Chapter 3

Question 1

What are the two main approaches to ethical guidance?

Answer 1

1. Principles based

2. Rules based

Question 2

What approach does the conceptual framework rely on?

Answer 2

Principal based approach

Question 3

What are the points of a principle based approach?

Answer 3

• Requires compliance with spirit of guidance
• Accountant to use professional judgement
• Flexible
• Principles may be applied across national boundaries
• Still incorporate specific rules for ethical situations

Question 4

What are the points of a rules based approach?

Answer 4

• Easier to follow because it is clearly defined
• Needs frequent updating
• May encourage accountants to interpret requirements narrowly in order to get round requirements
• Virtually impossible to be able to deal with every situation that may arise

Question 5

What are the fundamental principles?

Answer 5

O - objectivity
P - professional behaviour 
P - professional competence and due care 
I - integrity 
C - confidentiality

Question 6

What are examples of pressures?

Answer 6

Being asked to misinterpret the financial statements
Being asked to lie to the auditor
Being asked to sign off work as completed that you have not performed
Being asked to inappropriately reduce the extent of work performed

Question 7

What are safeguards for pressure?

Answer 7

Discuss the matter with the individual
Discuss the matter with a manager
Seek advice from the employer (HR)
Use the organisation’s formal dispute resolution process
Seek advice from ACCA
Seek legal advice
Last resort is to resign

Question 8

What are the 5 threats?

Answer 8

Self-interest
Familiarity
Self-review
Advocacy
Intimidation

Question 9

What are factors affecting the significance of a threat?

Answer 9

Value
Seniority of staff
Impact to the audit firm
Materiality to the financial statements - when considering whether a non-audit service can be provided

Question 10

Threat: owning shares

Answer 10

Safeguards - sell the shares

Question 11

Threat: fee dependency

Answer 11

Safeguards:
Listed - total fees from one client should not exceed 15% of the firms fee for 2 years running
Disclose to TCWG
Have an independent review by a person not in the audit firm

Non-listed - reduce dependency
Perform an independent review of the work

Question 12

Threat: gifts and hospitality

Answer 12

Safeguards: behaviour

Only accept if trivial and inconsequential as long as not offered to influence the auditors behaviour

Question 13

Threat: employment with the client

Answer 13

Safeguards:
Auditor should notify the firm
Remove the person from the team
Perform an independent review of significant judgements made by the individual

Question 14

What should the total fees be limited to for one client?

Answer 14

10% if listed

15% if unlisted

Question 15

How many non executive directors should be on an audit committee?

Answer 15

3

Question 16

What is the role of an audit committee?

Answer 16

Improve the quality of financial reporting
Increase the confidence of the public in the FS
Assist directors in meeting their responsibilities in respect of financial reporting
Provide a channel to external auditors
Review the company’s system of internal controls
Strengthen the position of internal audit
Appointment of external auditor

Question 17

What are the advantages of an audit committee?

Answer 17

Independent Reporting
Frees up Executive time
Corporate Governance monitored
Appropriate Internal Controls
Better Communication
Strengthens external audit independence

Question 18

What are the disadvantages of an audit committee?

Answer 18

Executive directors may perceive it as a threat to their authority
Finding non executive directors with appropriate expertise may be difficult
Additional costs will be involved
Too much detail may be thrust upon non executive directors