Ethical Standard Requirements

Question 1

why does the audit firm establish policies & procedures in the Ethical Standard?

Answer 1

to ensure the firm and covered persons act with integrity, objectivity and independence

Question 2

does the firm need to be able to demonstrate compliance with the ethical standard?

Answer 2

yes

Question 3

do leadership need to establish a control environment that ensures compliance with the ethical standard?

Answer 3

yes

Question 4

who does the audit firm need to appoint to be responsible for the firm’s policies & procedures relating to ethical compliance?

Answer 4

an ethics partner

Question 5

does the audit firm involve itself in clients’ management/decision making?

Answer 5

no

this gives rise to a management threat

Question 6

what are the 5 stages of an audit?

Answer 6

• acceptance/continuance
• planning
• forming an opinion
• considering provision of non-audit services
• when threats are reported to them

Question 7

does the audit partner need to consider threats at each stage of the audit?

Answer 7

yes

Question 8

what should the engagement partner do when a threat to ethics is identified?

Answer 8

• assess the effectiveness of the safeguards
• decline/discontinue the engagement

Question 9

do listed companies require an engagement quality review (EQR)?

Answer 9

yes

Question 10

when there’s a threat to the auditor’s objectivity, what must the engagement partner do to TCWG?

Answer 10

must communicate this

Question 11

how must threats/safeguards be documented?

Answer 11

must be documented in engagement working papers

Question 12

should the consideration of ethical problems be confined to a single engagement?

Answer 12

no

auditor must consider how ethics looks in context of past, other and potential future engagements

Question 13

can the auditor hold shares in the client’s company?

Answer 13

no

self interest threat

Question 14

can the audit firm make loans to the client?

Answer 14

no

self interest and intimidation threat

if the client is a bank, this can be acceptable

Question 15

should the auditor enter business relationships with the audit client?

Answer 15

no

self interest, advocacy and intimidation threats arise

Question 16

can the audit firm employ an employee of the audit client?

Answer 16

no

familiarity, self interest, self review and management threat

dual-employment is unacceptable

Question 17

under which conditions are loan staff assignments accepted?

Answer 17

non-management role for uk national audit agency

entity has no management responsibilities

for a short, maximum 3 month period

Question 18

how is potential employment with an audit client treated?

Answer 18

the firm must be notified

the individual will be removed from the engagement team

self interest, familiarity and intimidation threat

Question 19

when a partner leaves a firm to join an audit client as a director/key management role, what must the firm do?

Answer 19

the firm must resign as auditor and cannot accept reappointment for at least 2 years

Question 20

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?

Answer 20

firm must consider the composition of the audit team

Question 21

if a member of the audit team is closely associated with/related to someone employed by the audit client, what must the firm do?

Answer 21

they need to be removed from the engagement team

audit staff must report personal relationships to the engagement partner

familiarity, self interest & intimidation threat

Question 22

can an audit partner/employee of the audit firm perform the role of the client’s director?

Answer 22

no

management & self review threat

Question 23

when a former director/employee of the client joins the audit firm, can they be involved in the audit?

Answer 23

not for at least 2 years

self interest, self review and familiarity threat

Question 24

persons closely associated = ?

Answer 24

includes immediate family members

e.g., spouse, dependents

Question 25

other close family relationships = ?

Answer 25

e.g., parents, non-dependent children & siblings

Question 26

does the auditor need to consider the objectivity & integrity of external consultants involved in the engagement?

Answer 26

yes

they must also document the rationale for the conclusion

Question 27

why do audit firms need to monitor the length of time that partners and senior auditors work on a client?

Answer 27

to mitigate familiarity, self review and self interest threats

Question 28

adequate safeguards to handle threats?

Answer 28

rotation of partners

involvement of another partner to review the work of the partner

engagement quality review (EQR)

Question 29

can an audit partner remain on a non-listed client for 10 years?

Answer 29

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

Question 30

TCWG?

Answer 30

those charged with governance

Question 31

how long until the audit engagement partner of a listed client must be rotated?

Answer 31

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

Question 32

when the audit client becomes listed, how is the audit engagement partner’s duration in charge managed?

Answer 32

if they’ve already served 4 years or more, they may continue for a maximum for 2 years (after the client becomes publicly listed)

Question 33

with a listed client, how long until the auditor must be rotated?

Answer 33

engagement partner must be rotated after 7 years

they can’t return within 5 years

Question 34

must staff have sufficient time and skills to complete the audit?

Answer 34

yes, regardless of the fee charged

Question 35

should audit fees be influenced by the provision of non-audit services to clients?

Answer 35

no

contingent fees for audit/non-audit services aren’t permitted

self interest threat

Question 36

are overdue non-trivial fees allowed?

Answer 36

no

this creates a self interest threat

Question 37

what is the limit for non-audit service fees for listed clients?

Answer 37

fees for non-audit services to listed clients is limited to 70% of the average audit fee for the last 3 years

Question 38

what must happen if the fees for non-audit services exceed the audit fees for that year?

Answer 38

disclose to the ethics partner and consider the need for safeguards

Question 39

what is the threshold for listed client audit fees?

Answer 39

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)

Question 40

what is the threshold for non-listed client audit fees?

Answer 40

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

Question 41

can members of the audit firm accept gifts/hospitality from audit clients?

Answer 41

not unless the value is trivial

self interest & familiarity threats

Question 42

if litigation before the audit client and the audit firm is in progress or threatened…

Answer 42

the auditor should resign

self interest, advocacy & intimidation threats

Question 43

what should be done by the auditor before accepting non-audit work?

Answer 43

get a third party to inform on whether the non-audit work may impair the firm’s objectivity & independence

Question 44

can audit firms make management decisions for clients?

Answer 44

no

management threat

Question 45

when safeguards are insufficient to mitigate threats to independence…

Answer 45

the non audit work shouldn’t be accepted

Question 46

general safeguards for non audit services include…?

Answer 46

separate engagement teams for audit & non-audit work

EQR of the work

Question 47

can the management decision making that gives rise to management threat be safeguarded?

Answer 47

no

Question 48

must reasonings and safeguards related to non-audit services be documented?

Answer 48

yes

this must all be documented and communicated prior to the engagement letter being issued