Chapter 4: Ethics and acceptance of appointment
Chapter learning objectives
When you lot complete this chapter you lot will exist able to:
- Define and apply the key principles of professional ideals;
- Define and utilise the conceptual framework including the threats to the fundamental principles;
- Discuss the safeguards to outset the threats;
- Draw the auditor'southward responsibility with regard to auditor independence, conflicts of interest and confidentiality;
- Discuss the preconditions and other requirements in relation to the credence of new inspect engagements;
- Talk over the process by which an auditor obtains an audit appointment; and
- Explicate the importance of engagement letters and state their contents.
1 Introduction â€" the need for professional person ethics
The purpose of assurance engagements is to increase the confidence of end users of information by reducing their level of risk.
Information technology therefore follows that the user needs to trust the professional person who is providing the assurance. In club to be trusted the accountant needs to exist independent of their client. Independence can exist defined every bit having 'freedom from situations and relationships where objectivity would be perceived to be impaired by a reasonable and informed 3rd political party.’
Despite this need for trust the last xxx years has witnessed a number of high profile corporate scandals that accept had far reaching implications for companies, economies and accountancy firms. Enron and Worldcom are perhaps two of the nearly high contour examples from recent times.
To improve the image of the profession and to restore trust between users of accountancy services and the practitioners, it is vital that accountants operate (and are perceived to operate) according to an accepted code of ethics.
ii The IFAC and ACCA codes and the conceptual framework
IFAC, through the International Ethics Standards Board for Accountants, has issued a lawmaking of ideals, as has the ACCA. The ACCA Code of Ideals is covered in this affiliate nonetheless, both the IFAC and ACCA codes have the same roots and are, to all intents and purposes identical.
Both follow a conceptual framework which identifies:
- fundamental principles of ethical behaviour
- potential threats to ethical behaviour
- possible safeguards which can be implemented to counter the threats.
A conceptual framework relies on a principles rather than a rules based approach. This provides guidance so that the principles may exist applied to wide ranging and - potentially - unique circumstances.
Giving the framework some teeth
Whilst it is expected that practitioners apply the spirit of the lawmaking to every twenty-four hours practise the framework and principles would be of trivial utilise if they could not be enforced.
Professional bodies similar the ACCA therefore reserve the correct to subject members who infringe the rules through a process of:
- Disciplinary hearings which can consequence in:
- fines
- intermission of membership
- withdrawal of membership.
3 The key principles
The formal definitions of the fundamental principles are as follows:
- Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements.
- Professional behaviour: Members should comply with relevant laws and regulations and should avoid any activeness that discredits the profession.
- Professional competence and due care: Members accept a standing duty to maintain professional cognition and skill at a level required to ensure that a client or employer receives competent professional person service based on electric current developments in practice, legislation and techniques.
Members should act diligently and in accordance with applicable technical and professional person standards when providing professional services.
- Integrity: Members should be straightforward and honest in all professional and business organisation relationships.
- Confidentiality: Members should respect the confidentiality of data caused as a result of professional and business organisation relationships and should not disclose whatever such information to third parties without proper and specific potency or unless in that location is a legal or professional person right or duty to disembalm. Confidential information acquired as a result of professional and business relationships should non be used for the personal reward of members or third parties.
Practitioners needs to 'comport and be seen to deport' in an ethical, professional way. This ways complying with the Code of Ethics in every professional person state of affairs.
4 Threats and safeguards
Definitions of threats
The following are all examples of behaviour that could threaten the practitioner'southward independence from their clients:
Cocky involvement threat
This occurs when an auditor has a beneficial interest in a customer'due south functioning. Examples include:
- When the accountant or a member of their family owns shares in a client. They would straight do good from increases in client profits and would exist reluctant to raise whatsoever concerns that could adversely affect the operation of the client.
- When a firm is dependent upon one client for a significant proportion of their full fee income. The firm may not raise problems with the client for fright of losing them.
- The credence of gifts and hospitality. This could be perceived as bribery to keep quiet virtually issues in the fiscal statements
Self review threat
This occurs when an auditor has to review work that they previously performed. For example: if the external auditor prepared the financial statements and then audited them.
There is a risk that the auditor would not place any shortcomings in their own piece of work for fear of penalty (either fiscal or reputational).
