Final Chapter 2 Revised 2015

7/25/2019 Final Chapter 2 Revised 2015

1/92

P7 ACCA 1

P7 ACCA


2/92

2P7 ACCA

CHAPTER 2

CODES OF ETHICS

Fundamental principles and the conceptualframework approach

Specific guidance !ndependence

Specific guidance Confidentialit" Specific guidance Conflicts of interest Conflicts in application of the fundamental

principles


3/92

3P7 ACCA

E#A$ C%&TE#T Professional ethics is a ke" area of the s"lla'us and is

likel" to 'e e(amined regularl" in a practical conte(t) Apractical *uestion on ethics came up in the pilot paperfor +, marks in the optional section) The -ecem'er 2..7

e(am included an optional *uestion where +, markswere on offer for identif"ing/ e(plaining and discussingthe ethical and other professional issues in0ol0ed withtwo separate engagements)

The 1une 2.. sitting re*uired 'riefing notes to 'eproduced/ assessing the ethical issues 3among others4to 'e considered as part of client acceptance proceduresfor +2 marks in the compulsor" section/ while offering afurther +7 marks in the optional section for a discussionof the ethical and other professional issues raised '"three current clients)


4/92

4P7 ACCA

E#A$ C%&TE#T

The !FAC fundamental ethical principles were touchedupon as part of a 5 mark *uestion on forensic auditing in-ecem'er 2../ 'ut "et again/ candidates were asked in

the optional section of this e(am to identif" the ethicaland practice management issues in a specific firm for 2.marks/ this time a firm with commercial pro'lemsseeking new wa"s of 'oosting re0enues with potentiall"unethical 0entures) This theme was re0isited in 1une2..6 for +7 marks/ where ethical and professional issueswere discussed as well as testing theor" on professionalcompetence and due care8)

!n the e(am "ou are likel" to 'e faced with scenarioswhere "ou ha0e to appl" "our knowledge/ identif" ethicalthreats and recommend appropriate safeguards)


5/92

5P7 ACCA

The importance of ethics

9e" reason that accountants need to ha0e ethical codeis that people rel" on them and their e(pertise) Auditorsclaim to gi0e independence 0iew crucial for

them to 'e and seen to 'e ethical 3independent4 Pro0ide mem'ers with guidance for maintaining a

professional attitude and enhance the accountingprofession

Codif" 'eha0iour 'e"ond that which is incorporate inlegislation)


6/92

6P7 ACCA

!FAC and ACCA Codes of Ethics

!FAC and ACCA ha0e taken a principles:'asedapproach to ethics rather than issue a detailedset of rules

Ad0antages of an ethical framework o0er a setof rules Forces acti0e consideration in e0er" situation Pre0ents narrow interpretation

Allows for 0ariations in situations Can adapt to changing en0ironmentAnd can contain specific prohi'itions where

necessar"


7/92

7P7 ACCA

ACCA Code of ethics

The code takes the form of a conceptual framework/setting out fi0e fundamental principles) This recognisesthat it is impossi'le to define e0er" situation that ma"

gi0e rise to specific threats/ and to prescri'e specificsafeguards appropriate to widel" differing engagements)The ACCA Code has 'een 'ased on the !FAC Code ofEthics for Professional Accountants)

!t pro0ides mem'ers with guidelines for maintaining aprofessional attitude and enhancing the accountingprofession 3credi'ilit" and confidence4


8/92

2); 8

Conceptual framework< !ntegrit"

< %'=ecti0it"< Professional Competence > -ue Care

< Confidentialit"

< Professional ?eha0iour


9/92

9P7 ACCA

The fundamental principles

Integrity@ $em'ers should 'e straightforwardand honest in all professional and 'usinessrelationships

Objectivity @ $em'ers should not allow bias,conflicts of interest or undue influence ofothers to o0erride professional or 'usiness

=udgement

These definitions of integrit" and o'=ecti0it" helpto underline the importance of true8 and fair8when it comes to the audit opinion)


10/92

10P7 ACCA


rofessional co!"etence # due care

$em'ers ha0e a continuing dut" to !aintainprofessional $nowledge and s$ill at a le0elre*uired to ensure that a client or emplo"errecei0es co!"etent professional ser0ice 'asedon current develo"!ents in practice/ legislation

and techni*ues) $em'ers should act inaccordance with applica'le technical andprofessional standards when pro0idingprofessional ser0ices)


11/92

11P7 ACCA


Confidentiality @ $em'ers should respect theconfidentialit" of infor!ation ac%uired as a result ofprofessional and 'usiness relationships and should not

disclose an" such information to third parties withoutproper and specific authorit" or unless there is a legal orprofessional right or dut" to disclose) Confidentialinformation ac*uired as a result of professional and'usiness relationships should not 'e used for the

"ersonal advantage of mem'ers or third parties) rofessional behaviour@ $em'ers should compl" with

rele0ant laws and regulations and should a0oid an"action that discredits the profession)


12/92

12P7 ACCA

E(ercise 2)+

ou are an accountant with a pu'lic practicefirm) !dentif" which fundamental principles arecompromised '" each of the followingo'ser0ations

+) "ou are fre*uentl" ask to complete ta(ationcomputations/ 'ut "ou ha0e no e(perience onta(ation other that "ou learned two "ears agoduring "our ACCA studies

