Chapter 2 Flashcards
the obligation that all members of the accounting professional bodies be straightforward and honest
Integrity
the obligation that all members of the professional bodies not allow their personal feelings or prejudices to influence their professional judgement
Objectivity
the obligation that all members of the accounting professional bodies maintain their knowledge and skill at a required level
Professional competence
the obligation to complete each task thoroughly, document all work, and finish on a timely basis
Due care
the obligation that all members of the professional bodies refrain from disclosing information that is learned as a result of their employment to people outside of their workplace
Confidentiality
the obligation that all members of the professional bodies comply with rules and regulations and ensure that they do not harm the reputation of the profession
Professional behaviour
Specific rules incorporating the principles of professional ethics
Fees and pricing Advertising Contact with predecessor Firm names Professional conduct
Ethical decision-making
Obtain the relevant facts.
Distinguish the ethical issues from the facts.
Determine who is affected by the outcome of the dilemma and how each individual or group is affected.
Identify the likely alternatives available to the person who must resolve the dilemma.
Identify the likely consequence of each alternative.
Decide on the appropriate action.
occurs when a public accountant is involved with financial information
Association
here are three ways in which association can happen:
When the public accountant performs a service or consents to the use of his or her name implying that a service was performed with the information.
When a third party indicates, without the consent of the public accountant, that he or she is associated with the information.
When a third party assumes that the public accountant is associated with the information.
the ability to act with integrity, objectivity, and professional scepticism
Independence
the group that represents the shareholders and oversees the activities of a company and its management
Board of directors
There are two forms of independence
Independence of mind
Independence in appearance
Independence of mind
The ability to act with integrity, objectivity, and professional scepticism. It is the ability to make a decision that is free from bias, personal beliefs, and client pressures. Independence of mind is also referred to as actual independence
Independence in appearance
is the belief that independence of mind has been achieved. It is not enough for an auditor to be independent of mind; they must also be seen as independent. Auditors must consider their actions carefully and ensure that nothing is done to compromise their independence both of mind and in appearance. Independence in appearance is also referred to as perceived independence.
the threat that can occur when an accounting firm or its staff has a financial interest in an assurance client
Self-interest threat
Self-interest threat examples
assurance team members involved in the assurance engagement (and their immediate families) own shares in the client’s business
firm members not involved in the assurance engagement (and their immediate families) own more shares in the client than the minimum number of shares permitted by the relevant governing body
a loan to or from the client outside of normal lending terms
fee dependence, where the fees (from assurance and other services) from one client form a significant proportion of the total fees earned from all assurance clients
a close business relationship with the client, unless the relationship is limited to an immaterial financial interest for the client, the firm member, and the firm.
the threat that can occur when the assurance team needs to form an opinion on their own work or work performed by others in their firm
Self-review threat
Self-review threat examples
an assurance team member having recently been an employee or a director of the client and therefore able to influence the subject matter of the assurance engagement
information prepared for the client that is then assured, such as creating source documents, or preparing and recording journal entries without first obtaining management’s approval
services performed for the client that are then assured, such as internal audit services, information technology services, legal services, human resource services, and corporate finance services and valuations.
the threat that can occur when a firm or its staff acts on behalf of its assurance client
Advocacy threat
Advocacy threat examples
encouraging others to buy shares or bonds being sold by the client
representing the client in negotiations with a third party
representing the client in a legal dispute.
the threat that can occur when a close relationship exists or develops between the assurance firm (staff) and the client (staff)
Familiarity threat
Familiarity threat examples
a long association between the assurance firm and the client
a long association between members of the assurance team and their client
an assurance team member with a close relative who holds a senior position of influence at the client
a former partner of the assurance firm holding a senior position with the client
the acceptance of gifts by members of the assurance team from the client, other than very minor tokens
the acceptance of hospitality (for example, a meal or tickets to a sporting competition) by members of the assurance team from the client, other than very minor gestures.
the threat that can occur when a member of the assurance team feels threatened by client staff or directors
Intimidation threat
Intimidation threat examples
the threat that the client will use a different assurance firm next year
undue pressure to reduce audit hours to reduce fees paid.
additional requirements to ensure auditor independence for reporting issuers include
Audit partners must be rotated every seven years, with a five-year break from the audit engagement.
Audit committee must pre-approve all services provided to the client by the firm.
Audit partners may not be directly compensated for selling non-assurance services to the audit client.