Advocacy threat
This tin can occur when the auditor is asked to promote or stand for their customer in some way. In this situation the auditor would have to be biased in favour of the client and therefore cannot be objective. This could happen if the customer asked the auditor to promote their shares for a stock substitution list or if the client asked the auditor to represent them in court.
Familiarity threat
This occurs when the accountant is likewise sympathetic or trusting of the customer because of a close relationship with them. This may exist because a close friend or relative of the accountant works in a key part for the customer. The auditor may trust their friend or relative to non make mistakes and therefore non review their work every bit thoroughly as they should and every bit a consequence allow material errors to go undetected in the financial statements. This can also arise afterward a long clan with a client.
Intimidation threat
Clients may effort to harass or corking auditors into giving preferential audit reports. They may use the fee every bit leverage. The auditor should non requite in to such pressure and, in the circumstances, may choose to resign from such a customer.
Identifying the threats
In gild to baby-sit against these threats, existent or perceived, firms should establish procedures to enable them to:
- Place possible threats;
- Evaluate the run a risk arising from the threat;
- Evaluate whether the necessary safeguards are in identify; and
- Have corrective action if necessary.
Normally this will be done through the employ of checklists. Whilst ethics should always be of paramount consideration it must be considered at these vital junctures:
- On acceptance of a new customer;
- At the planning phase of whatever inspect;
- At the completion phase of any audit;
- Whenever additional, non audit services are provided to an audit client; and
- If whatever event, or modify in circumstance, occurs to either the auditor or the client.
Possible safeguards
General safeguards, equally recommended by ACCA
- Safeguards created by the profession. These include: education; training and experience requirements for entry into the profession; standing professional development requirements; corporate governance regulations; professional standards; monitoring; external review of work and reports; and disciplinary activity.
- Safeguards in the work surroundings. These include: oversight structures; ethics and behave programmes; recruitment procedures; internal controls; disciplinary procedures; strong upstanding leadership; policies and procedures to promote quality command; and culture.
- Safeguards created past individuals. These include: complying with professional evolution requirements; keeping records of contentious issues; using a mentor; and keeping in contact with professional bodies.
Specific safeguards
It is of import to note that the safeguards listed beneath are more often than not well regarded principles that can exist applied across a range of engagements and national boundaries. Nonetheless, national regulatory authorities may have their own ethical standards (such every bit the UK'south Auditing Practices Board'southward Ethical Standards) which are enforceable nationally. In sure circumstances the limits and thresholds may exist different
Common safeguards that should be employed past auditors include:
- monitoring fees received from significant clients in comparison to full fees to reduce perception of dependence on clients;
- rotating senior audit staff on an engagement after a stock-still period to reduce familiarity threat;
- using split up teams (and partners) where boosted services are offered to inspect clients to reduce self review threat;
- using contained partners to review work where any upstanding threat is identified;
- not accepting gifts or hospitality, unless it is considered by a partner to exist modest;
- not engaging in any concern or financial relationship with a client;
- non assuasive individuals with personal or family ties to a client to be involved in the audit of that visitor;
- not providing accountancy or internal audit services for listed inspect clients;
- maintaining an up to date engagement letter; and
- in cases where no safeguard are considered sufficient the auditor should resign.
5 Confidentiality
External auditors are in a unique position of having a legal correct of access to all information nearly their clients. The customer must exist able to trust the auditor not to disclose anything virtually their business to anyone as information technology could be detrimental to their operations.
Equally a basic rule, members of an audit squad should not disclose any information to those outside of the audit team, whether or not they work for the aforementioned firm. At that place is fiddling betoken using different teams for different piece of work assignments if staff from different teams are disclosing information to each other!
Data should just be disclosed under sure circumstances. In some circumstances the auditor must disclose the data and in others the auditor may chose to disclose the information, as follows:
Public interest
- Whether or non information technology is in the public interest is difficult to prove and the auditor must proceed with caution if thinking of disclosing information for this reason. Such examples could include fraud, ecology pollution, or simply companies acting against the public good.
Legal advice should be sought beforehand to avoid the risk of being sued. Matters to consider before disclosing data in the public interest are whether that matter is likely to be repeated and how serious the effects of the client’south deportment are.
