Fundamental principles that professional accountants should comply with
Integrity - be straightforward and honest in professional relationships
Objectivity - Not to compromise professional or business judgments because of bias, conflict of interest or undue influence of others
Confidentiality - to respect the confidentiality of information acquired in professional relationships
Professional behaviour - comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might discredit the profession
Professional competence and due care - attain and maintain professional knowledge and skill at the level required to ensure that a client receives competent professional service based on professional standards. To act diligently and in accordance with applicable professional standards.
Self interest threat
the risk that a financial or other interest in a client will inappropriately influence the professional accountant’s judgment or behaviour. Eg. receiving gifts from an audit client and owning shares in an audit client
Threats to fundamental principles
circumstances, relationships and situations that could threaten the professional accountant’s ability to satisfy the fundamental principles
Self review threat
where a professional accountant performs work for the client and this work is later reviewed by the same person or another professional accountant/auditor from the same firm to arrive at a judgment on the subject matter
Advocacy threat
when the auditor promotes or supports a client’s position or interests, to the point where their objectivity and independence are compromised. Eg. Promoting a client’s shares or financial products (e.g., helping them raise capital).
Familiarity threat
familiarity threat in audit arises when the auditor becomes too close or too trusting of the client or its employees, which can impair professional skepticism and objectivity.
Why is self interest a threat
If the auditor has something to gain or lose—such as fees, investments, or relationships—they might be tempted to overlook issues or not challenge the client, especially if doing so could hurt their own interests.
Why is advocacy a threat?
The auditor might become too emotionally or financially invested in the client’s success. This can impair their professional skepticism, making them less likely to critically evaluate the client’s financial statements or disclosures.
Why is self review a threat
If an auditor reviews something they were involved in creating, preparing, or recommending, they may be biased—consciously or unconsciously—toward not finding faults or errors in it.
Why is familiarity a threat
Over time, personal relationships, long association, or repeated interactions can lead an auditor to:
Be less questioning of management’s decisions.
Overlook errors or misstatements.
Avoid challenging the client to preserve the relationship.
Intimidation threat
occurs when the auditor is discouraged from acting objectively because of actual or perceived pressure from the client or others.
Why is intimidation a threat
If the auditor feels threatened, whether by loss of the client, legal action, or personal consequences, they may:
Soften their judgment to avoid conflict.
Fail to report misstatements or issues.
Give in to client demands out of fear.
Intimidation threat safeguards
Use strong ethical and firm policies to handle client pressure.
Involve senior firm leadership or external legal counsel.
Withdraw from the engagement if pressure is too great.
why is intimidation threat a risk
The auditor might compromise audit quality or fail to maintain independence out of fear, rather than professional judgment.
Safeguards against familiarity threat
Rotate key audit partners regularly.
Assign fresh team members to the audit.
Enforce firm policies to manage personal relationships.
Have independent reviews by someone not connected to the client.
Risk of familiarity threat
The auditor might compromise their independence and fail to act objectively, which undermines the reliability of the audit.
Normally, professionals should not disclose client information to third parties, without first obtaining permission from clients. However, in what circumstances can members disclose info without first obtaining permission?
- Disclosure required by law
- production of documents in the course of legal proceedings
- disclosure to public authorities of infringements of law (terrorism, money laundering) - Voluntary disclosure
- where disclosure is in the public interest
- to comply with technical/professional standards
- to protect the interests of a professional accountant in legal proceedings
- to respond to an inquiry/investigation by ACCA or other regulatory body
- to comply with the quality review of ACCA or other professional body
What is NOCLAR (non compliance with laws and regulations)
acts of omission or commission, intentional or unintentional committed by the entity, TCWG, management or other individuals working under the direction of the entity which are contrary to prevailing laws or regulations. Non compliance does not include personal misconduct related to the business activities of the entity
Objectives of an auditor when responding to NOCLAR
- comply with the fundamental principles of integrity and professional behaviour
- by alerting management or TCWG to seek to
a. enable them to rectify, remediate or mitigate the consequences of the identified or suspected non compliance or
b. deter the commission of the non-compliance where it has not yet occurred - to take such further action as appropriate in the public interest
Professional accountant who provide assurance services are required to be independent of the assurance client
True
Aspects of independence
Independence of mind
Independence in appearance
What are public interest entities?
all listed entries and entities that are of significant public interest because of their business, size or number of employees or because they have a wide range of stakeholders. Examples include banks, insurance companies and pension firms
Threats arising from financial matters
Gifts and hospitality
Fees
Loans and guarantees
Financial interests
Explain financial interest threats
examples include ownership of shares in a client by the firm, an audit team member, an immediate family member of the audit team member.
a self interest threat arises as the firm, audit team member (or their immediate family) would benefit personally if the client’s financial statements exceed market expectations
Safeguards: disposal of shares (only option if firm holds shares)
- remove individual from audit team
- inform audit committee
- review by an appropriate reviewer
