Ethical Standard Requirements Flashcards
why does the audit firm establish policies & procedures in the Ethical Standard?
to ensure the firm and covered persons act with integrity, objectivity and independence
does the firm need to be able to demonstrate compliance with the ethical standard?
yes
do leadership need to establish a control environment that ensures compliance with the ethical standard?
yes
who does the audit firm need to appoint to be responsible for the firm’s policies & procedures relating to ethical compliance?
an ethics partner
does the audit firm involve itself in clients’ management/decision making?
no
this gives rise to a management threat
what are the 5 stages of an audit?
- acceptance/continuance
- planning
- forming an opinion
- considering provision of non-audit services
- when threats are reported to them
does the audit partner need to consider threats at each stage of the audit?
yes
what should the engagement partner do when a threat to ethics is identified?
- assess the effectiveness of the safeguards
- decline/discontinue the engagement
do listed companies require an engagement quality review (EQR)?
yes
when there’s a threat to the auditor’s objectivity, what must the engagement partner do to TCWG?
must communicate this
how must threats/safeguards be documented?
must be documented in engagement working papers
should the consideration of ethical problems be confined to a single engagement?
no
auditor must consider how ethics looks in context of past, other and potential future engagements
can the auditor hold shares in the client’s company?
no
self interest threat
can the audit firm make loans to the client?
no
self interest and intimidation threat
if the client is a bank, this can be acceptable
should the auditor enter business relationships with the audit client?
no
self interest, advocacy and intimidation threats arise
can the audit firm employ an employee of the audit client?
no
familiarity, self interest, self review and management threat
dual-employment is unacceptable
under which conditions are loan staff assignments accepted?
non-management role for uk national audit agency
entity has no management responsibilities
for a short, maximum 3 month period
how is potential employment with an audit client treated?
the firm must be notified
the individual will be removed from the engagement team
self interest, familiarity and intimidation threat
when a partner leaves a firm to join an audit client as a director/key management role, what must the firm do?
the firm must resign as auditor and cannot accept reappointment for at least 2 years
when a regular member of an engagement team leaves the audit firm to join a client as a director/key management role, what must the firm do?
firm must consider the composition of the audit team
if a member of the audit team is closely associated with/related to someone employed by the audit client, what must the firm do?
they need to be removed from the engagement team
audit staff must report personal relationships to the engagement partner
familiarity, self interest & intimidation threat
can an audit partner/employee of the audit firm perform the role of the client’s director?
no
management & self review threat
when a former director/employee of the client joins the audit firm, can they be involved in the audit?
not for at least 2 years
self interest, self review and familiarity threat
persons closely associated = ?
includes immediate family members
e.g., spouse, dependents
other close family relationships = ?
e.g., parents, non-dependent children & siblings
does the auditor need to consider the objectivity & integrity of external consultants involved in the engagement?
yes
they must also document the rationale for the conclusion
why do audit firms need to monitor the length of time that partners and senior auditors work on a client?
to mitigate familiarity, self review and self interest threats
adequate safeguards to handle threats?
rotation of partners
involvement of another partner to review the work of the partner
engagement quality review (EQR)
can an audit partner remain on a non-listed client for 10 years?
yes, however careful consideration is given to the need to rotate the partner
if they’re not rotated, safeguards must be applied (e.g., involve another auditor or EQR)
they should also document the reason for keeping the audit partner to TCWG at the client
TCWG?
those charged with governance
how long until the audit engagement partner of a listed client must be rotated?
must be rotated after 5 years, and can’t return within 5 years
in certain circumstances, the audit committee can extend the partner’s tenure to 7 years
when the audit client becomes listed, how is the audit engagement partner’s duration in charge managed?
if they’ve already served 4 years or more, they may continue for a maximum for 2 years (after the client becomes publicly listed)
with a listed client, how long until the auditor must be rotated?
engagement partner must be rotated after 7 years
they can’t return within 5 years
must staff have sufficient time and skills to complete the audit?
yes, regardless of the fee charged
should audit fees be influenced by the provision of non-audit services to clients?
no
contingent fees for audit/non-audit services aren’t permitted
self interest threat
are overdue non-trivial fees allowed?
no
this creates a self interest threat
what is the limit for non-audit service fees for listed clients?
fees for non-audit services to listed clients is limited to 70% of the average audit fee for the last 3 years
what must happen if the fees for non-audit services exceed the audit fees for that year?
disclose to the ethics partner and consider the need for safeguards
what is the threshold for listed client audit fees?
10% of the firm’s fee income = cannot act as auditor
5% of the firm’s fee income = disclose to ethics partner & TWCG, consider safeguards (e.g., EQR)
what is the threshold for non-listed client audit fees?
15% of the firm’s fee income = cannot act as auditor
10% of the firm’s fee income = disclose to ethics partner & TWCG, arrange an EQR
thresholds are 5% higher than those for listed clients
can members of the audit firm accept gifts/hospitality from audit clients?
not unless the value is trivial
self interest & familiarity threats
if litigation before the audit client and the audit firm is in progress or threatened…
the auditor should resign
self interest, advocacy & intimidation threats
what should be done by the auditor before accepting non-audit work?
get a third party to inform on whether the non-audit work may impair the firm’s objectivity & independence
can audit firms make management decisions for clients?
no
management threat
when safeguards are insufficient to mitigate threats to independence…
the non audit work shouldn’t be accepted
general safeguards for non audit services include…?
separate engagement teams for audit & non-audit work
EQR of the work
can the management decision making that gives rise to management threat be safeguarded?
no
must reasonings and safeguards related to non-audit services be documented?
yes
this must all be documented and communicated prior to the engagement letter being issued
