Chapter 7

Question 1

On whom the requirements of Code of Ethics aplies.

Answer 1

This section of Code of Ethics is applied on Chartered Accountants in practice (auditors/assurance providers):

1. If law prevents an auditor from complying on any provision of code, law shall prevail.
2. If auditor believe that in a specific case that complying code will not be in public interest, he should consult with professional or regulatory body.

Question 2

What shall a CA do when he face a conflict b/w one fundamental principle with another one.

Answer 2

1. Accountant shall consult with others within the firm, TCWG, professional body or legal consel.
2. Accountant shall exercise his professional judgment to resolve this matter, if still matter cannot be resolved he shall withdraw from engagement.

Question 3

List down the fundamental principles of Code of Ethics.

Answer 3

1. Integrity.
2. Professional Competence and due care.
3. Confidentiality.
4. Objectivity.
5. Professional Behavior.

Question 4

List down the fundamental principles of Code of Ethics.

Answer 4

1. Integrity.
2. Professional Competence and due care.
3. Confidentiality.
4. Objectivity.
5. Professional Behavior.

Question 5

Define Integrity.

Answer 5

Integrity means that a CA should straightforward honest in all his business and professional dealings.

1. A CA shall not associate himself to any report or communication which in his knowledge omits any necessary information or may e false or misleading.
2. If CA become aware after being associated, he shall immediately disassociate himself from this information.

Question 6

Define Objectivity.

Answer 6

Objectivity means not to compromise professional judgment because of undue influence of others, bias or conflict of interest.
A CA shall not perform a service if a relationship or circumstance may unduly influence his judgment.

Question 7

Define Confidentiality Principle.

Answer 7

A CA shall ensure the confidentiality of information acquired in the course of business or professional judgement.
He shall not disclose this information to any third party, shall not use it for his personal benefit or for benefit of any third part and ensure that persons working under hum also comply with confidentiality principle.
Confidentiality Principle applies:
1. To information acquired from ex-client or prospective client.
2. Within firm, and in social environment.

Question 8

Exceptions of Confidentiality Principle.

Answer 8

1. If disclosure is authorized by client.
2. If disclosure is required by law/court:
   i. Production of evidence in legal proceedings.
   ii. Disclosure to public authorities for non-compliance with laws or regulations.
3. When there is a professional right or duty to disclose:
   i. To comply with Quality Control Review Program of ICAP.
   ii. To respond to an inquiry by professional/regulatory body.
   iii. To comply with requirements of standards or ethics.
   iv. To protect the professional interest of a CA in legal proceedings.

Question 9

What factors shall be considered before disclosing confidential information.

Answer 9

1. Whether the interest of any party could be harmed if client agree to make disclosure.
2. Whether all relevant information is known and substantiated.
3. Proposed type of communication.
4. Who are addressees and whether they are appropriate recipients.

Question 10

Define Professional Behavior.

Answer 10

A CA should:

1. comply with relevant laws or regulations.
2. avoid actions that may discredit his profession .

Question 11

Define Professional Competence and due care.

Answer 11

A CA should:

1. attain and maintain professional knowledge and skills at required level to ensure that clients receive quality service based on current laws or regulations.
2. act diligently in accordance with laws or regulations.

Question 12

What threat a CA may face in complying with Fundamental principles.

Answer 12

1. Self-interest Threat:
   Threat that the judgment of an assurance team member may be influenced because of financial interest held by that team members in audit client.
2. Familiarity Threat:
   Threat that assurance team member will be too sympathetic to interest of client or too accepting of their work because of long or close relationship.
3. Self-review Threat:
   Threat that an assurance team members will not appropriately evaluate work earlier performed by himself or by his firm in a separate non-assurance engagement.
4. Advocacy Threat:
   Threat that an assurance team member will promote client position on a matter to third parties and compromises his objectivity.
5. Intimidation Threat:
   Threat that an assurance team members will be deterred from acting objectively because of threats, undue influence or pressure.

Question 13

How a threat can be addressed .

Answer 13

1. Apply safeguard to reduce the threat to acceptable level.
2. Eliminate the circumstances that are creating threat.
3. Decline the engagement.

Question 14

What Threat an auditor shall face when Fee less than predecessor auditor is offered and how these threats can be reduced.

Answer 14

A CA shall not quote/offer a fee lower than previous auditor, unless scope and quantum of work requires, because this is undercutting. This result in a Self-interest Threat.

Factors in evaluating threat:

1. Whether client is aware of terms of engagement.
2. Whether fee is set by independent third party.

Safeguards:

1. Adjust level or scope of Engagement.
2. Appoint appropriate reviewer who did not take part in engagement to review the work done.

Question 15

What Threat an auditor shall face in case of overdue fee and how these threats can be reduced.

