Chapter 1: Section 6.1 - 6.3

Question 1

What could the assurance sought by intended users be compromised by?

Answer 1

External auditor not being fully independent from directors of the company being audited.

Question 2

Since assurance could be compromised by the external auditor not being fully independent from the directors of the company, what did the audit profession create to address this issue?

Answer 2

Number of ethical principles that should underpin all audit work with concepts such as independence and objectivity as well as recommended courses of action should any member find themselves exposed.
Can be found within AAT Code of Professional Ethics (2017).

Question 3

Where can the code be found and what are AAT members required to do?

Answer 3

AAT website and AAT members req to act in accordance with the code

Question 4

What are the 2 ways in which independence is defined by the Code?

Answer 4

1. Independence of mind
2. Independence in appearance

Question 5

What does independence of mind mean?

Answer 5

State of mind that permits provision of an opinion without being affected by influences that compromise professional judgement, allowing an individual to act with integrity and exercise objectivity and professional judgement.

Question 6

What does independence in appearance mean?

Answer 6

Avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant information including any safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s integrity, objectivity or professional scepticism had been compromised.

Question 7

Define fundamental principles.

Answer 7

Ethical principles that all accountants and auditors should comply with.

Question 8

What can the series of fundamental principles that should be complied with help with?

Answer 8

Helps understand how independence can be displayed

Question 9

What are the series of fundamental principles that should be complied with to help understand how independence can be displayed? (5)

Answer 9

1. Professional competence and due care
2. Integrity
3. Professional behaviour
4. Confidentiality
5. Objectivity

Question 10

Define fundamental principle of ‘professional competence and due care’

Answer 10

Maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques.

A member shall act diligently and in accordance with applicable technical and professional standards when providing professional services.

Question 11

Define the fundamental principle of integrity.

Answer 11

To be straightforward and honest in all professional and business relationships.

Question 12

Define the fundamental principle of professional behaviour.

Answer 12

To comply with relevant laws and regulations and avoid any action that brings our profession into disrepute.

Question 13

Define the fundamental principle of confidentiality.

Answer 13

In accordance with law, to respect confidentiality of information acquired as a result of professional and business relationships and 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 info acquired as a result of professional and business relationships shall not be used for the personal advantage of the member or third parties.

Question 14

Define the fundamental principle of objectivity.

Answer 14

To not allow bias, conflict of interest or undue influence of others to override professional or business judgements.

Question 15

Define Conceptual framework

Answer 15

Potential situations or ethical threats that auditors and accountants should aim to avoid.

Question 16

What does the Code use the conceptual framework to do?

Answer 16

Illustrate the possible threat auditors could be exposed to

Question 17

Why does the Code use the conceptual framework to illustrate the possible threats that auditors could be exposed to?

Answer 17

To help auditors avoid getting into situations where their independence or objectivity could be called into question.

Question 18

What are the possible threats auditors could be exposed to? (5)

Answer 18

1. Advocacy
2. Self-interest
3. Intimidation
4. Familiarity
5. Self-review

Question 19

What is the threat of advocacy?

Answer 19

When a member promotes a position or opinion to the point that subsequent objectivity may be compromised

Question 20

What is the threat of self-interest?

Answer 20

Where a financial or other interest will inappropriately influence the member’s judgment or behaviour

Question 21

What is the threat of intimidation?

Answer 21

When a member may be deterred from acting objectively by threats, whether actual or perceived.

Question 22

What is threat of familiarity?

Answer 22

When, because of a close or personal relationship, a member becomes too sympathetic to the interests of others.

Question 23

What is the threat of self-review?

Answer 23

When a previous judgement needs to be re-evaluated by the member responsible for that judgement.

Question 24

What is the acronym for memorising threats auditors could be exposed to?

