Lecture 13 - Professional Ethics (2) Flashcards
The IFAC code requires professional accountants to comply with….
The five fundamental principles of ethics AND requires professional accountants to be independent when
performing audit and assurance engagements
The five principles of ethics (‘COPPI’) are:
- Confidentiality
- Objectivity
- Professional Competence and Due Care
- Professional Behaviour
- Integrity
plus for audit:
1. Independence
Compliance with the fundamental principles and auditor independence may potentially be threatened by a broad range of circumstances. Many threats fall into the following categories ‘SSAFIM’, meaning:
- Self-interest threats
- Self-review threats
- Advocacy threats
- Familiarity threats
- Intimidation threats
- Management threats (FRC Ethical Standard)
A self interest threat is…..
Financial or other interests which might cause the auditor to be, or perceived to be, reluctant to take actions in connection with the engagement that
would be adverse to such interests of the auditor/firm
Examples: Holding an investment in the client
A self-review threat is…..
Arises when the results of non-audit / additional
services, or where the subject matter of such services, whether performed by the firm, the engagement team or others within the firm, are addressed in the audit engagement
Advocacy threat arises when…..
The firm undertakes work that involves acting as an advocate for an entity, supporting a position taken by the client in an adversarial or promotional context
Examples: Undertaking an active responsibility for the marketing of an entity’s shares
Familiarity threat occurs when…..
By virtue of a close relationship with the client, its
directors, officers or employees, an auditor becomes too sympathetic to the client’s interests or too accepting of their work.
Examples: Where close personal relationships are developed with an entity’s personnel through long association with the entity
Intimidation threat arises when….
The conduct of the firm or a covered person is influenced by fear or threats
Examples: Being threatened with dismissal or replacement in relation to a client engagement
Management threats arise when….
The firm undertakes work that involves making
judgements and taking decisions, which are the responsibility of the client’s management.
Examples: Becoming closely aligned with the views and interests of management
FRC Ethical Code packages circumstances creating threats into:
- Financial, business, employment and personal relationships
- Long association with the audit engagement
- Fees, remuneration and evaluation policies, litigation, gifts and hospitality
- Non-audit services provided to audit clients
Circumstances creating threats, for example: Financial interests
May create a self-interest threat, for example investments
To consider:
- Materiality of the financial interest (need to consider the net worth of the audit team member)
- The role of the individual holding the investment
- Whether the financial interest is direct or indirect (e.g. trust; estate; collective investment vehicle)
Address the threats:
-Prohibitions – auditor (nor their immediate family)shall not hold direct or material
indirect financial investment interest in the audit client or an entity controlling the
audit client
-Where indirect and not material, consider: Remove individual from the audit team or
structure audit responsibilities appropriately
Circumstances creating threats, for example: Family and personal relationships
Might create self-interest, familiarity or intimidation threat
To consider:
- Individual’s responsibility on the audit team, from audit junior to partner
- The family member/other individual at the client, their role within the client and relationship with audit team member
Address the threats:
-Remove individual from the audit team or structure audit responsibilities appropriately
-Prohibitions from being a member of an audit team, for example where individual’s immediate/close family is director/officer/senior position during the audit
Circumstances creating threats, for example: Long association with the client
Self-interest, familiarity or possibly intimidation threat
Consider:
-Length of relationship with client
-Length of time on engagement team and role on the team
-Closeness of relationship with senior management/directors
-The client environment, structure and changes
Safeguards:
-Establish policies/procedures to monitor time/involvement of senior staff/partners
-Rotate individual off the audit team
-Change role of audit team member, tasks and responsibilities
Circumstances creating threats, for example: Fees
The nature and level of fees, or other types of remuneration might create a self-interest or intimidation threat
To consider
-Relative size: do fees represent a large proportion of the total fees?
Address the threats
- Increase client base of firm to reduce over-reliance on client
- Independent reviewer of the audit engagement work
Non audit services - creating threats….
Examples: Internal audit, IT systems
Evaluate
• Nature/scope/purpose of NAS
• Will NAS be relied on in the audit?
• Will NAS impact on financial statement judgements?
Safeguard
• To reduce/decline/end –guidance given for NAS types in the Codes
• The 70% rule:
• NAS fees from a client capped to 70% of average audit fees received from the client over the last three years