2) A partner has asked "ou to monitor a particularclient 'ecause he is concerned that is runninginto difficult" and the partner arranged his 'ankloan for him) He has promised to alert the 'ank

if things start to get 'ad


13/92

13P7 ACCA

E(ercise 2)+

;) The practice refers pri0ate clients to oneparticular financial ad0iser for help with

specialist areas such as personal in0estmentsand 'orrowing)

B) ou ha0e 'een gi0en a list of clients who

partners feel are low 0alue) ou ha0e 'een toldto ignore phone calls from them and to onl" dotheir work when all other work has 'eencompleted)


14/92

14P7 ACCA

Answer 2)+

+) Professional competence due care ma"'e 'reached '" "ou unless "ou make"our reser0ation clear to "our manager)

The firm will 'reach its o'ligation unlessthe work its checked '" a competentperson

2) Confidentialit"/ assuming this was notspecificall" agreed to '" the client as acondition of o'taining the loan)


15/92

15P7 ACCA

Answer 2)+

;) %'=ecti0it" as the firm ma" not 'e sure that thisis the 'est ad0iser for each and e0er" client)

Possi'l" confidentialit" if the practice passeso0er client names to the ad0iser withoutpermission of the client

B) Professional 'eha0iour as clients ha0e a right toe(pect their concerns to 'e dealt with in areasona'le time


16/92

16P7 ACCA

Threats to compliance with the

fundamental principles Self&interest threat when auditor has a

'eneficial interest in the client e)g) financialinterests/ incenti0e compensation arrangements/

undue dependence on fees Self&review threat when accountant re0iews

work he has performed e)g) auditing a set offinancial statements "ou ha0e prepared

'dvocacy threat when auditor acts on 'ehalfof/ or as representati0e of the client e)g) actingas an ad0ocate on 'ehalf of an assurance clientin litigation or disputes with third parties


17/92

Threats to compliance with the

fundamental principles Fa!iliarity threat when relationship with

clients go 'e"ond professional le0el e)g)

long association with a client Inti!idation threat e)g) threat ofdismissal or replacement/ 'eing pressuredto reduce inappropriatel" the e(tent of

work performed in order to reduce fees

17P7 ACCA


18/92

18P7 ACCA

A0aila'le safeguards

Safeguards that ma" reduce threats to an accepta'lele0el can 'e created '" the profession/ legislation/ and inthe work en0ironment)

E(amples include Education Training and e(perience re*uirements Continuing professional de0elopment re*uirements Corporate go0ernance regulations Professional standards E(ternal re0iew '" empowered third parties -ocumented policies and procedures including a

disciplinar" mechanism to promote compliance)


19/92

19P7 ACCA

Specific guidance !ndependence

The ACCA guidance is 0er" similar to that issued '" !FAC) The !FAC Code discusses independence in the light of thewider term assurance engagements rather than focusingsolel" on audits)

The guidance states its purpose in a series of steps) !t aims

to help firms and mem'ersStep + Identify threats to independenceStep 2 Evaluate whether the threats are insignificantStep ; !f the threats are not insignificant/ identify and a""lysafeguards to eliminate risk/ or reduce it to an accepta'le

le0el) !t also recognises that there ma" 'e occasions where nosafeguard is available) !n such a situation/ it is onl"appropriate to< Eli!inate the interest or acti0ities causing the threat

< Decline the engage!ent/ or discontinue it


20/92

20P7 ACCA

Re0ised code of ethics

The !nternational Ethics Standards ?oard forAccountants/ or !ES?A/ issued a re0ised code of

ethics/ which strengthens and clarifies theindependence re*uirements for auditors) Thenew code @ a significant impro0ement o0er thepresent 0ersion dating 'ack to 1une 2.., @ will

take effect on + 1anuar" 2.++/ with transitionalpro0isions)


21/92

21P7 ACCA

Re0ised Code : changesRe0isions include Pro0iding a definition of pu'lic interest entities and ke"partners8 E(tending the listed entit" pro0isions to all pu'lic interest

entities E(tending partner rotation re*uirements to all audits ofpu'lic entities and to all ke" audit partners The esta'lishment of a mandator" cooling off period'efore a ke" partner can =oin a former audit client

Strengthening guidance on non:audit ser0ices)Re*uirement for re0iew of the second "ear8s audit if totalfees from an audit client 3pu'lic interest entit"4 e(ceed +,Dof the total fees of the firm for two consecuti0e "ears


22/92

Re0ised code Pu'lic interest entities

isted entities/ Entities that the" ha0e a large num'er and wide range

of stakeholders) Factors to 'e considered include

The nature of the 'usiness/ such as the holding of

assets for a large num'er of stakeholders) E(amplesma" include financial institutions/ such as 'anks andinsurance companies and pension funds

SiGe and

&um'er of emplo"ees)

22P7 ACCA


23/92

Professional skepticism

An attitude that includes

a *uestioning mind/

'eing alert to conditions which ma"indicate possi'le fraud or error and

a critical assessment of audit e0idence)

23P7 ACCA


24/92

Professional skepticism

Professional skepticism dri0es auditor 'eha0ior toadopt a *uestioning approach when consideringinformation and in forming conclusions)

!n this regard/ professional skepticism is strongl"connected to the fundamental ethical principles ofo'=ecti0it" and auditor independence) The auditor8s

independence enhances the auditor8s a'ilit" to act withintegrit"/ 'e o'=ecti0e and maintain an attitude ofprofessional skepticism)

24P7 ACCA


25/92

Professional skepticism : importance

The application of professional skepticism enhancesthe effecti0eness of an audit procedure and of itsapplication and reduces the possi'ilit" that the auditormight select an inappropriate audit procedure/misappl" an appropriate audit procedure/ ormisinterpret the audit results)

