Topic 5- Ethics and acceptance

Question 1

how should ethics be followed?

what part does the user and practitioner play in ethics

Answer 1

Ethics is a GUIDE to behavior, principals instead of rules; ethics describe “How” a person or practice does it’s business not what it does. The code of ethics provide guidance that the auditor must follow

The user needs to believe that assurance practitioners act in accordance with a code of ethics

The practitioner needs a code of ethics

Question 2

what are the sources of ethical guidance

Answer 2

IFAC Code of ethics- governs audits carried out under ISA’s (International Federation of
Accounting)

ACCA code of ethics- to be followed by ACCA’s but it is practically identical to the IFAC code

IESBA (International Ethics Standards Board for Accountants) International code for professional accountants

Question 3

how is ethic guidance enforced

Answer 3

fines
suspension of membership
withdrawal from membership

Question 4

For ethics there are three elements:

1) fundamental principles
2) Threats
3) Safeguards

what are some generic examples of safeguards? list 6

Answer 4

segregation of duties
review
rotation
ceasing to act

separate teams + (the employee working on one team would be prevented from being on the audit of the other competitor team for a period of time ‘ Chinese wall’

engagement quality review.

Question 5

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Answer 5

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Question 6

For ethics there are three elements:

1) fundamental principles
2) Threats
3) Safeguards

what are the fundamental ethical principles

Answer 6

Objectivity
Professional competence & Due Care
Professional behaviour
Integrity
Confidentiality

Question 7

define objectivity

Answer 7

A professional member should not allow bias, conflict of interest or undue influence of others to override professional or business judgments.

Question 8

define professional competence & due care

Answer 8

Members have a continuing duty to maintain professional knowledge and skills at a level required to ensure that a client receives competent professional services based on current developments in practice, legislation and techniques.

A professional accountant should act diligently and in accordance with applicable technical and professional standards.

Question 9

define professional behaviour

Answer 9

Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Question 10

define integrity

Answer 10

Members should be straightforward and honest in all professional and business relationships.

Question 11

define confidentiality

Answer 11

A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose.

Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage or third parties.

Question 12

WHEN can information be disclosed regarding confidentiality (general)

4 general types of scenarios where you could disclose information

Answer 12

Members should not disclose information to third parties without proper and specific authority from client unless there is a legal or professional right or duty to disclose,

AND information should not be used to personal advantage.

Can be disclosed if;

▪ Consent has been obtained from the client or employer

▪ Disclosure is required by law

▪ There is a professional right or duty to disclose

▪ There is a public duty to disclose

Question 13

give examples of when it is obligatory to disclose confidential information

Answer 13

There is a statutory right or duty to disclose such as if the auditor suspects the client is involved in

• money laundering,
• terrorism or
• drug trafficking.

Make disclosure if compelled by the process of law, for example under a court order or summons, under which they are obliged to disclose information.

Question 14

when is it voluntary to disclose confidential information - 4

Answer 14

• Before disclosing, auditors will seek legal advice.*
  1) Public interest – An auditor may disclose information which would otherwise be confidential if disclosure can be justified in the ‘public interest’. This would be perhaps if those charged with governance are involved in fraudulent activities;
  2) Protect a member’s interest – Members/auditors may disclose information to defend themselves against a negligence action, disciplinary proceedings or if suing for unpaid fees;
  3) Authorised by statute/laws – There are cases of express statutory provision where disclosure of information to a proper authority overrides the duty of confidentiality;
  4) Non-governmental bodies – Auditors may be approached by non-governmental bodies seeking information concerning suspected acts of misconduct not amounting to a crime or civil wrong. Disclosure should only be made to those bodies with statutory powers to compel disclosure

Question 15

For ethics there are three elements:

1) fundamental principles
2) Threats
3) Safeguards

What are some examples of potential threats which may lead to conflicts of interest and lack of independence

Answer 15

Self interest

self review

advocacy

familiarity

intimidation

Question 16

what is self review threat and examples

Answer 16

the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made or service performed by the professional accountant, or by another individual within the professional accountant’s firm or employing organisation, on which the accountant will rely when forming a judgment as part of providing a current service.

