CHAPTER 5 Par.

9 and 10 requires the engagement team to remain

ALERT to non-compliance with the relevant ethical
International Code of Ethics for requirements by members of the engagement team and
Professional Accountants Except Those in DETERMINE the appropriate action when non-
Business compliance does happen.
Part 1
It also discusses matters about INDEPENDENCE in par.
This presentation will discuss… 11.
✓ the preserving and enhancing effect that The Code
gives to professional accountants in public practice Thus, in BOTH documents, the inclusion of adherence to
as well as those in business relevant ethical requirements to the system of quality
control at the entity and engagement levels and the
As discussed in Chapter 2, the sustainability of the implementation of policies and processes supporting it is
accounting profession depends on the quality of service WELL ESTABLISHED as an important standard.
rendered by the auditor and the quality of service in turn
is affected by DISRUPTIVE and PRESERVING factors. The next logical step is to promulgate or adapt a code of
ethics to facilitate compliance to these requirements.
Professional Accountants in Business (PAIB) includes
accountants employed, engaged or contracted in an
executive or non-executive capacity, for example:
• one commerce industry or service
• public sector
• education
• not for-profit sector
• regulatory or professional bodies

REMEMBER: In the practice of accountancy, we

should be professional, perform effectively and
efficiently, follow standards, and document our work
adequately and properly. RA 9298 with its accompanying implementing rules and
regulations (IRR)
✓ created the Philippine Regulatory Board of
Accountancy (BOA)
✓ it also provides the power and functions of the Seven-
Man Board to prescribe and or adopt a code of ethics
for the practice of accountancy in the Philippines
through the RECOMMENDATION of the Philippine
Institute of Certified Public Accountants (PICPA)
which is the ONLY accredited integrated
professional organization of Filipino accountants
recognized by the BOA

On December 18, 2015, the board issued and promulgated

Seven Elements of a System of Quality Control Resolution Number 263 series of 2015 on the adoption
of a CODE OF ETHICS for professional accountants in
Element 2: Relevant Ethical Requirements the Philippines based on the 2013 edition of the code of
As mentioned in PSQC 1 par. 16b and 20 applied at the ethics developed and issued by the International Ethics
ENTITY LEVEL, it also discussed in quite detail in par. Standards Board for Accountants (IESBA) which was
21 to 25, to be exact, the REQUIREMENTS for subsequently adopted by the International Federation of
independence in general at the entity Accountants (IFAC).
level.
IFAC also adopted the subsequent versions of the Code
We also find the same requirement in PSA 220, Quality of Ethics.
Control for an Audit of Financial Statements, but at the
ENGAGEMENT LEVEL.
The LATEST version adopted by the BOA is the 2016
version of the IESBA code through Resolution Number
18 series of 2018, subject to certain conditions including
proposed changes to certain provisions therein, detailed in
pages 2-4, taking into account Philippine regulatory
requirements and circumstances

The Code serves THREE (3) purposes, namely:

1. It sets out FUNDAMENTAL PRINCIPLES OF
ETHICS for professional accountants reflecting the
profession's recognition of its public interest
responsibility.
a. These principles established the
In July 2018, IESBA released the LATEST VERSION of STANDARD OF BEHAVIOR expected of a
The Code- The 2018 version which includes the professional accountant, whether he is in
International Independence Standards, which is business or is practicing publicly.
presented extensively in part 4a and part 4b, new b. The fundamental principles are:
sections added to The Code, which the 2016 version does o integrity
not have. o objectivity
o professional competence and due
Parts one (1), two (2), and three (3) of The Code became care
EFFECTIVE as of June 15, 2019. o confidentiality
o professional behavior
Parts 4a and 4b became effective for beginning on or 2. The Code provides a CONCEPTUAL
after June 15, 2019, otherwise it will be effective as of FRAMEWORK that professional accountants are to
June 15, 2019. apply in order to identify, evaluate, and address
threats to compliance with the fundamental
principles. The code sets out requirements and
The DETAILED changes in substance from 2016 edition
application materials on various topics to help
may be found in page 4 of the 2018 edition.
accountants apply the conceptual framework to those
threats.
We will use this new 2018 edition in our discussion.
3. In the case of audits reviews and other assurance
engagements, The Code sets out International
As already mentioned at the outset, we will refer to this is
Independence Standards established by the
IESBA document as The Code which applies
APPLICATION of the conceptual framework to
internationally and adapted locally.
threats to independence in relation to these
engagements.
SEC revised SRC rule 68 and the BSP will include
reference to The Code.

