Module 11: Auditor Independence and Ethics

Question 1

The code of ethics identifies five fundamental principles that all professional accountants should observe, what are they?
COPIP

Answer 1

1. Integrity - A professional accountant should be straight forward and honest in all professional and business relationships
2. Objectivity - Should not allow bias, conflict of interest or undue influence of others to override professional or business adjustments
3. Professional competence and due care - A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives professional care.
4. Confidentiality - A professional accountant should respect the confidentiality of information acquired as a result of professional or business relationships and should not disclose any such information to third parties without specific authority unless there is a legal or professional duty of care
5. Professional behaviour - Accountant should comply with relevant laws and regulations.

Question 2

Define independence?

Answer 2

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 3

What are they sections of the ethical standards (ES) ?

Answer 3

Section 1: General requirements and guidance
Section 2: Financial, business, employment and personal relationships
Section 3: Long association with engagements and with entities relevant to engagements
Section 4: Fees, remuneration and evaluation policies, gifts and hospitality, litigation
Section 5: Non-audit/additional services
Section 6: Provisions available for audits of small entities

Question 4

What are the overarching principles?

Answer 4

Es is driven by the overarching principles of integrity objectivity and independence

Question 5

What is a covered persons?

Answer 5

A person in a position to influence the conduct or outcome of the engagement.
This includes:
Each member of the engagement team
Persons who provide engagement quality control review for the engagement
Any other persons who is involved in the audit
A number of other individuals within the audit firm with supervisory, management and other oversight responsibilities.

Question 6

What are the six categories that may affect independence? MASSIF

Answer 6

1. Self-interest - Auditors have financial or other interests. Investment in client or need to recover outstanding fee from client.
2. Self-review - Results from non audit services are reflected in the amounts disclosed on FS
3. Management - Undertaking work that involves making judgements and decisions that are responsibility of management. Design, selection and implementation of accounting information systems.
4. Advocacy - Acting as an advocate for a client
5. Intimidation- Auditors conduct is influenced by fear. Big bully client
6. Familiarity - Auditor develops close personal relationship with client.

Question 7

What is an ethics partner?

Answer 7

Each audit firm should nominate an ethics partner who is responsible for the adequacy of the policies and procedures and for ensuring that they are communicated to the other partners and staff within the firm and providing guidance to partners and staff on the application of ES.

Question 8

What does the auditor of a listed or PIE ensure that the audit committee is provided with?

Answer 8

A written disclosure of relationships that may bear on the integrity, objectivity or independence of the firm

Details of non-audit services, including the fees charged.

Written confirmation that the firm and each covered person is independent

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

Details of any breaches of the requirements in the ES, and of any safeguards applied and actions taken to address any threats

An opportunity to discuss independence issues.

Question 9

Sox VS UK requirements: Audit partner rotation?

Answer 9

SOX:
Audit parter should be rotated after a period of five years. Does not mention firm rotation

UK:
Audit partner must rotate after 5 years with flexibility up to an additional 2 years. Partner cannot return for 5 years.
The independent review partner should be moved after 7 years (not to return for 5 years).

Question 10

Sox VS UK requirements: Non-audit services

Answer 10

SOX:
No non-audit services

UK:
Some are allowed. In that case firms should consider if any threats to independence occur.

Question 11

Sox VS UK requirements: Pre-approval services

Answer 11

SOX:
All services by auditor should be pre-approved by audit committee

UK:
No formal pre-approval is required. Audit committee should pre-approve non-audit services.

Question 12

Sox VS UK requirements: Conflicts of interests

Answer 12

SOX:
Prohibits a public accounting firm from providing any services if CEO, CFO or CAO were employed by that accounting firm.

UK:
It is not allowable for any partner on an engagement to join the client in a key management position, as a director on the board or as a member of the audit committee within 1 year (2 year for PIE) of date partner stopped working for audit.