Integrity, Objectivity And Independence Flashcards
How to achieve confidence in financial reporting
- Be objective
In reaching the opinion on the FS - Demonstrate independence
From the audit client
3 concepts to confidence
- Integrity
- Objectivity
- Independence
Integrity
Not just honesty
But fair dealing
And truthfulness
Objectivity
Excluding bias
Regard to all considerations
Relevant to the task at hand
Independence
Freedom from situations
And relationships
That may lead a reasonable and informed 3P
To conclude that objectivity is impaired
Type of threat: financial internet
Self interest threat
Type of threat: business relationships
Self interest threat
Type of threat: employment with audit firm and client
Self interest threat
Type of threat: audit partner leaves to take up employment with a client
Self interest threat
Type of threat: employee of audit firm negotiating employment with a client
Self interest threat
Type of threat: close personal and family relationships
Self interest threat
Type of threat: gifts and hospitality
Self interest threat
Type of threat: loans
Self interest threat
Type of threat: overdue fees
Self interest threat
Type of threat: contingent fees
Self interest threat
Type of threat: fee dependence (non listed client)
Self interest threat
Type of threat: fee dependence (listed client)
Self interest threat
Type of threat: lowballing
Self interest threat
Type of threat: fee cap for listed clients
Self interest threat
Type of threat: client staff joins the audit firm
Self review threat
Type of threat: audit staff complete loan assignment to client
Self review threat
Type of threat: accounting services offered to an audit client
Self review threat
Type of threat: valuation services offered to an audit client
Self review threat
Type of threat: preparing tax calculations for accounting entities in an audit client
Self review threat
Type of threat: internal audit services offered to an audit client
Self review threat
Type of threat: IT services offered to an audit client
Self review threat
Type of threat: recruitment services provided to an audit client
Familiarity threat
Type of threat: close family or personal relationships
Familiarity threat
Type of threat: corporate finance services offered to audit client
Advocacy threat
Type of threat: legal services offered to an audit client
Advocacy threat
Type of threat: representing an audit client in a tax tribunal or court to resolve a tax dispute
Advocacy threat
Type of threat: close family or personal relationships
Intimidation threat
Type of threat: business relationships
Intimidation threat
Type of threat: audit partner leaves to take up employment with a client
Intimidation threat
Type for threat: actual or threatened litigation
Intimidation threat
Type of threat: any additional non-audit service provided to an audit client where the auditor may take on a management role
Management threat
Ethical guidance: financial interest
Not allowed
For firm, partner, audit team member, immediate family
Ethical guidance: business relationships
Not allowed
Ethical guidance: employment with audit firm and client
Dual employment prohibited
Ethical guidance: audit partner leaves to take employment with a client
Firm should resign as auditor
Cannot retake for 2 years
Ethical guidance: Employee of audit firm negotiating employment with a client
Employee to inform audit firm
Firm to remove the employee from the engagement
And perform a review of their recent work on the client
Ethical guidance: close personal and family relationships
Shouldn’t work on the engagement
Ethical guidance: gifts and hospitality
Only if value is trivial
Ethical guidance: loans
Auditor->Client loans prohibited
Client->Auditor loans prohibited
Unless made by a bank in normal course of business
Ethical guidance: Overdue fees
(Akin to a loan)
Consider resignation if fees Ramon unpaid
Ethical guidance: contingent fees
Prohibited
Ethical guidance: fee dependence (non listed client)
When regular fee income over 10% firm’s fee income:
1. Disclose to ethics partner
2. Disclose to governance at client
3. Implement independent quality control review of audit
When regular fee income exceeds 15% of the firm’s fee income: Cannot act as auditor
Ethical guidance: fee dependence (listed client)
Regular fee income over 5% firm’s fee income:
1. Disclose to ethics partner
2. Disclose to governance at client
3. Implement independent quality control review of the audit
4. Seek to reduce fees
When over 10%: Cannot act as auditor
Ethical guidance: lowballing
Firm can charge any fee
But engagement partner should document that:
Adequate resources have been allocated in order to comply with auditing and ethical standards
Ethical guidance: fee cap for listed clients
Total fees from non-audit services must be no more than 70% of the average audit fee of the last 3 years
Ethical guidance: client staff joins the audit firm
No involvement in the audit for 2 years
Ethical guidance: audit staff complete loan assignment to client
Prohibited for audit staff to be temporarily ‘loaned’ to client
Ethical guidance: accounting services offered to an audit client
Non-listed clients: allowed with safeguards e.g.
