Module 11. Auditor Indepedence And Ethics

Question 1

The ICAS code of ethics is largely based on what?

Answer 1

The International Ethics Standards Board for Accountants (‘IESBA’)

Question 2

The ICAS code of ethics identifies five fundamental principles that all professional accountants should observe:

Answer 2

Integrity

Objectivity

Professional Competence and Due Care

Confidentiality

Professional Behaviour

Question 3

Mnemonic for remembering ICAS Code of Ethics:

Answer 3

COPIP

Question 4

Independence definition

Answer 4

Freedom from conditions and relationships which make it probable that a reasonable and informed third party would conclude that integrity or objectivity either is or could be impaired

Question 5

Independent has two facets:

Answer 5

The fact of independence

The appearance of independence

Question 6

Scepticism regarding the integrity and objectivity of an auditor can be overcome by:

Answer 6

There is evidence that properly monitored standards have been established for auditor conduct

AND

These standards are properly enforced, either by the profession or by society

Question 7

Covered person definition

Answer 7

A person in a position to influence the conduct or outcome of the engagement

Question 8

Examples of a covered person on an audit:

Answer 8

Each member of the engagement team

Persons who provide engagement quality control review for the engagement

Any other person who is involved in the audit

A number of other individuals within the audit firm with supervisory management and other oversight responsibilities

Question 9

What is the ES

Answer 9

The Ethical Standard

Question 10

The ES identifies six categories of threat which may affect independence:

Answer 10

Self-interest

Self-review

Management

Advocacy

Familiarity

Intimidation

Question 11

Once potential ES threats have been identified, the auditor should apply procedures / safeguards which will either:

Answer 11

Eliminate the threat

Reduce the threat to an acceptable level

Question 12

Auditors of listed or public interest entities (‘PIEs’) are required to ensure that the audit committee is provided with:

Answer 12

Written disclosure of relationships that may bear on integrity etc

Details on non-audit services and fees charged

Written confirmation that the firm and each covered person is independent

Details on any inconsistencies between the ES and the policy of the entity for the provision of non-audit services

Details of breaches of requirements of ES

Discuss independents issues

Question 13

What is a PIE?

Answer 13

Public interest entity

Question 14

In the UK Public Interest Entities (PIE) include:

Answer 14

All UK entities that are listed on the LSE or other regulated markets

All credit institutions

All insurance undertakings

Question 15

Common ethical situations

Answer 15

Financial interest

Loans and guarantees

Business relationships

Audit staff on loan to audit client

Audit staff potentially leaving to join an audit client

Audit staff leaving to join an audit client

Former audit client staff joins the audit firm

Family and other personal relationships

Question 16

Other examples of potential ethical issues

Answer 16

Long-standing association with the audit engagement

Contingent fees

Overdue audit fees

Dependence on non-audit services

Dependence on one client

Remuneration for selling non-audit services

Gifts and hospitality

Threatened and actual litigation

Non-audit services

Question 17

Prohibited non-audit services for the auditors of public interest entities are:

Answer 17

Tax

Undertaking role of management

Bookkeeping and accounts preparation

Payroll services

Valuation services

Services related to the entity’s internal audit function

Question 18

Permitted non-audit services for public interest entities for the auditors of public interest entities:

Answer 18

Reporting required by a competent authority or regulator under law

Reporting on government grants

Reporting on the iXBRL tagging of financial statements

Reporting on internal financial controls when required by law or regulation

Question 19

The introduction in the US of the Sarbanes-Oxley Act (‘SOX’) in 2002 has led to what?

Answer 19

The establishment of heightened standards over the independence of external auditors

Question 20

The Sarbanes-Oxley Act (‘SOX’) in 2002 rules affect the audit of companies that are…

Answer 20

Associated with a listed company registered with the Securities and Exchange Commission (‘SEC’) in the US

This has had an impact on UK auditors

Question 21

Areas affected by SOX:

Answer 21

Prohibition of non-audit services

Pre-approval of services

Audit partner rotation

Conflicts of interest

Question 22

SOX prohibits accounting firms from providing specific additional non-audit services to audit clients. The list includes:

Answer 22

Book-keeping

Financial information systems design and implementation

Internal audit and valuation advice

Question 23

SOX states that all services provided by the external auditors (subject to de minimis amounts), in relation to both audit and non-audit work, must be:

Answer 23

Pre-approved by the audit committee

Not required in the UK

Question 24

What is the audit committee in the UK expected to monitor (shit question)

Answer 24

But in UK - audit committee is expected to monitor work done by the external auditor and determine a policy on allowed non-audit services that the external auditor can provide

Question 25

SOX introduced what in relation to partners?

Answer 25

Partner rotation provisions for engagement partners, lead partners and other key partners involved in the audit

Question 26

SOX prohibits what? If the CEO, CFO or CAO were employed by the accounting firm, and participated in any capacity in the audit of the company during the year preceding the date of the initiation of the audit

Answer 26

A registered firm from providing an audit services

Question 27

In the UK, is it okay for any partner on an engagement to join the client in a key management position within one year (or two years for public interest entities) of the date the individual ceased to be a partner on the engagement

Answer 27

No, it is not