Where an engagement team member accepts employment in a financial reporting role with a client, the firm must refrain from being the auditor of that client for at least one year from the date the financial statements were filed with securities regulators.
mechanisms that have been developed by the accounting profession, legislators, regulators, clients, and accounting firms. They are used to minimize the risk that a threat will surface (for example, through education) and to deal with a threat when one becomes apparent (for example, through reporting processes within the assurance firm).
Safeguards
Safeguards to Independence
Self-interest threat
Policies and procedures within an accounting firm identifying any staff with financial interest in an assurance client.
Regular review of assurance and other fees earned from each client in comparison to total fees from all assurance clients.
Minimizing the provision of non-audit services to assurance clients.
Policies and procedures prohibiting business relationships with clients.
Safeguards to Independence
Self-review threat
Minimizing the provision of non-audit services to assurance clients.
When providing non-audit services, ensuring that the client is responsible for overseeing and guiding that work and making any final decisions regarding the outcomes of that work.
Having a cooling-off period before an audit partner can be employed in a senior role at an audit client.
Safeguards to Independence
Advocacy threat
Policies and procedures prohibiting business relationships with clients.
Policies and procedures prohibiting the representation of clients in any disputes or legal matters.
Rotating staff assigned to clients so they do not spend too much time at any one client’s premises.
Safeguards to Independence
Familiarity threat
Partner and staff rotation policies.
Education regarding acceptance of gifts and hospitality from assurance clients providing examples of what is and what is not acceptable.
Procedures when assigning staff to assurance clients ensuring no close personal relationships exist between assurance team members and client personnel.
Education regarding socializing with client personnel.
Safeguards to Independence
Intimidation threat
Avoidance of fee dependence.
Appropriate corporate governance structures within clients, such as an audit committee, to liaise with senior assurance team members and client management.
Adherence to stringent procedures regarding the removal of assurance providers.
owners of the company
Shareholders
board members who are not employees of the company. Their involvement on the board is limited to preparing for and attending board meetings and relevant board committee meetings
Non-executive director
employees of the company who also hold a position on the board of directors
Executive director
a subcommittee of the board of directors. The audit committee enhances auditor independence and ensures that the financial statements are fairly presented and that the external auditor has access to all records and other evidence required to form their opinion.
Audit committee
The responsibilities of the audit committee include the following:
to recommend the auditor and their fees to the board
to oversee the audit and resolve any differences between the auditor and management
to pre-approve all non-audit services to be provided to the entity or its subsidiaries by the independent auditor.
employees of the company who evaluate and make recommendations to improve risk management, internal control procedures, and elements of the governance process
Internal auditors
how the internal audit function fits within the client’s organizational structure
Objectivity
the skills, training, and ability of the internal audit team
Technical competence
refers to the documentation, planning, and supervision of the internal audit function
Due professional
Under tort law, to prove that an auditor has been negligent, it must be established that:
A duty of care was owed by the auditor.
There was a breach of the duty of care.
A loss was suffered as a consequence of that breach.
a body of rights, obligations, and remedies that is applied by courts in civil proceedings to provide relief for persons who have suffered harm from the wrongful acts of others.
Tort law
A client can establish that the auditor owed them a duty of care in one of two ways:
(1) under contract law for breach of contract or (2) under tort law for negligence.
The first step involves the assessment of client integrity. When assessing client integrity, the auditor will consider:
the reputation of the client, its management, directors, and key stakeholders
the reasons provided for switching audit firms (client acceptance decision)
the client’s attitude to risk exposure and management
the client’s attitude to the implementation and maintenance of adequate internal controls to mitigate (minimize) identified risks
the appropriateness of the client’s interpretation of accounting rules
the client’s willingness to allow the auditor full access to information required to form their opinion
the client’s attitude to audit fees and its willingness to pay a fair amount for the work completed.
Information relevant to the client acceptance or continuance decision can be found through:
communication with the previous auditor (client acceptance decision) before communicating any client details to the prospective auditor (if that permission is refused, the auditor should consider declining the appointment as auditor)
communication with client personnel
communication with third parties such as client bankers and lawyers
an Internet or background search
a review of news articles about the client
a review of prior-period financial statements.
Management is considered to be responsible for the financial statements and acknowledges this responsibility when they sign the engagement letter in which the following are outlined
Management is responsible for the selection and preparation of the financial statements in accordance with the appropriate financial reporting framework.
Management is responsible for ensuring that there are adequate internal controls in place so the prepared financial statements are free from material misstatement.
Management is responsible for providing the auditor unrestricted access to personnel and documents as needed.
