Professional Ethics - Codes of ethics, compliance and identifying, evaluating and addressing threats Flashcards
Codes of Ethics and the conceptual framework (IFAC Code of Ethics and FRC Ethical Standard) - International Federation of Accountants (IFAC) Code of Ethics
What does it require? (2)
- IFAC Code of Ethics sets out a _____________ _______________
for _______________, ______________ and ______________ __________ to the ________________ _____________ and in the _______ of ______, to ________________ - categorises _____ __________
What does the IFAC Code also do? (3)
Requires:
- Compliance with five fundamental ethical principles applicable for all professional accountants
- Auditors to maintain independence when performing audits
- IFAC Code of Ethics sets out a conceptual framework
for identifying, evaluating and addressing threats to the fundamental principles and in the context of audit, to independence - categorises five threats
IFAC Code also:
- Identifies a range of facts and circumstances that may threaten fundamental principles and/or independence
- Suggests how to identify, evaluate and address threats in given circumstances
- Discerns ‘stricter’ requirements for audits of public interest entities (e.g. listed companies, banks)
Codes of Ethics and the conceptual framework (IFAC Code of Ethics and FRC Ethical Standard) - IFAC Code of Ethics and FRC Ethical Standard
3 facts about FRC Ethical Standard?
2 facts about Professional Bodies?
FRC Ethical Standard
- follows the same conceptual approach for auditors in the UK (though does not separately identify fundamental principles for professional accountants)
- Categorises the five threats of IFAC plus one more
- Some provisions of the FRC Ethical Standard are stricter than IFAC
Professional Bodies
- Expectation that IFAC Code of Ethics is adopted by professional accountancy bodies which are members of IFAC
- Professional bodies around the world who are members of IFAC commit to complying, or are developing towards compliance, with IFAC standards (180 members across 130 jurisdictions, as at March 2024)
Codes of Ethics and the conceptual framework (IFAC Code of Ethics and FRC Ethical Standard) - IFAC Code of Ethics –
membership obligations
IFAC standards set by ______ ____________ _____________ _________, and ____________ the ______________ and ____________ of ______ standards
IFAC standards set by four standard setting boards, and support the application and interpretation of IASB standards
Codes of Ethics and the conceptual framework (IFAC Code of Ethics and FRC Ethical Standard) - IFAC’s Fundamental principles and independence
4 things about it?
Picture of the conceptual framework
- Identifies five fundamental principles (‘COPPI’) for professional accountants
- Independence for audit engagements
- fundamental principles and independence are not mutually exclusive
- Exercise of professional judgement and professional scepticism are supported by and support fundamental principles and independence
Codes of Ethics and the conceptual framework (IFAC Code of Ethics and FRC Ethical Standard) - Fundamental Principles & Independence
6 with explanations (4,4,3,4,3,3)
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Integrity
- Straightforward and Honest: Always approach situations and interactions with clarity and sincerity, avoiding deception or ambiguity.
- Fair Dealing: Engage with others equitably, ensuring actions and decisions reflect justice and impartiality.
- Truthfulness: Commit to presenting facts accurately and without distortion.
- Courage: Demonstrate bravery in standing up for ethical principles, even when faced with challenges or adversity.
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Objectivity
- Judgment without Compromise: Make decisions based solely on factual evidence and sound reasoning, free from personal biases.
- Avoid Bias: Stay vigilant against partiality that could skew judgment.
- Conflicts of Interest: Identify and manage situations where personal or external interests could influence professional decisions.
- Undue Influence: Resist pressures that may improperly impact impartial decision-making.
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Professional Competence and Due Care
- Attain/Maintain Knowledge and Skills: Continuously update and refine expertise to remain competent in a profession.
- Diligent Actions: Perform duties with conscientious attention to detail and adherence to established professional standards.
- Judicious Application of Skills: Exercise sound professional judgment, adapting knowledge and techniques to suit the specific context of a task or challenge.
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Confidentiality
- Respect for Acquired Information: This emphasizes the importance of maintaining confidentiality regarding any information obtained during professional engagements or business operations.
- Inadvertent Disclosure: It’s about being cautious in informal settings (like social conversations or within the firm) to prevent unintentional sharing of confidential information.
- Awareness of Duties to Disclose: Professionals need to be aware of their legal and ethical obligations, which may sometimes require disclosing certain information in specific situations.
