IESBA Code only
B FRC’s Ethical Standard only
C Both
Management threat
D IESBA Code only
E FRC’s Ethical Standard only
F Both
Familiarity threat
G IESBA Code only
H FRC’s Ethical Standard only
I Both
Self-review threat
J IESBA Code only
K FRC’s Ethical Standard only
L Both

Answer 20

7
Correct answer(s):
C Both

Correct answer(s):
E FRC’s Ethical Standard only

Correct answer(s):
I Both

Correct answer(s):
L Both

Both the IESBA Code of Ethics and the FRC’s Ethical Standard identify the following five threats: self- interest, self-review, advocacy, familiarity and intimidation. The FRC’s Ethical Standard also identifies the management threat in addition; the IESBA Code of Ethics does not specify a ‘management threat’ as such, but notes that the assumption of ‘management responsibilities’ would create other threats. SAMPLE EXAM

Question 21

TRUE OR FALSE
A rules-based code requires a professional accountant to identify, evaluate and address threats to compliance with fundamental ethical principles.

Answer 21

False
A rules-based code does not require auditor adherence to a set of principles.

Question 22

12 There are five fundamental principles of ethics for professional accountants.
Which two of the following describe actions an auditor will take to comply with the fundamental principle of professional behaviour?
A Attaining and maintain professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional service.
B Complying with relevant laws and regulations.
C Exercising professional judgement without being compromised by bias.
D Avoiding conduct that the auditor knows could discredit the profession

Answer 22

B Complying with relevant laws and regulations.
D Avoiding conduct that the auditor knows could discredit the profession.
A professional account complying with the fundamental principle of professional behaviour will comply with relevant laws and regulations and avoid any conduct that the professional accountant knows, or should know, might discredit the profession.
Attaining and maintaining professional knowledge and skill at the level required to ensure that a client or employing organisation receives competent professional service will demonstrate compliance with the fundamental principle professional competence and due care.
Exercising professional judgement without being compromised by bias demonstrates objectivity.