Chapter 2 : Basics of Ethical Behaviour and Safeguards to Ethical Threats

Question 1

Why auditors need to be ethical ?

Answer 1

• SH and users of the F.S and other stakeholders rely on auditor’s report to us the F.S to take decisions.

Question 2

Fundamentals of Ethical behaviour

Answer 2

P - Professional competence and due care
I - Integrity
C - Confidentiality
O - Objectivity
P - Professional behaviour

Question 3

When can auditors breach confidentiality ?

Answer 3

• Obligatory responsibility
  and
• Voluntary responsibility

Question 4

Obligatory responsibility to breach confidentiality

Answer 4

• If client is suspected to be involved in illegal activities
  and
• If client is suspected to be involved in serious non-compliance with industry laws and regulations

Question 5

Voluntary responsibility to breach confidentiality

Answer 5

• To protect interest of a member of the audit firm or to protect interests of the firm in legal proceedings.
• If client is suspected to be involved in activities which are against public interest; yet first get legal advice before proceeding with action.

Question 6

2 kinds of Independence

Answer 6

#Independence of behaviour / appearance
#Independence of mind

Question 7

Explain independence of mind

Answer 7

Ensuring there is no conflict of interest or undue influence over the auditor’s professional judgment.

Question 8

Explain independence of appearance

Answer 8

A reasonable 3rd party should conclude that the auditor is independent of the client.

Question 9

When does conflict of interest arise ?

Answer 9

When auditing for two competitors in the same industry

Question 10

Steps to take to reduce conflict of interest threat to an acceptable level.

Answer 10

S1 : Advise both clients of the possible conflict of interest arising and obtain their consent before proceeding to audit.
S2 : Involve the TCWG of both clients and obtain their advice.
S3 : Make two separate teams with different members and partners.
S4 : Ensure there facilities in place to prevent access to data such as confidential secure data filing.
S5 : Provide guidelines on security and confidentiality to members and partners of each team and include this is LOE.
S6 : Have confidentiality agreements signed by the members and partners of each team.
S7: Advise client to seek professional advice such as lawyer’s support to ensure client is not breaching any law and regularly review the safeguards.

Question 11

Types of ethical threats

Answer 11

#Self-interest threat
#Self-review threat
#Advocacy threat
#Familiarity threat
#Intimidation threat

Question 12

When to consider threats to ethical behaviour ?

Answer 12

• Accepting a new client
• Acting in for an existing client
• planning stage of audit
• completion stage of audit
• change in the circumstances of the auditor or the client

Question 13

Procedures to be in place to reduce threat

Answer 13

# Identify any threats arising from the engagement
# Evaluate the level of risk arising from the threat
# Ensure necessary safeguards are in place to reduce level of threat
# if not, then take corrective action.