Lesson 3 : Professional ethics and independence

Question 1

What are ethics?

Answer 1

A sense of agreement in a society as to what is right and wrong.

Ethics represent a set of moral principles, rules of conduct or values.

Question 2

Why is there a need for professional ethics?

Answer 2

Professional accountants have a responsibility to act in the public interest.The purpose of assurance engagements is to increase the confidence of the intended users, therefore the users need to trust the professional who is providing the assurance.In order to be trusted the assurance provider needs to be independent of their client. and by operating in accordance with an accepted code of ethics.

Question 3

What does legislation require in terms of published code of ethics ?

Answer 3

Legislation requires accounting bodies to adopt the Ethical Standards (ESs).

Question 4

Do audits in the UK and Republic of Ireland comply with ESs

Answer 4

Yes, for audits in UK and Republic of Ireland: professional accountants comply with ESs.

Question 5

What do audits everywhere comply with

Answer 5

For audits elsewhere: comply with Section 290 of IFAC Code dealing with Audit and Review Engagements.

Question 6

Name the 5 general principles of the IFAC code

Answer 6

1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour

Question 7

Define Integrity and Objectivity under the general principles of IFAC code

Answer 7

Integrity – straightforward and honest in all professional and business relationships.

Objectivity – no bias, conflict of interest or undue influence of others to override professional or business judgments.

Question 8

Define professional competence and due care

Answer 8

Professional competence and due care – maintain professional knowledge and skill at level required

Question 9

Define professional behaviour

Answer 9

Professional behavior – to comply with relevant laws and regulations and avoid any action that discredits the profession.

Question 10

Define Confidentiality

Answer 10

Confidentiality requires no disclosure of any such information to third party without permission from specific authority unless a legal or professional right or duty to disclose, nor use the information for personal advantage of the professional accountant or third parties.

Question 11

Many threats fall into the following categories: What are they

Answer 11

Self-interest threat
  Self-review threat  
 Advocacy threat
 Familiarity threat
 Intimidation threat

Question 12

Self-interest threat

Answer 12

A self-interest threat occurs when an auditor could benefit from a financial interest in, or other self-interest conflict with, an assurance client.
A financial or other interest that will inappropriately influence the judgement or behaviour of the assurance provider.

Question 13

Give an example of self interest threat circumstances (6)

Answer 13

A financial interest in a client or jointly holding a financial interest with a client.
Undue dependence on total fees from a client.
Having a close business relationship with a client.
Concern about the possibility of losing a client.
Potential employment with a client.
Contingent fees relating to an assurance engagement.

Question 14

Self-review threat

Answer 14

A self-review threat occurs where non-audit
work is provided to an audit client and is then subject to audit, the auditor will be unlikely to admit to errors in their own work, or may not identify the errors in their own work.

Question 15

Give some example of Self-review threat circumstances (4)

Answer 15

Reporting on the operation of financial systems after being involved in their design or implementation.
Having prepared the original data used to generate records that are the subject matter of the engagement.
A member of the assurance team being, or having recently been, a director or officer of that client.
Performing a service for a client that directly affects the subject matter information of the assurance engagement.

Question 16

Advocacy threat

Answer 16

An advocacy threat – occurs when a member of the assurance team promotes, or seems to promote, an assurance client’s position or opinion. That is, the auditor subordinates his judgment to that of the client.

Question 17

Give some example of advocacy threat

Answer 17

Examples of circumstances that create advocacy threats:
Selling, underwriting or otherwise dealing in financial securities or shares of an assurance client.
Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties

Question 18

Familiarity threat

Answer 18

Familiarity threat – occurs when an auditor becomes too sympathetic to the client’s interests because he has a close relationship with an assurance client, its directors, officers or employees.

Question 19

Give some example of Familiarity threat (4)

Answer 19

Immediate family member or close family member who is a director, officer or influential employee of the assurance client.
A member of the assurance team having a close family member who, as an employee of the assurance client, is in a position to exert direct and significant influence over the subject matter of the engagement.
Acceptance of gifts or preferential treatment from a client, unless the value is trivial or inconsequential.
Senior personnel having a long association with the assurance client.

Question 20

Intimidation threat

Answer 20

Intimidation threat – occurs when a member of the assurance team may be deterred from acting objectively and exercising professional scepticism by threats, actual or perceived, from the directors, officers or employees of an assurance client.

Question 21

Give some example of Intimidation threat

Answer 21

Being threatened with dismissal from a client engagement.
Being threatened with litigation.
Being pressured to reduce inappropriately the extent of work performed in order to reduce fees.
An audit client indicating that it will not award a planned non assurance contract to the firm if the firm continues to disagree with the client’s accounting treatment.
A professional accountant being informed by a partner of the firm that a planned promotion will not occur unless the accountant agrees with an audit client’s inappropriate accounting treatment

Question 22

What do safe guards do ?

Answer 22

Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad categories:

1. Safeguards created by the profession, legislation or regulation
2. Safeguards in the work environment.

Question 23

What are some Safeguards created by the profession, legislation or regulation ?

Answer 23

Safeguards created by the profession, legislation or regulation include:

a. Educational, training and experience requirements to become a certified member of the profession.
b. Continuing education requirements.
c. Professional accounting, auditing and ethics standards.
d. Disciplinary processes.
e. Peer review of quality control.
f. Professional rules or legislation governing the independence requirements of the firms.

Question 24

What are some Firm-wide safeguards in the work environment?

Answer 24

Firm-wide safeguards in the work environment may include:
Leadership that stresses the importance of compliance with the fundamental principles and the duty to act in the public interest.
Monitor and implement quality control of engagements.
Documented policies regarding the need to identify threats to compliance with the fundamental principles, evaluate the significance of those threats and apply safeguards.
A disciplinary mechanism to promote compliance with policies and procedures.

Question 25

What are some Engagement-specific safeguards

Answer 25

Examples of engagement-specific safeguards in the work environment include:

1. Having a professional accountant who was not a member of the assurance team review the assurance work performed or otherwise advise as necessary.
2. Consulting an independent third party, such as a committee of independent directors, a professional regulatory body or another professional accountant.
3. Rotation of senior assurance team personnel.