Ethical Standard: Section 1 (General Requirements & Guidance)

Question 1

How shall auditors conduct an audit to ensure integrity, objectivity, and independence? (Similar to Q on Key Aspects of Section 1)

Answer 1

1. Implementing appropriately documented policies and procedures.
2. Exercising leadership within the audit firm.
3. Appointing an ethics partner.
4. Identifying, reporting, and assessing any threats to the audit’s integrity, objectivity, and independence.

Question 2

What are the key aspects of Section 1 regarding general requirements and guidance for audits?

Answer 2

1. Ethics Partner: The necessity for firms to designate an ethics partner, unless the firm has 3 or fewer Responsible Individuals (R.I.s).
2. Objectivity: The requirement for a group auditor to ensure that other auditors within a group maintain objectivity.
3. Ethics: The mandate that ethics be considered before accepting or continuing any audit engagement.
4. Communicate Concerns: The obligation to inform those charged with governance about any matters that could impact the audit’s integrity, objectivity, or independence.

Question 3

What are ‘Covered persons’?

Answer 3

Covered persons include partners, principals, shareholders, and employees of the audit firm who form part of the engagement team or the chain of command of the engagement or are involved in non-audit services provided to the client entity.

Question 4

What are the six types of threats to auditing, and what do they entail?

Answer 4

1. Management Threat: Involves making decisions for or on behalf of entity management, (envisaged that most of these threats may not be possible to be mitigated)
2. Intimidation Threat: Occurs when an auditor is influenced by fear, potentially compromising audit objectivity.
3. Self-review Threat: Arises when the audit firm performs non-audit work for the entity, leading to conflicts of interest.
4. Self-interest Threat: Happens when an auditor has a financial interest, such as an investment, in the entity being audited.
5. Advocacy Threat: Entails undertaking work for the entity as an advocate (envisaged that most of these threats may not be possible to be mitigated)
6. Familiarity Threat: Occurs when prolonged association with the entity may lead to a lack of critical distance or objectivity.

Question 5

What are examples of situations that threaten an auditor’s independence? (8 situations)

Answer 5

1. Undue Dependence: Relying too heavily on a single audit client for revenue.
2. Overdue Fees: Allowing fees from an audit client to remain unpaid for an extended period.
3. Family and Personal Relationships: Close personal or familial relationships with employees or management of the audit client.
4. Beneficial Interests: Holding shares or other investments in the audit client.
5. Acceptance of Goods, Services, or Hospitality: Accepting significant gifts or hospitality from the audit client.
6. Disputes and Litigation: Being involved in legal disputes or litigation with the audit client.
7. Loans: Giving or receiving loans to or from the audit client.
8. Pressure from Associated Organisations: Facing undue pressure or influence from organisations associated with the audit client.

Question 6

What are the examples of safeguards that can be applied to mitigate threats to an auditor’s independence? (8 examples)

Answer 6

1. Separate Teams: Utilise different teams and partners for various engagements to avoid conflicts of interest.
2. Regular Review: Conduct periodic reviews of audit work and decisions.
3. Confidentiality Instructions: Provide clear instructions regarding the importance of confidentiality.
4. Independent Advice: Advise clients to seek additional independent advice when appropriate.
5. Hot and Cold File Reviews: Include both timely (hot) and retrospective (cold) Engagement Quality Control Reviews (EQCR) in the audit process.
6. Disposal of Self-Interest: Eliminate any financial or personal interests that could compromise independence.
7. Partner Rotation: Rotate partners on engagements to prevent familiarity threats.
8. Resignation: Consider resigning from the audit if independence cannot be sufficiently safeguarded.