Ethics Flashcards
Code of Ethics and Conduct
Threats to objectivity and indpendence
Self-interest threat
Financial interest
An audit firm has a financial ineterst in client affairs i.e. shares, trustee of client shares
Substantial
Disallowed from direct financial interest or indirect material financial interest
Assurance firm, member of assurance team, engagement partner’s immediate family, same office partner and immediate family, non-audit service partner and managers
Direct financial interest no sufficent safeguards
Indirect, immaterial (no signficant influence exercise) interest
Safeguards: interest dispossal, remove individual from teasm, indpendent partner review work,
Materiality interest and immediate family closeness partner judgement
Disclose relevant financial interests/Culture of voluntary disclosure.
Loans and guarantees
Bank/similar institution client
Immaterial amount to audit firm or member
Normal commercial terms, no threat to independence
Material loan
Safeguards, indepndent review from separate branch/office partner in firm
Other situations
Do not enter into loan or guarantee, audit firm must not make a material loan to the client (overdue fees).
Business relationships
Material interest in joint venture collaboration, combing services and market together, distribution marketing arrangements.
Signficance
Do not participate, if material - terminate the business relationship or assurance provision
Individual member of audit team
Remove
Interest in the same joint venture
Not a great threat to independence
Arms length transactions
Not a threat unless substantial number (add safeguards)
Directior or officer of client
Prohibited
Company secretary
Allowed if administrative only, no manager decison-making, permitee dby regulation
Attend board meetings
Speak about matters of concern
Compensation and evaluation policy in relation to non-audit services
Signficance
Porportion of compensation tin selling non-audit services, individual’s team role, promotion decisions affected.
Safeguard: revise individual’s plan, review work, remove from team.
Key audit partner - do not evaluate based on selling non-assurance services
Engagement partner, engagement quality reviewer, component engagement partners (key decisions r judgements on significant matters)
Gifts and hospitality
Prohibited unless trivial and inconsequential
Overdue fees
Loan risk essentially of last year’s fees, safeguard: pre-issuance review or obtain partial payment
Guard: discuss issue with TCWG, resigning possibility if not paid
Contingent fee
Predetermined basis based on results of services (unless established by court or public authority)
Contingent fee
Assurance engagements: Prohibited, no safeguards
Non-assurance engagements, not an audit client: depends on range of possible fee amount, approrpiate authority determines matter outcome, disclosure of work and fee, nature of service, event/transaction effect on subject matter information.
Safeguards: professional accountant review and advice on relevant assurance work, in-advance written agreement with client on renumeration basis
Fees - Relative size
High proportion from client
Concern of losing client
Depends on firm operating structure and, firm ability to diversify to reduce fee dependency
Reduce client depndence
Via increase client base, reduce non-audit work, extent amount if work by other clients, independent reviewer of work.
Independent-seeming
Individual partner or office fee from client is high
Reduce dependence, internal quality review
Not public interest entities
more then 30% of firm’s total fees for five consecutive years - pre and post issuance reviews of fifth year work.
Listed clients
15% or more for two years, engagement quality review pre-issuance of audit report on second year
Lowballing
Significantly lower fee charged then predecessor firm
Lowballing safeguards if tender is successful
Records demonstrating appropriate staff and time spent on engagement, compliance with assurance standards, guidelines, and quality management procedures,
Recruitment services
1)Limited to professional qualifications advice and interviewing and advising on candidate competence in financial accounting, administrative, or control positions.
2) No managerial decisions in selection and employemnt terms
3) Prohibited for to be a negotiator, or for anything related to prospective dircetors or senior management (whose role relates to fianncial statements).
Self-review threat
Preparing accounting records and financial statements
Signfciant riskm though auditors routinely assist management with preparation of financial statements and advice on accounting treatments and journal entries.
Routine services: payroll calculations or reports, recording recurring transactions from source documentation, depreciation calculation with client determining accounting policy and estimates of useful life and residual values, post transactions coded by client to general ledger or client approved entries to trial balance, preparing financial statements based on information in client-approved trial balance and preparing the related notes based on client-approved records.
Unlisted companies: routine are allowed, avoid management repsonsibilities, with safeguards: staff other then audit, indpendnet review of work.
Listed: prohibited from accounts ir financial statements, minor exception of bookkeeping for immaterial to division of entity and overall entity, and not carried out by audit team members.
Valuation services
Listed entities is prohibited if self-review threat, advocacy is use of separate teams,
Unlisted, can’t provide of valuation material to financial statement and involves significant degree of subjectivity.
Taxation services
Prohibited to provide tax avodance serices or any service that defies current tax laws.
Tax return preparation
Not a threat to independence as long as management takes responsibility.
Tax calculations for purpose of accounting entry prep.
Unlisted: materiality is considered, safeguards are independent reviews and use of separate teams.
Listed: prohibited
Tax advisory services
Allowed if supported by tax authority
Disallowed if affects accounting treatment in financial statements, material, and audit team has reasonable doubt on accounting treatment
Self-review threat, and listed entity - prohibited
Advocacy threat - separate teams
Tax planning services
Tax services involving valuations
Listed - prohibited is elf-review threat
Advocacy - separate teams
May accept if immaterial, only affects tax amounts, safeguards for all clients: independent review, separate teams, pre-clearance form tac authority.
