Chapter 4

Question 1

What are the IESBA code of ethics Fundamental principles?

Answer 1

Integrity - honest and straightforward in business and professional relationships.
Objectivity - don’t compromise prof or business judgements because of bias, conflict of interes or undue influence of others
Prof competence and due care - maintain a high prof knowledge to ensure they receive prof service and act dilligently and in accordance with all standards.
Confidentiality - respect confidentiality of information acquired as a result of prof and business relationships.
Prof behaviour - to comply with relevant laws and regs and avoid any conduct that the prof accountant knows or should know should discredit the profession.

Question 2

What must a firm fo as a result of threats to a firms integrity, objectivity and independence?

Answer 2

implement safeguards to protect the firm from these threats

Question 3

As per the FRC’s threats to objectivity and independence?

Answer 3

1. Self interest threat - may not want to lose client for e.g.
2. self-review threat - i.e. difficult to keep judgement if reviewing its own work at a later date
3. Management threat - where the audit firm has to make judgements or decision which are the responsibility of management.
4. Advocacy threat - When auditor takes stances and argues on behalf of the client, when in fact they are supposed to take a balanced approach and remain neutral.
5. Familiarity threat - When get to know the client too well and objectivity is compromised as prof scepticism is imparied.
6. Intimidation threat - bullying/dominant behaviour who insists on getting his (or her) own way. Threatening the auditor with removal if modified report is published for e.g.

Question 4

Detail FRC procedures that can be used to safeguard against threats

Answer 4

1. segregation of duties between those engaged in audits and those on non-audit services
2. rotation of engagement partner and staff
3. consulting of ethics partner
4. regular completion of ‘fit and proper’ and independence declarations by partners and staff
5. staff training, development and performance appraisal
6. Monitoring and evidencing the firm’s own systems

Question 5

What is the third party test and when should it be used?

Answer 5

This is a test used to ensure that the ethical outcomes required from an audit have been met from the perspective of an “objective, reasonable and informed third party.

Question 6

What is the rules regarding ethics partners? Why are they used?

Answer 6

All firms except those that are small should appoint an ethics partner for an audit.

They are available for ethical matters and other matters of judgement that arise. They should be consulted when judgements about whether the safeguards are in place in the firm and if they are sufficient to counter potential threats.

Question 7

What communication responsibility does the audit partner have towards those charged with governance?

Answer 7

has to ensure that those charged with governance of the audited entity are appropriately informed on a timely basis and of all significant facts and matters that bear on the auditor’s objectivity and independence.

Question 8

What would you do if a member of staff moved to an audited entity?

Answer 8

You need to disclose the process.

Question 9

What would you do if you are tempted to go in to a business ventrure with an audited entiy? Or tempted to take financial interest in one?

Answer 9

Don’t

Question 10

What would you do if a former director/employee of an audited co who was in a position to exert signif influence over the preparation on the FS joins the audit firm?

Answer 10

They should not be assigned to a position where he can influence the conduct/outcome of the audit (eg, the audit opinion) or its affiliates for two years following leaving the audit client.

Question 11

what are the rules regarding financial interests in the audited entity?

Answer 11

there are relaxed rules when interest is indirect and immaterial.. but generally it should be completely prohibited.

Question 12

If you have a client that is looking for computer equipment and another client that is a computer equipment, can you recommend them to each other? Explain.

Answer 12

No this causes advocacy threat as the accountant is promoting the client. this can affect your objectivity.

remember if there is a financial incentive offered then its a threat as you are making decisions for economic benefit.

Question 13

What happens if an engagment partner or any other partner involved in the audit leaves and joing the client in a key position (e.g. director)

Answer 13

The firm should resign as the auditor of the client for at least 2 years, and the partner or other relevant person should be moved off of the audit as soon as the intention is made available to the audit firm.

Question 14

What if a family member is part of the audit client?

Answer 14

Consider whether the family member is in a signifact position and whether independence can be compromised. Also consider whether or not there is any financial interests as a result

Question 15

What is the length of time that an engagment partner can be involved in a single audit client?

