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Audit & Assurance by Amir Raza > chapter 7: Compliance with ethical requirements > Flashcards

chapter 7: Compliance with ethical requirements Flashcards

1
Q

what are fundamental principles of ethics?

A
  1. integrity
  2. objectivity
  3. confidentiality
  4. professional competence and due care
  5. professional behaviour
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2
Q

what is integrity in fundamental principles of ethics?

A

integrity mean truthfulness and fair dealings. a charted accountant should be straightforward and honest in all professional and business relationships.

  1. a charted accountant should not be associated with any reports, returns, or other communication if he believes that these:
    a. omits necessary information.
    b. are false, misleading, or prepared.
    recklessly.
  2. if charted accountant become aware after being associated, he should take steps to dissociate himself from that information.
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3
Q

what is objectivity in fundamental principles of ethics?

A
  1. objectivity means not to compromise professional judgements because of:
     a. undue influence of others
  b. bias, or    
  . conflict of interest
  2. a charted accountant shall not perform a service if a relationship or circumstance may unduly influence his judgemnt.
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4
Q

what is confidentiality in fundamental principles of ethics?

A

a charted accountant shall ensure the confidentiality of information acquired the course of business or business relationship.

he shall:

  1. not disclose such information to any third party.
  2. not use such information for personal advantage.
  3. ensure that individuals working under him (or whom he has obtained advice/assistance) also ensure confidentiality of information.

confidentiality principle applies:
1. to information acquired from ex-clients and prospective clients.
2. within the firm, and in social environment (e.g., to a family member)

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5
Q

what are exceptions of confidentiality principle?

A

confidentiality information may be disclosed in following circumstances:

  1. if disclosure is authorised by clients.
  2. if disclosure is required by law/court e.g.,
    a. production of evidence in legal
    proceedings
    b. disclosure to public authorities.
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6
Q

what would be the factors to consider when disclosing confidential information??

A
  1. whether the interest of any part (including third parties) could be harmed if client agrees to make disclosure.
  2. whether all the relevant information is known and substantiated.
  3. purpose type of communication.
  4. who are addresses and whether they are appropriate recipients.
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7
Q

what is professional competence and due care in fundamental priciples of ethics?

A
  1. it requires:
         a. to attain and maintain professional. 
      knowledge and skill at the level required. 
      to ensure that clients receive quality. 
      service based on current laws and 
      standards.
      b. to act diligently i.e., carefully on timely. 
      basis and in accordance with 
      requirements of applicable are.
  2. uncomplying with the principle, a charted accountant:
    a. shall ensure appropriate training and
    supervision of staff working under him.
    b. shall make clients aware of inherent
    limitations of the service.
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8
Q

what is professional behaviour?

A

a charted accountant should:

  1. comply with relevant laws and regulations, and
  2. avoid actions that may discredit profession i.e., that may adversly effect good reputation of the profession.
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9
Q

what is conceptual framework approach applicable to charted accountants?

A

following is the concept framework approach of code of ethics:

  1. identify threats to compliance with fundamental principles.
  2. evaluate threats.
  3. apply safeguards to eliminate threats or reduce to acceptable level.
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10
Q

what are ctagories of threats?

A
  1. self-interest threats
  2. familiarity threats.
  3. self-review threats
  4. intimidation threat.
  5. advocacy threat.
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11
Q

what is self-interest threat?

A

threat that judgement or behaviour of an assurance team member will be inappropriately influenced because of financial interest held by team member (or his relative) in audit client.

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12
Q

what is familiarity threat?

A

threat that an assurance team member will be too sympathetic to the interest of client or too accepting work of clients because of long or close relationship with client.

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13
Q

what is self review threat?

A

threat that an assurance team will not appropriately evaluate work earlier performed by himself or by his firm in separate non assurance engagement.

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14
Q

what is intimidation threat?

A

threat that an assurance team member is deterred from acting objectively because of threats, undue influence or pressure.

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15
Q

what is advocacy threat?

A

threat that an assurance team member will promote client’s position on a matter (to third parties) and compromises his own objectivity.

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16
Q

what are relevant factors in evaluating level of threats?

A

charted accountant shall consider quantitative and qualitative factors in evaluating threat.
certain policies and procedures established by profession, and legislation can help to identify threats and evaluate threats.

examples of such procedures include:

  1. corporate governance requirements.
  2. educational trainings and experience requirements for the profession.
  3. effective complaints system which enable the charted accountant and the general public to draw attention to unethical behaviour.
  4. an explicitly stated duty to report breaches of ethics requirements.
  5. professional or regulatory monitoring and disciplinary procedures.
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17
Q

what is consideration of new information while evaluating threats?

A

if, during the engagement, charted accountant becomes aware of new information which has impact on threat, he shall re-evaluate the threat and shall address it accordingly.

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18
Q

what is procedure of addressing threats.

A

eliminate the circumstances(interest or relationships) that are creating the threats, or
2. apply the safeguards to reduce the threat to acceptable level, or
3. decline the engagement.

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19
Q

what are some general rules of applying the conceptual framework?

A
  1. this part applies to both audit and review engagement.
  2. firm has to be independent from audit client throughout engagement period.
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20
Q

what should an auditor do if his fee is less than predecessor auditor?

A

a charted accountant should not accept the fee less than previous auditor, unless scope and quantum of work is materially different from previous year, because he is under cutting.

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21
Q

what are the factors in evaluating threats (when lower fee is charged)?