Conflicts of interest
Any advice given should be in the all-time interests of the client. However, where clients' interests conflict (for example, clients in the same line of business), the firm’s piece of work should be bundled to avoid the interests of one existence adversely affected by those of some other.
The steps to be taken by the auditor are:
- once a conflict is noted, you should advise both clients of the state of affairs
- reassure the client that adequate safeguards will exist implemented, e.thou. split up appointment leaders for each, separate teams, ‘Chinese walls’ to prevent the transfer of client information between teams and a second partner review
- suggest they seek additional independent advice
- if acceptable safeguards can't be implemented, the accountant should resign.
6 Accepting new inspect engagements
Preconditions
Auditors should only accept a new audit engagement, or continue an existing audit engagement if the 'preconditions for an inspect' required past ISA 210 Agreeing the terms of audit engagements are present.
ISA 210 requires the accountant to:
- Decide whether the financial reporting framework to exist applied in the grooming of the fiscal statements is advisable; and
- Obtain the agreement of management that it acknowledges and understands its responsibilities.
If the preconditions for an audit are not present, the auditor should hash out the matter with management, and should non accept the engagement unless required to do and then by law or regulation.
Procedures
If offered an audit role, the accountant should:
- inquire the client for permission to contact the approachable auditor (reject role if client refuses)
- contact the outgoing auditor, request for any reasons why they should not accept engagement. If a respond is not received, the prospective auditor should effort and contact the outgoing accountant by other means e.1000. by telephone. If a reply is withal not received the prospective accountant may yet choose to accept just must proceed with intendance.
- ensure that the legal requirements in relation to the removal of the previous auditors and the appointment of the business firm have been met (these were covered in chapter 2)
- carry out checks to ensure the firm tin can be independent, is competent to do this audit and has the necessary resources
- assess whether this work is suitably depression hazard
- appraise the integrity of the company'due south directors
- as a commercial organisation, the firm should also ensure that this is a desirable customer (e.chiliad. right manufacture, suitable profit margin etc)
- not accept the date, where it is known that a limitation will be placed on the scope of the audit.
seven Engagement messages
Appointment letters â€" master considerations
The engagement letter will exist sent before the audit. It specifies the nature of the contract between the audit business firm and the customer and minimises the run a risk of whatever misunderstanding of the auditor’due south role.
Information technology should be reviewed every year to ensure that information technology is upwards to date but does not need to be reissued every year unless in that location are changes to the terms of the engagement. The auditor must issue a new engagement letter if the scope or context of the assignment changes after initial appointment.
ISA 210 requires the accountant to consider whether in that location is a need to remind the entity of the existing terms of the audit date for recurring audits and many firms choose to transport a new letter every year, to emphasise its importance to clients.
Reasons for changes
Reasons for changes include:
- Changes to statutory duties due to new legislation.
- Changes to professional duties, maybe due to new ISAs.
- Changes to 'other services' as requested past clients.
The contents of the engagement letter
The contents of a letter of appointment for inspect services are listed in ISA 210 Agreeing the Terms of Audit Engagements. They should include the following:
- The objective and telescopic of the inspect;
- The responsibilities of the auditor;
- The responsibilities of management;
- The identification of an applicative fiscal reporting framework; and
- Reference to the expected form and content of whatever reports to be issued.
Analogy 1: Example of an audit engagement letter
Whites & Harper Inc.
14 The Grove
Kingston
KI4 6AP
25 Nov 20X0
To the Board of Directors of Blake Co.
This letter and the attached terms of business organisation dated 25 November 20X0 set out the basis on which we are to provide services as auditors and your and our respective responsibilities.
The objective and scope of the audit: You have requested that we audit the fiscal statements of Blake Company, which comprise the statement of financial position as at December 31, and the income statement, argument of changes in equity and cash menstruum statement for the yr and then ended, and a summary of significant bookkeeping policies and other explanatory data.
We are pleased to ostend our acceptance and our understanding of this inspect engagement past ways of this alphabetic character. Our audit will exist conducted with the objective of our expressing an opinion on the financial statements.