Answer 15

Where an engagement partner has been in place for 10 years, the ‘third party test’ should be applied to ensure that the objectivity and independence of the engagement partner has not been impaired.

Question 16

What does Article 17 of the EU Audit Regulations state for public listed entities on the length of time an engagement partner, and other senior staff are in placE?

Answer 16

They state that the engagement partner should not be in place for more than 5 years, and after this 5 years they should not be able to take up the position again for a further 5 years.

For other senior staff, they should not be involved for more than 7 years.

Question 17

When can the engagement partner of a public listed entity stay as the audit partner more than 5 years?

Answer 17

They can stay for an extra 2 years when if the clients audit committee consider it is necessary to safeguard the quality of the audit. e.g. if client director leaves.

in this circumstance the reasons why must be disclosed and there must be adequate safeguards in place to minimise the threats.

Question 18

What if the audit client refuses to make disclosure that the engagement partner is staying on for 2 years past the 5 years?

Answer 18

The engagement partner should not continue his role.

Question 19

What are contingent fees and what are the rules surrounding these in audit?

Answer 19

Contingent fees are fees where the amount is dependent on an event taking place, or a condition being met.

Contingency fees for audit work are banned.

Question 20

What is the rule for audit fees for listed and non-listed clients?

Answer 20

The audit fee should not exceed 10% of the firms fee income for listed clients.

The audit fee should not exceed 15% of the firms fee income for non-listed clients.

Question 21

what is the rule for non-audit fees from listed clients?

Answer 21

Shouldn’t exceed 70% of the average fees paid by the client and any group company in the last three consecutive financial years.

Question 22

What is the rule with audit staff wages?

Answer 22

Audit staff should not have performance related pay

Question 23

What should you do if there is litigation between the audit firm and the client?

Answer 23

The audit firm should resign as audit entity.

Question 24

what should you do if the fees exceed the threshold?

Answer 24

Should disclose this to the firms ethics partner and those charged with governance.

Question 25

How should an audit firm approach gifts and hospitality, and overdue fees outstanding?

Answer 25

They should apply the third party test.

Question 26

What are some of the non-audited services that are prohibited from being provided to public interest entities?

Answer 26

1. Tax services
2. decision making services
3. accounting/book keeping/payrolll
4. designing/implementing internal controls
5. valuation services.
6. investment strategies.
7. HR
8. underwriting shares
9. Internal audit
10. legal work

Question 27

Why should an audit firm not conduct an internal audit on behalf of an audit client?

Answer 27

Self review and management threat.

As it is responsible for the external audit… and the external audit is based on significant reliance on its internal audit, therefore resulting in the above threats.

Question 28

Examples of when management threat is high?

Answer 28

When the audit firm makes decisions relating to the following:

1. The scope and nature of internal audit services provided to the entity.
2. Designing or making changes to internal controls
3. Taking responsibility for risk management
4. Evaluating cost effectiveness of activities, systems and controls
5. Pre-implementation work on non-financial systems.

Question 29

Can the audit firm undertake work on IT systems?

Answer 29

The audit firm should not undertake work on IT systems that is seen as an important part of the accounting system, on which the auditors would place significant reliance. This would result in self-review threat and hence threat to independence and objectivity.

Question 30

What are the rules on whether the audit firm can provide tax services?

Answer 30

They cannot provide if it involves acting as an advocate for the firm in the resolution of an entity, where the outcome of the work is dependent on the a future or contemporary audit judgement.

Question 31

Can an audit client provide tax calculations (current or deferred) for listed entities?

Answer 31

No

Question 32

What are restructuring services and what is the rule for providing restructuring services?

Answer 32

These are non-audit services provided to an audited entity in connection with a planned change in its equity or debt financing structure, its corporate structure or its opening structure.

An audit firm cannot provide audit services where it would:

• involve taking on a management role
• require the firm to act as advocate for the audited entity
• give rise to a self-review threat

Question 33

What should you do if the fees exceed the threshold for non-listed entities?