Answer 15

In case of initial audit, predecessor auditor fee should be paid before acceptance of engagement.
Self-interest threat is created when significant part of fee is not paid before issuing next year auditor’s report.

Safeguards:

1. Obtain partial payment of overdue fee.
2. Appoint appropriate reviewer who did not take part in engagement to review the work done.

Question 16

What Threat an auditor shall face in case of contingent fee and how these threats can be reduced.

Answer 16

A contingent fee means a fee based on outcomes (profit, type of opinion, success of case, or saving in tax). A fee is not contingent of established by court or public authority.
Contingent fee creates self-interest threat.
There are no safeguards to reduce this threat.
Contingent fee is not allowed for both assurance or non-assurance engagement.

Question 17

What Threat an auditor shall face in case of referral fee or commission and how these threats can be reduced.

Answer 17

A self interest threat is created if auditor pays or receive a referral fee or commission.

Course of Action:

1. Disclosing arrangement to client.
2. Obtaining advance agreement from client.

Question 18

What Threat an auditor shall face in case of Compensation and Evaluation policies and how these threats can be reduced.

Answer 18

A self interest threat is created if an audit team member is evaluated/compensated on basis of selling non-assurance services to client.

Course of Action:

1. Revise compensation plan.
2. Remove individual from audit team.

Question 19

What Threat an auditor shall face in case of providing inducement and how these threats can be reduced.

Answer 19

Examples of Inducements:

1. Gifts.
2. Hospitality.
3. Entertainment.
4. Political or charitable donations.
5. Appeals to friendship and loyalty.
6. Preferential treatment, rights or privileges.

Self-Interest threat, Familiarity Threat and Intimidation Threat.

Safeguards:

1. Offer of significant inducement shall not be accepted.
2. Offer should be disclosed to senior MGT of firm and should be documented.
3. If a member has accepted an inducement:
   i. Inducement should be returned or its cost should be reimbursed,
   ii. Individual should be removed from engagement team and review of his work should be done.

Question 20

What Threat an auditor shall face in case of actual or threatened litigations and how these threats can be reduced.

Answer 20

Self interest threat or Intimidation Threat.

Factors for evaluation:

1. Materiality of litigation.
2. Whether litigation relates to a prior audit engagement.

Safeguards:

1. Remove the individual from team, or refuse to accept the engagement(if firm is involved).
2. Appoint appropriate reviewer who did not take part in engagement to review the work done.

Question 21

What Threat an auditor shall face in case of financial interest and how these threats can be reduced.

Answer 21

Holding a financial interest by a team member or his relative in audit client creates a self-interest threat.

Factors in Evaluation:

1. Role of individual holding the financial interest.
2. Nature of relationship (if held by relative)
3. Materiality of financial interest.

Safeguards:

1. Member should notify firm about financial interest.
2. Member should dispose off interest.
3. Remove the relevant team member from team.
4. Appoint appropriate reviewer who did not take part in engagement to review the work done.

Question 22

What Threat an auditor shall face in case of Loan or Guarantee and how these threats can be reduced.

Answer 22

Loans or guarantee with audit client creates self-interest threat.

Loan or Guarantee to Audit Client:
Loan can be given only if it is immaterial for both firm/member and client.

Loan or Guarantee from Audit Client:
1. If audit client is a bank or similar institution:
_ Loan shall be accepted only if under normal lending procedures and terms and conditions.
_ If loan is material, appropriate reviewer should be appointed to review the work done.
2. If audit client is not a bank or similar institution:
_ Loan can be accepted only if it is immaterial for both firm/member and client.
_ If loan is material, lean should be repaid or relevant member should be removed or firm should withdraw.

Question 23

What Threat an auditor shall face in case of Family or Personal Relationships and how these threats can be reduced.

Answer 23

Self Interest Threat, Familiarity Threat or Intimidation Threat.

Factors in Evaluating Threat:

1. Nature of relationship b/w individual.
2. Position of individual at client.
3. Role of audit team member.

Safeguards:

1. Restructure the responsibilities so that team members does not deal with matters that are under responsibility of his relative.
2. Engage an appropriate reviewer to review the work of that team member.
3. Remove that team member from engagement team.

Question 24

What Threat an auditor shall face in case of Business Relationship and how these threats can be reduced.

Answer 24

Examples:

1. A team member runs a partnership or joint venture with client.
2. Client obtains goods/other services from a team member.

Self interest threat or Intimidation Threat.

Safeguards:
1. If business relationship is insignificant, no action is required.
2. If business relationship is significant:
_ it should be reduced to insignificant level.
_ individual should be removed from team or firm should withdraw.

Question 25

What Threat an auditor shall face in case of Purchase of good and services from audit client and how these threats can be reduced.

Answer 25

Self-interest threat is created.