Reducing the possi'ilit" of wrong audit opinion

and thus possi'ilities of litigation claim

25P7 ACCA


26/92

Professional skepticism : e0idence

Professional skepticism is often demonstrated in the 0ariousdiscussions held '" the auditor during the course of an audit)

Audit documentation remains critical in e0idencing

professional skepticism 'ecause it pro0ides e0idence thatthe audit was planned and performed in accordance with!SAs and applica'le legal and regulator"

Auditors should document discussions of significant matters

with management/ 'oard and others/ including the nature ofthe significant matters discussed and when and with whomthe discussions took place)

26P7 ACCA


27/92

27P7 ACCA

Threats to independence

Self : interest

Self : re0iew

Ad0ocac"

Familiarit"

!ntimidation


28/92

28P7 ACCA

Self @ interest threats Financial !nterest

Close 'usiness relationships

Emplo"ment with assuranceclient

Partner on client8s 'oard

Famil" and personalrelationships

ifts and hospitalit"

oans and guarantees

%0erdue fees

D of contingent fees

High D of fees

ow'alling

Recruitment


29/92

29P7 ACCA

Financial interest threat

E(ists where an audit firm has a financial interest inclient8s affairs 3e)g hold shares4

?oth Codes state that parties listed 'elow are not

allowed to ha0e direct or indirect material financialinterest in a client

: The assurance firm: Partners in the same office

: A mem'er of the assurance team: An immediate famil" mem'er of mem'er of assurance

team


30/92

30P7 ACCA

Financial threat : safeguards

Safeguards Action to 'e taken

-ispose the interestRemo0e indi0idual from the team!nform client8s audit committeeIse an independent partner to

re0iew the work carried out)


31/92

31P7 ACCA

E(ercise 2)2 ou are the Ethics Partner at Stewart ?rice/ a firm of

Chartered Certified Accountants) The following situationse(ist)

+) Teresa is the audit manager assigned to the audit of

Recreate/ a large *uoted compan") The audit has 'een on:going for one week) esterda"/ Teresa8s hus'and inherited+/... shares in Recreate) Teresa8s hus'and wants to holdon the shares as an in0estment)

2) Stewart ?rice has 'een the auditor of 9ripps ?ros/ alimited lia'ilit" compan"/ for a num'er of "ears) !t is are*uirement of 9ripps ?ros8 constitution that the auditorowns a token J+ share in the compan")

Required Comment on the ethical and other professional issues

raised '" the a'o0e matters)


32/92

32P7 ACCA

Answer 2)2

3+4 Teresa is at present a mem'er of the assurance teamand a mem'er of her immediate famil" owns a directfinancial interest in the audit client) This is unaccepta'le)

!n order to mitigate the risk to independence that thisposes on the audit/ Stewart ?rice needs to appl" one oftwo safeguards

< Ensure that the connected person di0ests the shares< Remo0e Teresa from the engagement team

Teresa should 'e appraised that these are the options andremo0ed from the team while a decision is taken whetherto di0est the shares) Teresa8s hus'and appears to want tokeep the shares/ in which case/ Teresa should 'eremo0ed from the team immediatel")


33/92

33P7 ACCA

Answer 2)2The firm should inform the audit committee of Recreate of whathas happened and the actions the" ha0e taken) The partnersshould consider whether it is necessar" to 'ring in anindependent partner to re0iew audit work) Howe0er/ gi0en thatTeresa8s in0ol0ement is su'=ect to the re0iew of the e(istingengagement partner and she was not connected with the

shares while she was carr"ing out the work/ a second partnerre0iew is likel" to 'e unnecessar" in this case

324 !n this case/ Stewart ?rice has a direct financial interest inthe audit client) Howe0er/ it is a re*uirement of an" firm auditingthe compan" that the share 'e owned '" the auditors)The interest is not material) The audit firm should safeguardagainst the risk '" not 0oting on its own re:election as auditor)The firm should also strongl" recommend to the compan" that itremo0es this re*uirement from its constitution as it is at oddswith ethical re*uirements for auditors)


34/92

34P7 ACCA

Close business relationshi"( E(amples: $aterial financial interest in 1oint 0enture with client: Arrangements to com'ine market ser0ices and products: -istri'ution or marketing arrangements under which audit firm

acts as distri'utor of clients products)

The materialit" of the relationship to 'e =udged and if importantaudit firm not to participate in such 0enture with client

!f such a relationship e(ists it should 'e terminated/ unlessinterest is clearl" insignificant)

Purchasing goods and ser0ices from an assurance client on anarms length 'asis does not constitute a threat to independence


35/92

35P7 ACCA

E!"loy!ent with client

Staff to 'e transferred 'etween theclient and the firm or negotiations and

inter0iew to take place)Audit staff Tr" to impress the future

possi'le emplo"er:Affects o'=ecti0it")

A former partner turned Financedirector : much knowledge of the audits"stem)


36/92

36P7 ACCA

E!"loy!ent with client

ossible safeguards(

$odif" assurance plan

Remo0ed from the engagement if emplo"mentnegotiations of an indi0idual mo0ing from firm to firm8sclient are taken place)

Re0iew work '" another accountant not in0ol0ed in theengagement)

Kualit" control re0iew of the engagement)

!f the client is a pu'lic interest entit"/ a cooling off8 periodis re*uired 3+2 months must ha0e passed 'efore a ke"audit partner =oins the audit client4)