Answer 24

AS IFS

Question 25

Give an example of advocacy

Answer 25

Promoting shares in a listed entity when that entity is a financial statement audit client

Question 26

Give an example of self-interest

Answer 26

Having a close business relationship with a client

Question 27

Give an example of intimidation

Answer 27

Being threatened with dismissal or replacement in relation to a client engagement

Question 28

Give an example of familiarity

Answer 28

A member of the engagement team having a close or personal relationship with a director or officer of the client

Question 29

Give an example of self-review

Answer 29

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

Question 30

What does the AAT code suggest which 2 threats treatment of gifts may create?

Answer 30

Self-interest and familiarity

Question 31

When looking at gifts and determining the most likely ethical threat, you have to look at why the gift has been given. What are the 2 situations/reasonings behind gifts being given and what threat this presents?

Answer 31

1. If appears as incentive for member who may feel there is value attached to the gift and may therefore, feel more inclined to make a judgement that favours client, most likely = self-interest (made all more plausible given possible links to bribery such gifts may imply) 2. If gift given as gesture of friendship, more likely to indivate more established relationship where objectivity may be compromised due to long association, which is an illustration of the familiarity threat in action.

Question 32

(licensed members) What are the situations to remember where accountants and auditors who work in practice may be exposed to ethical threats? (8)

Answer 32

1. Professional appointment 2. Second opinions 3. Fees and other types of remuneration 4. Marketing professional services 5. Gifts and hospitality 6. Custody of client assets 7. Objectivity 8. Independence.

Question 33

What does the ethical threat of professional appointment mean?

Answer 33

Before accepting an engagement to work for a client, members should determine whether there a threats to compliance with the fundamental principles from any illegal activities (e.g., money laundering), dishonesty on part of clients or questionable financial reporting practices. Members should also ensure they are competent to act before accepting a professional appointment (s.210 of code)

Question 34

What does the ethical threat of second opinions mean?

Answer 34

If asked to provide a second opinion on the application of accounting, auditing, reporting or any other standards or principles to an entity that is not an existing client, members need to ensure they are competent to act in such a capacity and have access to the same relevant facts or evidence as the existing accountant. Members need to be alert to second opinions being abused by clients especially if they are not permitted to communicate with the existing accountant (s.230 of code)

Question 35

What does the ethical threat of 'fees and other types of remuneration' mean?

Answer 35

Members may quote whatever fee they feel is appropriate for a service but they must be alert to any threats presented by fees being too low (e.g., self interest if the fee quoted to clients is so low it may be difficult to perform the engagement in line with applicable technical and professional standards) Arrangements such as contingent fees and commissions can also present self-interest threats depending on the engagements and which, without adequate safeguards, are unacceptable (240)

Question 36

What does the ethical threat of 'marketing professional services' mean?

Answer 36

Like all service providers , accountants need to advertise to attract clients but must ensure they do so in a manner that does not distort the truth or misrepresent the interests of another professional: otherwise, a self-interest threat to compliance with the principle of professional behaviour may be created (s.250)

Question 37

What is the ethical threat of 'gifts and hospitality'?

Answer 37

It is not uncommon for members and their clients to give and receive items as part of maintaining their professional relationship. However, such gifts and hospitality may create self-interest threats if accepted and intimidation threats if made public. In such cases, the significance of any gifts and hospitality must always be considered, especially in the context of the UK Bribery Act 2010 (s.260)

Question 38

What is the ethical threat of custody of client assets?

Answer 38

Members may be asked to look after client assets (e.g., cash or valuables) due to possessing better safekeeping controls, but this could create self-interest threats and others relating to money laundering that they should consider before accepting this request (s.270)

Question 39

What is the ethical threat of objectivity?

Answer 39

All services - threats such as familiarity can be created by having a close personal or business relationship with a client or its directors, officers or the employees of a client (s.280)

Question 40

What is the ethical threat of independence?

Answer 40

Assurance engagements - family and other personal or business relationships, loans, beneficial interests in shares and other investments and gifts and hospitality can create threats to objectivity and independence by their nature. Members should evaluate the threats and sue professional judgement in applying the conceptual framework in such cases (s.290)