Ethical Considerations

Key Professional Skill: Analysis and Evaluation

• Assess ethical issues and their impact on the audit process

• Give relevant recommendations for further actions (appropriate conclusions/response)

Important terms

Public interest entity

Quality Control Review (QCR)

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Key Threats for the AAA Exam-LEARN LEARN LEARN!

Actual or threatened litigation by client QCR (have an appropriate reviewer review the work
When litigation with an audit client occurs, or appears likely performed.
If a team member involved, remove from team
Threats: Withdraw from engagement if very significant
 self-interest
 intimidation threats.

Gifts and hospitality Need to check if allowed by local laws and regulations
Nature, frequency, value, timing of offer need to be
Threats to integrity, objectivity and professional behavior considered
Can only accept if trivial and no intention to influence
 self-interest behavior
 familiarity
 intimidation (scared that would be considered wrong
if this is made public) .

Compensation and evaluation: When an audit team CANNOT evaluate or compensate a key audit partner based
member is evaluated on or compensated for selling non- on that partner’s success in selling non-assurance services to
assurance services to that audit client, the partner’s audit client. .

Threat: QCR: Have an appropriate reviewer review the work of the

 self-interest audit team member.

Fee dependence Public interest clients:

If gross recurring fee from one client greater than 15% of the firm’s
When the total recurring fees from an assurance client revenue for two consecutive years,
represent a large proportion of the total fees of the firm, Tell client’s TCWG
firm will be worried about losing the client
Independent QCR or external QCR before OR after issuing 2nd
Threats: year’s opinion
 self-interest
 intimidation
Other clients:
Try to reduce dependence ( increase client base)

External QCR

Referral fee or commission Disclose to the client any referral fees or commission
arrangements paid or received
For example, where the firm does not provide the specific
service required, a fee may be received for referring a Receive written consent from client for commission
continuing client to another firm or other expert. arrangement.

Threat to objectivity and professional competence and due

care:
 self-interest

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Overdue fee: QCR

Perceived as a loan to the client if it remains unpaid for a At least partial recovery or recovery plan before starting new
long time work

Threats: If outstanding for a long time, consider not accepting

 self-interest reappointment as the auditor
 intimidation

AAA: also means your firm’s credit control procedures are weak!

Contingent fee Not permitted for audit

Contingent fees are fees calculated on a predetermined
basis relating to the outcome of a transaction or the result If for non-assurance services to audit client, consider the
of the services performed. materiality of the amount, advance written agreement with
client about the basis, QCR and external QCR, segregation of
Threats: teams AND inform the intended user about the
 self-interest arrangement!
 advocacy

Serving as a Director or Officer of an Audit Client No allowed.

Threats: Particular reference made by the code to the role of the

 self-interest Company Secretary. If allowed under local laws or
 self-review professional rules, the duties and activities shall be limited to
those of a routine and administrative nature, such as
preparing minutes and maintaining statutory returns.

Long association Public interest entity

The engagement partner-not more than 7 cumulative years
When an individual is involved in an audit engagement over with 5 years cooling off period
a long period of time Quality control reviewer- not more than 7 cumulative years
with 3 years cooling off period
Threats:
 self-interest
 familiarity CAN be extended to an extra year IF rotation is not possible for
genuine reasons. Need to inform client’s TCWG about this and the
safeguards that are being implemented to manage this.

In the cooling off period, CANNOT participate in the audit or, provide
quality control for the engagement, or consult with the engagement
team or the client regarding technical or industry-specific issues or
have significant or frequent interaction with senior management etc.

Private clients

Depends on the firm’s structure and seniority of the people

involved
Rotate members
QCR, External QCR

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Recent Service with an Audit Client Consider the position he was at and the role he now has in
the team
If an audit team member has recently served as a director
or officer, or employee of the audit client. Remove from team if worked at the client in the year being
audited at a position to exert significant influence over the
subject matter. (remember, the F/s contain comparatives as
Threats: well so the same safeguard would apply if he has worked in
 self-interest the previous year as well)
 self-review
 familiarity
QCR if he has already done some work at the client

Temporary staff assignments: Lending of staff to the client Should ideally then not be made a part of the audit team
(Not including the loaned personnel as an audit team
Threats: member might address a familiarity or advocacy threat).
 self-review
 familiarity IF in the team, Not giving the loaned staff audit responsibility
 advocacy for any function or activity that the staff performed during
 management threat the temporary staff assignment ( this might address the self-
review threat)

Conducting an additional review of the work performed by

the loaned personnel might address a self-review threat.

