Ethics and acceptance

Question 1

Independence can be defined as

Answer 1

having ‘freedom from situations and
relationships where objectivity would be perceived to be impaired by a
reasonable and informed third party

Question 2

Objectivity:

Answer 2

A professional accountant must exercise professional or
business judgement without being compromised by bias, conflicts of
interest or undue influence of, or undue reliance on, individuals,
organisations, technology and other factors

Question 3

Professional behaviour:

Answer 3

A professional accountant must comply with
relevant laws and regulations, behave in a manner consistent with the
profession’s responsibility to act in the public interest in all professional
activities and business relationships, and avoid any conduct that might
discredit the profession

Question 4

Professional competence and due care:

Answer 4

A professional accountant
must attain and maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent
professional services based on current developments in practice,
legislation and techniques.
A professional accountant must act diligently and in accordance with
applicable technical and professional standards

Question 5

Integrity:

Answer 5

A professional accountant must be straightforward and honest
in all professional and business relationships. This involves fair dealing,
truthfulness and having strength of character to act appropriately in all
situations

Question 6

Confidentiality:

Answer 6

A professional accountant must respect the
confidentiality of information acquired as a result of professional and
business relationships.
They should not disclose any such information to third parties without
proper and specific authority, unless there is a legal or professional right or
duty to disclose. Such confidential information should not be used for the
personal advantage of members or third parties

Question 7

Self-interest threats

Answer 7

Where the auditor has a financial or other interest that will inappropriately
influence their judgement or behaviour

Question 8

Fee dependency

Answer 8

Self-interest and intimidation threats can be created if the total fees generated
from one audit client represent a large proportion of the total fees of the firm, or
represent a large proportion of the revenue of one partner or office of the firm

Question 9

Unlisted clients - A firm’s independence is threatened if total fees from an audit client
exceed X of the firm’s total fees for five consecutive years

Answer 9

30%

Question 10

Listed clients - A firm’s independence is threatened if total fees from a listed audit client
exceed X of the firm’s total fees for two consecutive years

Answer 10

15%

Question 11

Gifts and hospitality may not be accepted unless the value is

Answer 11

trivial and
inconsequential

Question 12

Gifts and hospitality which are trivial and inconsequential but which are intended
to improperly influence the behaviour of the recipient

Answer 12

should not be accepted

Question 13

A direct, or material indirect, financial interest in the audit client must not be held
by:

Answer 13

 the firm or a network firm
 an audit team member or the immediate family of a team member
 a partner working in the office connected with the audit engagement
partner
 any partner providing non-audit services to the audit client.

Question 14

Loans and guarantees to audit clients are not permitted unless

Answer 14

immaterial to the
firm or individual making the loan or guarantee, and the client

Question 15

If a material loan from a bank or similar financial institution is obtained under
normal lending procedures, terms and conditions, the work should be

Answer 15

reviewed
by an appropriate reviewer, who is not an audit team member, from a network
firm that is not a beneficiary of the loan

Question 16

A loan or guarantee from an audit client which is not a bank or financial
institution

Answer 16

is not permitted unless immaterial

Question 17

If the purchase of goods and services by an audit team member represents a
material amount, that person should be

Answer 17

removed from the audit team or they
should reduce the magnitude of the transactions

Question 18

Fees based on a particular outcome, e.g. level of profits of the company, are C

Answer 18

not
permitted for audit engagements

Question 19

A self-interest threat is created when a member of the audit team is evaluated
on, or compensated for, selling non-assurance services to that audit client.
The significance of the threat will depend on

Answer 19

 The proportion of the individual’s compensation or performance evaluation
that is based on the sale of such services.
 The role of the individual on the audit team.
 Whether promotion decisions are influenced by the sale of such services

Question 20

Listed clients -
The engagement partner, EQR or any other key audit partner must not act for a
period of more than

Answer 20

seven cumulative years (‘time-on’ period).
After the time-on period, the individual must serve a cooling-off period

