Chapter 7 Compliance with Ethical requirements

Question 1

Briefly explain the ethical principle of “Integrity”.

Answer 1

Integrity means truthfulness and fair dealings. A chartered accountant should be straightforward and honest in all professional and business relationships.

q A chartered accountant should **not be associated with any reports, ** returns, or other communication if he believes that these:
 omit necessary information.
 are false, misleading, or prepared recklessly.
q If chartered accountant becomes aware after being associated, he should take steps to disassociate himself from that information. (e.g. auditor may withdraw if management refuses to correct other information)

Question 2

Briefly explain the ethical principle of “Objectivity”.

Answer 2

Objectivity means not to compromise professional judgments because of undue influence of others, or bias, or conflict of interest.

A chartered accountant shall not perform a service if a relationship or circumstance may unduly influence his judgment.

Question 3

Briefly explain the ethical principle of “Confidentiality”.

Answer 3

Confidentiality Principle:
A chartered accountant shall ensure the confidentiality of information acquired in the course of business or professional relationship.

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

Confidentiality principle applies:
 to information acquired from ex-clients and prospective clients.
 within the firm (e.g. not to share with another partner of firm), and in social environment (e.g. not to share with a family member), at a public place.

Question 4

State the circumstances where a Chartered Accountant can disclose confidential information.

Answer 4

Confidential information may be disclosed in following circumstances:
 If disclosure is** authorized by client.**
 If disclosure is required by law/court e.g.
o Disclosure to public authorities for non-compliance with laws and regulations
o Production of evidence in legal proceedings
 When there is professional right or duty to disclose (and disclosure is not prohibited by law):
o To comply with Quality Control Review Program of a professional body.
o To respond to an inquiry/investigation by the professional or regulatory body.
o To comply with requirements of standards or ethics.
o To protect the professional interest of a chartered accountant in legal proceedings.

Question 5

What factors should be considered by a Chartered Accountant when disclosing confidential information.

Answer 5

Factors to consider when disclosing confidential information:
 Whether the interest of any party (including third parties) could be harmed if client agrees to make disclosure.
 Whether all the relevant information is known and substantiated.
 Proposed type of communication.
 Who are addressees and whether they are appropriate recipients.

Question 6

Briefly explain the ethical principle of “Professional competence and due care”. How firms in practice comply this principle?

Answer 6

It requires:
 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.
 To act diligently i.e. carefully, on timely basis and in accordance with requirements of applicable standards.

In complying with this principle, a chartered accountant:
 shall ensure appropriate training and supervision of staff working under him (e.g. firm is responsible to provide training to staff on recent amendments like IFRS 15).
 shall make clients aware of inherent limitations of the service.

Question 7

Briefly explain the ethical principle of “Professional behavior”.

Answer 7

A chartered accountant should:
q comply with relevant laws and regulations, and
q avoid actions that may discredit profession i.e. that may adversely affect good reputation of the profession.

Question 8

What is the structure of conceptual framework of Code of Ethics?

Answer 8

Code of Ethics consists of three elements:
1. Identify and explain threats (including threat to fundamental principles).
2. Evaluate significance of threats on the basis of factors.
3. Apply safeguards (or course of action) to eliminate threats or reduce them to acceptable level.

Question 9

Briefly explain “Self-Interest” Threat. Also give some examples.

Answer 9

Self-interest threat
Threat that judgment or behavior of an assurance team member will be inappropriately influenced because of a financial interest held by that team member (or his relatives) in audit client.

Examples:
1. Holding financial interest (e.g. shares) in an audit client by team members or their relatives
2. Material loan (or guarantee) is obtained from assurance client.
3. Contingent fee, Overdue fee, or Undercutting.

Question 10

Briefly explain “Familiarity threat”. Also give some examples.

Answer 10

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

Examples:
1. Family/personal relationships between a member of the audit team and an employee of client.
2. Long association with assurance client (e.g. using same team member for more than 3 years).

Question 11

Briefly explain “Self review threat”. Also give some examples.

Answer 11

Self review threat:
Threat that an assurance team member will not appropriately evaluate work earlier performed by himself or by his firm in a separate non-assurance engagement.

Examples:
1. Performing non-assurance services for audit client (e.g. preparation of accounting records and financial statements, or valuation of assets and liabilities).
2. Providing Temporary Staff Services/Secondment (i.e. lending of staff by firm to audit client).

Question 12

Briefly explain “Intimidation threat”. Also give some examples.

Answer 12

Intimidation threat:
Threat that an assurance team member is deterred from acting objectively because of threats, or pressure from management.

Examples:
1. Threat of dismissal of auditor (or his relative) by client from current or proposed engagement.
2. Threat of litigation by client

Question 13

Briefly explain “Advocacy threat:”. Also give some examples.

Answer 13

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

Examples:
1. Firm promoting shares of an assurance client.
2. Firm acting as an advocate of assurance client in litigations or disputes (e.g. tax disputes) with third parties.

Question 14

List down the policies and procedures established by the profession, and legislation which can help to identify and evaluate threats.