37/92

37P7 ACCA

artner on client)s *oard

Partner or emplo"ee should not ser0e on theclient8s 'oard)

!t can 'e the secretar" if the role is strictl"administrati0e)

&ote howe0er corporate go0ernance codesre*uire compan" secretar" role to 'e 'e"ond theadministrati0e tasks)


38/92

38P7 ACCA

ersonal + Fa!ily relationshi"s(

The indi0idual8s responsi'ilities on the assignment/ thecloseness of the relationship and the role of the other part"at the assurance client 3director or =ust emplo"ee4 must 'econsidered)

!f influence considered significant the person should 'eremo0ed from the assignment)

Safeguards

The firm should ha0e *ualit" control procedures that

re*uire staff to disclose such relationships) !f there is a 0iolation Kualit" control re0iew of the audit -iscuss the matter with audit committee


39/92

39P7 ACCA

ifts and hos"itality

Inless the gift is clearl" insignificant

should not 'e accepted and e0en theseshould 'e appro0ed '" a partner)


40/92

40P7 ACCA

-oans and guarantees

The client is a 'ank %R other situations)

If lending institution. !mmaterial amounts and under normal commercial terms not

considered as a threat to independence)

!f amounts material then a re0iew from another partner in another officewill reduce the risk)

oans to mem'ers of the firm if under commercial terms notconsidered a threat)

If not lending institution. An" loans from clients that are not lending institutions should not 'e

made)


41/92

41P7 ACCA

Overdue fees

Client owes 'ig amount of fees to audit firm3making a loan to client4

Safeguards

-iscuss the matter with the audit committee orother in0ol0ed in go0ernance to put a repa"ment

schedule

Resign if matter not resol0ed)


42/92

42P7 ACCA

Contingent fees

Fee calculated on a predetermined 'asisrelating to the outcome or result of the workperformed)

Ethical guidelines state that a firm should notenter into an" fee arrangement for an assuranceengagement under which the fee is contingent

on the result of the assurance work) !t is also inappropriate to accept contingent fee

for non assurance work from an assurance client


43/92

43P7 ACCA

High / of fees

Firm should 'e alerted when the total feesgenerated '" assurance client represent largeproportion of firm8s total fees)

The pu'lic ma" percei0e that a mem'er8so'=ecti0it" is likel" to 'e in =eopard" where thefees for audit and recurring work paid '" oneclient or group of connected clients e(ceed +,D

of the firm8s total fees) Lhere the entit" is listedor pu'lic interest/ this figure should 'e +.D)


44/92

Safeguards -iscuss with audit committee

Take steps to reduce dependenc"

%'tain e(ternal Minternal *ualit" control

Consult independent part" such as ACCA

For audit clients that are listed M pu'lic interest entities/the Code states that where the total fees from the clientrepresent more than +,D of the firm8s total fees for two

consecuti0e "eas/ then a re0iew should 'e conducted'" e(ternal 'od")

44P7 ACCA


45/92

45P7 ACCA

ow'alling

Firm *uotes a significant lower fee le0el for anaudit ser0ice than predecessor firm

&ewl" appointed firm should $aintain records such that the firm is a'le to

demonstrate the appropriate staff and time arespent on the engagement

Compl" with all applica'le assurance standardsand *ualit" control procedures


46/92

46P7 ACCA

Recruitment

Recruiting senior management forassurance client threat to independence

&ot to take decisions) Their in0ol0ementto 'e limited to re0iewing a shortlist of

candidates pro0iding the client has drawnup the criteria '" which the" are selected


47/92

47P7 ACCA

SEF REN!EL THREAT

Refers to the threat of independence where theassurance firm pro0ides additional ser0ices other thanassurance ser0ices to an assurance client)

Remem'er that in the ISA the Sar'anes @%(le" ruleconsiders auditors that offer certain non audit ser0ices tolisted companies as 'eing non independent)3'ookkeeping/ 0aluation/ internal audit/ legal ser0ices4

The ACCA > !FAC rules pro0ide guidance to mem'ers

regarding non:audit ser0ices) A distinction need to 'e made 'etween Pu'lic interest

compan" 0all co!"anies that for so!e reason& si1e,nature , "roduct& are in the 2"ublic eye)3 and smallowner:managed 'usiness)


48/92

48P7 ACCA

SEF REN!EL THREAT Recent ser0ices with assurance compan"

eneral other ser0ices

Preparing accounting records and FS

Naluation ser0ices

Ta( ser0ices

!nternal audit ser0ices

Corporate finance

%ther ser0ices


49/92

49P7 ACCA

Recent ser0ice with assurance

compan" ?eing a director or officer or an emplo"ee of the

assurance compan" 'efore the assurance engagement

@the pre0ious two "ears)

Safeguards

%'taining *ualit" control re0iew of the indi0idual8s work

-iscussing the issue with the audit committee


50/92

50P7 ACCA

eneral ser0ices

The ser0ices stated 'elow should not 'eoffered

AuthoriGe and e(ecute a transaction -etermine which recommendation to 'e

implemented)

Report in a management capacit" to thosecharged with go0ernance)


51/92

51P7 ACCA

Preparing accounting records and

Financial statements Significant risk e(ists since the accountant will audit his ownwork) For "ublic interest co!"any the ser0ice regardingthe preparation of accounting records should not 'e offeredunless an emergenc" arises) Howe0er assisting clients inthe preparation of the FMS is routine ser0ice for the

assurance firm) Safeguards

Ising staff other than the assurance team staff %'tain clients appro0al:Audit committee)

