P7 ACCA
CHAPTER 2
CODES OF ETHICS
P7 ACCA
EXAM CONTEXT
P7 ACCA
EXAM CONTEXT
P7 ACCA
P7 ACCA
P7 ACCA
where
6
P7 ACCA
Conceptual framework
Integrity
Objectivity
Professional Competence & Due Care
Confidentiality
Professional Behaviour
2.3
P7 ACCA
P7 ACCA
10
P7 ACCA
11
Exercise 2.1
1.
2.
P7 ACCA
12
Exercise 2.1
3.
4.
P7 ACCA
13
Answer 2.1
1.
2.
P7 ACCA
14
Answer 2.1
3.
4.
P7 ACCA
15
P7 ACCA
16
P7 ACCA
17
Available safeguards
P7 ACCA
18
P7 ACCA
20
21
Listed entities,
Entities that they have a large number and wide range
of stakeholders. Factors to be considered include:
The nature of the business, such as the holding of
assets for a large number of stakeholders. Examples
may include financial institutions, such as banks and
insurance companies and pension funds;
Size; and
Number of employees.
P7 ACCA
22
Professional skepticism
An attitude that includes:
a questioning mind,
being alert to conditions which may
indicate possible fraud or error and
a critical assessment of audit evidence.
P7 ACCA
23
Professional skepticism
P7 ACCA
24
P7 ACCA
25
P7 ACCA
26
Threats to independence
Self - interest
Self - review
Advocacy
Familiarity
Intimidation
P7 ACCA
27
Financial Interest
Overdue fees
% of contingent fees
High % of fees
Lowballing
Recruitment
P7 ACCA
28
P7 ACCA
29
Action to be taken
Dispose
the interest
Remove individual from the team
Inform clients audit committee
Use an independent partner to
review the work carried out.
P7 ACCA
30
Exercise 2.2
1.
2.
31
Answer 2.2
(1) Teresa is at present a member of the assurance team
and a member of her immediate family owns a direct
financial interest in the audit client. This is unacceptable.
In order to mitigate the risk to independence that this
poses on the audit, Stewart Brice needs to apply one of
two safeguards:
Ensure that the connected person divests the shares
Remove Teresa from the engagement team
Teresa should be appraised that these are the options and
removed from the team while a decision is taken whether
to divest the shares. Teresas husband appears to want to
keep the shares, in which case, Teresa should be
removed from the team immediately.
P7 ACCA
32
Answer 2.2
The firm should inform the audit committee of Recreate of what
has happened and the actions they have taken. The partners
should consider whether it is necessary to bring in an
independent partner to review audit work. However, given that
Teresas involvement is subject to the review of the existing
engagement partner and she was not connected with the
shares while she was carrying out the work, a second partner
review is likely to be unnecessary in this case
(2) In this case, Stewart Brice has a direct financial interest in
the audit client. However, it is a requirement of any firm auditing
the company that the share be owned by the auditors.
The interest is not material. The audit firm should safeguard
against the risk by not voting on its own re-election as auditor.
The firm should also strongly recommend to the company that it
removes this requirement from its constitution as it is at odds
with ethical requirements for auditors.
P7 ACCA
33
Examples:
Material financial interest in Joint venture with client
Arrangements to combine market services and products
Distribution or marketing arrangements under which audit firm
acts as distributor of client's products.
P7 ACCA
34
Audit staff
Try to impress the future
possible employer-Affects objectivity.
A former partner
turned Finance
director - much knowledge of the audit
system.
P7 ACCA
35
Possible safeguards.
P7 ACCA
36
P7 ACCA
37
P7 ACCA
38
P7 ACCA
39
If lending institution:
Immaterial amounts and under normal commercial terms not
considered as a threat to independence.
P7 ACCA
40
Overdue fees
P7 ACCA
41
Contingent fees
P7 ACCA
42
High % of fees
P7 ACCA
43
Safeguards
P7 ACCA
44
Lowballing
P7 ACCA
45
Recruitment
Recruiting
senior
management
for
assurance client threat to independence
Not to take decisions. Their involvement
to be limited to reviewing a shortlist of
candidates providing the client has drawn
up the criteria by which they are selected
P7 ACCA
46
P7 ACCA
47
Valuation services
Tax services
Corporate finance
Other services
P7 ACCA
48
P7 ACCA
49
General services
P7 ACCA
50
Valuation services
P7 ACCA
52
Corporate finance
P7 ACCA
53
P7 ACCA
54
Taxation services
P7 ACCA
55
P7 ACCA
56
Other services
IT services
Litigation support
Legal services.
If such assignments are undertaken, the
assurance firm should ensure that adequate
safeguards are in place to reduce the threat of
independence. Otherwise they should not be
undertaken.
P7 ACCA
57
ADVOCACY THREAT
Examples:
Offering legal services
Provide evidence as expert witness
Defend the client in a legal case
Represent client with negotiations with bank regarding
debt reconstruction
Safeguards
Different department offering the service
Disclosures to audit committees
Withdraw from the assignment if risk to independence too
high.
58
P7 ACCA
FAMILIARITY THREAT
P7 ACCA
59
P7 ACCA
60
Intimidation Threat
An intimidation threat arises when a professional
accountant is deterred from acting objectively by threats,
actual or perceived. Situations which might create
intimidation threats include:
(a) Threats of dismissal.
