Module 3 Auditor Independence and Ethics

Question 1

PIPCO

What are the ICAS code of ethics?

Answer 1

PIPCO

P- Professional competence
I- Integrity
P- Professional behaviour
C- Confidentiality
O- Objectivity

Question 2

What are CA 2006 provisions to try to safeguard auditor independence?

Answer 2

• The shareholders appoint the auditor rather than the board
• The auditors numeration is fixed by shareholders
• Publication of audit fee in financial statement
• Penalties in place for failing to provide the auditor with information relevant to the audit

Question 3

In the UK Public interest entities (PIE) are:

Answer 3

• All UK entities that are listed on the LSE or other regulated markets
• All credit institutions
• All insurance undertakings

Question 4

MASSIF

What are the main threats to auditor independence according to FRC?

Answer 4

MASSIF

M- Management
A- Advocacy
S - Self interest
S- Self review
I- Intimidation
F- Familiarity

Question 5

What is a covered person?

Answer 5

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

Question 6

What are the threats associated with family and other personal realtionships?

Answer 6

Familiarity, self-interest and intimidation.

Question 7

If litigation is in progress or is probable, the firm should:

Answer 7

either not continue with, or not accept, the audit engagement.

Question 8

Auditors of a listed or public interest entity are required to ensure that the audit committee is provided with:

Answer 8

• A written disclosure of relationship
• Details of non audit services
• Written confirmation that the firm and each covered person is independent
• Details of inconsistencies between the ES and the policy of the entity
• Details of any breaches of the requirements in the ES
• An opportunity to discuss independence issues

Question 9

What are the exceptions for Financial interest when it comes to independence?

Answer 9

Exception where the interest is an immaterial indirect investment where the holder has no influence over the investment decisions

Question 10

What are the exceptions for Loans when it comes to independence?

Answer 10

It is permissible if:

• The client is a bank or a similar deposit taking institution
• The loan is made in the ordinary course of business
• It is not material to the audit firm and client

Question 11

What are the exceptions for secondments to audit clients?

Answer 11

The only exception relates to staff employed by a UK national audit agency.

Exception only made if:
- No management responsibilities
- Was for a period of no longer 3 months (6 months if training contract)
- Did not include the provision of a prohibited service

Question 12

Would an adult daughter working in the marketing department be an acceptable threat?

Answer 12

Yes this would be acceptable. She works in marketing so disconnected to finance

Question 13

What are the sections of the FRS ethical standard

Answer 13

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 (not examinable in Assurance)

Question 14

What threats arise when an audit client lends money to an auditor

Answer 14

Self interest
Intimidation

Question 15

What threats arise from a business relationship with an audit client?

Answer 15

Advocacy
Self interest
Intimidation

Question 16

when a member of the audit team has family at the audit client what threats arise?

Answer 16

Self interest
Intimidation
Familiarity

Question 17

What threats arise with long association?

Answer 17

Familarity
Self Interest
Self review