For any clients/ assurance firms are not allowed to -etermine or change 1ournal Entries without client8s

consent) AuthoriGe or appro0e transactions)

Prepare source documents 3e)g) purchase orders4


52/92

52P7 ACCA

Naluation ser0ices These should not 'e carried out '" audit firms if the 0aluation

will 'e material to the financial statement)

!f the 0aluation not material the ser0ice ma" 'e offeredpro0ided the following safeguards are applied to reduce therisk to an accepta'le le0el)

Safeguards

Second partner re0iew

Ensure client understand the 0aluation and assumptionsused

Ensure clients acknowledge responsi'ilit" of the 0aluation

Ising separate personnel for the 0aluation and the audit)


53/92


54/92

54P7 ACCA

!nternal audit ser0ices !nternal audit ser0ices Can 'e pro0ided 3not in the ISA4 pro0ided the client

understand that he is responsi'le for esta'lishing/ monitoringand maintaining the s"stem)

The 'oard andMor the audit committee appro0e the work ofthe internal audit team

The assurance compan" staff implementing the internal audits"stem is not in0ol0ed in the assurance assignment)

!f the client is a pu'lic interest entit"/ then internal auditser0ices must not 'e pro0ided if related to financialaccounting s"stems and financial reporting


55/92

Ta(ation ser0ices

Ta( return preparation does not generall"threaten independence as long as managementstakes responsi'ilit" for the returns)

Ta( calculations for the purpose of preparing theaccounting entries ma" not prepared for pu'licinterest entities/ e(cept in emergenc" situations)

For non:pu'lic interest entities/ it is accepta'lepro0ided that safeguards are applied)

55P7 ACCA


56/92

Temporar" staff assignments Staff ma" 'e loaned to an audit client for a short period of time)

Staff must not assumed management responsi'ilities)

Safeguards

&ot including the loaned staff in the audit team

&ot gi0ing loaned staff an" responsi'ilit" during audit forfunctions that the" performed during their temporar" staffassignment

Conducting an additional re0iew of the work performed '"loaned staff

56P7 ACCA


57/92

57P7 ACCA

%ther ser0ices

!T ser0ices

itigation support

egal ser0ices)

!f such assignments are undertaken/ theassurance firm should ensure that ade*uate

safeguards are in place to reduce the threat ofindependence) %therwise the" should not 'eundertaken)


58/92

58P7 ACCA

A-N%CAC THREAT Arises in situations where the assurance firm is in a

position of taking the client8s part in a dispute or promotinginterests of the client

E(amples: %ffering legal ser0ices

: Pro0ide e0idence as e(pert witness: -efend the client in a legal case: Represent client with negotiations with 'ank regarding

de't reconstruction

Safeguards -ifferent department offering the ser0ice -isclosures to audit committees Lithdraw from the assignment if risk to independence too

high)


59/92

59P7 ACCA

FA$!!AR!T THREAT

A serious threat of independence ma" arise if theassurance firm8s staff 'ecomes o0er familiar with the

client and its staff such as

: Famil" and personal relationships with client: Emplo"ment with assurance client: Recent ser0ice with assurance client

$ost of the risks a'o0e co0ered under self:interestguidelines


60/92

60P7 ACCA

ong association of senior personnel

with an assurance client The long relationship of senior staff with assurance clients ma" 'e

a serious threat of independence)

Safeguards

$onitor the relationship 'etween staff and client8s staff Rotate senior staff and partner of the assurance team 3ke" audit

partners must 'e rotated 7 "ears after originall" 'ecame ke" auditpartner for the client4

!n0ol0e second partner re0iew %'taining internal *ualit" control re0iew)


61/92

61P7 ACCA

!ntimidation Threat

An intimidation threat arises when a professionalaccountant is deterred from acting o'=ecti0el" '" threats/actual or percei0ed) Situations which might createintimidation threats include

3a4 Threats of dismissal)3'4 Threats of litigation)3c4 Pressure to reduce fees or the e(tent of work performed

The audit firm ma" 'e under pressure to issue anun*ualified report that otherwise will not 'e issued)SEC%&- %P!&!%& Client ma" ask second opinion from other audit firm on

application of accounting on reporting standards


62/92

62P7 ACCA

!ntimidation threat& Safeguards

-isclose to the audit committee the nature and e(tent of litigation) Remo0e affected indi0iduals from the assignment

!n0ol0ing an additional professional accountant on the team tore0iew work done

Resign from the assignment if the litigation is material)

SEC%&- %P!&!%& !f a firm asked for second opinion must seek permission from the

client to communicate with the appointed auditor)

Take great care if asked to gi0e second opinion)


63/92

63P7 ACCA

E(ercise 2);

ou are a partner in a firm of chartered certifiedaccountants) The following issues ha0e emerged in relationto three of "our clients

3a4 A td is a ma=or client) !t is listed on a ma=or Stock

E(change) The audit team consists of eight mem'ers/ ofwhom Paul is the most =unior) Paul has =ust in0ested in apersonal pension plan that in0ests in all the listedcompanies on the e(change)

3'4 ou are at the head of a team carr"ing out due diligencework at Electra/ a limited compan" which "our client/ Powertd/ is considering taking o0er) our second in command onthe team/ Peter/ has confided in "ou that in the course of hiswork he has met the daughter of the managing director ofElectra/ and he is keen to in0ite her on a date)


64/92

64P7 ACCA

E(ercise 2);

