Chapter 4 - Ethics and acceptance Flashcards
The ACCA code of ethics and conducts provides what?
guidance to members on the ethical behaviour expected of them
What is independence?
freedom from situations and relationships where objectivity would be perceived to be impaired by a reasonable and informed third party
What are the two main approaches to ethical guidance?
- Principles based
- Rules based
What is a principles based approached?
use fundamental principles to guide behaviour at all times, even when there are no rules
What is a rules based approach?
Easier to follow, needs updated more frequently, virtually impossible to deal with every situation. Rules set out for people to folow.
A conceptual framework relies on what approach?
a principles based approach
What are the five fundamental ethical principles?
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
What is integrity?
- straightforward and honest in all relationships
What is objectivity?
members must exercise professional or business judgement without being compromised by bias, conflicts of interest etc
What is professional competence and due care?
Members must attain and maintain professional knowledge and skills at the level required
What is confidentiality?
information on clients must not be disclosed without appropriate authority
What is professional behaviour?
members must comply with relevant laws and regulations, behave in a manner consistent with the profession’s responsibility
What are the different threats that could occur?
- self interest
- familiarity
- self-review
- advocacy
- intimidation
What is self interest and give examples?
Putting your own interest ahead of what is right e.g., gifts and hospitality
What is self review and give examples?
Unlikely to find, or admit, to errors in our own work e.g., accounts prep, internal audit
What is advocacy and give examples?
Acting for or against a position rather than being impartial e.g., representing the client (meant to be independent)
What is familiarity and give examples?
allowing personal or business relationships to influence your judgement e.g., personal relationships, long association
What is intimidation and give examples?
allowing physical or other pressure to influence your actions e.g., fee dependency, personal relationships
What is a safeguard?
an action or measure that eliminates a threat, or reduces it to an acceptable level.
Disclosure of confidential information should only be made if what?
- permitted by law
- required by law
- professional duty or right
A conflict of interest arises when?
when the same audit firm is appointed for two companies that interact with each other e.g.,
- companies that compete in the same market
- trade with each otehr
- in legal dispute with each other
Where a conflict of interest does arise what must the firm do?
- notify all affected clients of the conflict and obtain their consent to act
- implement safeguards to manage the threat
What safeguards should be implemented when a conflict of interest arises?
- separate engagement teams
- procedures to prevent access to information
- signed confidentiality agreements by the engagement team members
- regular review of the application of safeguards by an independent partner
What matters should be considered before accepting a new engagement or client?
- professional clearance
- preconditions for an audit
- reputation of the client
- professional competence
- fees
- risks
- resources
- money laundering
- management integrity
- Independence and objectivity
What is professional clearance an example of?
mutual respect
What is the process for obtaining professional clearance?
- ask permission to contact outgoing auditor
- Assess client’s response (if no then decline)
- Outgoing auditor seeks permission to respond (from client)
- Assess outgoing auditor’s response (if permission on 3 not granted decline)
Auditor’s should only accept a new audit engagement, or continue an existing audit engagement if what is present?
The ‘preconditions for an audit’ required by ISA 210 Agreeing Terms of Audit Engagements
What does ISA 210 require the auditor to do?
- is the financial reporting framework that the client intends to use acceptable? e.g., IFRS acceptable
- Have the directors acknowledged their responsibilities?
What are the directors responsibilities?
- prepare the FS in accordance with an acceptable financial reporting framework
- have suitable internal controls necessary to prepare the FS
- they will provide the auditor with all the information and explanations required for the audit
An engagement letter specifies what?
the nature of the contract between the audit firm and client
What is the purpose of an engagement letter?
- minimise the risk of misunderstandings
- confirm the acceptance of the engagement
- set out the terms and conditions
What are the main contents (must) of an engagement letter?
- objective and scope
- responsibilities
- financial reporting framework
- form and content of repots
What are the additional contents of an engagement letter?
- basis of fees
- reference to professional standards
- need for a written representation letter
- limitations of an audit
Give some reasons to give a new engagement letter?
- changes to statutory duties due to new legislation
- changes to professional duties, e.g., due to new or updated auditing standards
- changes to other services as requested by the client
What are some reasons to update and engagement letter?
- new board members at the client’s company
- new standards that need to be complied with
- the need to remind the client of their responsibilities