Interestingly on November 2018, ethics committee of

PICPA made a PRESENTATION recommending to
PICPA board approval to endorse adoption of the 2018
edition.

The TARGET EFFECTIVITY of The Code was set to

June 15, 2019 as detailed in slide 64. However, there
has not yet been any resolution from the Board of
Accountancy to that effect.
The Code – Part One (1): Complying with The Code, A professional accountant's responsibility is NOT
Fundamental Principles, and Conceptual Framework EXCLUSIVELY to satisfy the needs of an individual
✓ includes the fundamental principles and the client or employing organization.
conceptual framework
✓ applicable to all professional accountants whether in Therefore, The Code contains requirements and
business or practicing publicly application material to ENABLE professional
accountants to meet their responsibility to act in the public
However, we shall limit our discussion to cover only interest.
Professional Accountants in Public Practice (PAIPP).
The principle of professional behavior REQUIRES a
The Code requires professional accountants to: professional accountant to comply with relevant laws and
• comply with the fundamental principles of ethics regulations.
• apply the conceptual framework to identify,
evaluate, and address threats to compliance with Some jurisdictions might have provisions that DIFFER
the fundamental principles from or go beyond those set out in The Code.

Applying the conceptual framework requires: Accountants in those jurisdictions need to be AWARE of
• exercising professional judgment those differences and COMPLY with the more stringent
• remaining alert for new information and to provisions, UNLESS prohibited by law or regulation.
changes in facts and circumstances
• using the reasonable and informed third party Or he might encounter unusual circumstances in which he
test believes that the result of applying a specific requirement
of The Code would be disproportionate or might not be in
the public interest.

In those circumstances, he is encouraged to consult with

a professional or regulatory body.