▪ Self-review threats – occur when you are required to evaluate your own previous work or judgement

o Member of assurance team being or recently having been employed by the client in a position to influence the subject matter being reviewed

o Involvement in implementation of financial system and subsequently reporting on the operation of said system

o Same person reviewing decisions or data that prepared them

o An analyst, or member of a board, audit committee or audit firm being in a position to exert a direct or significant influence over the financial reports

o The discovery of a significant error during a re-evaluation of the work undertaken by the member

o Performing a service for a client that directly affects the subject matter of an assurance engagement.

Question 17

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Answer 17

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Question 18

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Answer 18

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Question 19

what is self interest and examples

Answer 19

the threat that a financial or other interest will inappropriately influence
a professional accountant’s judgment or behaviour;

Self-interest threats – can occur as a result of your own or your close family interests, financial or otherwise

o Undue dependence on fee income from one client- large client (Fee from listed client shouldn’t exceed 15% of the total practice income from 2 consecutive year, PLC is 10%)

o Auditor is ex employee of the client
o Close personal or business relationships
o (auditor owns shares in the client
o Outstanding fees from the client (don’t accept work until it’s been paid off)

o Client requests contingent fees- (Contingent fees are not acceptable for assurance work)

o Gifts/hospitality from the client- (Must be trivial. Audit partner must authorize acceptance)

Question 20

what is advocacy and examples

Answer 20

the threat that a professional accountant will promote a client’s or employing organisation’s position to the point that the accountant’s objectivity is compromised;

▪ Advocacy – threats occur when you are promoting or been seen to represent someone or something

o Client asks auditor to represent them in court (Decline. no sufficient safeguard exists.)

o Acting as an advocate on behalf of a client in litigation or disputes

o Promoting shares in a listed audit client

o Commenting publicly on future events in particular circumstances

o Where information is incomplete or advocating an argument which is unlawful.

e. g. joining a client on a visit for a loan application by bank
e. g. audit firm asked to tender for a contract for a client

Question 21

what is famialirity and examples

Answer 21

the threat that due to a long or close relationship with a client, or
employing organisation, a professional accountant will be too sympathetic to their interests or too accepting of their work; and

▪ Familiarity threats – can be present when you become so sympathetic to interests of others

o Long association with a client causing you to loose professional scepticism/become too trusting- (Partner rotation after 7 years for listed clients, can be extended for further 1 year if audit committee approves)

o Ex auditor now works for audit client (review composition of audit team and perform EQCR).

o close relationship between auditor and client staff

o Acceptance of gifts or preferential treatment (significant value)

o Over familiarity with management

o Former partner of firm being employed by client

o A person in a position to influence financial or non-financial reporting or business decisions having an immediate or close family member who is in a position to benefit from that influence.

Question 22

what is intimidation and examples

Answer 22

the threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant.

▪ Intimidation threats – occur when you are deterred from acting objectively by actual or perceived threats

o Threat of litigation

o Threat of removal as assurance firm

o Dominant personality of client director attempting to influence decisions

o Pressure to reduce inappropriately the extent of work performed in order to reduce fees.

Question 23

what is conflict of interest and examples

Answer 23

Difficult situations to manage, with no obvious “correct” solution. If you are under pressure to do something that you think is unethical, or against your principles.

ACCA members should be constantly conscious of, and be alert to factors which give rise to conflicts of interest.

Avoid conflicts of interest wherever possible.

Question 24

When a conflict of interest is identified for an audit company, give examples of safeguards?

Answer 24

The firm must notify all affected clients of the conflict to whom they act as auditors for, and if necessary obtain their consent to act (Written). The following additional safeguards should be considered;

▪ Advising one or both clients to seek additional independent advice.

▪ The use of separate engagement teams, with different engagement partners and team members; once an employee has worked on one audit they would be prevented from being on the audit of the other company for a period of time. This separation of teams is known as building a ‘Chinese wall’.