(b) Threats of litigation.
(c) Pressure to reduce fees or the extent of work performed
61
SECOND OPINION
If a firm asked for second opinion must seek permission from the
client to communicate with the appointed auditor.
P7 ACCA
62
Exercise 2.3
P7 ACCA
63
Exercise 2.3
P7 ACCA
64
Answer 2.3
(a) In relation to A Ltd, there is a threat of self-interest arising, as
a member of the audit team has an indirect financial interest in
the client.
The relevant factors are as follows:
The interest is unlikely to be material to the client or Paul, as
the investment is recent and Paul's interest is in a pool of
general investments made in the exchange on his behalf
Paul is the audit junior and does not have a significant role
on the audit in terms of drawing audit conclusions or audit risk
areas
The risk that arises to the independence of the audit here is
not significant. It would be inappropriate to require Paul to
divest his interest in the audit client. If I wanted to eliminate all
elements of risk in this situation, I could simply change the
junior assigned to my team, but such a step is not vital in this
situation.
P7 ACCA
65
Answer 2.3
(b) In relation to Power Ltd, two issues arise. The first is that
the firm appears to be providing multiple services to Power
Ltd, which could raise a self-interest threat.
The second is that the manager assigned to the due
diligence assignment wants to engage in a personal
relationship with a person connected to the subject of the
assignment, which could create a familiarity threat.
With regard to the issue of multiple services, insufficient
information is given to draw a conclusion as to the
significance of the threat. Relevant factors would be
matters such as the nature of these services, the fee income
and the team members assigned to each. Safeguards
could include using different staff for the two assignments.
The risk is likely to be significant only if one of the services
provided is audit, which is not indicated in the question.
P7 ACCA
66
Answer 2.3
In relation to the second issue, the relevant factors are these:
The assurance team member has a significant role on the team
as second in command
The other party is closely connected to a key staff member at
the company being reviewed
Timing
In this situation, the firm is carrying out a one-off review of the
company, and timing is a key issue. Presently Peter does not
have a personal relationship which would significantly threaten
the independence of the assignment. In this situation, the
safeguard is to request that Peter does not take any
action in that direction until the assignment is completed.
If he refuses, then I may have to consider rotating my staff on
this assignment, and removing him from the team.
P7 ACCA
67
Answer 2.3
(c) In relation to Teddies, there is a risk that my long
association and personal relationship with the client will
result in a familiarity threat. This is compounded by my
acceptance of significant hospitality on a personal level.
The relevant factors are:
I have been involved with the client for ten years and have
a personal relationship with client staff
The company is not a listed or public interest company
It is an audit assignment
P7 ACCA
68
Answer 2.3
P7 ACCA
69
Exercise 2.4
1.
2.
P7 ACCA
70
Exercise 2.4
3.
4.
5.
P7 ACCA
71
Answer 2.4
1.
2.
P7 ACCA
72
Answer 2.4
3.
4.
5.
P7 ACCA
73
Exercise 2.5
ANYIA & Co has been requested by a long standing
client to do a special investigation into a foreign group of
companies. The target group is based in Egypt where the
firm has no representation. The client is very keen to use
the firm and are prepared to pay not only for the cost of
the investigation but also the additional costs of the firm
having to use temporary staff. The firms gross practice
income is normally $7,500,000, the audit fee for this
client is normally $800,000. The extra service is expected
to cost the client $1,600,000.
2. The audit senior of Neutron Co is having a relationship
with the credit controller and is staying with her during
the week and leaving the audit files in the boot of his car
overnight. There are no other audit staff available that the
client considers to be capable of replacing him on the
assignment.
74
P7 ACCA
1.
Exercise 2.5
3.
P7 ACCA
75
Answer 2.5
1.
P7 ACCA
76
Answer 2.5
2.
P7 ACCA
77
Answer 2.5
3.
P7 ACCA
78
79
Exceptions
Obligatory disclosure
If a member knows or suspects his client to have
committed a terrorist offence, an offence of treason or
a money laundering offence or drug trafficking, he is
obliged to disclose all the information at his disposal to
a competent authority. Local legislation may also
require auditors to disclose other offences.
The auditor may also be obliged to provide
information where court demands disclosure. Refusal
to provide information is likely to be considered
disrespect of court with the auditor being liable for this
offence.
80
P7 ACCA
Exceptions
Voluntary disclosure
To comply with technical standards. For example they
should report any non-compliance with law or regulation
to the proper authorities. (ISA 250)
Disclosure is reasonably required to protect the
members interests (enable him to sue a client for fees
or defend an action against them e.g. negligence)
There is a public duty to disclose e.g. the client has
committed an action against the public interest such as
unauthorised release of toxic chemicals
P7 ACCA
81
P7 ACCA
82
P7 ACCA
84
P7 ACCA
85
EXERCISE
2.6
ANSWER 2.6
87
ANSWER 2.6
P7 ACCA
88
CONFLICTS OF INTEREST
CONFLICTS OF INTEREST
- conflict: duty to
Matters to consider:
The resolution process should include consideration of:
Relevant facts
Ethical issues involved
Fundamental principles related to the matter in question
Established internal procedures
Alternative courses of action
P7 ACCA
91
P7 ACCA
92