Separate teams
Mechanical/technical work only
Quality control review of audit
Listed client: Not allowed
Ethical guidance: valuation services offered to an audit client
Non-listed clients: Not allowed if material and subjective
If material, allowed with safeguards:
1. Separate teams
2. Second partner review
3. Management acknowledge responsibility for valuation
Listed clients: not allowed
Ethical guidance: preparing tax calculations for accounting entries in an audit client
Non-listed clients: allowed with safeguards
1. Separate teams
2. Review of tax work by independent tax partner
3. Quality control review of audit
Listed clients: Do not prepare tax calculations for the purpose of making material accounting entries
Ethical guidance: internal audit services offered to an audit client
Prohibited
Ethical guidance: it services offered to an audit client
Prohibited when relating to accounting or financial management system
Of where they involve taking the role of management
Ethical guidance: recruitment services provided to an audit client
Prohibited
Including advising on appointment of director or employee, or remuneration package
Ethical guidance: close family or personal relationships
Shouldn’t work on the audit
Ethical guidance: non listed: engagement partner
Review independence after 10y
Rotate or continue with safeguards:
1. Document reasons
2. Disclose to client
3. Consider other safeguards
Ethical guidance: listed: engagement partner
Rotate off after 5y
(Can extend to 7 with audit committee approval)
No return for 5y
Ethical guidance: listed: quality control review partner
Rotate off after 7y
No return for 5y
Ethical guidance: non listed client becomes listed: engagement partner
Take previous service into account
Of already served more than 4y can only continue for 2y
No return for 5y
Ethical guidance: listed: other senior staff
Review independence after 7y
Ethical guidance: corporate finance services offered to audit client
Not allowed to:
Promote
Deal in
Or underwrite
Client’s shares
Other CF services:
Risks must be appraised
And safeguards implemented where possible
E.g. separate teams, 2nd partner review, disclosures to audit committee
Ethical guidance: legal services offered to an audit client
Can’t be solicitor representing client in legal case
Other legal services:
Risks must be appraised
Safeguards implemented where possible
Ethical guidance: representing an audit client in a tax tribunal or court to resolve a tax dispute
Prohibited if:
Issue is material to FS
Otherwise:
With safeguards:
Separate teams
Advice from external tax professional
Ethical guidance: close family or personal relationships
Don’t work on audit
Ethical guidance: business relationships
Audit firm can’t have business relationships with client
Ethical guidance: audit partner leaves to take up employment with a client
Firm resigns as auditor
Cannot retake for 2y
Ethical guidance: actual or threatened litigation
Disclose to TCWG at client
Consider resignation
Ethical guidance: any additional non-audit service provided to an audit client where the auditor may take on a management role
Don’t take on management roles
Use the engagement letter to clarify:
Mngmnt responsibility for decision making
Limiting audit firm involvement in mechanical/technical work
Establish informed management
When to establish Informed management
When auditors believe the member of management designated by client to receive results of a non-audit service provided by the auditors have the capacity to make independent management judgements and decisions on the basis of the info provided
Things professional accountants should consider when faced with an ethical conflict
Relevant facts and parties
Ethical issues involved
Fundamental principles related
Established internal procedures
Alternative courses of action
If appropriate course of action in ethical conflict still not clear what should the accountant do?
Refer the matter:
- In house
E.g. to the ethics partner - Externally
E.g. ICAEW ethics helpline
ICAEW code of ethics advice to accountants in conflicting situations in industry
- Try to resolve the matter INTERNALLY
- Obtain advice from the ICAEW
- Seek LEGAL ADVICE
- Consider RESIGNATION
As last resort
