Chapter 15 - Integrity, objectivity and independence Flashcards
How is integrity defined?
Being straightforward and honest in all professional/ business relationships
How is objectivity defined?
State of mind that excludes bias
What do FRC prohibit for public interest entity audit clients?
- Tax services
- Bookkeeping
- Legal services
- Valuation services
How can self interest threats arise?
- Employment with an assurance client
- Partner on client board
- Familiarity
- Low balling
- Close business relationships
What is a financial interest?
An interest in the equity or other security, debenture loan or other debt instruments of the entity
What is a direct financial interest?
Directly owned financial interest by an individual or entity
What is an indirect financial interest?
Financial interest beneficially owned by a collective investment vehicle
Which parties are not allowed to own a direct interest or indirect material financial interest in the client?
- Assurance firm
- Assurance firm partner
- Any person who can influence
- Immediate family member
What safeguards are there against a self interest threat?
- Disposing of interest
- Remove team member
- Inform audit committee
- Engagement quality control reviewer
Is dual employment permitted?
NO
What does FRC section 2 state?
When a partner leaves to take up a key management position at the client, the firm may have to resign
Review of employees work should also take place
Are loan staff assignments prohibited?
Yes
Should a firm or member of an assurance team accept gifts or hospitality?
No
What is the exception of gifts and hospitality?
If they are considered trivial and inconsequential
Can audit firms get involved in loans with a client?
No
What is the exception with loans?
Client is a bank
If a loan is made under normal lending procedures, is it acceptable?
Yes, providing appropriate safeguards are implemented
What does the ICAEW state about overdue fees?
Payment required before the assurance report for the following year can be issued
What is a contingent fee?
Fee calculated on a predetermined basis relating to the outcome of the transaction
What are the safeguards relating to contingent fees?
- Discuss issues with audit committee
- Reduce client dependency
- Control reviews
- Consult 3rd party (ICAEW)
What threat does lowballing present?
Significant self interest threat
What rules does the FRC section 4 have?
Audit team must allocate appropriate time and skill to perform audit
What does the FRC state that the total non-audit fee must not exceed?
70% of average total fees based on fees from the last 3 years
What is the key area which there is likely to be a self-review threat?
Assurance firm provides more than one service
What is a valuation?
Making of assumptions and use of methodologies to compute a certain value for an asset
What threats arise if an audit firm performs a valuation?
Self-review
Management
What does FRC section 5 state?
Audit firms shall not carry out valuations which have material effect on listed company financial statements or involve subjective judgement
What can the auditor not do in relation to tax?
- Promote tax structure
- Tax engagement which involves audit firm taking managerial role
- Current/deferred tax calcs for listed entity
What did the revision of the 2019 FRC prohibit?
Providing internal audit services to an audit client
Are assurance firms allowed to promote an assurance client’s shares?
No
How can an advocacy threat arise?
Assurance firm is in the position of taking the client’s role in the dispute or somehow acting as their advocate
What does FRC section 5 prohibit?
Audit firm providing legal services where it would involve acting as a solicitor
When does a management threat arise?
When the audit firm undertakes work involving making judgements and taking decisions that are management’s responsibility
Are assurance providers allowed to make decisions on behalf of management
No, it’s prohibited
What must be considered according to the ICAEW Code when resolving ethical conflicts?
- Relevant facts
- Relevant parties
- Ethical issues involved
- Related fundamental principles
- Internal procedures
- Alternative courses of action
What non-audit services are exempt from the 70% cap?
- Services required by law
- Reporting on internal financial controls
- Specified auditors
What is the standard presumption of dependence for a non-listed client?
There is a presumption of dependence when annual fee income from all services to the client
will regularly exceed 15% of gross practice income.
What relationship automatically formed when overdue fees aren’t paid?
Loan relationship, threat to independence
In general, can you provide extra services to listed companies?
No