Question 21

The cooling-off periods are as follows:

Answer 21

 5 years for an engagement partner.
 3 years for an EQR.
 2 years for a key audit partner

Question 22

In exceptional circumstances, a key audit partner may be permitted to serve a
one-year extension if

Answer 22

continuity is important to maintain audit quality

Question 23

An independent regulatory body may provide an audit firm with an exemption
from partner rotation if the firm

Answer 23

does not have sufficient people with the
necessary knowledge and experience to enable partner rotation

Question 24

A familiarity threat (and self-interest or intimidation threat) may occur when a
member of the engagement team has a family or personal relationship with
someone at the client who is able to

Answer 24

exert significant influence over the financial
statements (or subject matter of another assurance engagement)

Question 25

Factors which should be considered when evaluating the threat include the
individual’s

Answer 25

responsibilities on the audit team and the role of the family member
or other individual within the client, and the closeness of the relationship

Question 26

Recruitment services may be provided to an audit client provided

Answer 26

the client
makes all management decisions including determining the suitability of the
candidate, selecting a suitable candidate, determining employment terms and
negotiating remuneration

Question 27

The firm cannot provide recruitment services in respect of

Answer 27

directors or senior
management who would be in a position to exert significant influence over the
financial statements

Question 28

If a senior or managing partner of the firm joins a listed audit client,
independence is compromised unless

Answer 28

twelve months have passed since the
individual was the senior or managing partner

Question 29

Self review - Where non-audit work is provided to an audit client and is then subject to audit,

Answer 29

the auditor will be unlikely to admit to errors in their own work, or may not
identify the errors in their own work.

Question 30

Providing accounting and bookkeeping services for an audit client might create
a self-review threat

Answer 30

Accounting and bookkeeping services include:
 Preparing accounting records and financial statements including:
− determining accounting policies
− originating or changing journal entries
− determining account classifications of transactions
 Recording transactions
 Payroll services

Question 31

A firm shall only provide a non-listed audit client with accounting and
bookkeeping services which are

Answer 31

routine or mechanical in nature

Question 32

Listed clients
A firm cannot provide a listed audit client with

Answer 32

accounting and bookkeeping
services

Question 33

Internal audit services -

Answer 33

Non-listed clients - Professionals who are not audit team members must be used to perform the
internal audit service

Listed clients - A firm cannot provide internal audit services for a listed audit client, where the
service relates to internal controls over financial reporting, financial accounting
systems, or in relation to amounts or disclosures that are material to the
financial statements

Question 34

Providing tax services to an audit client might create a

Answer 34

self-review and advocacy
threat

Question 35

The firm should consider:

Answer 35

 The characteristics of the engagement.
 The level of tax expertise of the client’s employees.
 The complexity of the tax regime

Question 36

Completion of tax returns does

Answer 36

not usually create a threat as the returns are
based on historical information and subject to approval by the tax authority

Question 37

A firm shall not provide tax planning and advisory services to an audit client
when

Answer 37

the effectiveness of the tax advice depends on a particular accounting
treatment

Question 38

When providing such services, the firm should

Answer 38

 Use professionals who are not audit team members to perform the service.
 Have an appropriate reviewer who was not involved in providing the
service to review the audit work or service performed.
 Obtain pre-clearance from the tax authorities

Question 39

Assistance in the resolution of tax disputes-

Answer 39

Non-listed clients - A firm shall not act as an advocate for the audit client before a public tribunal or
court in the resolution of a tax matter if the amounts are material to the financial
statements.