▪ Procedures to prevent access to information, for example, strict physical separation of both teams, confidential and secure data filing.

▪ Clear guidelines for members of each engagement team on issues of security and confidentiality. These guidelines could be included within the audit engagement letters.

▪ Potentially the use of confidentiality agreements signed by employees and partners of the firm.

▪ Regular reviewing/monitoring of the application of the above safeguards by an independent senior individual in the audit firm not involved in either audit.

Question 25

what are some other general safeguards under the following category

▪ Professional, legal and regulation
▪ Work environment
▪ Individual’s actions

Answer 25

▪ Professional, legal and regulation

• ->Education and training
• -> setting Corporate governance requirements
• -> Setting professional standards
• ->disciplinary procedures
• ->external review

▪ Work environment

• ->Internal control systems
• ->Recruit the right staff
• -> review procedures
• ->Whistle blowing procedures
• ->Disciplinary process
• ->Leadership that drives ethical behavior
• -> organisation code of ethids
• ->Second partner review and reporting for key engagements

▪ Individual’s actions

• ->Maintaining records of contentious issues
• ->Ethical conflict resolution
• ->Seek legal advice
• -? Nebtirubg
• -> contacting professional bodies with queries
• -> complying with professional standards

Question 26

what are the three ways of accepting new work for an audit company

Answer 26

1) Tendering
* Potential client approaches the audit firm and asks the audit company to bid for some work

2) Fee negotiation
3) Lowballing

• Concept: audit firms may go in low with their quote for the audit = low fee
• > in hope of obtaining more lucrative work

Question 27

what are the list of issues to consider prior to accepting an engagement

Prior to accepting an audit engagement the firm should consider any issues which might arise which could threaten compliance with ACCA’s Code of Ethics and Conduct or any local legislation.

List them - 10items and explain

Answer 27

Professional clearance
Preconditions for an audit
Reputation of the client
Professional Competence
Independence and objectivity (threats to fundamental principles)
Fees
Management integrity
Money laundering (client due diligence)
Resources
Risks

Prior to accepting an audit engagement the firm should consider any issues which might arise which could threaten compliance with ACCA’s Code of Ethics and Conduct or any local legislation.

Professional Competence

▪ The firm should consider whether they are competent to perform the work and whether they would have appropriate resources available, as well as any specialist skills or knowledge

▪ The prospective firm must communicate with the outgoing auditor to assess if there are any ethical or professional reasons why they should not accept appointment*

▪ The prospective firm must obtain permission from the client to contact the existing auditor, if this is not given then the engagement should be refused

▪ The existing auditor must obtain permission from the client to respond, if not given then the prospective auditor should refuse the engagement

▪ If given permission to respond, then the existing auditor should reply to the prospective auditor, who should then carefully review the response for any issues that could affect acceptance

**Professional clearance / Reputation of the client / Management integrity / Risks / Resources / Money laundering (client due diligence) / Independence and objectivity / Fees **

▪ In addition the audit firm should undertake client screening procedures such as considering management integrity and assessing whether any conflict of interest with existing clients would arise

▪ Further client screening procedures would include assessing the level of audit risk of the client and whether the expected engagement fee would be sufficient for the level of anticipated risk.

Preconditions for an audit

Question 28

.what is conceptual framework definition in context of ethics

Answer 28

.what is conceptual framework definition and made up of

A framework is needed because it is impossible to define every situation where threats to fundamental principles may occur or the mitigating action required.

Conceptual framework can be explained as the following:
* It provides an initial set of assumptions values and definitions which are agreed upon and shared by all those subject to the framework.

• It is stated in relatively general terms so it is easy to understand and communicate.
• It recognises that ethical issues may have no ‘correct’ answer and therefore provides the generalised guidelines and principles to apply to any situation.

Members are required to apply the conceptual framework to identify threats to compliance with the fundamental principles, to evaluate their significance and, if such threats are other than clearly insignificant, to apply safeguards to eliminate them or reduce them to an acceptable level such that compliance with the fundamental principles is not compromised

The framework helps to identify threats - using the fundamental principles as guidance.