Ensure
- only for a short period of time
- seconded staff should not assume management
responsibilities
- the audit client is responsible for directing and supervising
the activities of the personnel.

Employment with the client: the director or a senior Public interest: 12 months should have passed since the individual
member of the audit client has been a member of was Partner.
the audit team or partner of the firm in the past
Ensure no significant connection remains between the firm
Threats: and the individual ( e.g. material amounts owed by the firm
 self-interest to the individual, participation in firm’s professional activities
 familiarity etc)
 intimidation Modify the audit plan;
Assign individuals to the audit team who have sufficient
experience in relation to the individual who has joined the
client; or
QCR of the former member of the audit team.

Considering a job offer at the client

Removing the individual from the audit team; or

A review of any significant judgments made by that
individual while on the team.

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Family and personal relationship Remove from team if the relationship is with a senior person at the
client with influence over the f/s.
Threats:
 self-interest If not, consider work allocated to the team member(Structuring the
 familiarity responsibilities of the audit team so that the professional
 intimidation does not deal with matters that are within the responsibility of the
immediate family member.)

Business relationship If material to the firm/individual, not allowed

- Commercial relationship
- Common financial interest Buying goods/services is okay if normal course of business
and arm’s length transaction
Examples:
❖ joint venture with the client or a controlling
owner/ director;
❖ formal marketing of each other’s product;
❖ combine the services of the firm with those being
offered by client and market the package

Threats:
 self-interest
 intimidation (due to actual or perceived pressure
about losing the audit assignment)

Loan and guarantees Okay if in normal course of business under normal lending
(Taking a loan from the client or giving a guarantee for the conditions
client’s loan) QCR

Threat:
 self-interest

Financial interest
Team member/firm’s financial interest in a client:
Threats:
 self-interest (threat to objectivity and confidentiality) Direct- not allowed

Material indirect-not allowed

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Conflict of interest In general, the more direct the connection between the professional
service and the matter on which the parties’ interests conflict, the
Objectivity affected. more likely the level of the threat is not at an acceptable level.
Examples of circumstances that might create a conflict of
interest include: Examples of actions that might be safeguards to address threats
 Providing advice to two clients at the same time created by conflicts of interest include
where the clients are competing to acquire the
same company and the advice might be relevant to
the parties’ competitive positions.
 Representing two clients in the same matter who Notify all parties( disclose the nature of the conflict of
are in a legal dispute with each other, such as interest and how any threats created were addressed to the
during the dissolution of a partnership. relevant parties)
 Providing strategic advice to a client on its
competitive position while having a joint venture Get Written consent from the affected clients to act
or similar interest with a major competitor of the
client. Segregation of teams
 Advising a client on buying a product or service
while having a royalty or commission agreement Confidentiality guidelines and agreement
with a potential seller of that product or service.
Regular QCR

Second opinion
With the client’s permission, obtaining information from the
Firm might be asked to provide a second opinion existing or predecessor accountant.
on the application of accounting, auditing, reporting or
other standards or principles to an entity that is not an Ensure same set of facts given as existing auditor
existing client.