The responsibilities of the auditor: We will conduct our audit in accordance with International Standards on Auditing (ISAs). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are gratuitous from material misstatement. An audit involves performing procedures to obtain audit evidence nigh the amounts and disclosures in the financial statements. The procedures selected depend on the auditor'due south judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or mistake. An audit as well includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by direction, every bit well equally evaluating the overall presentation of the financial statements.
Because of the inherent limitations of an inspect, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with ISAs.
In making our take a chance assessments, we consider internal control relevant to the entity'southward preparation of the financial statements in order to blueprint inspect procedures that are appropriate in the circumstances, only not for the purpose of expressing an opinion on the effectiveness of the entity'southward internal control. Notwithstanding, we will communicate to you in writing concerning whatever significant deficiencies in internal control relevant to the audit of the financial statements that we take identified during the audit.
The responsibilities of management: Our audit will exist conducted on the ground that management admit and empathise that they accept responsibility:
(a)For the preparation and fair presentation of the fiscal statements in accordance with International Fiscal Reporting Standards;
(b)For such internal control every bit management determines is necessary to enable the preparation of financial statements that are free from cloth misstatement, whether due to fraud or fault; and
(c)To provide us with:
(i)Access to all data of which direction is enlightened that is relevant to the grooming of the financial statements such equally records, documentation and other matters;
(2) Boosted information that we may asking from management for the purpose of the audit; and
(3)Unrestricted access to persons within the entity from whom we make up one's mind it necessary to obtain audit bear witness.
As office of our audit process, we will request from management written confirmation concerning representations made to us in connection with the audit.
We look forward to total cooperation from your staff during our audit.
Study: Nosotros will report to the members of Blake Company as a body, whether in our opinion the fiscal statements present adequately in all material respects, the financial position of Blake Company as at December 31, and its fiscal performance and its cash flows for the year then concluded in accord with International Financial Reporting Standards. The form and content of our written report may need to exist amended in the low-cal of our audit findings.
Fees: Our fees, which will exist billed every bit piece of work progresses, are based on the time required by the individuals assigned to the date plus out-of-pocket expenses. Private hourly rates vary according to the caste of responsibility involved and the experience and skill required.
Period of appointment: This appointment will outset on 01 January 20X1 with the company's accounting menses ending on 31 December. We will not be responsible for before years. The company’s previous advisers, Jones & Mackay Inc. will deal with outstanding returns, assessments and other matters relating to earlier periods.
This letter of the alphabet supersedes any previous engagement letter for the period covered. Once agreed, this letter will remain constructive for hereafter years from the date of signature unless it is terminated, amended or superseded. You or we may agree to vary or cease our authority to act on your behalf at any fourth dimension without penalty. Detect of variation or termination must exist given in writing.
Limitation of liability: To the fullest extent permitted by law, we will non exist responsible for whatever losses, where you lot or others supply incorrect or incomplete information, or neglect to supply whatsoever appropriate data or where you fail to act on our communication or respond promptly to communications from us.
Our work is not, unless there is a legal or regulatory requirement, to be made available to third parties without our written permission and we will accept no responsibleness to third parties for whatsoever aspect of our professional services or work that is made available to them.
Confirmation of your understanding: Delight confirm your agreement to the terms of this letter and the attached terms of business past signing and returning the enclosed copies.
Delight sign and return the attached re-create of this letter to bespeak your acknowledgement of, and agreement with, the arrangements for our inspect of the financial statements including our respective responsibilities.
If this alphabetic character and the attached terms of business are not in accordance with your understanding of our terms of engagement, please permit usa know.
Whites & Harper Inc.
Acknowledged and agreed on behalf of Blake Visitor by
(signed)
..........................
Name and Title
Date
Contents of the engagement letter of the alphabet
In addition to the above the appointment letter may also make reference to:
- The unavoidable risk that some material misstatements may go undetected due to the inherent limitations in an audit;
- Arrangements regarding the planning and performance of the audit;
- The expectation that management will provide written representations;
- The agreement of management to make available to the auditor draft financial statements and other information in fourth dimension to complete the audit in accordance with the proposed timetable;
- The agreement of management to inform the auditor of facts that may affect the fiscal statements;
- The basis on which fees are computed and billing arrangements;
- A request for management to acknowledge receipt of the engagement letter and to agree the terms outlined;
- Agreements concerning the involvement of auditors experts and internal auditors; and
- Restrictions to the accountant's liability.
