Chapter 4 Flashcards
What are the 5 fundamental principles?
- Integrity
- Objectivity
- Professional Competence and due care
- Professional behaviour
- Confidentiality
What are the threats to the fundamental principles?
- Self-Interest
- Self-Review
- Intimidation
- Advocacy
- Familiarity
- Management
All impair to the auditor’s ability to provide professional scepticism.
Under the ICAEW Code what are the members responsible for when it comes to the fundamental principles?
- Identify threats to compliance with fundamental principles
- Evaluating the significance of these threats
- Implementing safeguards to eliminate or reduce them to an acceptable level
What are examples of safeguards created by the profession, legislation or regulations?
- Education, training and experience.
- Continuing professional development requirements (CPD)
- Corporate governance regulations
- Professional standards
- External review from third party
What are examples of safeguards within the work environment?
- Hot file reviews (unlisted company) & expanded quality control review (listed company)
- Reassess the composition of the audit team
- Inform those charged with governance (Audit committee if listed company)
- Inform ethics partner
- Ensures informed management exists (where they make the decisions as competent)
- Partner rotation (if listed 5 years on 5 years off)
- Resign if no safeguards available
What is covered in FRC Ethical Standards Part A (Overarching Principles and Supporting Ethical Provisions)?
The fundamental concept of integrity, objectivity and independence.
Integrity - Being trustworthy, straightforward honest and fair behaving in a way that would uphold public trust in the profession.
Objectivity - Is a state of mind, being uncontaminated, acting impartially without discrimination or bias.
Independence - Is how we appear to others: Freedom from situations and relationship which make it probable that a reasonable and informed third party would conclude that objectivity either is impaired or could be?
How many sections under Part B FRC Ethical Standards?
6 -
1. Integrity, objectivity and independence
2. Financial, business, employments and personal relationships
3. Long association with the audit engagement
4. Fees, remuneration and evaluation policies, litigation, gifts and hospitality
5. Non-audit services provided to audit entities
6. Provision available for small entities
FRC Ethical Standards Part B Section 1
Section 1 deals with policies and procedures in place to help comply with standards.
- The control environment - firm wide
Firm should:
Create ethical principles
Monitor compliance and training
Have reporting systems in place - The engagement team - job specific
Sets out requirements to report if:
Family and other relationships
Financial interests in the entity
Decisions to join an audited
entity
FRC Ethical Standards Part B Section 2 - Financial, business, employments and personal relationships
Financial Interests:
- The following parties are not allowed
to own a direct financial interest in an
audited entity; audit firm, audit
partner, member of audit team,
immediate family.
- They should not enter into any loan or
guarantee engagement
Close business relationships:
- There should be no close business
relationships
- Unless purchase of goods on an arms-
length basis, not material and in
ordinary course of business
Employment with assurance client ( audit firm to client ):
- If a partner leaves and becomes a key
management position at your clients
company you must resign and not re-
accept for 2 years
Employment from assurance client to firm:
- If the employee had significant
influence over the subject matter for 2
years they should not be assigned to
the clients audit
Family and personal relationships:
- If an immediate family member has
significant influence over the subject
matter the individual should be
removed from the audit team
FRC Ethical Standards Part B Section 3 - Long Association with Audit Engagement
Listed entities:
The following rules exist for the partner:
- Five years - engagement partner for
listed party cannot be for a further 5
years ( 5 years on 5 years off)
- Can be extended by 2 years if
necessary to safeguard (significant
change)
Seven years - engagement quality reviewer must rotate, key partners involved in audit cannot be q quality reviewer for a further 5 years.
Non-listed entities:
Regular rotation isn’t mandatory.
After 10 years firm must consider if ‘ a reasonable and informed 3rd party would question objectivity.
FRC Ethical Standards Part B Section 4 - Fees, remuneration and evaluation policies, litigation, gifts and hospitality
Percentage or contingent fees:
An audit cannot be undertaken on a contingent fee basis (pre-determined basis must be used)
High percentage of fees:
Listed; if exceed 10% of total income must
reduce or cease to act.
if exceed 5% of total income
safeguards must be put in place
Unlisted; if exceed 15% total income must
reduce reliance or cease to act.
if exceed 10% safeguards must be
put in place
If non-services are permitted, they are limited to no more than 70% of the audit fee.
Lowballing:
Where the fee is quoted significantly lower, the engagement partner must be satisfied that; appropriate staff and time, all applicable assurance standards complied with.
Gifts and Hospitality:
Unless the value is clearly insignificant they should not accept them.
Evaluation Policies:
- There should be policy’s on extent to which gifts are acceptable
- Audit staff must not be assessed on performance relating to pay
- For listed companies a hot file review must be undertaken.
FRC Ethical Standards Part B Section 5 - Non-audit services provided to audit entities (PLCs)
Audit related services:
Other assurance engagements are permitted as they too require the auditor to be objective.
Internal audit: Prohibited
Valuation: Prohibited
IT: Should not undertake work on IT systems
Tax: Must not prepare, calculate or provide tax advice
Transaction related: Prohibited
Restructuring: Limitations on advice
Recruitment and remuneration advice: Prohibited if means taking on responsibility for the appointment.
Accounting and Payroll: Prohibited
FRC Ethical Standards Part B Section 5 - Non-audit services provided to audit entities (Non-listed)
Audit related services:
Other assurance engagements are permitted as they too require the auditor to be objective.
Internal audit: Prohibited
Valuation: Prohibited
IT: Should not undertake work on IT systems
Tax: Must not undertake tax services that would result in advocating for the client
Transaction related: Subject to consideration of management role
Restructuring: Subject to consideration of management role
Recruitment and remuneration advice: Prohibited if means taking on responsibility for the appointment.
Accounting and Payroll: Only permitted so far as management role not adopted.
FRC Ethical Standards Part B Section 6 - Provision available for small entities
Section 6 applies where the client qualifies as a small company under the Companies Act and covers 3 issues.
Fee dependence: Exempts the firm from the requirement in section for (percentage of total income)
Non-audit services: The restrictions are waived but there must be informed management, extend its cycle of cold reviews and departure needs to be mentioned in auditor’s report.
Partners joining audit clients: The provision is waived provided that there is no threat to the audit team’s integrity, objectivity and independence. Disclosure has to be made in auditor’s report.