Contact existing auditor after taking client’s permission

Threat:
 self-interest (threat to compliance with the Send a copy of your opinion to the existing/predecessor
principle of professional competence and due care, auditor
if the second opinion is not based on the same
facts that the existing or predecessor accountant
had, or is based on inadequate evidence) AAA: Discouraged by ACCA

Lowballing Quality to be ensured

Where audit firms offer reduced (or unrealistic) fees to sign QCR
new audit clients

Threat:
 self-interest (threat to compliance with the
principle of professional competence and due
care)

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Custody of Client Assets Before taking custody
(assume custody of client money, documents or Check if allowed by laws and regulations
other assets for a fee) Make inquiries about the source of such assets( might reveal
that the assets were derived from illegal activities, such as
money laundering)

Threat to professional competence and due care and After taking custody
objectivity
Confidentiality to be ensured
 self-interest Keep such assets separately from personal or firm assets;
Use such assets only for the purpose for which they are
intended;
Internal control in firm for security

Non-assurance services to audit clients

Assuming Management responsibility for an audit client Generally, the threat is so significant that no safeguard is possible.
They involve responsibilities involve controlling, leading and
directing an entity, including making decisions regarding the If not related to decision making ( eg routine and administrative like
acquisition, deployment and control of human, financial, filing returns), ensure client management makes all judgments and
technological, physical and intangible resources. decisions that are the proper responsibility of management.

Threats

 Self-review
 self-interest threats
 familiarity threat

Accounting and bookkeeping services

Audit Clients that are Public Interest Entities- Not allowed.
Accounting and bookkeeping services comprise a broad
range of services including: Other clients: may provide accounting and bookkeeping
- Preparing accounting records and financial services if a routine or mechanical if safeguards are
statements. implemented.
- Recording transactions.
Safeguards for routine and mechanical services:
- Payroll services.
Threat
- Segregation of teams: Using professionals who are not audit
 Self-review team members to perform the service.
- QCR: Having an appropriate reviewer who was not involved
Accounting and Bookkeeping Services that are Routine or Mechanical in providing the service review the audit work or service
Accounting and bookkeeping services that are routine or mechanical in
performed
nature require little or no professional judgment. Some examples of these
services are:
- Preparing payroll calculations or reports based on client
originated data for approval and payment by the client.
- Recording recurring transactions for which amounts are easily
determinable from source documents or originating data, such
as a utility bill where the client has determined or approved the
appropriate account classification.
- Calculating depreciation on fixed assets when the client
determines the accounting policy and estimates of useful life
and residual values.

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Valuation
Audit Clients that are Public Interest Entities: not allowed if
the valuation service would have a material effect on the
Threats F/S.

 Self-review Audit Clients that are Not Public Interest Entities: not allowed
 Advocacy if the valuation involves a significant degree of subjectivity
and the valuation will have a material effect on the financial
statements on which the firm will express an opinion.

(Certain valuations do not involve a significant degree of subjectivity. This is likely to be

the case when the underlying assumptions are either established by law or regulation,
or are widely accepted and when the techniques and methodologies are prescribed by
law or regulation).

Safeguards to be implemented to address threats if immaterial and

doesn’t involve significant degree of judgment:
- Segregation of teams
- QCR

Administrative services Providing administrative services to an audit client does not usually
create a threat.
Administrative services involve assisting clients with their
routine or mechanical tasks within the normal course of
operations. Such services
require little to no professional judgment and are clerical in
nature.
Examples of administrative services include:
- Word processing services.
- Preparing administrative or statutory forms for
client approval.
- Submitting such forms as instructed by the client.
- Monitoring statutory filing dates, and advising an
audit client of those dates.

Internal audit
Audit Clients that are Public Interest Entities: Not allowed if
Internal audit services involve assisting the audit client in they relate to a significant part of the internal controls over
the performance of its internal audit activities. financial reporting or relate amounts/disclosures that are
material
Threat

 Self-review (the results of internal audit service might Safeguards for self-review and management threats for
be used in conducting the external audit). clients that aren’t public interest or for internal audit service
 Performing a significant part of the client’s internal that don’t relate to financial reporting:
audit activities increases the possibility that firm will
assume a management responsibility.
- Segregation of teams
- The client designates an appropriate and competent senior
management to be responsible at all times for internal audit
activities
- The client acknowledges responsibility for designing,
implementing, monitoring and maintaining internal control.
- The client evaluates and determines which
recommendations resulting from internal audit services to
implement and manages the implementation process
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IT systems Audit Clients that are Public Interest Entities: NOT Allowed to
if relate to the internal control over financial reporting
Services related to IT systems include the design or
implementation of hardware or software systems. For other clients/other IT systems not related to financial
reporting:
Threat: - Segregation of teams
 Self-review - The client has to acknowledge its responsibility for
 Assuming management responsibility establishing and monitoring a system of internal controls
- The client should make all management decisions with
respect to the design and implementation process;