UK Syllabus Focus
The APB has issued a set of UK specific ethical standards designed to ensure practitioners comply with the IFAC Code of Ethics. These can be summarised as follows:
Ethical Standard 1 - integrity, objectivity and independence
- The audit house shall constitute policies and procedures to ensure that the firm, and all those involved in the audit, act with integrity, objectivity and independence;
- The leadership of the audit firm shall take responsibility for establishing a control environs that places adherence to upstanding principles above commercial considerations;
- the inspect firm shall designate an ethics partner;
- The inspect firm shall establish policies and procedures to prevent employees from taking decisions that are the responsibleness of management of the audited entity;
- The audit firm shall establish policies and procedures to assess the significance of threats to the accountant's objectivity:
(i)when considering whether to have or retain an audit or non-inspect service;
(ii) when planning the audit
(iii)when forming an stance on the fiscal statements; and
(iv)when potential threats are reported
- The audit engagement partner shall not accept or shall non continue an audit engagement if he or she concludes that whatever threats to the accountant's objectivity and independence cannot be reduced to an acceptable level.
- In the case of listed companies the engagement quality control reviewer shall:
(i)consider the inspect firm's compliance with APB Ethical Standards; and
(two) course an independent opinion every bit to the ceremoniousness and adequacy of the safeguards practical.
Ethical Standard ii - fiscal, concern, employment and personal relationships
- The audit business firm, or employees, shall not hold any financial interest in an audited entity;
- Audit firms and employees shall non brand loans to, or guarantee the borrowings of, an audited entity (and vice versa);
- Audit firms and employees shall not enter into business concern relationships with an audited entity;
- An audit firm shall non second partners or employees to an audit client unless:
(i)the agreement is for a short period of time; and
(two) the audited entity agrees that the individual concerned will non hold a direction position.
- Where a partner or employee returns to a firm on completion of a secondment to an audit client, that private shall non exist given any role on the audit involving whatever function or activeness that they performed or supervised during that assignment.
- Where a partner joins an audited entity, the inspect business firm shall have action to ensure that no connections remain between the firm and the individual;
- Where a partner leaves a firm and is appointed as a director or to a key management position with an audited entity, having acted as audit date partner at any time in the two years prior to this date, the firm shall resign as auditor.
- A partner, or employee of the audit firm who undertakes audit piece of work, shall not accept date:
(i)to the board of directors of the audited entity; or
(ii) to whatever subcommittee of that board;
ES 3 - Long association with the inspect engagement
- The inspect business firm shall plant policies and procedures to monitor the length of time that senior staff serve as members of the engagement team for each audit;
- Where senior staff have a long clan with the inspect, the audit firm shall assess the threats to the auditor’s objectivity and independence and shall apply safeguards to reduce the threats to an acceptable level. Where advisable safeguards cannot be applied, the audit business firm shall either resign as auditor or not represent reappointment, as appropriate;
- Once an audit engagement partner has held this office for ten years, careful consideration must be given every bit to whether their objectivity would exist perceived to exist dumb;
- In the case of listed companies the inspect firm shall establish policies and procedures to ensure that no one shall act as audit engagement partner for more than five years; and
- In the instance of listed companies, the inspect engagement partner shall review the safeguards put in place to address the threats arising where senior staff have been involved in the inspect a period longer than seven years.
ES 4 - Fees, remuneration and evaluation policies, litigation, gifts and hospitality
- The audit engagement partner shall ensure that audit fees are not influenced or determined by the provision of non-audit services;
- An audit shall not be undertaken on a contingent fee basis;
- Audit fee for the previous audit and the arrangements for its payment shall be agreed with the audited entity before the audit house formally accepts appointment as auditor in respect of the following menses;
- Where it is expected that the total fees receivable from a listed audited entity will regularly exceed 10% of the almanac fee income (xv% if non-listed) of the audit house, the firm shall not act every bit the auditor of that entity;
- The inspect firm shall constitute policies and procedures to ensure that the objectives and appraisement of members of the audit team exercise not include selling non-audit services.
