Chapter 15: Integrity, objectivity, and independence

Question 1

Define integrity, objectivity, and independence

Answer 1

1. Integrity: straightforward + honest
2. Objectivity: state of mind excludes bias, prejudice, compromise
3. Independence: underpins objectivity

Question 2

What can an auditor do to preserve objectivity?

Answer 2

1. evaluate how significant -> apply safeguards
2. withdraw from any engagement

Question 3

Define public interest entity

Answer 3

listed entity
1. defined by regulation or legislation
2. audit is required by regulation or legislation

Question 4

Services that are prohibited for public interest entity audit clients

Answer 4

1. tax services: preparation of tax forms, payroll tax, customs duties, identification of public subsidies and tax incentives, tax inspections, calculation of direct, and indirect tax, provision of tax advice
2. services involve playing any part in the mgt
3. bookkeeping and preparing accounting records
4. payroll services
5. design and implement IC
6. valuation services
7. legal services
8. services related to IA function
9. promote, deal in, underwrite shares in audited entity
10. human resources

Question 5

What are types of financial interest?

Answer 5

1. direct financial interest: 1) owned directly 2) beneficially owned and has control
2. indirect interest: beneficially owned and has NO control

Question 6

Parties are not allowed to own direct/ indirect financial interest in a client?

Answer 6

1. assurance firm
2. partner in the assurance firm
3. person in a position to influence the conduct and outcome of engagement
4. immediate family of such a person (spouse, dependent)

Question 7

Cases of inappropriately close business relationship?

Answer 7

1. operate joint venture
2. arrangements to combine services
3. distribution or marketing arrangements
4. others, eg: audit firm leasing its office space from the assurance client

Question 8

Purchasing goods and services from an assurance client in the ordinary course of business constitute a threat to independence. True or Fasle?

Answer 8

False

Question 9

At what length to use employee which previously work for the client?

Answer 9

1. For partner, finance director, chief accountant -> after 2-year period
2. Other individuals -> does not required length

Question 10

A partner or employee of an assurance firm should not serve on the broad of an assurance client. True or False? Exception?

Answer 10

1. True
2. Unless the partner serves as a company secretary or administrative role

Question 11

Are loan staff assignments allowed?

Answer 11

They are prohibited

Question 12

What is the difference between close family and immediate family?

Answer 12

1. Close family: parent, child, siblings
2. Immediate family: spouse, dependent

Question 13

Should auditors accept gifts and hospitality?

Answer 13

No, they shouldn’t, unless immaterial + inconsequential

Question 14

What is the exception to make/ guarantee a loan to a client, or accept a loan from a client?

Answer 14

The client is a bank in case of an ordinary course

Question 15

At which time the payment of overdue fees should be required?

Answer 15

Before the assurance report for the following year can be issued

Question 16

A firm can/ cannot enter into any fee arrangement for an assurance engagement. Choose can or cannot?

Answer 16

cannot (contingent fee)

Question 17

According to ICAEW Code of Ethics, what % of fees is the threshold?

Answer 17

Public interest entity for 2 consecutive years: <= 15% of total fees received by the firm

Question 18

According to FRC, what % of fees is the threshold?

Answer 18

1. Total fees (audit and non-audit services) <= 10% of annual fee income of the audit firm (5% in case of listed company)
2. Total fees (audit and non-audit services) <= 15% of gross practice income of the audit firm (10% in case of listed company)

Question 19

What % from non-audit services in listed company?

Answer 19

70% (cap)

Question 20

Which non-audit services for public-interest entities are subject to the cap of 70%?

Answer 20

1. review of interim financial information and providing verification of interim profits
2. report on government grants, report on covenant of loan arrangement
3. extended of audit work that is authorised by TCWG

Question 21

According to FRC, total fees received must be no more than ___ of the average total fees from the last ____ years

Answer 21

70% - three

Question 22

Individuals who have been a director or officer of the client under review or the previous two years ____ be assigned to the assurance team. Should they be assigned to the assurance team or not?

Answer 22

should not

Question 23

1. Can auditors routinely assist mgt with the preparation of FSs and advise about accounting treatment and journal entries?
2. What is the case that auditors cannot in term of self-review threats?

Answer 23

1. Yes, but they have to analyse the risk arising and put safeguards
2. In the preparation of accounting records and FSs or reviews them

Question 24

Can auditors provide valuation services to clients?

Answer 24

Yes, they can if the valuation for an immaterial matter (then apply safeguards)

Question 25

Which types of taxation services does the auditors can provide to the client?

Answer 25

1. tax return preparation
2. tax calculations for the purpose of preparing the accounting entities (may not be prepared for public interest entity)
3. tax planning and other advisory services
4. assistance in the resolution of tax disputes

Question 26

Can auditors provide internal audit services to an audit client?

Answer 26

No, prohibited

Question 27

Can auditors provide corporate finance services to audit clients?

Answer 27

Only some corporate finance services, eg: assisting a client in defining corporate strategies, assisting in identifying possible sources of capital,…

Question 28

According to EU Audit Regulation, auditors of public interest entities is ____ to provide services linked to the financing, capital structure, allocation of audit client unless these services have no consequential effect on FSs

Answer 28

prohibited

Question 29

All IT services are not allowed for auditors to provide to the audit client. True or False?

Answer 29

False. IT services that do not relate to the accounting system or the FSs can be provided, subject to safeguards

Question 30

Can auditors provide litigation support services for non-public interest entities?

Answer 30

No. FRC forbids acceptance of litigation support services for all entities

Question 31

What is advocacy threat?

Answer 31

When assurance firm is in a position of taking the client’s part in a dispute or acting as their advocate

Question 32

At what length does the audit engagement partner for non-public entities and public interest entities should be rotated to reduce familiarity threat?

Answer 32

1. non-public interest: 10 years, not rotated -> apply alternative safeguards
2. public interest: <= 5 years, not subsequently until 5 years elapsed (can continue for 2 more years if the audit committee of the audited entity decides and applies safeguards)

Question 33

At what length should one be an engagement quality reviewer?

Answer 33

No longer than 7 years

Question 34

Can auditors provide recruitment services to an audit client (advising on the appointment of a director, advising on remuneration packages)?

Answer 34

Cannot

Question 35

For an engagement quality reviewer who has been holding its position for 7 years, they ___ return to them for at least ___ years

Answer 35

should not/ 5

Question 36

When an audited entity becomes a listed company, the engagement partner should only continue the position for another ___ years where 4 years/ more have already been served

Answer 36

2

Question 37

When litigation is at all serious, what actions can auditors take?

Answer 37

Resign from the engagement (however not required to resign immediately in circumstances a reasonable and informed 3rd party would not regard it in the interest of the shareholders for it do so)

Question 38

What is management threat?

Answer 38

When an audit firm undertakes work involving making judgments and taking decisions that are the responsibility of mgt

Question 39

Define informed management.

Answer 39

When auditors believe that they can have the capability to make independent mgt judgments and decisions

Question 40

In the case of informed management, auditors can apply safeguards to avoid management threat or reduce it. True or False?

Answer 40

True

Question 41

If an accountant cannot determine the best course of action to resolve ethical conflicts on their own, further advice can be sought from what organization?

Answer 41

ICAEW helpline

Question 42

As a trainee, to resolve ethical conflicts, they should refer to whom?

Answer 42

Senior member of staff