Recruitment services to an audit client For ALL audit clients

Cannot act as a negotiator on the client’s behalf

Threats
 Self-interest, Cannot provide a recruiting services (related to searching for
 Familiarity candidate and conducting reference checks) to an audit
 intimidation client with respect to the following positions:
 assuming management responsibility - A director or officer of the entity; or
- A member of senior management in a position to exert
significant influence over the preparation of the F/S

For other positions (excluding the above)

- The client makes all management decisions with respect to

the hiring process, including determining the suitability of
prospective candidates and selecting suitable candidates for
the position and determining employment terms and
negotiating details, such as salary, hours and other
compensation.

Corporate finance services to an audit client

Corporate Finance Services that are Prohibited
- promoting, dealing in, or underwriting the audit client’s
Threats shares.
 Self-review
 Advocacy For other services:
- Segregation of teams
- QCR
Examples of corporate finance services:
- Assisting an audit client in developing corporate
strategies.
- Identifying possible targets for the audit client to
acquire.

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Taxation services to an audit client Tax return preparation
ALL audit clients

Threats Allowed. Ensure management takes responsibility for the return

 Self-review (Preparing calculations of current and
deferred tax liabilities (or assets) for an audit client Providing tax return preparation services does not usually create a
for the purpose of preparing accounting entries threat.
that will be subsequently audited by the firm,
Providing tax planning and other tax advisory Tax return preparation services are usually based on historical
services ) information and principally involve analysis and presentation of such
historical information under existing tax law, including precedents
 Advocacy (Providing tax planning and other tax and established practice. Further, the tax returns are subject to
advisory services, assistance in resolution of tax whatever review or approval process the tax authority considers
disputes) appropriate.

Tax services comprise a broad range of services, including Tax Calculations for the Purpose of Preparing Accounting Entries
activities such as:
- Tax return preparation.
- Tax calculations for the purpose of preparing the Audit Clients that are Public Interest Entities
accounting entries.
- Tax planning and other tax advisory services. NOT allowed if material to the F/S.
- Assistance in the resolution of tax disputes.
Audit Clients that are Not Public Interest Entities

- Segregation of teams
- QCR

Tax Planning and Other Tax Advisory Services

Tax planning or other tax advisory services comprise a broad range of

services, such as advising the client how to structure its affairs in a tax
efficient manner or advising on the application of a new tax law or
regulation.

Allowed if immaterial and the advice provided as a result of the tax

planning and other tax advisory services:
○○Is clearly supported by a tax authority or other precedent.
○○ Is an established practice.
○○ Has a basis in tax law that is likely to prevail.

Safeguard to be put in place:

- Segregation of teams
- QCR

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 Assistance in the Resolution of Tax Disputes
A tax dispute might reach a point when the tax authorities have
notified an audit client that arguments on a particular issue have
been rejected and either the tax authority or the client refers the
matter for determination in a formal proceeding, for example, before
a public tribunal or court.

Not allowed if relates to material amounts and/or the services

involve acting as an advocate for the audit client
before a public tribunal or court in the resolution of a tax matter

Otherwise:

- Segregation of teams
- QCR

LITIGATION SUPPORT SERVICES Not allowed if relates to material amounts and involve judgment

Threats

 Self-review
 Advocacy

Litigation support services might include activities such as:

- Assisting with document management and
retrieval.
- Acting as a witness, including an expert witness.
- Calculating estimated damages or other amounts
that might become receivable or payable as the
result of litigation or other legal dispute.

Generic intimidation examples-

Being asked to reduce extent of work to reduce fee
Team members feels pressured to agree with client’s judgment as client has more expertise

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Answering Techniques

1. Identify: Use words from the scenario- no marks for this BUT need to tell the marker which point you’re going to be
discussing!