- Where litigation with a client is already in progress, or where it is probable, the inspect firm shall either not continue with or not take the inspect engagement;
- The inspect firm, including employees, shall not accept gifts from the audited entity, unless the value is clearly insignificant; and
- Audit business firm employees shall not accept hospitality from the audited entity, unless it is reasonable in terms of its frequency, nature and toll.
ES five - not-inspect services provided to audited entities
- Before the audit firm accepts a proposed engagement to provide not-audit services to an audit client, the audit appointment partner shall:
(i)consider whether a reasonable third party would regard the objectives of the proposed engagement every bit being inconsistent with the objectives of the inspect;
(ii) place and appraise whatever threats to the auditor'due south objectivity, including whatsoever perceived loss of independence; and
(iii)identify and appraise the effectiveness of the bachelor safeguards to eliminate the threats or reduce them to an acceptable level.
- Where the audit partner considers it probable that a reasonable 3rd party would regard the objectives of the proposed non-audit service date as being inconsistent with the objectives of the audit, the audit business firm shall either:
(i)not undertake the non-audit service engagement; or
(ii) not accept or withdraw from the audit engagement.
- Specifically, the audit firm shall not undertake an engagement to provide internal audit services to an audited entity where it is reasonably foreseeable that:
(i)for the purposes of the audit of the fiscal statements, the auditor would place significant reliance on the internal inspect work performed by the audit house; or
(ii) for the purposes of the internal audit services, the audit firm would undertake part of the office of management.
- The audit firm shall non undertake an engagement to pattern, provide or implement information technology systems for an audited entity where:
(i)the systems concerned would be important to any significant part of the accounting system and the accountant would place meaning reliance upon them as function of the inspect of the financial statements; or
(2) for the purposes of the information technology services, the inspect firm would undertake part of the office of management.
ES - Provisions Available for Pocket-size Entities (PASE)
Test your understanding 1: Fixed Test 1 - JT & Co.
You lot are a manager in the audit business firm of JT & Co; and this is your first time yous have worked on ane of the business firm's established clients, Pink Co. The principal activeness of Pink Co is providing investment advice to individuals regarding saving for retirement, buy of shares and securities and investing in tax efficient savings schemes. Pink is regulated by the relevant financial services authority.
You accept been asked to start the inspect planning for Pink Co, past Mrs Goodall, a partner in JT & Co. Mrs Goodall has been the engagement partner for Pink Co, for the previous half dozen years and so has a audio knowledge of the customer. Mrs Goodall has informed you that she would similar her son Simon to be office of the audit squad this year; Simon is currently studying for his starting time ready of fundamentals papers for her ACCA qualification. Mrs Goodall also informs you that Mr Supper, the audit senior, received investment communication from Pinkish Co during the year and intends to practice the aforementioned next yr.
In an initial meeting with the finance director of Pink Co, you learn that the audit squad will not be entertained on Pink Co'southward yacht this year as this could appear to exist an attempt to influence the opinion of the audit. Instead, he has bundled a 24-hour interval at the horse races costing less than two fifth'due south of the expense of using the yacht and hopes this will be acceptable.
JT & Co have washed some consultive work previously and the invoice is however outstanding.
Required:
(a) (i)Explain the upstanding threats which may affect the auditor of Pink Co.
(6 marks)
(2)For each ethical threat, discuss how the effect of the threat tin can be mitigated.
(6 marks)
(Full: 12 marks)
Reply plan
You are a manager in the audit firm of JT & Co; and this is your first time yous have worked on one of the firm's established clients, Pink Co. The main action of Pink Co is providing investment advice to individuals regarding saving for retirement, purchase of shares and securities and investing in revenue enhancement efficient savings schemes. Pink is regulated by the relevant financial services dominance.
Yous accept been asked to kickoff the inspect planning for Pink Co, by Mrs Goodall, a partner in JT & Co. Mrs Goodall has been the appointment partner for Pinkish Co, for the previous six years and then has a sound knowledge of the client. Mrs Goodall has informed you lot that she would like her son Simon to be part of the audit team this year; Simon is currently studying for his first set of fundamentals papers for her ACCA qualification. Mrs Goodall as well informs you lot that Mr Supper, the inspect senior, received investment communication from Pink Co during the yr and intends to do the same next year.
