Chapter 2 professional standards Flashcards
IFAC code of ethics
Integrity- straightforward and honest in all relationships
Objectivity- not allow bias, conflict of interest or influence of others to hinder professional judgement
Professional competence and due care- duty to maintain professional knowledge to deliver competent service in accordance with legislation. act diligently in accordance with professional standards.
confidentiality - respect the confidentiality of information acquired through business relationships and should not disclose such to third parties without legal right or duty. not to use confidential info to ones advantage.
professional behaviour- comply with relevant laws and legislation and avoid any action that discredits the profession.
FRC threats to objectivity + independence
Self interest threat - all firms face it, if they lose client they lose money
self review threat- may be difficult for a firm to maintain objectivity, if any product/judgement made by the company needs to be re-evaluted/challenged later. (e.g. brand valuation)
management- when audit firm undertakes work involving making judgements and decisions (MGMTs job)
advocacy threat- when a professional adopts a stance for or against a client, rather than taking a balanced (objective) position.
familiarity threat- if they get to know the client too well, prof scepticism may be impaired and therefore objectivity.
Intimidation threat - bullying, dominant personality or threatening to remove the auditor
FRC ethics safeguards
environmental safeguards:
- training
- ICAEW support helpline
Quality control procedures at engagement, firm and professional level:
- planning, supervision and review procedures
- hot and cold review files
- regulatory inspections
procedures envisioned under the FRC ethical standard
- Overall control environment (used to ensure professional approach to ethics)
- Segregation of duties
- Rotation of engagement partners and staff (between those on audit and those on non audit engagements)
- consulting the ethics partner
- procedures to evaluated INTEGRITY of potential new clients
- formal process of reviewing the appropriateness of the firm continuing in office before it is allowed to go forward for reappointment
- staff recruitment procedures
- regular completion of fit and proper and independence procedures by staff and partners
- staff training, development and performance appraisal
- monitoring and evidencing the firms own systems
FRC ethical standards
section 1 - general requirments and guidance
section 2 - financial, business, employment and personal relationships
section 3 - long association with engagements and entities relevant to engagements
section 4 - Fees, remuneration, and evaluation policies, gifts and hospitality, litigation
section 5 - Non audit/additional services
section 6 - Provisions available for audits of small entities
information can be found in open book
Section 1 - general requirements and guidance overview
integrity and objectivity
Independence- freedom from conditions and relationships which, in the context of the engagement, would compromise the integrity or objectivity of the firm or covered persons.
look in OB
deals with :
a- control environment
b- engagement team
then a-h from reporting doubts on independence to empowering staff to communicate about ethical issues
section 2 - financial, business, employment and personal relationships
a) if tempted to take a financial interest (direct or indirect) in an audit client - DO NOT. Direct=owning shares or making a loan, indirect = auditing a company which the audit company has invested it’s pension fund in.
b) if tempted to go in a business venture with the audit client - DO NOT
c) staff move from firm to client, must disclose during process and give consideration of future impact.
d) client to firm (employee with significant influence over prep of FS) - should not be assigned to position where they can influence outcome of audit. for two years after leaving client.
look in OB for more info
section 3 - long association with engagements and with entities relevant to engagements
time limits for engagement partners and key staff involved in audit for PIE or UK listed client
a) Maximum of five years in post - further five years before they can be reappointed. this period can be extended by 2 years if audit committee feels necessary to protect quality of the audit.
b) this employment period can be 7 years, for engagement quality control reviewers, key partners involved in the audit and senior staff for UK Listed and PIEs (5 years must elapse before reappointment)
for non listed - once eng partner has held role for 10 continuous yrs careful consideration sbhould be given (quote in OB)
section 4 - fees renumeration and evaluation policies, gifts and hospitality
contingent fees (amount of fee dependant on event taking place or condition being met) - are PROHIBITED
a- audit eng partner ensures sufficient partners and staff assigned (irrespective of audit fee)
b- audit fee should not be influenced by provision of non audit services
c- For audits of PIEs only, total fee charged to non audit services must be no more than 70% of average audit fees paid in last 3 years
d- fees for audit and non audit services for UK listed or PIE client should NOT EXCEED 10% of firms fee income
e- fee % limit for non listed is 15%
f- audit staff should not be assessed/performance appraisal on selling non audit services
g- should be a policy on the extent to which gifts, hospitality etc may be accepted from audited entities
h- firm should resign as auditor when actual or potential litigation between audit firm and client
fee :
between 5-10% for UK listed an dPIE
between 10-15% non listed
section 5 non audit/additional services, general approach and steps a firm should take.
general approach on whether supply is allowed:
a) what an objective, reasonable and informed third party would think about the impact on the firms objectivity and independence
is the service significant/material to the FS - if yes - DONT DO
b) the need for the firm to have procedures to monitor and deal with potential threats
c) the need for the client to have ‘informed management’ where the audit firm concludes it can provide non audit services to a client aware of these issues
d) it is never appropriate for the audit firm to find itself in a position where it undertakes, or is perceived as undertaking, a management role.
this approach states that the firm should:
a- consider impact of providing services
b- establish safeguards to counter threats
c- communicate with those charged with governance
d- document rationale for decisions made
section 5 - what work can you undertake 1-internal audit 2-IT services 3-Valuation+ valuation services 4-Tax services 5-Litigation support and legal services 6-recruitment and remuneration 7-corporate finance services 8-transaction related services 9-restructuring services 10-accounting services
1- NO-self review and managment threats
2-NO if system is important to any significant part of accounting/financial system, production of FS, or auditors have significant reliance on. Self review+mgmt threats
3- NOT for an unlisted entity where the valuation would:
- involve significant degree of subjective judgement
- material effect on FS
4- Not if it would involve them acting as an advocate. where the outcome of the trial is:
- material to the FS
- dependant on a future or contemporary audit judgement
important to note:
a) rule does not prevent usual discussion on points of discussion with inspectors of tax or the provision of information if the case goes to the commissioners
b) most tax issues neither material nor dependant on future or contemporary judgements
c) where the matter progresses to the commissioners, conditions of section 6 may apply
5- DO NOT - unless advice provided to non listed clients. otherwise advocacy and management threats arise. examples include acting as expert witness or solicitor. self review threat can arise when advising on matters material to the FS.
6-No- mgmt and familiarity threats
7- NOT unless safeguards are available, can lead to advocacy, management and self review threats. e.g. takeover target identification and support in seeking additional finance
8- in general one off engagement such as due diligence should not be performed. management threat.
9- NOT where an entity plans to change capital structure, audit firm may not provide services where the role played would create management, advocacy or self review threats
Section 6 - provisions available for audits of small entities
where one client makes between 10-15% of fees, section 6 exempts the audit firm from the requirement in section 4 for an external independent quality control review- the expectation should be disclosed to ethics partner and those in governance of the audited firm
