ETHICS & ACCEPTANCE

CONCEPTS & DETAILS

 THE NEED FOR PROFESSIONAL
ETHICS
• Professional accountants have a responsibility to act in the public interest. The
purpose of assurance engagements is to increase the confidence of the intended
users, therefore the users need to trust the professional who is providing the
assurance.
In order to be trusted the assurance provider needs to be independent of their
client.
• Independence can be defined as having ‘freedom from situations and
relationships where objectivity would be perceived to be impaired by a
reasonable and informed third party.’
• Practitioners need to behave and be seen to behave in an ethical, professional
manner. This means taking active steps to comply with the Code of Ethics in
every professional situation.
CONCEPTUAL FRAMEWORK
Both follow a conceptual framework which identifies:

• Fundamental principles of ethical behavior

• Potential threats to compliance with these fundamental principles
• Possible safeguards which can be implemented to eliminate the
threats identified, or reduce them to an acceptable level.
 DIFFERENTIATE
PRINCIPLES-BASED APPROACH RULES-BASED APPROACH

• Flexible, so can be applied to new, unusual • May be easier to follow because it is

or rapidly changing situations. clearly defined.
• Principles may be applied across national • Needs frequent updating to ensure the
boundaries where laws may not. guidance applies to new situations.
• Requires the accountant to use • May encourage accountants to interpret
professional judgment. requirements narrowly in order to get
• Requires compliance with the spirit of the
round the spirit of the requirements.
guidance. • Virtually impossible to be able to deal
• Can still incorporate specific rules for with every situation that may arise,
ethical situations likely to affect many firms. particularly across various national
boundaries and in a dynamic industry.
 THE FUNDAMENTAL 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 judgments.
• Professional behavior: Members should comply with relevant laws and
regulations and should avoid any action that discredits the profession.
• Professional competence and due care: Members should maintain professional
knowledge and skill at a level required to ensure that a client or employer receives
competent professional services based on current developments in practice,
legislation and techniques.
Members should act diligently and in accordance with applicable technical and
professional standards.
• Integrity: Members should be straight-forward and honest in all professional and
business relationships.
 THE FUNDAMENTAL PRINCIPLES
• Confidentiality: Members should respect the confidentiality of information
acquired as a result of professional and business relationships and should not
disclose any such information to third parties without proper and specific
authority or unless there is a legal or professional right or duty to disclose.
Confidential information acquired as a result of professional and business
relationships should not be used for the personal advantage of members or third
parties.
IDENTIFY THREATS = NO. OF THREATS = 06

ASSESS THREATS = RANK THE THREATS

VERY IMP – IMPOR – NORMAL – CASUAL

TREAT THE RISK – OPERATE THE RISK

MONITOR AND COMMUNICATE THESE REVIEWS

 SAFEGUARDS
A safeguard is an action or measure that eliminates a threat, or reduces it to an
acceptable level.
The Code of Ethics divides safeguards into two broad categories:
• Safeguards created by the profession, legislation or regulation, these include:
requirements for entry into the profession, continuing professional development,
corporate governance, professional standards, monitoring and disciplinary
procedures, etc.
• Safeguards created by the work environment, these include: rotation/removal
of relevant staff from the engagement team, independent quality control reviews,
using separate teams, etc.
 SELF-INTEREST THREATS

THREAT SAFEGUARDS
• Gifts & Hospitality: acceptance of • Only gift which are trivial and
goods, services and hospitality from inconsequential should ever be
an audit client can create self interest accepted and even these should be
and familiarity threats as the auditor approved by a partner.
may feel indebted to the client.
• The offer of gifts & hospitality must be
documented on the audit file even if
refused.
 SELF-INTEREST THREATS

THREAT SAFEGUARDS
• Fee dependency: Over-dependence • Non-listed clients If fees from an audit
on an audit client could lead the client represent a large proportion of
auditor to ignore adjustments the firm's total fees, the firm should
required in the financial statements implement safeguards such as:
for fear of losing the client • Reducing dependency on the client
• Consulting with a third party on key audit
judgments
• Having an external quality control review.
Self interest threat
• Direct financial interest or
materially significant indirect
financial interest in a client.
• Loan or gurantee to and from the
client
• Close business relationship with
an audit client.
• Potential employment with client
 ADVOCACY THREATS
• Promoting the position of a client or representing them in some way would
mean the audit firm is seen to be taking sides with the client.
Examples includes:
• Promoting a share issue for an audit client
• Representing a client in the court or in any dispute where the matters is
material to the financial statements.
• Negotiating on the clients behalf for finance.