- Timeless Obligation: Confidentiality is not limited to a particular period and must be upheld indefinitely unless legally required otherwise.
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Professional Behaviour
- Compliance with Regulations: Always adhering to the rules, laws, and guidelines relevant to their profession.
- Serving the Public Interest: Professionals should act in a way that aligns with the broader good of society, beyond individual or organizational interests.
- Avoid Impaired Judgment: Professionals should stay clear of situations that could compromise their professional judgment (PJ) or professional skepticism (PS).
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Independence
- ‘Be, and Be Seen to Be’ Independent: It’s crucial not only to maintain independence but also to ensure it’s visibly evident to others.
- Importance of Professional Scepticism: This is about fostering a questioning mindset, ensuring the work remains objective and free from bias.
- Compliance with Fundamental Principles: Following the core principles of ethics helps in reinforcing professional skepticism.
Codes of Ethics and the conceptual framework (IFAC Code of Ethics and FRC Ethical Standard) - IFAC’s conceptual framework
What is the three-step approach described in IFAC’s conceptual framework?
Why is this three-step approach important?
What key points are highlighted around the circular diagram of the IFAC framework?
What is the three-step approach described in IFAC’s conceptual framework?
The approach involves:
- Identifying threats
- Evaluating threats
- Addressing threats
_Why is this three-step approach important? +
Answer:
- It helps ensure compliance with the fundamental principles and, where applicable, independence.
What key points are highlighted around the circular diagram of the IFAC framework?
The key points include:
- Exercising professional judgment
- Staying alert to new information and changes in facts and circumstances
- Using the reasonable and informed third-party test
Codes of Ethics and the conceptual framework (IFAC Code of Ethics and FRC Ethical Standard) - Applying the conceptual framework
What is the general approach to applying the conceptual framework? (3)
What is the role of an inquiring mind?
What does ‘reasonable and informed third party’ mean? (2)
Why is professional judgment important?
What is the general approach to applying the conceptual framework?
The general approach involves:
- Having an inquiring mind
- Exercising professional judgment
- Using the ‘reasonable and informed third party test’ in the context of the audit engagement (for this module).
What is the role of an inquiring mind?
- An inquiring mind requires being curious and critically assessing information to make informed decisions.
What does ‘reasonable and informed third party’ mean?
It refers to:
- Evaluating situations from the perspective of an independent person who is fully informed of all relevant facts.
- Asking whether the same conclusion would be reached by such a person, ensuring objectivity.
Why is professional judgment important?
- It ensures decisions are made thoughtfully, considering all applicable facts, circumstances, and ethical requirements.
Codes of Ethics and the conceptual framework (IFAC Code of Ethics and FRC Ethical Standard) - Identify, Evaluate and Address threats
What are the steps to identify threats? (3)
What should be evaluated when assessing threats? (3)
What actions should be taken if a threat is not at an acceptable level? (3)
What are the steps to identify threats?
- Understand the relevant facts and circumstances.
- Categorise the type or types of threat.
- Use professional judgement to assess the situation.
What should be evaluated when assessing threats?
- Determine if the threat is at an acceptable level (RITPT).
- Consider policies and procedures that might mitigate the threat in the given context.
- Assess the organisational culture and its influence on the situation.
What actions should be taken if a threat is not at an acceptable level?
- Eliminate the circumstance that creates the threat.
- Apply safeguards to reduce the threat to an acceptable level.
- If neither approach works, decline or withdraw from the engagement.
Codes of Ethics and the conceptual framework (IFAC Code of Ethics and FRC Ethical Standard) - Factors relevant to applying the conceptual framework
What factors are relevant when applying the conceptual framework?
The factors are divided into two main categories: (6,6)
What factors are relevant when applying the conceptual framework?
The factors are divided into two main categories:
-
Existence of Conditions, Policies, and Procedures
- Effective corporate or audit firm governance.
- Identification of all ‘covered persons’.
- Documenting conclusions related to independence (I), ethical (E), and audit (A) threats.
- Initial and continuing professional development.
- Mechanisms for reporting ethical breaches.
- Strong professional and regulatory oversight.
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Strong Organisational Culture
- Promotion of ethical values.
- Establishing a strong ‘tone at the top’.
- Quality management systems for audit.
- Regulatory oversight of audit firms.
- Engagement partner’s ultimate responsibility for ethical compliance.