A
  1. whether client is aware of terms of engagement.
  2. whether fee is set by independent third party.
22
Q

what are safeguards to evaluate threats of fee?

A
  1. adjust level of fee or scope of engagement.
  2. appoint appropriate reviewer who did not take part in the audit engagement to provide advice or review the work done.
23
Q

what would be overdue fee - initial audit?

A

in case of initial audit, predecessor auditors fee should be paid before acceptance of engagement.

24
Q

what is overdue fee- recurring audit?

A

self- interest threat is created if a significant part of fee is not paid before issuance of next year’s audit report.

25
Q

what are safeguards of overdue fee recurring audit?

A
  1. obtain full or partial payment of overdue fee.
  2. appoint an appropriate reviewer who did not take part in the audit engagement to provide advice or review the work done.
26
Q

what would be procedure if
if significant part remains unpaid for a long time?

A

if significant part remains unpaid for a long time
firm shall determine:
1. whether it is equivalent to loan to client.
2. whether it is appropriate to continue engagement, or to be re-appointed.

27
Q

what is contingent fee?

A

contingent fee means fee based on outcome e.g., profit, type of opinion, success of case, or saving in tax.

28
Q

when fee could not be regarded as contingent?

A

contingent fee creates self-interest threat if established by a court or other public authority.

29
Q

when contingent fee creates self-interest?

A

contingent fee creates self-interest threat. threat created is so significant that no safeguard can reduce the threat to acceptable level.

30
Q

when is contingent fee not allowed?

A
  1. for an assurance engagement.
  2. for a non-assurance engagement provided to audit client.
31
Q

what is threat to referral fee or commission?

A

a self-interest threat to compliance with the principal objectivity and professional competence and due care is created if a charted accountant pays or receives a referral fee or receive commission relating to client.

32
Q

what would be the course of action for referral fee or commission?

A
  1. disclosing the arrangement to the client.
  2. obtaining advance agreement from client.
33
Q

what are threats to compensation and evaluation policies?

A

a self-interest threat is created if an audit TEAM MEMBER IS EVALUATED / COMPENSATED ON THE BASIS OF SELLING NON-SURANCE SERVICES TO AUDIT CLIENT.

34
Q

what are action for compensation and evaluation policies?

A
  1. revise compensation plan
  2. remove individual from audit team.
35
Q

what are some imducements?

A
  1. gifts
  2. hospitality
  3. entertainment
  4. political or charitable donations
    5.appelas to friendship and loyality
  5. preferential treatment, rights or privileges.
36
Q

what are threats of inducement?

A

offer of inducement from client creates self-interest threat, familiarity threats or intimidation threat.

37
Q

what are safeguards of inducement?

A
  1. offers of significant t inducements should not be accepted.
  2. such offers should be disclosed to senior management of the firm and should be documented.
38
Q

what would be the procedure if inducemet is acceptd by any member?

A
  1. inducement should e returned, or cost of inducement should be reimbursed to the client.
  2. he should be removed from management team, and his work should be reviewed by appropriate reviewer.
39
Q

what are factors in evaluating level of threats of threatened litigation with audit client?

A
  1. materiality of litigation
  2. whether litigation relates to prior audit engagement.
40
Q

what are safeguards of threatened litigation with audit client?

A
  1. removing the individual from engagement or refuse the engagement (if firm is involved).
  2. appoint appropriate reviewer who did not take part in the audit engagement to provide advice or review the work done.
41
Q

what are threats to financial interests?

A

holding financial interests (e.g., share) in audit client by team members or his relative create a self- interest threat.

42
Q

what are factors involved in evaluation of level of financial interests?

A

1.the role of individual holding the financial interest.
2. nature of relationship (if held by relative)
3. the materiality of the financial interest.

43
Q

what are safeguards of financial interests?

A
  1. members should notify firm about financial interests.
  2. member shall dispose -off interest (or so much interest that remaining becomes immaterial),
  3. remove the relevant audit team member from the audit team.
  4. appoint appropriate reviewer who did not take part in the audit engagement to provide advice or review the work done by relevant member.
44
Q

what would be the safeguards of loans and guarantee to an audit client?

A

loans can be given to an audit client only if it is immaterial to both firm/member and client.

45
Q

what are examples of business relationship?

A
  1. a team member runs a partnership or joint venture with client.
  2. client obtain goods/other services from a team member.
46
Q

what are threats to business relationship?

A

a close business relationship with an audit client or its management might create a self-interest or intimidation threat.

47
Q

what are safeguards to prevent threats of business relationship.

A
  1. if a business relation is insignificant, no action is required.
  2. if business relationship is insignificant:
    a. it should be reduced to insignificant level.
    b. individual should be removed, or firm should
    withdraw from engagement.
48
Q

what is threat to purchase of goods services (by team member or his relative from audit client)

A

purchase of goods and services from audit client may create self-interest. threat.

49
Q

what are the factors in evaluating threat of self-interest by purchase of goods and services.

A
  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 favours are accepted.
  4. magnitude of transaction.
50
Q

what would be safeguards if threat of self-interest in purchasing goods and services is significant?

A
  1. eliminate or reduce the size of transaction.
  2. remove the individual from audit team.
51
Q

what are threats of family and personal relationships with client?

A

family and personal relationship with client personnel create self-interest threat, familiarity threat, or intimidation threat.

Audit & Assurance by Amir Raza (12 decks)

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