In an initial meeting with the finance director of Pink Co, you learn that the inspect team will not be entertained on Pink Co's yacht this year equally this could announced to be an attempt to influence the opinion of the inspect. Instead, he has bundled a day at the horse races costing less than two fifth's of the expense of using the yacht and hopes this will be adequate.
JT & Co have washed some consultive work previously and the invoice is still outstanding.
Required:
(a) (i)Explain the ethical threats which may touch the accountant of Pink Co.
(6 marks)
(ii)For each ethical threat, hash out how the issue of the threat can be mitigated.
(6 marks)
(Total: 12 marks)
Exam your agreement 2
Explain each of the FIVE fundamental principles of ACCA’s Lawmaking of Ethics and Acquit.
Real exam question: December 2007
(v marks)
Test your understanding 3
(a) There are legal and professional arrangements for the appointment and removal of auditors.
(i) State the circumstances in which a person is non eligible to human activity equally an auditor
(2 marks)
(ii) Describe the steps required to remove an auditor from an engagement.
(3 marks)
Yous are a manager in the audit department of Whilling and Abel. A potential new client, Truckers Ltd, a haulage visitor, has approached your firm to do the statutory audit in addition to another non-inspect services for the financial year ended 30 September 2011. Your audit firm was recommended to Truckers by an existing client, O&P, a aircraft company who is as well a major client of Truckers Ltd.
You have been chosen to lead the assignment as you lot accept feel of auditing haulage companies and you besides manage the audit of O&P. Whilst arranging the initial meeting with the directors of Truckers y'all observe that y'all studied accountancy with the finance managing director at university.
During the meeting, you found that Truckers has not made a turn a profit for the last 2 years. The directors explain that this is largely due to escalating costs in the industry including fuel toll rises. They are confident they take now controlled their costs for the electric current year to xxx September 2010. They have besides been approached to tender for a large profitable contract which would improve their fiscal performance going forward. They would similar you to aid them with the preparation of this tender and present with them on the day.
The current year'south financial statements and inspect are being finalised with another audit business firm. The finance director tells you that the current auditors have identified material misstatements merely the lath of directors are refusing to brand these adjustments. If adjusted, it would turn the break even position into a loss. The finance manager told you this information informally whilst catching up on old times at the local pub.
The current auditors have replied to your professional clearance alphabetic character and have informed you that they are still owed fees relating to the year ended 30 September 2010. This is under dispute with the customer.
Once dorsum from the meeting you lot summate that the potential fees from Truckers would corporeality to most 14% of your firms total fee income.
Required:
(b) Identify and explain the threats to auditor independence if Whilling and Abel accept Truckers as a new customer. For each threat, recommend how the threat tin can be managed.
(15 marks)
(Total: 20 marks)
Test your understanding 4
Client confidentiality underpins the human relationship between Chartered Certified Accountants in practice and their clients.
Information technology is a core element of ACCA's Rules of Professional Carry.
Required:
(a)Explicate the circumstances in which ACCA's Rules of Professional Bear allow or require external auditors to disclose data relating to their clients to 3rd parties without the knowledge or consent of the customer.
(8 marks)
(b) A waste matter disposal company has breached tax regulations, environmental regulations and wellness and safety regulations. The auditor has been approached past the taxation authorities, the authorities body supervising the award of licences to such companies and a trade union representative. All of them accept asked the auditor to provide them with data about the company. The auditor has also been approached past the law. They are investigating a suspected fraud perpetrated by the managing director of the company and they wish to ask the auditor sure questions about him.
Describe how the auditor should respond to these types of request.
(12 marks)
(Total: 20 marks)
8 Chapter summary
Test your understanding answers
Test your understanding i: Stock-still TEST i - JT & Co.
THIS IS A FIXED Exam â€" Please answer the question in total (long form written). And then log on to EN-gage at the following address: www.en-gage.co.great britain. Follow the link to 'Stock-still Test one' and answer the questions based on your homework reply.
In one case you have answered the questions on EN-gage, a model reply will be available for your reference.
Test your understanding 2
Central principles
Integrity. A professional person accountant should be honest and straightforward in performing professional person services.
Objectivity. A professional auditor should be fair and not allow personal bias, conflict of involvement or influence of others to override objectivity.
Professional competence and due care. When performing professional services, a professional person accountant should testify competence and duty of care by keeping up-to-date with developments in do, legislation and techniques.
