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AA > Q&A Chapter 1 - Ethics / legal > Flashcards

Q&A Chapter 1 - Ethics / legal Flashcards

1
Q

Cash Error (even if not material)

A

always treated as Money Laundering susp. see ‘money laundering’

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2
Q

Materiality - total assets

A

Material to financial
5% profit before tax
0.5% revenue
1% gross assets

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3
Q

Leasing of a property

A 
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
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4
Q

wife is apart of the management team of company that has bought >20% stake in an audit client

A

self ineterest and famiiliarity threat

  • ethics partner consider how much influence the wife has
  • may need to withdraw
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5
Q

Benefits for a company stat audit

A
  • confirmation of profits
  • assurance of compliance with Companies Act
  • Recommendations via management letter
  • credibility
  • helps business decisions
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6
Q

Why should auditor be objective and independent?

A
  • use of sceptical judgement
  • audit opinion must be unbiased
  • public confidence
  • required by ethical standards
  • independence = objective
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7
Q

Substantial fees

A

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
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8
Q

Customer pays twice

A 
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
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9
Q

Impact on cyber crime on audit procedures

A
  • 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
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10
Q

Info gap - detecting fraud

a) auditors responsibiltiy
b) management responsbility
c) potential affects of fraud on business?

A

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

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11
Q

Auditor leaving in a month to become finance director

a) ethical issues
b) safeguards

A

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?
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12
Q

Money Laundering

A 
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
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13
Q

police request to disclose info

A
  • 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
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14
Q

Shares are going to be sold in the business sooon….

A
  • alert! could lead to windowshopping - trying to impress
  • increased risk
  • reduce materiality thresholds/bigger samples
  • emphasis on income overstatement
  • be more sceptical
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15
Q

Current auditor requests info from you, as the ex auditor

A
  • 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
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16
Q

LEARN: Audit partner rotation - long association

A

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
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17
Q

A deal and you junior buys shares and tells parents

A 
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
18
Q

Request for a partner in firm to join as a NED

A

refuse as a continuing partner. dual employment is prohibted - see book. board member would be approving strategy - management threat.

19
Q

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

A

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

20
Q

LEARN Generic types of comments for chapter

A

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

21
Q

Overdue fees

A

ETHICAL ISSUES
- self interest threat to independence (ES4)
SAFEGUARDS/ACTIONS
- unmodified report
- arrange for settlement
- if fees are significant… consider resigning
- notify ethics partner

22
Q

a) What are the two types of assurance?

A

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

23
Q

LEARN Audit of public sector vs. limited companies

A

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

24
Q

Professional scepticism
General importance
- impairment
- related parties

A

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
25
Q

PPE - risks of misstatement

A
  • cutoff
  • useful lives
  • depreciation
  • revaluation is subjective
  • illimenation of assets done properly
  • capitalisation rather than expenses?
26
Q

preparation of the financial statements

A
  • management threat, self- review, threatens indep and obj, aligned interests
  • prohib in the uk, no involvement, no taking decisions on judgements
  • mitigate with reviews
27
Q

Why must auditors understand laws and requirements that impact the client

A
  • Required by ISA
  • to assess controls of client
  • non compliance may indicate lack of integrity
  • non compliance may have material affect (good will, fines, etc..)
  • going concern issue due to suspended license
  • breaching to save costs = money laundering
  • See money laundering
28
Q

Auditing a similar big client
What are the issues?
What are the positives?

A
  • chinese walls
  • ensure that staff are aware
  • obtain written consent
  • independent review
  • separate teams

Benefits: enhance quality of service, efficient, cheaper

29
Q

Intimidation threat

A
  • benefit of the doubt
  • ethics partner
  • consider legal action
  • keep documentation
  • consider resignation
  • do not give in…
30
Q

Mandatory introduction of audit rotation (give pros and cons)

A

Pros - no familiarity, more competition (cost and quality), increased objectivity, greater credibility,
Cons - less efficient, knowledge shortage, disruptive, increased costs, less value with less knowledge?

31
Q

Working capital report in order to get overdraft (benefits to bank / firm)

a) what is it
b) benefits to firm
c) benefits to bank

A 
What is it?
report states (1) whether trade receivables are likely to be received, (2) inventory can be sold profitably in the near future.

Firm: gets an overdraft/loan

Bank…
Benefits: reduces uncertainty, reduces risk of management bias, enables bank to determine risk
Limitations: only a sample, misrepresentation, limitations of accounting systems

32
Q

Role of an ethics partner

A
  • firms policies regarding integrity, objectivity and independance
  • firms compliacnce with FRC Ethical standards
  • Communication
  • advice on ethical matters
  • training
  • assesses implications of breach
  • weighs up safeguards versus resign
33
Q

Revaluation >2%

A
  • self review threat, no adequate safeguards
  • not permitted ES5
  • may rely to heavily on valuation
  • audit team reluctant to report misstat
  • management threat,
34
Q

Bribery and foreign corruption

A

ETHICAL ISSUES
- foreign government official (worse than normal)
- it is illegal under the bribery act 2010
- benefiting from criminal conduct
- check value of items.. is it excessive
ACTIONS
- big no no - report to MLRO officer
- required to report under POCA (proceeds of crime act)
- report to your officer
- must not tip off client

35
Q

Explain professional comp and due care

A
  • maintain pro knoledge
  • skilled enough to do the task
  • act diligently and in accordance with standards
  • things should be reviewed (staff appraisals, training, cold reviews, supervision etc…)
36
Q

What is the basis on which an audit fee should be calculated?

A
  • time expended
  • responsibility risk
  • people involved
  • expenses incurred
  • priority of work for client
  • nature of business/ complexity
  • higher in first year?
37
Q

Refusal to correct a modified audit opinion

A
  • benefit of the doubt, explain treatment mistake
  • intimidation threat, check other parts
  • seek legal advice
  • consider resigning as integrity could rub off on you
38
Q

LEARN Controls to detect fraud?

A
  • authorisation of expenditure, cheque signatures, review documentation, passwords, access to bank accounts, segregation of duties, bank reconcilliations, whistleblowing lines of communication, segregation of duties, review expenses claims, make staff take holidays for extended periods, internal review, review variances, obtain references for new staff, recruitment checks
39
Q

Asked for a second audit opinion

A
  • Opinion Shopping
  • May compromise the opinion of existing auditor
  • PC/DC
  • Audit firm tempted to give opinion to please client
  • Obtain client’s permission to contact auditor – notify them, if client refuses… decline
40
Q

Why can absolute assurance not be provided?

A
  • human error/judgement
  • management could override
  • hidden transactions

AA (5 decks)

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