Q&A Chapter 1 - Ethics / legal Flashcards
Cash Error (even if not material)
always treated as Money Laundering susp. see ‘money laundering’
Materiality - total assets
Material to financial
5% profit before tax
0.5% revenue
1% gross assets
Leasing of a property
This is a related party transaction... Allowed as long as arrangement is: - in the ordinary course of business - on an arms length basis (e.g. market rate) - not material to either party
wife is apart of the management team of company that has bought >20% stake in an audit client
self ineterest and famiiliarity threat
- ethics partner consider how much influence the wife has
- may need to withdraw
Benefits for a company stat audit
- confirmation of profits
- assurance of compliance with Companies Act
- Recommendations via management letter
- credibility
- helps business decisions
Why should auditor be objective and independent?
- use of sceptical judgement
- audit opinion must be unbiased
- public confidence
- required by ethical standards
- independence = objective
Substantial fees
ETHICAL ISSUES
- 15%/10%
- SI - fear of losing client
- Intimidation - audit team reulctant to find errors/give modified opinion
SAFEGUARDS
- regularly review fees (only on going engagements)
- disclose fee to EP and IP review
- consider reducing the amount of non audit services
Customer pays twice
ETHICAL ISSUES - this is a crime - criminal offense for auditor not to report ACTIONS - report to MLRO officer - Report to National Crime Agency (NCA) - Avoid tipping off client - recommend repayment - double payment should be a liability
Impact on cyber crime on audit procedures
- get an IT guy
- could corrupt data - so maybe more time (analytical procedures… e.g. diff years)
- check for data back up, and viral protection
Info gap - detecting fraud
a) auditors responsibiltiy
b) management responsbility
c) potential affects of fraud on business?
a) Auditors repsonsibilty
- not to prevent fraud (auditing involves sampling)
- auditors may not find material frauds
- fraid = harder to detect
- detect misstatements
- must keep documentation, and report to MRLO
- must not tip off
- see engagement letter
b) prevent, detect, implement controls, safeguard assets
c) could affect indemnity insurance, reputation
Auditor leaving in a month to become finance director
a) ethical issues
b) safeguards
ETHICAL ISSUES
- objectivity/independence
- manager was carrying work whilst gaining position
- could overlook errors
- familiarity threat - maybe intimidation of audit team once moves over
SAFEGUARDS
- remove manager immediately,
- review and reperform the work he has done
- look at the audit team… anyone close to her?
- audit resignation?
Money Laundering
ETHICAL ISSUE - STATE THAT IT COULD BE ML - no de minimus (all material) ACTIONS - report to MLRO - do not tip off (comm. with govern., auditors report, resigning, mentioning,) - keep documentation - consider implications on revenue, taxation, VAT
police request to disclose info
- ask for more information
- firm owes confidentiality
- do not disclose any info unless court order or legal duty
- ask client permision (unless MLRO or fraud - dont tip off)
- seek legal advice
- reputational risk?
- ICAEW hotline
Shares are going to be sold in the business sooon….
- alert! could lead to windowshopping - trying to impress
- increased risk
- reduce materiality thresholds/bigger samples
- emphasis on income overstatement
- be more sceptical
Current auditor requests info from you, as the ex auditor
- ask clients permission first
- if the firm refuses, then should report that fact to the auditors (lips sealed… but cheeky nod)
- give info if not… BE TIMELY and ALL THE FACTS
- explain matters honestly
- explain any differences of opinion
LEARN: Audit partner rotation - long association
ETHICAL ISSUES
- issue of long association
- familiarity threat, self interest, self review
- audit partner may be too trusting
- unlisted company, rotation is 10 years, listed =5, for key audit partners =7 years
- Listed = four years but may continue another two (safeguards required) (- can be requested for 2 years if Audit committee feeel it necessary to safeguard quality of audit extra, but no more… must alert shareholders and must have a quality control review)
- if becoming listed you dont start again
SAFEGUARDS
- IPR + EP
- Document reasons
- tell the client
A deal and you junior buys shares and tells parents
ETHICAL ISSUES - INSIDER TRADING - confidentiality broken to parents - Pro behav & due care... used info for personal gain - shouldn't deal in shares of company which he/she has professional association ACTIONS - remove junior - explain that it was wrong/ discipline - repreform work of junior - ICAEW hotline
Request for a partner in firm to join as a NED
refuse as a continuing partner. dual employment is prohibted - see book. board member would be approving strategy - management threat.
LEARN
1) Rights of an auditor when threatened with removal - what are auditors rights? and why do you get them?
2) Rights of an auditor when audit firm resigns
1) RIGHTS - make written representation and request to be distributed to members (could be a disagreement, gives balanced case, protection), attend and speak at general meeting, hearing at general meeting
RESPONSIBILITIES - prepare statement of circumstances specifying reasons and request to circulate to members, maintain confidentiality, maintain money laundering records, cannot say “no circumstance if company is listed”
Gives you, an auditor, the ability to put its case forward to the members, return books and records of the company
2) RIGHTS: request directors to convene a general meeting, auditor can speak, explain circumstances, company must circulate
RESPONSIBILITIES: submit written notice of resignation, state disagreement over policies, cannot say “no circumstances” if company is listed
LEARN Generic types of comments for chapter
ETHICS: Eth. partner review, disclose to EP, independent Part. rev, independent quality review, consider affect on future audit work, could consider more resources on audit
CLIENT IS BEING BAD: See ethics above, is it material?, is it chance of fraud or ML? (if so see standard responses), give benefit of doubt, consider reputational risk, could show lack of integrity in client, allocate more staff to audit, dont trust management statements, sample sizes must be increased, review minutes from meetings, doubts cast on individuals involved, increase professional scepticism
DISAGREEMENT WITH CLIENT: show in engagement letter, seek legal advice, see ethics above
Overdue fees
ETHICAL ISSUES
- self interest threat to independence (ES4)
SAFEGUARDS/ACTIONS
- unmodified report
- arrange for settlement
- if fees are significant… consider resigning
- notify ethics partner
a) What are the two types of assurance?
TYPE-LEVEL-OPINION-EXAMPLE
Reasonable, High, Positive “true and fair view”
Limited, Moderate, Negative “nothing has come to our att.”
1) forecast are based on assumptions, judgements, historical can be checked
LEARN Audit of public sector vs. limited companies
Public sector: additional (1) regulation focused (check compliance with rules and regs), but focus on (2) propriety (transactions are handled with integrity), (3) value for money - how they use resources EEE (econ, effic, effectiv)
Limited - standard
Professional scepticism
General importance
- impairment
- related parties
General?
- haivng a questioning mind
- being aware of things that may lead to misstatements
- critical assessment of audit evidence
- impairment: management may have motive to not write down issues, assets are more vulnerable in current econ climate, management might nor WD assets.
- Related parties: used for fraud, harder to track, managers may reluctant to disclose, evidence no readily available
