Professional standards and ethics

Question 1

The need for professional standards

Answer 1

Important for users of financial statements that their reliability does not vary from company to company

Question 2

Financial Reporting Council

Answer 2

Established to promote good financial reporting through the setting of accounting standards and review of published financial statements
Codes and Standards Committee - Actuarial policy, audit and assurance, corporate governance and accounting and reporting policy
Conduct Committee - Audit quality review, corporate reporting review, professional discipline and oversight, supervisory inquiries

Question 3

How does the FRC promote improvements in audit quality?

Answer 3

Audit standards (ISAs) - describe auditor responsibilities and approaches
Ethical standards (ES) - objectivity
Practice notes - eg. professional scepticism
Monitors compliance with ISA /ES via its Audit Quality Review Team
Oversees matters of misconduct and has power to take disciplinary action against auditors and firms
Oversees the UK code of Corporate Governance - outlines responsibilities of the Audit Committees to oversee the external audit function

Question 4

Professional scepticism

Answer 4

Adopting a questioning mind
Being alert to conditions which may indicate possible misstatement due to error or fraud
Critically assessing audit evidence

Question 5

Why is professional scepticism nesseccary?

Answer 5

Management may deliberately conceal fraud / be biased in the creation of financial statements
Evidence may not be reliable
Financial statements contain complex judgemental issues

Question 6

Professional scepticism ensures…

Answer 6

Sufficient enquiry and challenges to management
Scrutiny of accounting policies, documents and responses for reliability
Contradictory evidence / conditional indicative of fraud followed up

Question 7

Big data allows the auditor to…

Answer 7

Monitor large sets of data rather than samples
Mine unstructured sets of data to identify anomalies, patterns, trends and usual relationships for further investigation

Question 8

Audit data analytics

Answer 8

The use of big data on an audit
Allows the auditor to monitor large sets of data rather than samples and mine unstructured sets of data to identify anomalies / trends for further investigation
Provide a better quality audit
Reduce risk and liability for the auditor

Question 9

Technological developments with implications for accounting and auditing

Answer 9

Audit data analytics
Robotic process automation
AI & cognitive computing
Blockchain

Question 10

Reviews that could influence the future of audit

Answer 10

Kingman Review
Competitions and Market Authority’s review
Brydon Report

Question 11

Kingman review recommendations

Answer 11

December 2018
Followed high profile corporate collapses (eg. Carillion)
Abolishing the FRC and replacing it with a new Audit, Reporting and Governance Authority to directly regulate the biggest audit firms
Imposing greater sanctions in cases of corporate failure
Requiring rapid explanations from companies
Publishing reports about company’s conduct and management

Question 12

Competitions and Market Authority’s review recommendations

Answer 12

Greater oversight of audit committees and the role they play to ensure audit quality
Splitting the Big Four’s audit and non-audit businesses to ensure focus and quality
Five year review of the state of the industry
Mandatory joint audits to increase the ability of smaller firms to compete with the Big Four

Question 13

Brydon Report recommendations

Answer 13

Separating of the audit and accounting professions
Redefining of audit and its purpose
Introducing ‘suspicion’ into qualities of audit
Increasing audit responsibilities beyond the financial statements
Greater engagement with shareholders
Changing the language of the opinion given
Greater clarity around the role of the audit committee
Improving auditor transparency

Question 14

International Federation for Accountants (IFAC) boards

Answer 14

International Accounting Standards Board (IASB)
International Sustainability Standards Board (ISSB) (2020)

Question 15

ISSB reporting standards

Answer 15

IFRS 1 - General Requirements for Disclosure of Sustainability-related Financial Information
IFRS 2 - Climate-related disclosures

Question 16

Code of Ethics - fundamental principles

Answer 16

Integrity
Objectivity
Competence and due care
Confidentiality
Behaviour

Question 17

Code of Ethics - threats to objectivity and independence

Answer 17

Self-interest
Self-review
Management
Advocacy
Familiarity
Intimidation

Question 18

Safeguards against the threats to the Code of Ethics

Answer 18

Training
ICAEW counselling service and helpline
Quality management systems in place at engagement, firm, profession level
- review procedures/regulatory inspections

Question 19

FRC Ethical Standard Part A

Answer 19

Overarching Principles and Supporting Ethical Provision
Integrity
Objectivity
Independence

Question 20

How many sections are in FRC Ethical Standard Part B?

Answer 20

6
Pages 33 - 36

Question 21

Section 1 key roles

Answer 21

Ethics partner - available for consultation on ethical matters
Engagement partner - responsible for the firm’s ethical compliance on the audit
Independent partner - Reviews the firm’s compliance with ethical standards for listed clients
Other auditors - Firm must be satisfied that other auditors involved with the engagement comply with the ethics rules

Question 22

Section 6

Answer 22

Provisions available for Small Entities

Question 22

Section 1

Answer 22

General Requirements and Guidance
Deals with policies, procedures and roles to be put in place by the firm to help facilitate compliance with other sections
Control environment should lead to ethical behaviour
Sets out requirements for the engagement team so to avoid doubts over firm’s independence

Question 23

Section 4

Answer 23

Fees, Remuneration and Evaluation Policies, Litigation, Gifts and Hospitality

Question 23

Section 3

Answer 23

Long association with the Audit Engagement

Question 24

Section 2

Answer 24

Financial, Business, Employment and Personal Relationships

Question 25

Section 5

Answer 25

Non-Audit / Additional Services

Question 26

ICAEW Code of Ethics Confidentiality

Answer 26

Keep information confidential
Take all reasonable steps to preserve confidentiality

Question 27

Circumstances where accountant is or may be required to disclose confidential information

Answer 27

Client given permission
Disclosure is required by law
- eg. reporting to regulators for regulatory breaches / reporting suspected money laundering to the NCA
Disclosure is in the public interest
- professional duty / right to disclose, auditor should take legal advice first

Question 28

Informant procedure

Answer 28

Advise the informant to pass on the information to employer in accordance with company procedures
Protect identity of the informant
Take care in the way that the information is used

Question 29

ICAEW Code of Ethics Conflict of Interest safeguards

Answer 29

Disclosure of the circumstances of the conflict
Obtaining the informed consent of the client to act
Use of confidentiality agreements signed by employees
Establishing information barriers
Regular review of the application of safeguards by a senior individual not involved with the relevant client engagement
Ceasing to act in events where the conflict cannot be managed