- Larger firms may appoint a designated ethics partner to oversee policy adequacy, provide guidance, and conduct training.
Defining and identifying threats to auditor independence - Self-interest Threat
What is a self-interest threat?
What are some examples of self-interest threats? (5)
What are some safeguards against self-interest threats? (5)
What is a self-interest threat?
- A self-interest threat is the threat that a financial or other interest might inappropriately influence the auditor’s judgment or behavior.
What are some examples of self-interest threats?
- Holding an investment in the client.
- Seeking to provide non-audit services (NAS) or additional services to the client.
- Undue dependence on total fees from a client; concern about the possibility of losing the client.
- Needing to recover outstanding fees from the client.
- Potential future employment with a client.
What are some safeguards against self-interest threats?
- Fees should never be contingent.
- Overdue fees must be settled.
- The “70% rule” for NAS to audit clients.
- The “10% rule” for auditing Public Interest Entities (PIE) or listed companies (with IFAC allowing up to 15%).
- The “15% rule” for non-PIE and non-listed companies.
Defining and identifying threats to auditor independence - Understanding Self - Review Threats
What is a self-review threat?
What are examples of situations that lead to self-review threats? (3)
What safeguards can address self-review threats?
Examples include: (2)
What challenges exist in mitigating self-review threats?
Key difficulties include: (3)
What is a self-review threat?
- A self-review threat occurs when the outcomes of non-audit or additional services provided by an audit firm, its engagement team, or others within the firm become subject to scrutiny during an audit engagement.
What are examples of situations that lead to self-review threats?
Self-review threats can arise in scenarios such as:
- Work performed in non-audit/additional services impacting the audit.
- An assurance team member serving as a director or officer of the client.
- Secondment of an audit team or firm member to the client.
What safeguards can address self-review threats?
Examples include:
- Recognizing that the auditor’s integrity and objectivity might be impaired when reviewing a colleague’s work.
- Acknowledging that material impacts on the engagement subject from non-audit services often render safeguards insufficient.
What challenges exist in mitigating self-review threats?
Key difficulties include:
- Hesitancy among engagement staff to critically assess prior judgments.
- Risks of compromised integrity, objectivity, and independence.
- Limited safeguards for situations involving significant overlap between audit and non-audit activities.
Defining and identifying threats to auditor independence - Advocacy Threat
What is an Advocacy Threat?
What are some examples of situations that create Advocacy Threats? (4)
What safeguards can be applied to address Advocacy Threats?
What is an Advocacy Threat?
An Advocacy Threat arises when a firm takes on work that involves acting as an advocate for an entity, particularly supporting a client’s position in an adversarial or promotional setting.
What are some examples of situations that create Advocacy Threats?
Examples include:
- Selling or underwriting financial securities or shares for an assurance client.
- Acting as a legal advocate for a client.
- Negotiating bank or credit terms and funding on behalf of a client.
- Taking on responsibility for marketing an entity’s shares.
What safeguards can be applied to address Advocacy Threats?
- Safeguards might include avoiding certain activities entirely. For instance, if non-audit or additional services require a firm or auditor to act as a client advocate for matters material to an engagement, it’s often impossible to implement safeguards that can reduce the Advocacy Threat to an acceptable level.
Defining and identifying threats to auditor independence - Familiarity Threat
What is a familiarity threat?
What are some examples of situations that might lead to a familiarity threat? (3)
What safeguards can be used to mitigate familiarity threats? (3)
What is a familiarity threat?
- A familiarity threat occurs when an auditor becomes overly sympathetic to a client’s interests or too accepting of their work, due to a close relationship with the client, its directors, officers, or employees.
_What are some examples of situations that might lead to a familiarity threat? _
- Developing close personal relationships with an entity’s personnel through long association with the entity.
- Having an immediate or close family member who is a director, officer, or influential employee of the client.
- When a former partner of the audit firm becomes a director, officer, or an employee in a significant position at the client.
What safeguards can be used to mitigate familiarity threats?
Examples of safeguards include:
- Declaring conflicts of interest.
- Monitoring the length of engagement and the tenure of senior audit team members.
- Properly constituting the audit team and structuring the audit process.
Defining and identifying threats to auditor independence - Management Threat
What is a management threat?
What circumstances might lead to management threats? (4)
How can management threats be mitigated?
What is a management threat?
- A management threat occurs when a firm takes on tasks requiring decisions or judgments that should be the responsibility of the client’s management.
