Chapter 5 - Professional Ethics

Question 1

3 main elements of professional ethics?

Answer 1

ICAEW code

FRC ethical standard

fundamental principles

Question 2

what characteristic does financial information need to have?

Answer 2

reliability

as it will be relied upon by stakeholders (e.g., shareholders, trading partners, investors, management etc)

Question 3

sources of ethical guidance for assurance?

Answer 3

IFAC/IESBA code

ICAEW code

FRC Ethical standard

Question 4

IFAC / IESBA ?

Answer 4

IFAC = international federation of accountants - they issue the code of ethics through the IESBA

IESBA = international ethics standards board for accountants

Question 4

ICAEW code ?

Answer 4

uses the IESBA for specific circumstances that accountants may face when serving the public interest

Question 5

FRC ethical standard ?

Answer 5

designed to provide engagement specific guidance for audit/assurance work

Question 6

which fundamental ethical principles are set out in the IESBA code?

Answer 6

integrity

objectivity

confidentiality

professional competence & due care

professional behaviour

Question 7

what are the 5 general threats to objectivity set out in the IESBA code of ethics?

Answer 7

self-interest

self review

advocacy

familiarity

intimidation

Question 8

what is the one threat in addition to the IESBA general threats to objectivity & independence identified in the FRC ethical standard?

Answer 8

management

Question 9

is professional scepticism required when considering climate-related disclosure?

Answer 9

yes

trustworthiness of the information needs to be considered

Question 10

greenwashing ?

Answer 10

a public relations ploy used to make the business/product/service seem environmentally friendly - without proof

Question 11

is it common for businesses to portray themselves as environmentally friendly or green when they’re not?

Answer 11

yes, it is common

the FCA (financial conduct authority) launched a UK initiative to limit the overuse of terms such as ‘green’, ‘sustainable’ and ‘ESG’

Question 12

must disclosures by businesses be transparent and open?

Answer 12

yes

this is to align with ethical principles integrity and objectivity in all communication with stakeholders

Question 13

‘covered persons’ ?

Answer 13

includes partners and staff involved in an engagement

can also be another person used by the audit team (e.g., expert), anyone in the firm supervising the engagement partners or any person who can influence the audit’s outcome

Question 14

PIEs?

Answer 14

public interest entities

PIE = an issuer whose transferable securities are admitted to trading on a UK regulated market

= a credit institution

= or a person who would be in insurance undertaking

Question 15

why are PIEs subject to stricter rules?

Answer 15

because they’re considered important entities to the public interest

Question 16

what does the FRC ethical standard apply to?

Answer 16

audit engagements and other public interest assurance engagements

Question 17

‘third party test’?

Answer 17

when considering whether ethical standard requirements have been met, evaluation must be done by an objective third party

e.g., an informed investor/public interest stakeholder’s perspective

Question 18

is there permitted services list for PIEs?

Answer 18

yes, only those listed services can be provided to the client

Question 19

examples of prohibited non-audit services for PIE audit clients

Answer 19

almost all non-audit services are banned from being provided; e.g.,

tax services

legal services

payroll services

bookkeeping/preparing financial statements

valuation services

Question 20

can an auditor conduct internal audit services for a client?

Answer 20

no

nor can they provide services relating to the design, provision or implementation of systems that:
- form a significant element of the accounting systems
- or involve taking on a management role

Question 21

if an auditor provides services to a client, which threats should be considered?

Answer 21

self review threat

management threat

Question 22

what is the safeguard to be implemented when self review/management threats arise?

Answer 22

self review = use separate teams or independent partner review

management threat = unlikely safeguards could reduce the threat

Question 23

threats involved when an auditor provides valuation services to a client?

Answer 23

self review threat (safeguard: use separate teams, independent partner review or don’t perform valuation services)

management threat (safeguard: keep management informed)

Question 24

threats involved when an auditor provides tax services to a client?

Answer 24

self review (safeguard: use separate teams, independent partner review or don’t give an tax advice at all)

management (safeguard: informed management)

self interest threat (safeguard: contingent fees aren’t allowed)

advocacy threat (safeguard: don’t act as an advocate in court if FS have a material issue)

Question 25

threats involved when an auditor provides legal services to a client?

Answer 25

self review

advocacy

safeguards: don’t provide legal support regarding material FS matters (self-review) or representing the client in a dispute (advocacy)

Question 26

can advice be provided on the recruitment of any director/employee?

Answer 26

no

Question 27

can an auditor provide accounting services for listed clients?

Answer 27

no

auditors should never take on a management role

Question 28

ICAEW code of ethics states that accountants have a duty of confidentiality meaning…

Answer 28

• they shouldn’t disclose client info unless there’s a right/duty to do so
• should take all reasonable steps to preserve confidentiality
• shouldn’t use confidential info for personal advantage

Question 29

two instances in which an auditor can disclose client information?

Answer 29

when there’s a:
- duty to disclose
- right to disclose

Question 30

examples of duty to disclose

Answer 30

• required by a regulator
• ordered by a court
• comply with professional standards

Question 31

examples of right to disclose

Answer 31

• client permission is granted
• public interest
• to defend the firm/provide evidence in legal proceedings

Question 32

what should the auditor do when conflict of interest arises?

Answer 32

notify both clients and seek consent

Question 33

safeguards if an auditor acts for two clients?

Answer 33

• use separate teams
• implement information barriers to prevent leakages
• confidentiality agreements (e.g., NDA’s)
• independent partner safeguard

Question 34

benefits & issues regarding social media in audit?

Answer 34

benefits: sharing experiences, creating engagement in debates, raising awareness/profiles

issues: confidentiality breachers, criticism, lack of integrity/pro behaviour, offensive posts

Question 35

what threat arises from an audit partner leading a client for too long

Answer 35

issue of long association

could lead to familiarity threat

engagement partner could become too trusting of the client and stop applying professional scepticism

Question 36

how often should audit partners be rotated?

Answer 36

unlisted company engagement partners should be rotated every 10 years

for listed companies, engagement partners mustn’t act for more than 5 years

if a partner has served for 4 or more years, they can continue for a maximum of 2 years once the company becomes listed