The audit firm must not act for the audit client in this way. Any request for such
services must be politely declined.
Self review threat
• Reporting on the operation of financial information system after being
involved in their designing or implementation.
• A member of engagement team is being associated with the client as
a director or officer
• A member of the engagement team is employed by the team in a
position to exert direct and significant influence over the subject
matter of the engagement.
INTIMIDATION THREATS
• Actual or perceived pressure from the client, or attempts to exercise
undue influence over the assurance provider, e.g. actual or
threatened litigation between the audit firm and audit client.
• Intimidation can arises from some of the same situations mentioned.
The safeguard to address these threats are the same as to address the
other threats.
• Fee dependency
• Personal relationships
• Audit partner joining the client
ACCEPTING/CONTINUING AN AUDIT
ENGAGEMENT
ACCEPTING/CONTINUING AN AUDIT
ENGAGEMENT
Case Study
• The management team of Cheetah Co has also approached Leopard & Co to ask
whether representatives of the firm would be available to attend a meeting with
the company’s bankers, who they are hoping will finance the acquisition of Zebra
Co, to support the management team in conveying the suitability of the
acquisition of Zebra Co. For the meeting the bank requires the most up-to-date
interim accounts of Cheetah Co with the accompanying auditor’s independent
interim review report. Your firm is due to complete the interim review shortly and
the management team of Cheetah Co has requested that the interim review is
completed quickly so that it does not hold up negotiations with the bank, stating
that if it does, it may affect the outcome of the next audit tender, which is due to
take place after the completion of this year’s audit.
• Required:
Comment on the ethical and professional issues raised, and recommend any
actions which should be taken in respect of the request from the management
team of Cheetah Co.
Response
• Ethical and other professional issues
Advocacy threat
Accompanying the client to a meeting with their bankers will create an advocacy threat to
objectivity as Leopard & Co may be perceived to be representatives of Cheetah Co.
• This is particularly relevant as the bank may wish to establish a number of facts relating to
the suitability of providing finance to Cheetah Co.
• Management responsibility
Leopard & Co must also be careful that in providing services relating to the potential
acquisition of Zebra Co and the associated financing arrangements that the firm is not
assuming a management responsibility.
• Although the terms of the engagement have not yet been confirmed, it is likely that by
attending the meeting with the client, the audit firm will give the impression of supporting
the acquisition of Zebra Co and therefore give credit to the decision.
• The IESBA Code of Ethics for Professional Accountants (the Code) specifically states that the
firm shall not assume a management responsibility for an audit client as the threats created
would be so significant that no safeguards could reduce the threats to an acceptable level.
• Self-review threat – loan transaction
The Code specifically states that providing assistance in finance raising
transactions for audit clients also creates a self-review threat to objectivity.
• A self-review threat arises where the outcome or consequences of a corporate
finance service provided by the audit firm may be material to the financial
statements under review.
• This is a particular problem as the transaction will directly affect the financial
statements, which the audit team will be responsible for auditing in consequent
financial periods and therefore the audit team is likely to be more accepting of
information provided or may not investigate issues as thoroughly, as the team
may feel that much of this has been done via the due diligence.
• Self-review threat – interim review
Reviewing the work of the team engaged in the interim financial
statements review would also create a self-review threat to
objectivity as the audit team would be reviewing the work of another
team within the audit firm.
• It may be perceived externally that the purpose of reviewing the
progress of the interim review is to ensure that any output from this
does not impact the attempt by Cheetah Co to secure the loan
finance.
• Intimidation threat
The request by Cheetah Co to ensure that the interim review does not impede the
application for a loan may be perceived as intimidation by the client.
• It appears as though they are putting pressure on Leopard & Co to finish the work
based on the deadlines imposed by the bank, rather than those originally agreed with
the client.
• This may force the auditor into changing their approach to any remaining procedures
which would be considered to be undue influence of the client over the procedures
performed.
• This appears to be supported by a further threat relating to the upcoming tender for
the audit. The management team of Cheetah Co appears to be suggesting that failing
to ensure the interim review is completed on time for the loan decision may have an
adverse impact on any consequent tender bid.
Actions
• The firm should ascertain the purpose of attending the meeting with the
bank; if there is any expectation that it will provide assurances to the bank,
then the request should be declined, explaining to Cheetah Co that the
firm’s responsibilities extend to reporting to the management and the
owners of the company and not to any third parties.
• It must be made clear, however, that no members of the audit team/interim
audit team will be able to attend and the firm will not be permitted to make
any representations to the bank.
• On balance, Leopard & Co may consider that the threats, both real and
perceived, are too great and it would be most prudent not to attend the
meeting.
• If this is the case, Leopard & Co should politely decline the invitation,
explaining the reasons why it is inappropriate.
• Leopard & Co should communicate with the directors of Cheetah Co
explaining that the firm is unable to be involved in the interim review
or to review any of the working papers.
• Leopard & Co should explain the reasons to the client. The firm
should also explain that, if the client has any concerns, they should
communicate with the interim review engagement partner to
ascertain a reasonable timeframe for conclusion of this engagement.
Case 2
• You are an audit manager at Buffon & Co, responsible for the audit of Maldini Co.
• The audit engagement partner for Maldini Co, a listed company, has been in place for approximately
eight years and her son has just been offered a role with Maldini Co as a sales manager.
• This role would entitle him to shares in Maldini Co as part of his remuneration package.
• Maldini Co’s board of directors are considering establishing an internal audit function, and the
finance director has asked the audit firm, Buffon & Co, about the differences in the role of internal
audit and external audit.
• If the internal audit function is established, the directors have suggested that they may wish to
outsource this to Buffon & Co.
• The finance director has suggested to the board that if Buffon & Co are appointed as internal as well
as external auditors, then fees should be renegotiated with at least 20% of all internal and external
audit fees being based on the profit after tax of the company, as this will align the interests of Buffon
& Co and Maldini Co.
• Your audit assistant has highlighted a number of potential threats to independence in respect of the
audit of Maldini Co.
• Identify which of the following facts from the scenario represent valid threats to independence,
matching each threat to the appropriate category.
Explanation