Factors in evaluating threat:

1. Whether transaction is in normal course of business and at arm’s length basis.
2. Whether proper tendering process was followed.
3. Whether undue favors are accepted.
4. Magnitude of transaction.

Safeguards:
1. If threat is significant:
_ eliminate or reduce the number of transactions.
_ remove the individual from team.

Question 26

What Threat an auditor shall face in case of recent service with audit client and how these threats can be reduced.

Answer 26

Self-interest threat, Familiarity Threat, Self-review Threat.

Factors in evaluating threat:

1. Position of individual at client
2. Role of individual as an audit team member.
3. Length of the time since the individual left the client.

Safeguards:
1. If individual served during the period covered by report:
_ Individual shall not form part of team.
2. If individual served prior to period covered by report:
_ Remove individual.
_ Restructure responsibilities.
_ Engage an appropriate reviewer to review the work performed.

Question 27

What Threat an auditor shall face in case of serving simultaneously as an officer to audit client and how these threats can be reduced.

Answer 27

Self-interest threat, Self-review threat is created if a team member is serving as an employee or partner at audit client.

Serving as an officer or director to audit client is not allowed.

Question 28

What Threat an auditor shall face in case of Employment with audit client and how these threats can be reduced.

Answer 28

If a former member of firm join client as director, officer. It creates a self-interest threat, intimidation threat, or familiarity threat

Factors in evaluating threat:

1. Current position in client.
2. Former position in firm.
3. The length of time passed.
4. Level of involvement individual will have with firm.

Safeguards:

1. no significant connection should remain b/w firm and individual.
2. Modify the audit plan.
3. Assign individual to team ho ha sufficient experience.
4. Conducting an additional review of the work of individual ho joined the client.

Question 29

What Threat an auditor shall face in case of entering employment negotiations with client and how these threats can be reduced.

Answer 29

If a team member is planning to join audit client, this create self-interest threat.

Safeguards:

1. member should notify firm, about his willingness
2. Remove concerned member from audit team.
3. Appoint appropriate reviewer who did not take part in engagement to review the work done.

Question 30

What Threat an auditor shall face in case of Temporarily Personal Assignment and how these threats can be reduced.

Answer 30

self-interest threat, advocacy threat and familiarity threat is created.

Safeguards:
Firm will not loan personnel to audit client unless:
1. Such assistance iis only for a short oeriod of time.
2. client will be responsible for directions and supervision activities.
3. personnel does not take part in mgt responsibility.

If personnel is lent to audit client, following safeguards must be applied:

1. Firm should not include loaned personnel in team.
2. If loaned staff is included in assurance team, restructure responsibilities.
3. Conducting an additional review of the work perforned by loanded personnel.

Question 31

What Threat an auditor shall face in case of Long Association of personnel and how these threats can be reduced.

Answer 31

If an individual is involved in an audit engagement over a long period of time more than 3 years, Familiarity threat and self-interest threat is created.
Factors in evaluating threat:
1. Length of time.
2. Role of individual 
3. Closeness of individual with mgt.

Safeguards:

1. Rotate the individual and determine the time for which it will not become part of team
2. Restructure responsibilities of the individual on audit team.
3. Appoint appropriate reviewer who did not take part in audit team to perform.review of the work done by individual
4. Independent QCR of engagement.

Question 32

What Threat an auditor shall face in case of Accountancy and bookkeeping service and how these threats can be reduced.

Answer 32

Threats:

1. Providing accounting and bookkeeping service to an audit client creates a self-review threat.
2. No threat is created if there is normal discussion b/w the firm and team.

Safeguards:
If client is a listed company:
_ Accounting and bookkeeping service cannot be provided to client.
If client is a unlisted company:
_ accounting and bookkeeping service of only routine and mechanical nature can be provided.

Other safeguards:

1. Firm should use professionals who are not audit team members to perform.the service.
2. Appoint appropriate reviewer who didn’t take part in engagement to review the work done.

Question 33

Examples of mechanical accounting and bookkeeping services.

Answer 33

1. Recording transactions approved by client.
2. Posting transactions to ledger and trial balance.
3. Preparing F/S based on trial balance and information from client approved records.

Question 34

What Threat an auditor shall face in case of Tax Services and how these threats can be reduced.

Answer 34

Tax return preparation services:
This service doesn’t create any threat.

Tax calculation services for purpose of journal enteries:
Self-review threat is created.

Factors in evaluating threat:

1. Materiality.
2. Nature of client

Safeguards:
1. Not allowed to listed clients if material.
2 For other case: 
  _ Separate team.
  _ Independent review.

Assistance in resolution of tax dispute:
Self-review threat and advocacy threat.

Safeguards:
1. Not allowed to listed clients if material.
2 For other case: 
  _ Separate team.
  _ Independent review.