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ACCA P7

Advanced Audit and Assurance (AAA)

高级审计与鉴证业务

ACCA Lecturer: Iris Nie

Provided by ACCA Research Institute ACCA课程研究学院

Copyright © ACCAspace.com ACCAspace 中国ACCA特许公认会计师教育平台 2

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Fundamental principles

Threats

Safeguards

Syllabus


Syllabus

Conceptual framework

Fundamental principles threats safeguards

• Objectivity

• Professional behavior

• Professional competence

and due care

• Integrity

• Confidentiality

• Self-interest

• Self-review

• Advocacy

• Familiarity

• Intimidation

IFAC Code of Ethics ACCA Code of Ethics and Conduct


The conceptual framework

A conceptual framework relies on a

principles rather than a rules based

approach. (guidance)

This requires the assurance provider to

apply professional judgement in applying

the code of ethics.


The fundamental principles

Integrity—— (truth)

Members should be straightforward and

honest in all professional and business

relationships.

Integrity implies not merely honesty but fair

dealing and truthfulness.



Objectivity——(fairness)

Members should not allow bias, conflicts of

interest or undue influence of others to override

professional or business judgments.

Objectivity is a state of mind that excludes bias,

prejudice and compromise and that gives fair and

impartial consideration to all matters that are

relevant to the task in hand, disregarding those

that are not.



Professional competence & due care——

Members have a continuing duty to maintain

professional knowledge and skill at a level required

to ensure that a client or employer receives

competent professional service based on current

developments in practice, legislation and

techniques.

Members should act diligently and in accordance

with applicable technical and professional

standards when providing professional services.



Confidentiality——

Members should respect the confidentiality of information

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.



Professional behaviour——

Members should comply with relevant laws and

regulations.

Members should avoid any action that discredits

the profession.


Threats

Self-interest——This would arise in situations

where the audit firm or a member of the team has

some financial or other interest in the audit client.

• Financial interests in clients in the form of shares,

or personal relationships; or when family members

are employed at a client.

• Significant outstanding fees from a client;

Dependence on one client for a significant

proportion of the firm’s total fee income

• The acceptance of gifts and hospitality


Threats

Self-review——This occurs when a previous

judgement needs to be re-evaluated by members

responsible for that judgement. The situation tends

arise when the auditor has provided other services

to a client..

• The external auditor advised on the

implementation of the financial reporting system of

the client

• The auditor providing a specialist valuation, eg,

pension liabilities.


Threats

Advocacy——This occurs when members promote

a position or opinion to the point that their objectivity

is compromised in regard to that position or opinion

• The client asked the auditor to represent them in

court

• The client asked the auditor to promote their

shares for a stock exchange listing


Threats

Familiarity——This occurs when members become

too sympathetic to the interest of others because of

a close relationship.

• Long relationship with a client

• Acceptance of gifts or preferential treatment unless

the value is clearly insignificant.


The rules for public interest entities

If an individual is a key audit partner for seven years, they

must be rotated off the audit for two years.

If the key audit partner continuity is particularly beneficial to

audit quality, and there is some unforeseen circumstance, he

can remain on the audit for an additional year.

If the individual has served the audit client as a key audit

partner for six or more years when the client becomes a

public interest entity, the partner may continue to serve in that

capacity for a maximum of two additional years before

rotating off the engagement.


Threats

Intimidation——This occurs when members are

actually or perceived to be deterred from acting

objectively by threats made against them.

• Clients may try to harass or bully auditors into

giving preferential audit reports.

• Outstanding fees from a client; Dependence on

one client for a significant proportion of the firm’s

total fee income (total fees from the client represent

more than 15% of the firm’s total fees for two

consecutive years)


Safeguards

Monitoring fees received from significant clients (self

interest, intimidation )

Rotating senior audit staff on an engagement ( familiarity

threat)

Using separate teams (and partners) to offer additional

services ( self review)

Using independent partners to review work

Not accepting gifts or hospitality (self interest)

Not engaging in any business or financial relationship with

clients (self interest)

Not providing accountancy or internal audit services for

listed audit clients

resign


Exam question

Jun.2013 Q1

(b) Discuss any ethical issues raised and

recommend the relevant actions to be

taken by our firm. (7 marks)


Answer

(b) Ethical matters

Parker Co is intending to acquire Beauty Boost Co, which is an audit

client of our firm. This raises an ethical issue, as the auditor could be

involved with advising both the acquirer and the intended target

company in relation to the acquisition, which could create a conflict

of interest. IESBA’s (IFAC) Code of Ethics for Professional

Accountants states that in relation to the fundamental principle of

objectivity, an auditor should not allow bias, conflict of interest or

undue influence of others to override professional or business

judgements.

IESBA’s Code requires that, when faced with a potential conflict of

interest, an auditor shall evaluate the significance of any threats and

apply safeguards when necessary to eliminate the threats or reduce

them to an acceptable level.


Answer

An important safeguard is that both parties should be notified of

the potential conflict of interest in relation to the planned

acquisition. The notification should outline that a conflict of

interest may exist and consent should be obtained from both

Parker Co and Beauty Boost Co for our firm, Hound & Co, to act

for both in relation to the acquisition. If the requested consent

is not obtained, the auditor should not continue to act for one of

the parties in relation to this matter.


Answer

The auditor shall also determine whether to apply one or more of

the following additional safeguards:

– The use of separate engagement teams;

– Procedures to prevent access to information (for example,

strict physical separation of such teams, confidential and

secure data filing);

– Clear guidelines for members of the engagement team on

issues of security and confidentiality;

– The use of confidentiality agreements signed by employees

and partners of the firm; and

– Regular review of the application of safeguards by a senior

individual not involved with relevant client engagements.


Answer

If the conflict of interest creates a threat to objectivity or

confidentiality that cannot be eliminated or reduced to an

acceptable level through the application of safeguards, Hound &

Co should not advise Parker Co regarding the acquisition.

Parker Co has specifically requested advice on financing the

acquisition. IESBA’s Code has specific guidance on such

activities, which are corporate finance activities. The provision of

such services can create advocacy and self-review threats to

objectivity. The advocacy threat arises as the audit firm could be

put in a position of promoting the audit client’s interests, for

example, when negotiating financial arrangements. The self-

review threat arises because the financing arrangements will

directly affect amounts that will be reported in the financial

statements on which the firm will provide an opinion.


Answer

The significance of any threat must be evaluated and safeguards

applied when necessary to eliminate the threat or reduce it

to an acceptable level. Examples of such safeguards include:

– Using professionals who are not members of the audit team to

perform the corporate finance service; or

– Having a professional who was not involved in providing the

corporate finance service to the client advise the audit team

on the service and review the accounting treatment and any

financial statement treatment.

The extent of the self-review threat should be evaluated, for

example, by considering the materiality of the potential financing

transactions to the financial statements, and the degree of

subjectivity involved in determining the amounts to be

recognised. Where no safeguards could reduce the threat to an

acceptable level, the corporate finance advice should not be

provided.

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