• Statement 1 - Partner has been in role for 8 years which contravenes the code
and represents a familiarity threat.
• Statement 2 - Providing information on internal audit does not present a threat
to independence
• Statement 3 - Partner's son holding shares represents a self-interest threat as a
close family member of the partner holds a financial interest
• Statement 4 - Providing internal audit services raises a self review threat as it is
likely that the audit team will be looking to place reliance on the control system
reviewed by IA
• Statement 5 - This represents fees on a contingent basis and raises a self interest
threat as the audit firms fee will rise if the company's Profit after tax increases.
• Which of the following safeguards would NOT be relevant in mitigating
the threat identified in relation to fees?

• Disclosure to those charged with governance that fees from Fir Co

represent more than 15% of Sycamore & Co's total fee income

• A pre-issuance review to be conducted by an external accountant

• The use of separate teams to provide the audit and non-audit

services

• A post-issuance review to be conducted by an external accountant

or regulatory body
Q4
• Auditors have a professional duty of confidentiality under ACCA’s Code of Ethics
and Conduct; voluntary disclosure of information may be necessary in certain
situations.
• For which TWO of the following situations should an auditor make VOLUNTARY
disclosure?
• (1) If an auditor knows or suspects his client is engaged in money laundering
(2) Where disclosure is made to non-governmental bodies
(3) Where it is in the public interest to disclose
(4) If an auditor suspects his client has committed terrorist offences
• A. 1 and 4
B. 1 and 3
C. 2 and 4
D. 2 and 3
Answer
•D
• In the case of situations 1 and 4, the auditor has an obligation to
disclose details of their clients’ affairs to third parties. Situations
2 and 3 are ones where voluntary disclosure should be made.