3c4 our longest standing audit client is Teddies/ which"ou ha0e 'een in0ol0ed in for ten "ears/ four asengagement partner) ou recentl" went on an e(tended

cruise with the managing director on his "acht) Required Comment on the ethical and other professional issues

raised '" the a'o0e matters) our answer should outlinethe threat arising/ the significance of the threat/ an"

factors "ou ha0e taken into account/ and/ if rele0ant/ an"safeguards "ou could appl" to eliminate or mitigateagainst the threat)


65/92

65P7 ACCA

Answer 2);

3a4 !n relation to A td/ there is a threat of self:interest arising/ asa mem'er of the audit team has an indirect financial interest inthe client)

The relevant factors are as follows< The interest is unlikel" to 'e !aterial to the client or Paul/ as

the in0estment is recent and Pauls interest is in a pool ofgeneral in0estments made in the e(change on his 'ehalf< Paul is the audit junior and does not have a significant role

on the audit in terms of drawing audit conclusions or audit riskareas

The risk that arises to the independence of the audit here isnot significant) !t would 'e inappropriate to re*uire Paul todi0est his interest in the audit client) !f ! wanted to eliminate allelements of risk in this situation/ ! could simpl" change the

=unior assigned to m" team/ 'ut such a step is not 0ital in thissituation)


66/92

66P7 ACCA

Answer 2);

3'4 !n relation to Power td/ two issues arise) The first is thatthe firm appears to 'e pro0iding multiple ser0ices to Powertd/ which could raise a self&interest threat)

The second is that the manager assigned to the duediligence assignment wants to engage in a personal

relationship with a person connected to the su'=ect of theassignment/ which could create a fa!iliarity threat)

Lith regard to the issue of multiple ser0ices/ insufficientinfor!ation is gi0en to draw a conclusion as to thesignificance of the threat) 4elevant factors would 'e

matters such as the nature of these ser0ices/ the fee incomeand the team mem'ers assigned to each) Safeguardscould include using different staff for the two assignments)The risk is likel" to 'e significant onl" if one of the ser0icespro0ided is audit/ which is not indicated in the *uestion)


67/92

67P7 ACCA

Answer 2); !n relation to the second issue/ the relevant factors are these< The assurance team mem'er has a significant role on the team

as second in command< The other part" is closel" connected to a ke" staff mem'er at

the compan" 'eing re0iewed

< Timing !n this situation/ the firm is carr"ing out a one:off re0iew of the

compan"/ and ti!ing is a $ey issue) Presentl" Peter does notha0e a personal relationship which would significantl" threatenthe independence of the assignment) !n this situation/ the

safeguard is to re%uest that eter does not ta$e anyaction in that direction until the assign!ent is co!"leted )!f he refuses/ then ! ma" ha0e to consider rotating m" staff onthis assignment/ and remo0ing him from the team)


68/92

68P7 ACCA

Answer 2);

3c4 !n relation to Teddies/ there is a risk that m" longassociation and personal relationship with the client willresult in a fa!iliarity threat) This is compounded '" m"acceptance of significant hospitalit" on a personal le0el)

The relevant factors are< ! ha0e 'een in0ol0ed with the client for ten "ears and ha0e

a personal relationship with client staff< The compan" is not a listed or pu'lic interest compan"

< !t is an audit assignment


69/92

69P7 ACCA

Answer 2);

The risk arising here is significant/ 'ut as the client isnot listed/ it is not e(tremel" important) Howe0er/ it would'e a good idea to implement some safeguards tomitigate against the risk)

! could in0ite a second partner to pro0ide a hot review ofthe audit of Teddies/ or e0en consider re*uesting that !am rotated off the audit of Teddies for a period/ so thatthe engagement partner is another partner in m" firm)

!n addition/ ! must cease accepting hospitalit" from thedirectors of Teddies unless it is clearl" insignificant


70/92

70P7 ACCA

E(ercise 2)B For each of the following situations/ identif" the

threat to independence and suggest potentialremedies

+)A 'ank has re*uested a reference from the firma'out a client that is seeking additional funding)The client promises to 'e a 0alua'le client if the'usiness succeeds in raising e(tra funds)

2) The client has told the firm that has recei0ed acheaper *uote from a ri0al for conducting theannual audit and that it is considering changingauditor ne(t "ear)


71/92

71P7 ACCA

E(ercise 2)B

;) The firm has 'een asked to conduct an internalaudit for the client of the effecti0eness of arecent !T in0estment) The !T in0estment was

pro=ect managed '" the consulting di0ision ofthe accounting practice)

B) A partner at the office conducting the auditholds 2.D of the e*uit" of the client

,) The managing partner and the Chairman of theclient often pla" golf together


72/92

72P7 ACCA

Answer 2)B

5( 'dvocacy threat) The reference could 'e 'iased tohelp the client to get the funding) The reference could'e e(ternall" re0iewed or the relationship disclosed to

the 'ank 3which presuma'l" the" realiGe alread"4)

6( Inti!idation threat) The present audit and futureaudits ma" 'e Osoft to keep client happ" or superficialto sa0e costs and so allow a competiti0e fee to 'e

charged) Sta" its original audit plan and gi0e clearaccount for time spent to client)


73/92

73P7 ACCA

Answer 2)B

7( Self&review threat if it can 'e shown that there is noproper independence from the consulting di0ision)Check independence or decline re*uest)

8( Self&interest threat the partner should dispose hisinterest and his work to 'e re0iewed) -isciplinar"actions according to internal code of ethics)

9( Fa!iliarity threat howe0er this does not appear to 'esignificant pro'lem 3assuming the managing partner

has no connection with the audit4 for now/ so no actionneeded)


74/92

74P7 ACCA

E(ercise 2),+) A&!A > Co has 'een re*uested '" a long standing

client to do a special in0estigation into a foreign group ofcompanies) The target group is 'ased in Eg"pt where thefirm has no representation) The client is 0er" keen to usethe firm and are prepared to pa" not onl" for the cost of

the in0estigation 'ut also the additional costs of the firmha0ing to use temporar" staff) The firm8s gross practiceincome is normall" J7/,../.../ the audit fee for thisclient is normall" J../...) The e(tra ser0ice is e(pectedto cost the client J+/5../...)