Answer 14

Examples of such procedures include:
 Effective complaint systems which enable the chartered accountant and the general public to draw attention to unethical behaviour.
 Educational, training and experience requirements for the profession.
 An explicitly stated duty to report breaches of ethics requirements.
 Professional or regulatory monitoring and disciplinary procedures
 Corporate governance requirements.

Question 15

Discuss the Threats, Significance and Course of Action if an auditor charges fee less than predecessor auditor.

Answer 15

Threat:
Self-interest threat.
Factors in Evaluating threat:
 Whether client is aware of terms of the engagement.
 Whether fee is set by independent third party (e.g. a regulator)

Safeguards:
 Adjust level of fee or scope of engagement.
 Appoint appropriate reviewer (who did not take part in the audit engagement) to provide advice or review the work done.

Question 16

Discuss the Threats and Course of Action if Assurance Fee is Overdue.

Answer 16

Overdue Fee – Initial Audit:
In case of initial audit, predecessor auditor’s fee should be paid before acceptance of engagement.

Overdue Fee – Recurring Audit:
Threat:
Self-interest threat.

Safeguards:
 Obtain full or partial payment of overdue fee.
 Appoint appropriate reviewer (who did not take part in the audit engagement) to provide advice or review the work done.
 If significant part remains unpaid for a long time, firm shall determine:
o Whether it is equivalent to loan to client.
o Whether it is appropriate to continue engagement, or to be re-appointed .

Question 17

What is Contingent Fees:

Answer 17

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

A fee is not regarded as being contingent if established by a court or other public authority.

Question 18

Discuss the Threats and Course of Action if auditor charges Contingent Fees.

Answer 18

Threats
Self-interest threat.

Safeguards:
Threat created is so significant that no safeguard can reduce the threat to acceptable level. Contingent fee is not allowed:

 For an assurance engagement.
 For a non-assurance engagement provided to audit client.

Question 19

Discuss the Threats and Course of Action if a Chartered Accountant charges Referral Fee or Commission:

Answer 19

Threat:
Self-interest threat, particularly affecting compliance with the principles of objectivity and professional competence and due care.

Safeguards/Course of Action:
 Disclosing the arrangement to client.
 Obtaining advance agreement from client.

Question 20

Discuss the Threats, Course of Action if an audit team member is evaluated/compensated on the basis of selling non-assurance services to audit client.

Answer 20

Threat:
Self-interest threat

Actions:
 Revise compensation plan.
 Remove individual from audit team.

Question 21

List some examples of Inducements:

Answer 21

An inducement can take many different forms, for example:
 Gifts.
 Hospitality.
 Entertainment.
 Political or charitable donations.
 Appeals to friendship and loyalty.
 Preferential treatment, rights or privileges.

Question 22

Discuss the Threats, and Course of Action if an Inducement is offered by audit client to an audit team member.

Answer 22

Threats:
 Self-Interest Threat.
** Familiarity Threat.
 Intimidation Threat. **

Safeguards:
 Offer of significant inducements should not be accepted.
 Such offer should be disclosed to senior management of the firm, and should be documented.
 If offer has been accepted by any team member:
o Inducement should be returned, or cost of inducement should be reimbursed to client.
o He should be removed from engagement team, and his work should be reviewed by appropriate reviewer.

Question 23

Discuss the Threats, Significance, and Course of Action if there is actual or threatened litigation between audit firm and audit client.

Answer 23

Threats:
 Self-Interest threat.
 Intimidation threat.

Factors in evaluating Level of Threats:
 Materiality of litigation
 Whether litigation relates to a prior audit engagement.

Safeguards:
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.

Question 24

Discuss the Threats, Significance, and Course of Action if an audit team member holds financial interest (e.g. shares) in audit client.

Answer 24

Threat:
Self-interest threat.

Factors in Evaluating threat:
1. The role of the individual holding the financial interest.
2. Nature of relationship (if held by a relative)
3. The materiality of the financial interest.

Safeguards:
1. Member should notify firm about financial interest.
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 team member.

Question 25

What should be course of action if an auditor obtains loan or guarantee from his audit client which is a bank.

Answer 25

1. If Loan is** immaterial,** no action is required.
2. If material,
    Loan must be made under normal lending procedures and terms and conditions, and
    Appropriate reviewer should be appointed (to review the work performed).

Question 26

What should be course of action if an auditor obtains loan or guarantee from his audit client which is NOT a bank or financial institution.

Answer 26

1. If Loan is immaterial for both client and firm/team member, no action is required.
2. **If material, **
    Loan should be repaid, or
    Concerned member should be removed, or
    Firm should withdraw.

Question 27

Discuss Threat, Factors in evaluating threat and Safeguards if a team member purchases goods or services from audit client.

Answer 27

Threat:
Self-interest threat.

Factors in evaluating Threat:
 whether transaction is in normal course of business and at arm’s length basis.
 Whether proper tendering process was followed.
 Whether undue favors are accepted.
 Magnitude of transaction.

Safeguards:
If threat is significant, firm should:
 Eliminate or reduce the size of transaction, or
 Remove the individual from the audit team.