Resolution of tax disputes assistance
Depends on whetehr firm provided service on subject matter of dispute, and if material.
Safeguards: not audit team member, advice from external at professional.
Self-review is prohibition, advocacy is separate teams.
Internal audit services
Ensure client acknwoledges internal control respinsibility (assumiong management responsibility is key risk).
Prohibited: setting internal audit polcies, directing and taking repsonsibility for employees’ work, deiciding how to implement recomemndations, report results of internal audit to audit committee, perform pricedures that are part of internal controls, design/maintain, oustoruced internal audit with some management repsonsibility.
Evaluate materiality for work to financial statements, associated risk of misstatement, extent firm will rely on internal audit work.
Threats safeguards separate teams, - if unlisted
If listed - prohibited for internal controls over financial reporting, financial accounting systems for generating information for financial statements being audited, amounts or disclosures material to the financial statements being audited,
Corporate finance
No safeguards for some, not allowed to promote, deal, underwrite clients shares
Listed entity - prohibited if self-review threat
Advocacy - managed by separate teams
Prohibited to provide advice that interacts with financial statements when advice depnds on accounting treatment and when advice may have material effect on financial statements
With safeguards, assist in deine corroate strategies, potential sources of capital, structuring advice - different teams, review work undertaken so no management decisions on client’s behalf.
Temporary personnel assignments
Short period of time only, no management responsibilities, no prohibited by Code services.
Audit client responsible for directing, supervising activities of loaned personnel.
Safeguards: additional review of work, no assign of audit of work did as temporary personnel, no loaned personnel in audit team.
General other services
IT, Legal, litigation - evaluate if threat to independence.
Cannot accept management of responsibilities.
Risk factors consider: nature of engagement, nature of client, perception of reasonable and informed third part
Advocacy threat
Promoting client business interests e.g. advice on debt reconstruction and negotiate with bank on client’s behalf. Or acting as an expert witness in a legal case: essentially, the assurance firm is in a position of taking the client’s part in a dispute, or somehow acting as its advocate.
Safeguards: usingd differentd epartments in firm and making disclosures to audit commktee.
Risk assessmnet is necessary, and if too high, withdraw from the engagement,
A partner or employee of firm or network firm hall not servve as General Counsel of audit client, firm or network firm shall not act in advocacy role tfor audit client that is unlisted in reeolving dispute or litigation before court when amounts material to financial cstatements firm expresses opinion on.
For listed, they cannot aact in advocay role, period.
Familiarity threat
Client and assurance staff become familair, loss of professional scpeticism.
Long association of senior personnel
Lonbg periof of time having teh audit client, factors: relationship length, how ong individuasl been on audit team and nature of role performed, extent of supervision and review of individual by seniorp personnel, extent of infividual’s influence on audit outcome, closeness of any personal relationshop betwene individual and anyone in repsonsible position on client, nature and frequency and extent of interaction between indivdiual and a repsonsible client employee,.
Other factors can also occur, sycg as client axxoynt and reporting framework or its senior management personnel, including any changes.
Safeefhuafrds: rotat individual of role pr change nature of their role or tasks, appropriate reviewer not an audit team emmber review work of the individual, regular indpendet internal and external quality reviews of enaggement.
Listed - stricture. Key audit partner is for seven years, rotates off and cooling period. 3 years for engfagemnt qualiuty reviewers, 2 for other key aidit partners, 5 for engagement partner. Cannot be in audit team nor consult wit aiudit teasm or client on any issues, including generla industry advice.
Key partner flexibility iof unforseen circmstance, can be in for additional year, makiing eight years total (unforseen cicrumstance).
Unlisted - seven year limit applies starting from fate key audit partner origia;l become key partner for audit client.
Pissible for indepndent regulator give permisison for aydit partner to remain key indefinietly, privised alternative safehuards e.g. external review.
Recent service with audit client
If individual worked during periof audited (both current and and piroir year), cant be in team if were director or officer of client, an employee with signfciant influence on fin ancial statemnts.
If one of the above individuals did not work for client during periof audited (left client before that), threat created nd obtain safeguard: quality review of individual’s work on audit.
Employment with an audit client
Begotiants or interviews could be taking place, reuslting in staff transfer: audit staff member may want tpo onpress duture posisble emplyer, former partner may have too much knwoledge of auidt firm’s systems and processes.,
Signficant connection between aydit firm and former employee/partner when: individual is entitled to beenfits from aufit team, unledd dized and pretermined and not material to fimr,
Any ak,ount owed to the individyual is material to the firm, infivisuak continues ti particpate in audit fiorm’s busioness pr profesisonal activities.
Any familiarity or intimdation threatd epends on: position individual taken at the client, invilvement individual will have with audit team, length of time since individual was member of audit team or partner of firm, former position of individual within the audit team or firm e.f. responsible regular contact maintenace with client’s management of TCWG.