▪ Identify threats ( which affect their independence)
▪ Evaluate threats (why do we see them as significant)
▪ Mitigate/Address issues or apply safeguards if necessary
–> Eliminate the threat (decline engagement) or
–> Reduce the threat to an acceptable level

Where conflicts arise in the application of fundamental principles, the code of ethics provides guidance on how to resolve the conflict.

Question 29

ISA 210 defines preconditions for an audit as follows:

Answer 29

.‘The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted’.

Question 30

ISA 210 defines preconditions for an audit as follows:
‘The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted’.

First, the auditor must determine the acceptability of the financial reporting framework to be applied in the preparation of the financial statements.

Second, the auditor must obtain the agreement of management that it acknowledges and understands its responsibility:

for the first bit, explain this in more detail

Answer 30

First, the auditor must determine the acceptability of the financial reporting framework to be applied in the preparation of the financial statements.

This includes evaluating whether
- law or regulation prescribes the applicable financial reporting framework,

• considering the purpose of the financial statements, and the nature of the reporting entity (for example, whether a listed company or a public sector entity).

In most cases this will simply be a matter of confirming with the client that the financial statements will be prepared under International Financial Reporting Standards, or other national reporting framework.

Question 31

ISA 210 defines preconditions for an audit as follows:
‘The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted’.

First, the auditor must determine the acceptability of the financial reporting framework to be applied in the preparation of the financial statements.

Second, the auditor must obtain the agreement of management that it acknowledges and understands its responsibility:

for the second bit, explain this in more detail

Answer 31

Second, the auditor must obtain the agreement of management that it acknowledges and understands its responsibility:

▪ For the preparation of the financial statements in accordance with the applicable financial reporting framework.

▪ Management understands its responsibility for internal controls

-> For internal controls to enable the preparation of financial statements which are free from material misstatement, whether due to fraud or error.

▪ To provide the auditor with access to all information necessary for the purpose of the audit and also unrestricted access to persons within the entity to obtain audit evidence.

Question 32

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Answer 32

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Question 33

If the preconditions for an audit are not present, the auditor shall discuss the matter with management.

the auditor shall not accept the proposed audit engagement: if.. 2 reasons?

Answer 33

▪ If the auditor has determined that the financial reporting framework to be applied in the preparation
of the financial statements is unacceptable; or

▪ If management agreement of their responsibilities has not been obtained.

Question 34

what is the purpose of an engagement letter

Answer 34

( it is basically a contract between auditor and director- sets out terms to agree responsibilities of auditors and directors to avoid misunderstandings)

An engagement letter provides a written agreement of the terms of the audit engagement between the auditor and management or those charged with governance.

Confirming that there is a common understanding between the auditor and management, or those charged with governance, of the terms of the audit engagement helps to avoid misunderstandings with respect to the audit.

Question 35

what does the engagement letter include

Answer 35

▪ The objective and scope of the audit

▪ The responsibilities of the auditor

▪ The responsibilities of management

▪ Reference/identification of legislation and standards;
–>the financial reporting framework for the preparation of the financial statements;

▪ Expected form and content of any reports to be issued

▪ Reference to inherent limitations of the audit;
–>The fact that some material misstatements may not be detected

▪ what communications will take place

▪ Arrangements regarding the planning and performance of the audit, including the composition of the audit team

Specific planning issues:

• -> use of internal audit (N/A in UK)
• -> Deadlines
• -> Use of experts etc

▪ The expectation that management will provide written representations

▪ The basis on which fees are computed and any billing arrangements; and

▪ A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement.

Question 36

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Answer 36

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Question 37

IAS210 doesn’t say you have to send audit engagement letter every year. it says you should review it annually. A new letter may be send every year:

▪ to emphasize it’s importance to clients

but when MUST a new letter be sent?

