Integrity, objectivity and independence Flashcards
What are the 6 threats of audit?
Self-interest, self-review, advocacy, familiarity, intimidation and management
What are the threats involved in self-interest?
Financial interest - owning shares in the company
Close business relationship - in business with company
Gifts and hospitality - unless value insignificant
Loans and guarantees - lending a material amount
Overdue fees - will make a loan if not paid
High percentage of fees
Lowballing
Percentage of contingent fees - fees based on outcome
What are the safeguards in place for self-interest?
Dispose of all shares, remove person from team, inform audit committee
Must keep company at arms length
Policy on gift acceptance/not accept them
Should not enter loan agreement
Payment of overdue fees required
Monitor fees, disclose breaches, external quality reviews
Comply with all quality control procedures
Not enter into fee arrangements
What are the threats involved in self-review?
Service with an assurance client - been an employee/director of client before
Providing internal audit
Preparing accounting records and FS - firm prepares and then audits
Valuation services
Tax services
What are the safeguards in place for self-review?
Not assigned to client for 2 years after leaving
Cannot provide internal audit
Use other staff members
No valuation if material effect on listed company/significant degree of subjective judgement
Listed companies is prohibited, non-listed use separate staff
What is an advocacy threat?
The threat that a client may put the firm in a position to take their side in a legal dispute as their advocate
What are the threats involved in familiarity threats?
Long association with assurance clients
Personal relationships - threatens independence
What are the safeguards involved in familiarity threats?
Rotating senior staff, listed companies - audit engagement partner no longer than 5 years and key partners no longer than 7 years, unlisted - partner no longer than 10 years
Individual removed
What is an intimidation threat?
When clients threaten to sue or not pay etc
What safeguards are involved in intimidation threat?
Disclosing to audit committee
Removing individuals involved
Additional professionals
Resign
What is management threat?
When the audit team do work involving making judgements/decisions that management should
What should be taken into consideration before accepting new clients?
Illegal activities
Apparent dishonesty
Questionable accounting practices
What should be considered when resolving ethical conflicts?
Relevant facts
Relevant parties
Ethical issues involved
Fundamental principles
Internal procedures
Alternative courses of action
What situations could an accountant be put in that is conflict of interest?
Act contrary to law
Act contrary to technical/professional standards
Unethical/illegal earnings management strategies
Lie to mislead auditors
Be associated with published reports that materially misstate
What is the course of action for a conflict of interest?
Resolve internally - audit committee
Advice from ICAEW
Legal advice
Resign