Safeguards: modify audit plabn, asisgn individuals witjithin audit team who have sufficnet expeirnece with client who just joined, have an indpendent profesisonal accountant review work of former member of audit team.
Individual should tell firm asap if purusing employment with audit client. Safeguyad: remove individual from tesm, review their work for bias indication.
Listed entity coolomh off periofd. - when key audit partner joins cluent, as firector or signfcinat influence empluee, client must have issued audited financial statements covering at least 12 months befor eemployment can behine. Partner in question myst also not have been audit team member in relation to the audited fin stats.
If senior or managing partner join an audit client 12 months must have passed p no need for audited financial statements to have been issued.
Family and personal relationships
Immediaqte family: spouse or dependent, close family: parent, child, sibling who is not imemdiate,
Each situation evaluate indivdiually. Imeddiare family who is director or offiver of signficnat influecnce, remove individual from audit team, otherwise safeiardfs: removal, restructure role so not deal with matters related to familys role
Clsoe family member: tgrear evaluated and same safeguards.
If not family nit still close, evaluate and safeugaurds
Firms hould have QM polices and pricedures of disclosure, becayse if firm iandvertenyly violates riles then additional safeguards: wuality review, discuss matter with audit committe if there is one
Intimidation threat
By client staff
Actual and threatened litigation
Threaten sue or sue, Risk of losing client, bad publcity, possiblely negligent, further problems pressurizes to create unmodified audit repirtr.
Avoid situations, nit if do arise: consider materiality of litigation, whether litigation relates to priori audit engagemnt. Safeguards: remove from audit team the individual, have professional review of work done
Second opinions
Client unhappy with propsoed opinion, seeks second. second firm cannot give formal audiot opinion on financial stateents, only appointed can. Probkem is that appointed auidtir may geel pressure to chnage opinion if second firm indicates that unmodified. TgAAN AUDITOR SELFINETERST IF FEEL WILL LOSe the audit relationship next year.
Nithing can stop dircetor form talking toa second firm, nit second firm should be careful because opinion could be oncorect if dircetor doesn’t provdie all the information relevant. Sercond firm should seek permission to communciate with existing auditor and appraise all facts. If permission not given, second firm should con sider whether can reasonably act in teh cirucmtsnaces.
Confidentiality
Respect confidnetiality of info acquired in busiess and profesisonal relationshops. Do not disclose information, and in exchange cliuent must agree to dislocse infull all information relevant to enaggement, Porfesisonal accountant must make client awatre of duty of confidentialitu, and of the fact can be overriden where theire is a right or duty to dislcose.
Avoid inadvertent disclisrue e.f. when socialising and unintentionally disclose,s confidentiality occurs even after relation end.
Exceptions to confidentiality
Disclosure perimiteed by law and authoruzed by client, required by law, professional duty or right to diclise, to comply with standards and regulatory bnodues.
Obligatory dislcosure: client committed terrorist offences, has reasonable cayse beliueved client treason, disclose knowledge to approrpiate authorities
Voluntary: professional accountant can dislcose if in public inetetst, protect professional accountants inetetstys, authorized bu law, to non-governmental bodies.
Deciding whtehr diclose: if harms the inetesys of all parties (incuding third partes), whether all relevant info known and ubstantiated, type of communciation expected, wgether parties who receivedcommunication are approrpiate rceipients.
Disclosure in public interest
POemritted to those in proper ineterst like police, govt depatment for tarde and industry, stock echnage.
WHteher justified depends on size of amount involved, extent of likely fianncial fame, whether member sof public affected, likelihood of repetition, reaosns for clients ubwillingnes sto disclose, gravity of matters relevant laws and acocunting and auditing stanfatrds, any legal advice obtaiend.
Often appropriate take legal advice.
Disclosure to protect a professional accountant’s interests
Defense against criminal chsrhed, rsiist proceding related to taxation offence, resist legal actio bu client or thrid party, discplinary procceding defense, profesisonal accountant sue for their feeds.
Disclosure by statute
Anti-money launder legislation, whistelblowing respinsibilitu - its the law
Disclosure to non-governmental bodies
Where body has statutory powers requring disclosure. If not have powers, then need clients consent to dislcose.
Conflicts of interest
ExampleZ: confidnetial information obtained during an audit to help anotehr client to acquire the audit client, two clients same time acquiring same company competition, privising services to both vendor and purchaser of same transactioon, reprsenting two clients in legal dispute
An issue os idnetifying conflicts of ineterst as audit firm may not eb aware p quality amangement: effective conflict identification process.
DSafeguards example: disclosure to clients, obtain conent to eprform sevrices, separate engagement teams, create separate areas of practice for speciality functions, establish polcies anjd procedures to limit acecess to client files, review sof safdeguarcs nyu a sbeior individual not involved with the engagement, external review byu profesisonal acocuntant, consulting thrid parties like legal, profesiona body, prifessio al accountant.
Conflicts in application of fundamental principles
Cinsder, in respolution:relevant facts, relevany parties, ethcial issues involved, fundamnetal principles related, established internal procedures, alternative courses of action