2) The audit senior of &eutron Co is ha0ing a relationshipwith the credit controller and is sta"ing with her duringthe week and lea0ing the audit files in the 'oot of his caro0ernight) There are no other audit staff a0aila'le that theclient considers to 'e capa'le of replacing him on the

assignment)


75/92

75P7 ACCA

E(ercise 2),

;) Trainees of Porterhouse/ a firm ofCertified Accountants/ ha0e 'een offered

o0erdraft facilities up to J,/.../ onstudent terms/ '" a client 'ank)

Re*uired

Comment and conclude on the a'o0esituations


76/92

76P7 ACCA

Answer 2),

+) Total income from client in current "ear is likel" to createundue dependence Q3..k +/5..k4 37/,..k +/5..k4 25DU)

Competence of temporar" staff would need to 'eesta'lished)

Possi'le safeguard @ different staff mem'ersMpartnerassigned to audit and special in0estigation)

Conclusions : As e(isting clients/ in particular/ are

likel" to percei0e undue dependence specialin0estigation should 'e declined) Engagement partneron audit should 'e rotated)


77/92

77P7 ACCA

Answer 2),

2) %'=ecti0it" appears to 'e threatened '" personalrelationship) E0en if credit controller is not regarded asa senior emplo"ee the senior8s o'=ecti0it" ma" 'eimpaired/ e)g) when reporting weaknesses in creditcontrol)

Senior is not keeping audit working papers in safecustod" @ could result in 'reach of dut" ofconfidentialit")

!t is not up to the client to determine who is capa'le ofundertaking the assignment @ otherwise this wouldconstitute undue influence)

Conclusion : Senior should 'e replaced immediatel")Audit timeta'le ma" ha0e to 'e put 'ack) The Seniorswork should 'e re0iewed as soon as possi'le and/ ifnecessar"/ re:performed)


78/92

78P7 ACCA

Answer 2),

;) oans 3including o0erdrafts4 on normal commercialterms ma" 'e accepted '" mem'ers of staff 3includingtrainees4)

OStudent terms ma" 'e Onormal commercial if the 'ankoffers them to all accountanc" trainees @ not =ust thoseof Porterhouse) !f not Onormal commercial/ is 'enefitsignificantV

Conclusion : Engagement and compliance partners

should consider the a'o0e 'efore decide if acceptanceof the offer will 3or not4 appear to threaten o'=ecti0it")


79/92

79P7 ACCA

Specific guidance Confidentialit"

?oth !FAC and ACCA recognise a dut" of confidence andse0eral e(ceptions to it)The ACCA gi0es guidance relating to confidentialit" in theCode of Ethics and Conduct. A mem'er ac*uiringinformation in the course of his professional work shouldnot use/ nor appear to use/ that information for his personalad0antage or for the ad0antage of a third part") Lhere a mem'er agrees to ser0e a client in aprofessional capacit" 'oth the mem'er and the clientshould 'e aware that it is an implied term of that agreement

that the mem'er will not disclose the clients affairs to an"other person without the clients consent or if not within theterms of certain recognised e(ceptions)

E ti


80/92

80P7 ACCA

E(ceptions

Obligatory disclosure !f a mem'er knows or suspects his client to ha0ecommitted a terrorist offence/ an offence of treason or

a mone" laundering offence or drug trafficking/ he iso'liged to disclose all the information at his disposal toa competent authorit") ocal legislation ma" alsore*uire auditors to disclose other offences)

The auditor ma" also 'e o'liged to pro0ideinformation where court demands disclosure) Refusalto pro0ide information is likel" to 'e considereddisrespect of court with the auditor 'eing lia'le for thisoffence)


81/92

81P7 ACCA

E(ceptions

;oluntary disclosure To compl" with technical standards) For e(ample the"

should report an" non:compliance with law or regulation

to the proper authorities) 3!SA 2,.4 -isclosure is reasona'l" re*uired to protect the

!e!ber)s interests 3ena'le him to sue a client for feesor defend an action against them e)g) negligence4

There is a "ublic duty to disclose e)g) the client hascommitted an action against the pu'lic interest such asunauthorised release of to(ic chemicals

-i l t t t t t8


82/92

82P7 ACCA

-isclosure to protect accountant8sinterests

Ena'les the accountant to defend themsel0esagainst a criminal charge or suspicion

Resist proceedings in relation to ta(ation offence Resist legal action '" a client or third part" Ena'le accountant to sue for their fees Ena'le accountant to defend themsel0es against

disciplinar" proceedings '" ACCCA or other'od"


83/92

83P7 ACCA

-isclosure in the pu'lic interest

ACCA gi0es further on disclosure in the pu'lic interest8)Accountants should usuall" seek legal ad0ice 'efore makingdisclosures)