Question 28

Discuss Threat, and Safeguards if a team member runs a business with client or client obtains other goods/services from a team member.

Answer 28

Threats:
 Self-interest Threat.
 intimidation Threat.

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

Question 29

Discuss the possible threats which may arise, their significance and the safeguards if an audit team member has Family or Personal Relationship with an employee of audit client.

Answer 29

Threats:
 Self-Interest Threat.
 Familiarity Threat.
 Intimidation threat.

Factors in evaluating Threat:
Relevant factors in evaluating threats include:
 Nature of relationship between individuals.
 Position of individual at client.
 Role of audit team member.

Safeguards:
 Restructure the responsibilities so that audit team member does not deal with matters that are within the responsibility of the individual with whom member has close relationship.
 Engage an independent reviewer (who did not take part in the audit engagement) to provide advice or review the work done.
 Remove the relevant audit team member from the audit team.

Question 30

Discuss the possible threats which may arise, their significance and the safeguards if an audit team member has recently worked in audit client.

Answer 30

Threats:
 Self-Interest.
 Self-review.
 Familiarity Threat.

Relevant factors to evaluate significance of threat include:
 Position of the individual at client.
 Role of individual as audit team member
 Length of time since the individual left the client.

Safeguards:
If individual served during period covered by the audit report:
 Individual shall not be included in the audit team.

If individual served prior to period covered by the audit report:
 Restructure responsibilities.
 Engage an independent reviewer (who did not take part in the audit engagement) to provide advice or review the work done.

Question 31

Discuss the possible threats which may arise, their significance and the safeguards if a former member of the firm joins client as director, officer etc.

Answer 31

Employment with an Audit Client:
Threats:
1. Self-interest threat.
2. Familiarity threat.
3. Intimidation threat.

Factors in evaluating Level of Threats:
1. Current position in client
2. Former position in firm
3. The length of time passed
4. Level of involvement individual will have with audit team.

Safeguards:
1. No significant connection should remain between firm and individual.
2. Modify the audit plan.
3. Assign individuals to the audit team who have sufficient experience relative to individual who joined the client.
4. Conducting an additional review of the work of individual who joined the client.

Question 32

Discuss the possible threats which may arise, and the safeguards if an audit team members enters into employment negotiation with audit client.

Answer 32

Threat:
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 the audit engagement) to provide advice or review the work done.

Question 33

Discuss the possible threats which may arise, and the safeguards if an audit team members is lent to audit client on temporary basis.

Answer 33

Threats:
 Self-review threat.
 Advocacy threat.
 Familiarity threat.

Safeguards:
Firm will loan personnel to audit client only if:
 Such assistance is only for a short period of time.
 Client will be **responsible **for directing and supervising activities.
 Personnel does not take management responsibilities.

If personnel is lent to audit client, following safeguards may be applied:
 Firm should not include the loaned-staff in assurance team.
 If loaned-staff is included in assurance team, restructure responsibilities (i.e. he should not be given responsibility for any function or activity that he performed during temporary staff assignment).
 Conducting an additional review of the work performed by the loaned personnel.

Question 34

Discuss the possible threats which may arise, their significance and the safeguards if an audit team member has long association with audit client.

Answer 34

Threat:
 Familiarity Threat.
 Self-Interest Threat.

Factors in evaluating Level of Threats:
1. Length of time
2. Role of individual
3. Closeness of individual with management.

Safeguards:
1. Rotate the individual, and determine the time for which it will not become part of team again.
2. Restructure responsibilities of the individual on the audit team.
3. Appoint appropriate reviewer (who did not take part in the audit engagement) to provide advice or review the work done by individual.
4. Independent QCR of engagement.

Question 35

Discuss the type of services which can be provided to unlisted audit client, and related safeguards.

Answer 35

Accounting and Bookkeeping services of routine or mechanical nature can be provided to audit client.

Examples of routine or mechanical nature services:
 Recording transactions approved by client.
 Posting transactions to ledger and trial balance.
 Preparing financial statements based on trial balance and information from client approved records.

Safeguards/Actions:
 Firm uses professionals who are not audit team members to perform the service.
 Appoint appropriate reviewer (who did not take part in the audit engagement) to provide advice or review the work done.

Question 36

Discuss the threats and safeguards if audit firm prepares or reviews Tax return of audit client.

Answer 36

This service does not create any threat.

Question 37

Discuss the threats and safeguards if audit firm prepares Tax calculations for audit client for the purpose of preparing the accounting entries.

Answer 37

Threats:
Self-review Threat.

Factors in evaluating Threat:
 Materiality.
 Nature of client (listed or unlisted)

Safeguards/Actions:
Such service can be provided to Unlisted client with following safeguards:
o Separate team.
o Independent reviewer.

Question 38

Discuss the threats and safeguards if audit firm assists audit client in resolution of tax disputes.

Answer 38

Threats:
Self-review threat, and Advocacy Threat.

Safeguards/Actions:
Such service can be provided if it is immaterial, with following safeguards:
o Separate team.
o Independent reviewer.