Confidentiality. A professional accountant should respect the confidentiality of information caused during the course of providing professional services and should non use or disclose such information without obtaining customer permission.
Professional behaviour. A professional accountant should act in a way consistent with the good reputation of the profession and refrain from whatever conduct which might bring discredit to the profession.
Test your understanding three
(a)
(i)A person is not eligible to act every bit an auditor for the post-obit reasons:
- They are non a member of an RSB (recognised supervisory body) or not allowed to practice nether the rules of an RSB;
- If they are an officer or employee of the company; or
- If they are a concern partner or employee of the company.
(2) Steps required to remove an auditor from an engagement
- A decision must be fabricated by the shareholders at a general coming together usually with a bulk vote being required.
- Accelerate discover should be fabricated to the visitor and the auditors prior to any full general meeting â€" in the Great britain for case 21 days find would be required.
- Auditors have the correct to attend and speak at the GM or take representation read out on their behalf. The company should ensure that this is adhered to.
(b)Threats to independence
Test your understanding 4
(a)Disclosure of information relating to clients to third parties
(i)Auditors are permitted or required to disembalm data about their clients to third parties without their knowledge or consent in very limited circumstances.
(2) Generally, auditors can be required to, or are permitted to, disclose data to certain regulatory bodies, including certain specialist units within law forces under legislation. Such legislation in many countries includes financial services legislation, legislation concerning banks and insurance companies, legislation concerning coin laundering and legislation concerning the investigation of serious fraud or taxation evasion.
(3)Auditors are also permitted or required to disembalm information where they are personally involved in litigation, including litigation that involves the recovery of fees from clients, or where they are subject to disciplinary proceedings brought by ACCA or other, similar professional bodies.
(four)Auditors are as well permitted to disembalm data where they consider it to be in the 'public interest' or in the interests of national security. Factors to accept into business relationship include the seriousness of the affair, the likelihood of repetition and the extent to which the public is involved. This right is rarely used in practice.
(b) Response to requests
(i)It is not unusual in practice for various bodies to request data from auditors 'informally' considering information technology relieves them of the obligation to obtain the necessary statutory regime which may be fourth dimension consuming or difficult.
(ii) Auditors must non disclose information without the consent of the client or unless the necessary statutory documentation is provided by the person(s) requesting the data.
(three)Unless the auditor has reason to believe that there is a statutory duty not to inform the client that an approach has been made, the customer should showtime be approached to meet if consent tin be obtained, and to see if the customer is aware of the investigations, as should commonly be the case. The auditor should ensure that the customer is aware of the fact the voluntary disclosure may work in the customer's favour, in the long run, but if the client refuses, the auditor should inform the client if the auditor has a statutory duty of disclosure.
(iv)Auditors should take legal communication in all of the cases described.
(v) Where the accountant is made aware of potential actions against the client that may take an issue on the financial statements, the auditor must consider the effect on the audit study. If the client is enlightened of the investigation, the auditor will be able to seek audit testify to support any necessary provisions or disclosures in the financial statements.
(vi)The auditors should consider whether the suspected fraud relating to the managing director relates to the company and affects the fiscal statements.
(vii)Auditors will be in a very difficult situation if they become aware of an activity that may materially affect the financial statements, but where the client is non, and where auditors are under a statutory duty not to inform the customer. This situation volition non be improved by the resignation of auditors as they may be obliged to brand a statement on resignation. This puts auditors in a very difficult position and legal advice is essential in such circumstances.
(viii)Taxation government usually take powers to ask clients to disclose data voluntarily. Such voluntary disclosure is frequently looked on favourably by the taxation authorities and the courts. Tax authorities normally also have statutory powers to demand information from both clients and auditors. The aforementioned is generally truthful of environmental and wellness and safety inspectors.
(ix)The power of the police to need information is sometimes less clear and auditors and clients should accept care to ensure that the advisable authorities are in place. Those sections of the police investigating serious frauds normally take more powers than the full general police. It is unlikely that merchandise matrimony representatives have any statutory powers to need information.
| Created at 5/24/2012 2:34 PM by Arrangement Business relationship (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London |
Last modified at 10/three/2012 1:49 PM by Organization Account (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
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