The courts ha0e ne0er gi0en a definition of the pu'licinterest) This means that again/ the issue is left to the

=udgement of the auditor) !t is often therefore appropriate forthe mem'er to seek legal ad0ice) !t is onl" appropriate for information to 'e disclosed to

certain authorities/ for e(ample/ the police) !nformation can 'e also disclosed to other non:

go0ernmental 'odies 3ta( authorities/ en0ironment andhealth and safet" inspector4 pro0ided that the properauthorit" under which information is re*uired/ e(ists)

Inless he is satisfied that such statutor" authorit" e(istsauditor should decline to gi0e an" information until he haso'tained his clients authorit")


84/92

84P7 ACCA

-isclosure in the pu'lic interest

The ACCA guidance states that there are se0eral factorsthat the mem'er should take into account when decidingwhether to make disclosure)

'CC' guidance The siGe of the amounts in0ol0ed and the e(tent of likel"

financial damage Lhether mem'ers of the pu'lic are likel" to 'e affected The possi'ilit" or likelihood of repetition

The reasons for the clients unwillingness to makedisclosures to the authorit" The gra0it" of the matter Rele0ant legislation/ accounting and auditing standards An" legal ad0ice o'tained


85/92

85P7 ACCA

E(am focus point

!f "ou are re*uired to make =udgementsa'out whether such a disclosure should

'e made in a gi0en scenario/ "ou shouldappl" a checklist like in the pre0ious slideto the scenario to ensure "ou ha0e showne0idence of "our consideration of all therele0ant factors)

E#ERC!SE 2 5


86/92

86P7 ACCA

E#ERC!SE 2)5 !dentif" which of the following situations would compel an

auditor to disclose otherwise confidential facts to an

appropriate authorit"3a4 The auditor of a chain of launderettes suspects that se0eral

cash inflows ha0e 'een the result of illegal acts)3'4 The auditor of a golf clu' has found e0idence that a director

is pa"ing parking tickets and speeding fines using the

compan"8s cash 'ook)3c4 The auditor of a manufacturing 'usiness 'elie0es that the

client has terrorist s"mpathies) He has heard the client makese0eral comments that he 'elie0es support this theor")?ased on these comments/ he has called the integrit" of the

management into *uestion and thinks that it is likel" that heis in0ol0ed in illegal terrorist acti0it")3d4 The auditor of a pension fund 'elie0es that the directors

ha0e little regard to internal control and has e0idence thatthe" ha0e 'een 'reaking guidelines from the regulator

regarding holding client mone")


87/92

87P7 ACCA

A&SLER 2)5

3a4 ?efore informing authorities a'out $one" aundering/ theauditor should report it to the firm8s $R%/ who will 'eproperl" trained in spotting mone" laundering and will ha0eappropriate e(perience to know what further e0idence isre*uired) The auditor must 'e careful not to tip the client offduring the process of looking into this matter further)

3'4 Although this casts dou't on the integrit" of management/the auditor would not report this to an" authorit") The auditorshould inform his or her senior who can decide appropriateaction) This is likel" to 'e to communicate with the

shareholders at the A$ 3if the fines are su'stantial4 or toreport to the audit committee/ if the client has one) This isunlikel" in a small 'usiness)


88/92

88P7 ACCA

A&SLER 2)5

c4 Here/ the auditor seems to ha0e no or littlee0idence) Although terrorist offences constitute asituation when the auditor does ha0e an

o'ligation to disclose/ care must 'e taken not to'e o0er sensiti0e and act on 0ague suspicion) 3d4 Pension funds hold the pu'lic8s mone" and

as a result are usuall" more significant whendeciding on whether or not to report wrongdoing)!n this situation/ the auditor should make theappropriate facts known to the regulator)

C%&F!CTS %F !&TEREST


89/92

89P7 ACCA

C%&F!CTS %F !&TEREST

Conflict of interest ma" arise 'etween+)$em'ers of the assurance firm8s and client8s interests Lhen mem'ers compete directl" a client

!n the case of significant conflict 'etween mem'ers andclient the mem'er should refuse or discontinue theassurance assignment)

2)Conflict of interests 'etween different clients

Assurance firms ha0e clients who are in competition with eachother)

!n the case of conflict 'etween clients/ the firm mustensure that the fact that the firm is auditing 'oth clients isnot a su'=ect for a dispute otherwise the assignment should

not 'e accepted or discontinue)

CO


90/92

90P7 ACCA

CO


91/92

91P7 ACCA

Conflicts in application of thefundamental principlesThe Code of Ethics and Conduct gi0es some general

guidance to mem'ers who encounter a conflict in theapplication of the fundamental principles

E=a!"le. An auditor disco0ers a fraud : conflict dut" toreport could conflict with confidentialit"

>atters to consider.

The resolution process should include consideration of< Rele0ant facts< Ethical issues in0ol0ed< Fundamental principles related to the matter in *uestion< Esta'lished internal procedures< Alternati0e courses of action

Conflicts in application of the


92/92

Conflicts in application of thefundamental principles

?nresolved conflict !f the matter is unresol0ed/ the mem'er should consult

with other appropriate persons within the firm)

The" ma" wish to o'tain ad0ice from ACCA or legalad0isers)

!f after e(hausting all rele0ant possi'ilities/ the ethicalconflict remains unresol0ed/ mem'ers should considerwithdrawing from the engagement team/ a specificassignment/ or to resign altogether from theengagement)

Documents

Final Chapter 2 Revised 2015