When providing such services, the firm should:
 Use professionals who are not audit team members to perform the
service.
 Have an appropriate reviewer who was not involved in providing the
service to review the audit work or service performed

Listed clients
A firm shall not act as an advocate for a listed audit client before a public
tribunal or court in the resolution of a tax matter. [R604.26]
The firm is allowed to have a continuing advisory role e.g.
 Responding to specific requests for information.
 Providing factual accounts or testimony about the work performed.
 Assisting the client in analysing the tax issues

Question 40

IT services may create a

Answer 40

self-review threat and also be considered to be
assuming management responsibilities

Question 41

The firm can provide IT services which involve:

Answer 41

 Design or implementation of IT systems unrelated to internal controls or
financial reporting.
 Implementation of off-the-shelf accounting software that was not
developed by the audit firm and does not require significant customisation

Question 42

Listed clients

Answer 42

A firm shall not provide IT systems services to a listed client that form a
significant part of the internal controls over financial reporting or generate
information that is significant to the financial statements.

Question 43

Providing valuation services to an audit client might create a

Answer 43

self-review and
advocacy threat

Question 44

The firm should consider:

Answer 44

 The use and purpose of the valuation report, including whether the report
will be made public.
 The extent of the client’s involvement in determining matters of judgement.
 The degree of subjectivity.
 Whether the valuation will have a material effect on the financial
statements.
 The degree of dependence on future events that might create significant
volatility in the amounts involved

Question 45

Prohibited services

Answer 45

 Corporate finance services that involve promoting, dealing in, or
underwriting the audit client’s shares
 Corporate finance services where:
− the effectiveness of the advice depends on a particular accounting
treatment or presentation in the financial statements, and
− the audit team has reasonable doubt as to the appropriateness of the
accounting treatment

Question 46

Providing legal services to an audit client might create a

Answer 46

self-review and
advocacy threat

Question 47

A firm shall not act in an advocacy role for an audit client when

Answer 47

the amounts
involved are material to the financial statements

Question 48

Staff may be loaned to the client provided:

Answer 48

 The loan period is short.
 The person does not assume management responsibilities.
 The client is responsible for directing and supervising the person

Question 49

Circumstances in which disclosure is permitted or required

Answer 49

Information should only be disclosed with proper and specific authority, or when
there is a legal or professional right or duty to disclose

Question 50

A conflict of interest arises when the same audit firm is appointed for two
companies that interact with each other, for example:

Answer 50

 Companies which compete in the same market.
 Companies which trade with each other.
 Companies in a legal dispute with each other.
 Providing services to a seller and a buyer in relation to the same
transaction

Question 51

for conflicts of interest

Answer 51

the firm must disclose the nature of the conflict to the
relevant parties and obtain consent to act

Question 52

Management integrity
A lack of integrity may indicate risks such as

Answer 52

 Aggressive interpretation of accounting standards including window
dressing of financial statements, management bias and inappropriate
judgements.
 Weak control environment and possible override of controls.
 Intimidation of auditors.
 Criminal activities such as money laundering, fraud and breach of laws
and regulations.
 Aggressive tax avoidance/evasion.
 Unreliable management representations

Question 53

The firm must comply with money laundering regulations which require client
due diligence to be carried out. If there is any suspicion of money laundering, or
actual money laundering committed by the prospective client,

Answer 53

the firm cannot
accept the engagement

Question 54

Before accepting (or continuing with) an engagement, the auditor must establish
whether

Answer 54

the preconditions for an audit are present and that there is a common
understanding between the auditor and management and, where appropriate,
those charged with governance

Question 55

The preconditions for an audit are that management acknowledges and
understands its responsibility for:

Answer 55

 Preparation of the financial statements in accordance with the applicable
financial reporting framework.
 Internal control necessary for the financial statements to give a true and
fair view.
 Providing the auditor with access to all relevant information and
explanations.

Question 56

If the client imposes a limitation on the scope of the auditor’s work to the extent
that the auditor believes it likely that a disclaimer of opinion will ultimately be
issued, then the auditor shall

Answer 56

not accept the engagement, unless required to do
so by law

Question 57

The terms are recorded in a written audit engagement letter and should include:

Answer 57

 The objective and scope of the audit of the financial statements
 The responsibilities of the auditor
 The responsibilities of management
 Identification of the applicable financial reporting framework for the
preparation of the financial statements
 Reference to the expected form and content of any reports to be issued by
the auditor