Week 2

Question 1

Fundamental principles of professional ethics

Answer 1

All members of the professional accounting bodies are to comply with the fundamental ethical principles

Question 2

All members of the professional accounting bodies are to comply with the fundamental ethical principles (APES 110, S. 100.4):

Answer 2

integrity
objectivity
professional competence and due care
confidentiality
professional behaviour.

Question 3

Integrity

Answer 3

To the obligation that all members of the professional bodies be straightforward and honest.
A member shall not knowingly be associated with reports, returns, communications or other information where the Member believes that the information:

contains a materially false or misleading statement

contains statements or information furnished recklessly

omits or obscures information required to be included where such omission or obscurity would be misleading.

Question 4

Objectivity

Answer 4

Not allow personal feelings or prejudices to influence professional judgement.
Be unbiased.
Not allow conflict of interest or influence of others to impair decision process.

Question 5

Professional competence and due care

Answer 5

Maintain knowledge and skill at a level required by professional bodies.
Keep up-to-date with changes in regulations and standards.
Continue education and work experience.
Act diligently, taking care to complete each task thoroughly, document all work, finish on a timely basis.

Question 6

Confidentiality

Answer 6

Refrain from disclosing information to people outside the workplace that is learned as a result of employment.
Exception if legal requirement to disclose.
Not allowed to use confidential information to their advantage or advantage of another person.

Question 7

Professional behaviour

Answer 7

Comply with rules and regulations and do not harm reputation of the profession.
Be honest in representations to current and prospective clients.
Do not claim to provide services they cannot provide, or qualifications they do not possess, or experience they do not have. Do not undermine reputation of, or quality of work produced by, others.

Question 8

Independence

Answer 8

Independence is the ability to act with integrity, objectivity and with professional scepticism (questioning mind).
Lack of auditor independence impacts on credibility and reliability of the financial report.
The auditor must be, and be seen to be, independent.

Question 9

Independence of mind:

Answer 9

ability to act independently
ability to make a decision free from bias
personal belief and client pressures.

Question 10

Independence in appearance:

Answer 10

belief that independence of mind

has been achieved

Question 11

Threats to independence:

Answer 11

self-interest
self-review
advocacy
familiarity
intimidation.

Question 12

Self-interest threat:

Answer 12

Can occur if the audit firm or its staff have financial interest in audit client. 
Examples:
Bank account held with the client.
Shares owned in the client.
A loan to or from the client.

Question 13

Self-review threat:

Answer 13

Can occur when the assurance team need to form an opinion on their own work or work done by others in their firm.
Examples:
Assurance team member has recently been an employee or director of the client.
Preparing information for the client that is then assured.

Question 14

Advocacy threat:

Answer 14

Can occur when an audit firm or assurance staff act, or is believed to act, on behalf of assurance client.
Can lead to questioning of auditor’s objectivity.

Examples:
Encouraging others to buy client’s shares or bonds.
Representing client in negotiations with third party.
Representing the client in a legal dispute.

Question 15

Familiarity threat:

Answer 15

Can occur when close relationship exists or develops between assurance firm and client, or firm and client personnel.
Assurance staff can become too sensitive to needs of client and lose objectivity.
Examples:
Long association between assurance firm and client.
Long association between assurance firm and client personnel.

Question 16

Intimidation threat

Answer 16

Can occur when member of assurance team feels threatened by the client’s staff or directors.
Assurance team member unable to act objectively, fearing negative consequences

Examples:
Threat that client will use different assurance firm next year.
Undue pressure to reduce audit hours to reduce fees paid.

Question 17

Safeguards to independence:

Answer 17

Created by profession, legislation or regulation:
quality control standards
code of ethics
legislative requirement to be independent.

Created by clients:
corporate governance
policies and procedures.

Created by accounting firms:
quality control procedures
client acceptance and continuance.

Question 18

The auditor’s relationship with others

Auditors and shareholders:

Answer 18

Audit report addressed to them.
Attendance at AGM.
Formal responsibility for auditor appointment.

Question 19

Auditors and the board of directors:

Answer 19

Represents shareholders.
Executive and non-executive directors.
Large companies have committees made up of several directors to deal with specific issues.

Question 20

Auditors and the audit committee:

Answer 20

A special committee of the board of directors.
Acts on behalf of board in financial reporting and audit matters.
Top 500 listed companies must have audit committee, top 300 must follow ASX guidelines.

Aid to auditor independence:
Non-executive directors, majority independent.
Financial accounting knowledge desirable.
Meets with external and internal auditors.

Question 21

Auditors and internal auditors:

Answer 21

Viewed by external auditor as part of client.
External auditor can reduce scope of testing if effective internal audit function (ASA 610: ISA 610). Depends on internal auditor’s:
objectivity
technical competence
due professional care
communication with external auditors.

Question 22

Legal liability

Answer 22

External auditor must exercise due care, be diligent in applying standards and documenting work.
Auditor can be found negligent and liable for damages under tort law if it is established that:

A duty of care was owed by the auditor.
There was a breach of the duty of care.
A loss was suffered as a consequence of that breach.

Question 23

Legal liability to clients:

Answer 23

Liability under either contract or tort law.
Negligence: failed in performance of audit by being careless and breaching duty of care.
Contract: failed duty of care implicit in acting as auditor and explicit in engagement letter.
Case law shows change in definition of ‘reasonable’ care and skill over time as standards change.

Question 24

Contributory negligence:

Answer 24

If directors are also negligent, each party is held accountable in proportion to their guilt.

Question 25

Legal liability to third parties:

Answer 25

No contract between auditor and third parties, they must rely on tort law and show duty of care.
Duty of care less likely with third parties.

Question 26

Avoidance of litigation:

Answer 26

Hire competent staff, regular training.
Comply with ethical and auditor regulations.
Implement policies and procedures such as client acceptance and staff allocation

Question 27

Auditor can take steps to avoid litigation:

Answer 27

Meet with client’s audit committee to discuss significant issues arising in audit.
Follow up any significant weaknesses in client’s internal control procedures from previous year audit.

Question 28

The first stage in any audit is client acceptance or continuance decision.

Answer 28

Step 1: assess client integrity.
Step 2: assess audit firm’s ability to meet ethical requirements, service client.
Step 3: prepare client engagement letter.

Question 29

Client integrity - auditor should consider:

Answer 29

Reputation of client, management, directors, key stakeholders.
Client’s reason for switching auditor.
Client’s attitude to risk exposure and management.
Client’s attitude to using internal controls to mitigate risk.
Appropriateness of the client’s interpretation of accounting rules.
Client’s willingness to allow auditor full access to information required to form an opinion.
Client’s attitude and willingness to pay fair amount for audit work.

Question 30

Auditor can obtain information from:

Answer 30

Communication with prior auditor (with client’s permission, APES 110), client personnel, third parties, key competitors.
Review of press articles.

Question 31

Ethical requirements:

Answer 31

Consider if any threats to fundamental principles arise from appointment (APES 110 s.210).
Auditor must ensure it has sufficient staff available with required knowledge to complete audit (professional competence and due care).
Consider potential safeguards and remedies.
Decline appointment if threat insurmountable.

Question 32

Engagement letter (ASA 210; ISA 210):

Answer 32

Prepared by auditor, acknowledged by client.
Form of contract, can expand on obligations in Corporations Act.
Explains scope of audit, timing of various aspects of audit, overview of client responsibilities.
Confirms auditor’s right of access to information, independence considerations.
Sets fees.