Answer 37

A new letter may be send every year If there have been changes to :

• ->statutory duties
• ->professional duties
• ->Other services

Question 38

what is the definition of independence

Answer 38

independence is freedom from any external control or influence in making decisions

Question 39

what is the definition of objectivity

Answer 39

objectivity is the state of mind which has regard to all considerations relevant to the task in hand but no other

Question 40

what is the definition of independence

Answer 40

independence is freedom from any external control or influence in making decisions

Question 41

identify the issues to consider prior to accepting an engagement

general- i.e. list them

Answer 41

independence & objectivity
management integrity
Money laundering (client due diligence)
Resources
Risks
Fees
Professional Competence
Reputation of the client
preconditions for an audit
professional clearance

Question 42

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Answer 42

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Question 43

Fees from listed client should not exceed how much of what?

Answer 43

15% of the total practice income for 2 consecutive years

Question 44

if there are signification outstanding fees dur from client, how do you deal with this threat?

Answer 44

don’t commence audit work until outstanding fees are paid

organise a payment plan for the client

Question 45

what is contingent fee?

Answer 45

A contingent fee is any fee for services provided where the fee is payable only if there is a favourable result.

Question 46

if a client requests contingent fees, how do you deal with this threat?

Answer 46

refuse- contingent fees are not acceptable for assurance engagements

Question 47

if you’ve been offered gifts or hospitality from the client, how do you deal with this threat?

Answer 47

do not accept unless clearly trivial. Audit partner must authorize the acceptance

the audit firm should also have a policy for this in place

Question 48

if an audit partner has been in post for many years, there is a familiarity threat, what are the safeguards for this threat i.e. state the limits for listed company

Answer 48

partner rotation after 7 years for listed clients. May be extended for 1 year if audit committee approves

Question 49

if the ex auditor now works for the audit client, how do you deal with this familiarity threat?

Answer 49

review composition of the audit team and perform Engagement Quality Control Review (EQCR)

Question 50

If a person has been an audit partner for 7 years and wants to go onto become the engagement quality control reviewer, how long should the cooling period be?

Answer 50

of a listed company, the cooling off period of 5 years is required

Question 51

if for a listed company, the auditor’s receive 15% of the total practice income for 2 consecutive years

what are the practical actions and what is not

Answer 51

Resigning is not a practical action

They should however:

Auditor should assets whether audit and non audit fees would represent more than 15% of gross practice income for two consecutive years

if the recurring fees are likely to exceed 15% of annual practice income this year, additional consideration should be given as to whether the taxation and audit related services should be undertaken by the firm. For a listed company, many additional services are prohibited

If the fees do exceed 15% this should be disclosed to those charged with governance at the company

Request a pre‐issuance review be conducted by an external accountant

Question 52

if an audit manger wants to work at a client firm, what should they action

Answer 52

The ACCA Code of Ethics and Conduct requires individuals to notify the firm of the possibility of employment with an audit client so they can be removed from the audit team.

Question 53

Approval FOR gifts would be sought from the audit engagement partner or the audit manager?

Answer 53

Approval for gifts would be sought from the audit engagement partner

Question 54

if the FD asks your company to prepare the company’s tax return and provide tax advice to minise the amount of tax payable, which one is under self review threat?

Answer 54

The ACCA code of ethics and conduct states that preparation of tax returns does not generally create a self review threat because the audit firm would not be calculating the figures to include in the return. The procedure of preparing the tax return is mechanical in nature

Provision of tax advice could instead create a significant self review threat as it may be discovered at a later date that the advice was not appropriate and the firm may be reluctant to admit this to the client

Question 55

what does it mean when an auditor is assumed to have management responsibility in relation to audit services

Answer 55

Assuming a management responsibility is when the auditor is involved in leading or directing the company or making decisions which are the remit of management. Designing and maintaining internal controls, determining which recommendations to implement and setting the scope of work are all decisions which should be taken by management

Question 56

explain why representing a client in court is a threat and the safeguard

Answer 56

Being perceived as taking the viewpoint of the client –
therefore losing professional scepticism and integrity

Individual should resign from that appointment or not
accept the offer of representing them in court