Chapter 3 - Ethics And Acceptance

Question 1

Fundamental principles

Answer 1

1. Objectivity:
   Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements.
2. Professional behaviour:
   Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.
3. Professional competence and due care:
   Members should maintain professional knowledge and skill required to ensure a client or employer received competent professional services.

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

4. Integrity:
   Members should be honest and straightforward in all professional and business relationships.
5. Confidentiality:
   Members should respect the confidentiality of information acquired and should not disclose any information to third parties without proper authority unless there is a legal professional right or duty to disclose.

Confidential information acquired should not be used for the personal advantage of members or third parties.

Question 2

Self interest threats

Answer 2

Owning shares/ financial interests:
Dispose shares immediately if a member of the audit team.
Remove the individual from engagement team.
Any employee not a member of the audit team must dispose the shares asap.
A partner must dispose of the shares or the engagement declines.

Fee dependency:
If total fees from a listed client exceed 15% of the firm’s total fees for 2 consecutive years.

Gifts and hospitality:
Only trivial and inconsequential gifts should be accepted and approved by the partner.
Must be documented on the audit file even if refused.

Loans and guarantees:
Will provide a threat if it’s not on commercial terms and not made in the normal course of business.

Overdue fees:
Do not perform any further workforce the client until outstanding fees are paid.

Business and personal relationships:
The individual with the connection to the audit client should be removed from the audit team.

Potential employment with an audit client:
Removal of the individual from the assurance engagement.
Performing an independent review of any significant judgements made by that individual.

Contingent fees:
Fees e.g. Level of profits of the company are not permitted for assurance services.

Actual or threatened litigation:
The firm must resign from or decline the audit.
May be possible to continue other assurance engagements depending on the significance of the threat by
- discussing with client’s audit committee.
- removing the individual involved from the engagement team.
- obtaining an external review of the work done.

Question 3

Self review threats

Answer 3

Accounting and bookkeeping services:
A firm can provide an audit client that is not listed with accounting and bookkeeping services.
Separate teams must be used.

Internal audit services:
A firm cannot provide internal services for an audit client that is listed e.g. Internal controls over financial reporting, financial accounting systems.
Separate teams must be used.

Taxation services:
A firm cannot prepare tax calculations for an audit client that is listed except in an emergency.
Separate teams must be used.

Valuation services:
Valuation of matters material to the financial statements should not be provided.
Valuation services material to the financial statements should not be provided for listed audit clients.

Client staff joins audit firm:
Should not be assigned to an engagement team until at least 2 years.
An employee or partner of a firm cannot also be an employee or director of an assurance client.

Question 4

Familiarity threats

Answer 4

Long association of senior personnel:
Rotation of senior personnel.
Independent partner/ quality control reviews.
It is a requirement to rotate key audit partners on listed clients after no more than 7 years (with 2 years minimum break) unless in exceptional circumstances in which case 1 year extension is permitted.

Family and other personal relationships:
Remove the individual from the engagement team.
Structure the engagement team so the individual does not deal with the close family member.

Audit staff leave the firm to join the client:
Review and revise the composition of the engagement team.
Performing an independent partner/ quality control review of the engagement.

Question 5

Advocacy threats

Answer 5

Promoting the position of a client or representing them in some way so the audit firm is ‘taking sides’ with the client.

The audit firm must decline politely.

Question 6

Intimidation threats

Answer 6

Attempts to exercise undue influence over the assurance provider.

The safeguards are

• fee dependency
• personal relationships
• audit partner joining the client
• litigation between the audit firm and client

Question 7

Preconditions for an audit

Answer 7

1. Professional clearance
   - Ask the client for permission to contact the existing auditor.
   - Contact the outgoing auditor asking for all relevant information to whether or not to accept appointment.
   - if no reply, the prospective auditor should try and contact the outgoing auditor by other means e.g. Telephone.
   - if still no reply, the prospective auditor may accept but proceed with care.
   - consider the outgoing auditors response and assess any ethical and professional reasons why they shouldn’t accept appointment.

The existing auditor must ask the client for permission to respond to the prospective auditor.

2. Independence and objectivity
   If the threats to objectivity cannot be managed to an acceptable level, the audit should not be accepted.
3. Management integrity
   If the audit firm has reason to believe the client lacks integrity, there is a greater risk of fraud and intimidation.
4. Money laundering (client due diligence)
   The audit firm cannot accept the engagement if there is any suspicion of money laundering.
   The audit firm must comply with Money Laundering Regulations which requires client due diligence to be carried out.
5. Resources
   If there is insufficient time to conduct the work with the available resources, the quality of audit could be impacted.
6. Risks
   Any risks identified with the prospective client should be considered.
   The auditor should only take on clients of acceptable risk.
7. Fees
   The audit firm should consider the acceptability of the fee and should commensurate with the level of risk.
   The creditworthiness of the prospective client should be considered as non payment of fees can create a self interest threat.
8. Professional competence
   An engagement should only be accepted if the audit firm has the necessary skill and experience to perform the work competently.
9. Reputation of the client
   The audit firm should consider the reputation of the client and if this could be damaged.

Question 8

Engagement letters

Answer 8

Specifies the nature of the contract between the audit firm.

Purpose to:-

1. Minimise the risk of misunderstanding between auditor and client.
2. Confirm acceptance of the engagement.
3. Set out the T&C’s of the engagement.

The letter will be sent before the audit commences.

It should be reviewed every year.
The auditor must issue a new engagement letter if the scope or context of the assignment changes after initial appointment.

Question 9

The main contents of the engagement letter.

Answer 9

1. The objectives and scope of the audit.
2. The responsibilities of the auditor.
3. The responsibilities of management.
4. The identification of an applicable financial framework.
5. Reference to the expected form and content of any errors issued.

In addition,

1. References will be to professional standards, regulations and legislation applicable to the audit.
2. Limitations of an audit.
3. Expectation that management will provide written representations.
4. Basis on which the fees are calculated.
5. Agreement of management to notify the auditor of subsequent events after report is signed.
6. Agreement of management to provide draft financial statements in time to allow the audit to be completed by the deadline.