What circumstances might lead to management threats?
Examples include:
- Becoming too closely aligned with management’s views and interests.
- Collaborating on a divestment strategy for the client.
- Deciding on assumptions for profit forecasts.
- Advising the client on accounting policies and practices.
How can management threats be mitigated?
- A safeguard example is that auditors must not participate in client decision-making during an engagement. This ensures independence and avoids threats that can’t be mitigated.
Considering specific circumstances and facts threatening auditor independence - Facts and Circumstances creating threats
What does the FRC Ethical Code package into circumstances creating threats? (4)
FRC Ethical Code packages these circumstances into:
- Financial, business, employment and personal relationships
- Long association with the audit engagement
- Fees, remuneration and evaluation policies, litigation, gifts and hospitality
- Non-audit / additional services
Considering specific circumstances and facts threatening auditor independence - Circumstances creating threats, for example - 1
What circumstances might create threats in auditing?
Big flashcard
What circumstances might create threats in auditing?
- Financial Interests: May create self-interest threats, such as investments.
- Family and Personal Relationships: May create self-interest, familiarity, or intimidation threats.
- Long Association with the Client: May create self-interest, familiarity, or intimidation threats.
- Fees: The nature and level of fees or other remuneration may create self-interest or intimidation threats.
- Gifts and Hospitality: May create self-interest, familiarity, or intimidation threats if not trivial or inconsequential.
Considering specific circumstances and facts threatening auditor independence - Circumstances creating threats, for example - 2
What should be considered regarding financial interests? (3)
How can threats from financial interests be addressed? (2)
What should be considered regarding financial interests?
- Materiality of the financial interest (consider the net worth of the audit team member).
- Role of the individual holding the investment.
- Whether the financial interest is direct or indirect (e.g., trust, estate, collective investment vehicle).
How can threats from financial interests be addressed?
- Prohibitions: Auditors (and their immediate family) must not hold direct or material indirect financial investment interests in the audit client or controlling entities.
- If indirect and not material: Remove the individual from the audit team or structure audit responsibilities appropriately.
Considering specific circumstances and facts threatening auditor independence - Circumstances creating threats, for example - 3
What considerations arise from family and personal relationships? (2)
How can threats from family and personal relationships be addressed? (2)
What considerations arise from family and personal relationships?
- The individual’s role on the audit team, from junior staff to partner.
- The family member or other individual’s role within the client and their relationship with the audit team member.
How can threats from family and personal relationships be addressed?
- Remove the individual from the audit team or structure audit responsibilities appropriately.
- Prohibit the individual from being on the audit team if an immediate or close family member holds a director, officer, or senior position in the client during the audit.
Considering specific circumstances and facts threatening auditor independence - Circumstances creating threats, for example - 4
What are the risks related to long association with a client? (4)
What safeguards address long associations with a client? (6,2)
What are the risks related to long association with a client?
- Length of the relationship with the client.
- Time spent on the engagement team and the individual’s role.
- Closeness of relationships with senior management or directors.
- Changes in the client’s environment, structure, or leadership.
What safeguards address long associations with a client?
- Implement policies to monitor involvement of senior staff or partners.
- Rotate individuals off the audit team.
- Change audit team members’ roles, tasks, and responsibilities.
- Conduct regular reviews of audit work.
- Appoint an independent partner to review the engagement partner’s work.
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For PIEs and listed companies:
- IFAC Code: 7-year rule with 5 years cooling off.
- FRC Ethical Code: 5-year rule with 5 years cooling off.
Considering specific circumstances and facts threatening auditor independence - Circumstances creating threats, for example - 5
What should be considered regarding fees? (3)
How can threats from fees be addressed? (3)
What is important to consider about gifts and hospitality?
What should be considered regarding fees?
- Do fees represent a large proportion of total fees for the audit firm?
- Ensure a proper audit is conducted regardless of agreed fees.
- Fees should never be contingent.
How can threats from fees be addressed?
- Increase the client base of the firm to reduce over-reliance on a single client.
- Appoint an independent reviewer for the audit engagement work.
- For PIEs and listed companies: Address threats if fees regularly exceed 15% (IFAC) or 10% (FRC) of total fees.
What is important to consider about gifts and hospitality?
- Ensure their value is trivial and inconsequential to avoid self-interest, familiarity, or intimidation threats.