2. Name AND explain the threat (s): Two important points to remember. One, don’t simply write self-interest. That’s a zero!
Explain what it means. Secondly, most situations have more than one threat. Explain ALL. Each explained threat is for 1
mark!

3. Explain what the code says about it

4. Give a conclusion for the given situation. It would either be ‘it isn’t allowed so don’t do it’ OR it can be mitigated with
safeguards. EACH safeguard has 1 mark!

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Question 1

You are an audit manager in Coram & Co, a firm of Chartered Certified Accountants.

Your client portfolio as an audit manager at Coram & Co includes Turner Co which is a listed financial institution offering loans and
credit facilities to both commercial and retail customers. You have received an email from the audit supervisor who is currently
supervising interim testing on systems and controls in relation to the audit for the year ending 31 October 20X8. The email gives the
following details for your consideration:

One of the audit team members, Janette Stott, has provisionally agreed to take out a loan with Turner Co to finance the purchase of
a domestic residence. The loan will be secured on the property and the client’s business manager has promised Janette that he will
ensure that she gets ‘the very best deal which the bank can offer.’

The payroll manager at Turner Co has asked the audit supervisor if it would be possible for Coram & Co to provide a member of staff
on secondment to work in the payroll department. The payroll manager has struggled to recruit a new supervisor for the
organisation’s main payroll system and wants to assign a qualified member of the audit firm’s staff for an initial period of six months.

Required: Comment on the ethical and professional issues raised in respect of the audit of Turner Co and recommend any actions
to be taken by the audit firm. (6 marks)

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Question 2

You are a manager in Dando & Co, a firm of Chartered Certified Accountants responsible for the audit of the Adams Group, a listed
entity. The Group operates in the textile industry, buying cotton, silk and other raw materials to manufacture a range of goods
including clothing, linen and soft furnishings.

The Group’s accounting and management information systems are out of date, and the Group would like to develop and implement
new systems next year. The audit committee would like to obtain advice from Dando & Co on the new systems as they have little
specialist in-house knowledge in this area.

In addition, the audit committee requests that the Group audit engagement partner attends a meeting with the Group’s bank, which
is planned to be held the week after the auditor’s report is issued. The purpose of the meeting is for the Group to renegotiate its
existing lending facility and to extend its loan, and will be attended by the Group finance director, a representative of the audit
committee, as well as the bank manager. The Group is hoping that the audit partner will be able to confirm the Group’s strong
financial position at the meeting, and also confirm that the audit included procedures on going concern, specifically the audit of the
Group’s cash flow forecast for the next two years, which the bank has requested as part of their lending decision.

Required: Identify and evaluate any ethical threats and other professional issues which arise from the requests made by the
Group audit committee. (6 marks)

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Question 3

You are an audit manager in Thomasson & Co, a firm of Chartered Certified Accountants. You have recently been assigned to the
audit of Clean Co for the year ended 30 September 20X8. Clean Co is an unlisted company and has been an audit client of your firm
for a number of years. Clean Co is a national distributor of cleaning products. Clean Co’s chief executive is Simon Blackers.

Your review of the audit working papers and an initial meeting with Mr Blackers have identified the following potential issues:

Following your review of the audit engagement letter and the working papers of the taxation section of the audit file, you have
established that Thomasson & Co performed the taxation computation for Clean Co and completed the tax returns for both the
company and Mr Blackers personally. All of the taxation services have been invoiced to Clean Co as part of the total fee for the audit
and professional services.

During your initial meeting with Mr Blackers, he informed you that Clean Co is planning to develop a new website in order to offer
online sales to its customers. He has asked Thomasson & Co to provide assistance with the design and implementation of the
website and online sales system.

As a result of your audit review visit at the client’s premises, you have learned that the audit team was invited to and subsequently
attended Clean Co’s annual office party. The client provided each member of the audit team with a free voucher worth $30 which
could be redeemed at the venue during the party. The audit senior, Paula Metcalfe, who has worked on the audit for the last three
years has informed you that the audit team has always been encouraged to attend the party in order to develop good client
relations.

Comment on the ethical and professional issues arising from your review of the audit working papers and recommend any actions
which should now be taken by Thomasson & Co. (9 marks)

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