Answer 33

There should be a hot review. This is when a review takes place BEFORE the auditor forms the audit opinion. (cold review is the opposite)

*n.b. a hot review will be undertaken for listed companies anyway.

Question 34

What can a small firm if the fee regularly exceeds the 10% fee threshold (for listed companies) but doesnt regularly exceed the 15% threshold

Answer 34

Small firms are exempt from the external independent quality control review. This should be disclosed to the ethics partner and to those charged with governance of the audited entity.

Question 35

What is the rule for the provision of non-audit services for small firms?

Answer 35

For small entities the rules on provision of non-audit services are waived. However, must be ensured that:

1. there needs to be informed management
2. the audit firm needs to extend the cycle of cold reviews
3. the departure needs to be mentioned in auditors report.

Question 36

What is the rules on partners joining the audit firm for partners?

Answer 36

The provisions are waived for small companies, provided that there is no threat to the audit teams integrity, objectivity and independence is made in the auditors report.

Question 37

What is informed management? How is it defined?

Answer 37

Informed management is a crucial safeguard where there is a conflict of interest posed by the provision of non audit services.

Informed management is when:

• objective and transparent analyses is provided for the client
• The client must have the genuine opportunity to decide between alternative courses of action
• There should be a member of management designated to receive the results of non-audit services and make necessary judgements and decisions
• there should be a member of managment designated to receive the results of non-audit services and make necessary judgements and decisions.
• That member must have the capability to make independent judgements and decisions based on the basis of the information provided.

Question 38

What are the situations in which you should try and detect threats?

Answer 38

1. On appointment and reappointment as auditor
2. When planning the engagement
3. When forming the opinion.
4. When considering appointment or reappointment for non-audit services.
5. When potential threats are reported.

Question 39

What are the rules for accountants around confidentiality?

Answer 39

Information that comes to light as a result of an audit should remain confidential and should not be disclosed.

Question 40

What are the situation in which an accountant can disclose information?

Answer 40

1. Where permitted by law, and authorised by client/employer
2. Where required by the law. e.g. Money laundering
3. There is a professional duty or right to disclose when not prohibited by law. i.e. can disclose if can be justified to be in public interest

Question 41

Where is there a difficulty for auditors when it comes to confidentiality?

Answer 41

When there is a judgment to be made on whether the public interest overrides the duty of confidentiality.

Question 42

What if an accountant needs to disclose information in order to defend oneself?

Answer 42

This is allowed.

Question 43

What should an accountant do when they suspect actual frauds or instances of non-compliance?

Answer 43

1. report to management
2. report to those charged with governance
3. go to regulatory and enforcement authorities.

If you think that management are involved you should report to those charged with governance first and then to the reg authorities if worse. Remember you cannot be seen to be tipping off.

Question 44

What should an accountant do if approached by an informant, with information about alleged illegal or improper acts on the part of employees or management of the business for which the informant works?

Answer 44

• advise the informant to pass on the information to employer in respect of the co procedures
• protect the identity of the informant to the extent it is possible
• take care in the way that this information is used

Question 45

How should you deal with engagements where there is a conflict of interest?

Answer 45

If no conflict of interest firms can accept assignment. If conflict of interest and capable of being mitigated firms must take note of the relevant safeguards in place to mitigate the conflict of interest!

Question 46

What must you consider if there may be a conflict of interest?

Answer 46

Can it be managed? If so then make sure there is sufficient disclosure to the clients with the safeguards implemented to ensure that the conflict is managed.

Question 47

Safeguards that can be used to mitigate self-interest threat?

Answer 47

• Disclosure of the circumstances of the conflict.
• Obtaining the informed consent of the clients to act
• The use of confidentiality agreements signed by employees
• Establishing information barriers (e.g. physical separation, no overlap in teams etc)
• Regular review of the application of safeguards by a senior individual not involved with the relevant client engagments
• Ceasing to act.

Question 48

You consider taking files home to finish working at home while in the middle of the audit. What must you consider for before doing so?

Answer 48

You need client permission to remove files from the office.