a snapshot of how the code is structured

Five Fundamental Principles of Ethics for

Professional Accountants

1. Integrity, it means to be straightforward and honest

in all professional and business relationships.
2. Objectivity is not to compromise professional or
business judgment because of bias, conflict of
A DISTINGUISHING MARK of the accountancy interest, or undue influence of others.
profession is its acceptance of the responsibility to act
in the public interest.
3. Professional competence and due care, to attain 2. Objectivity requires that the professional accountant
and maintain professional knowledge and skill at the not to compromise professional or business judgment
level required to ensure that a client or employing because of bias, conflict of interest, or the undue into
organization receives competent professional service influence of others. For example, the accountant
based on current technical and professional complies with the principle of objectivity by:
standards and relevant legislation, and to act o recognizing circumstances or relationships
diligently and in accordance with applicable such as familiarity with the client that might
technical and professional standards. compromise the accountant's professional or
4. Confidentiality, to respect the confidentiality of an business judgment
information acquired as a result of professional and
o considering the impact of such circumstances
business relationships. Confidentiality involves a set
and relationships of the accountant's judgment
of rules or a promise usually executed through
when evaluating the sufficiency and
CONFIDENTIALITY AGREEMENTS that limits appropriateness of audit evidence related to a
access or places restrictions on certain types of matter, material to the client's financial
information. statements applying relevant knowledge when
5. Professional behavior, this means to comply with critically assessing whether audit evidence is
relevant laws and regulations, as already mentioned, sufficient and appropriate in the circumstances
and avoid any conduct that the professional
accountant knows or should know might discredit In doing so, the accountant behaves in a manner that
the profession. contributes to the exercise of professional skepticism.
3. Professional competency and due care
Two (2) important considerations for audits, Also requires the professional accountant to have
reviews and others assurance engagement: professional knowledge and skill at the level required to
• Independence ensure the provision of competent professional service
• Professional skepticism and to act diligently in accordance with applicable
Under auditing review and other assurance standards standards laws and regulations. For example, the
including those issued by the IAAS, auditors are accountant complies with the principle of professional
REQUIRED to exercise professional skepticism when competence and due care by:
planning and performing audits, reviews, and other o applying knowledge that is relevant to a
assurance engagements. particular client's industry and business
activities in order to properly identify risks
Professional skepticism and the five fundamental of material misstatements
principles are INTERRELATED CONCEPTS. o designing and performing appropriate audit
procedures
o applying relevant knowledge when critically
In an audit of financial statements, compliance with the assessing whether audit evidence is sufficient
fundamental principles individually and collectively, and appropriate in the circumstances
SUPPORTS the exercise of professional skepticism as
shown in the following examples: In doing so, the accountant behaves in a manner that
1. Integrity requires the professional accountant to be contributes to the exercise of professional skepticism.
straightforward and honest. For example,
accountant complies with the principle of integrity A professional account shall COMPLY with each of the
by: fundamental principles. A professional accountant might
o being straightforward and honest when face a situation in which complying with one fundamental
raising concerns about a position taken by principle CONFLICTS with complying with one or more
a client other fundamental principles. In such a situation, the
o pursuing inquiries about inconsistent accountant might consider CONSULTING on an
information and seeking further audit anonymous basis, if necessary, with:
evidence to address concerns about • others within the firm or employing organization
statements that might be MATERIALLY
• those charged with governance
false or misleading in order to make
informed decisions about the appropriate • a professional body
course of action in the circumstances. • a regulatory body or legal counsel
However, such consultation DOES NOT relieve the
In doing so, the accountant demonstrates the accountant from the RESPONSIBILITY to exercise
professional judgment to resolve the conflict or, if
critical assessment of audit evidence that
necessary and unless prohibited by law or regulation,
contributes to the exercise of professional disassociate from the matter creating the conflict.
skepticism.
 2. Objectivity
A professional accountant SHALL COMPLY with the
principle of objectivity which requires him not to
compromise professional or business judgment because of
bias, conflict of interest, or undue influence of others.

He, likewise, SHALL NOT undertake a professional

activity if a circumstance or a relationship UNDULY
INFLUENCES the accountant's professional judgment
regarding that activity.

1. Integrity  While BIAS can just mean having a preference for one
A professional accountant SHALL COMPLY with the thing or over another it also is synonymous with
principle of integrity which requires an accountant to PREJUDICE, and that prejudice can be taken to the
be straightforward and honest in all professional EXTREME.
and business relationships.
Sometimes, a person is so biased or is leaning so far in one
Integrity also implies fair dealing and truthfulness. direction that it is hard to see the other position, creating
UNFAIRNESS in an argument or decision.
A professional accountant SHALL NOT knowingly be
associated with reports, returns, communication, or other For example, if an audit staff is biased in favor of a
information where the accountant believes that the certain engagement partner, the staff might not accept
information: an assignment from other partners.
Often though, it's used more lightly, like when someone
• contains a materially false or says, “Our audit firm has the most competent auditors in
misleading statement the country.”
• contains statements or information provided
recklessly
 A conflict of interest occurs when a party has
• omits or obscures required information where
COMPETING INTERESTS or LOYALTIES because of
such omission or obscurity would be
their duties to more than one person or organization.
misleading
A person with a conflict of interest CANNOT do justice
If a professional accountant PROVIDES a modified report
to the actual or potentially conflicting interests of both
in respect of such a report, return, communication or other
parties.
information, the accountant is NOT IN BREACH of this
provision.
It involves a person or entity that has two relationships
competing with each other for the person's loyalty.
When a professional accountant becomes AWARE of
having such association with information described in
For example, an auditor might have loyalty to his friend
the proceeding, the accountant shall take steps to be as
who is in a management position in a client entity and he
DISASSOCIATED from that information.
also has loyalty to his profession as an auditor. The
girlfriend and the audit firm expect the auditor to look for
their best interests first thus, the conflict.

 Undue influence occurs when an individual is able to use

an advantage to coerce another party's decision.

Often, this coercion occurs to the detriment of the weaker

party and the gain of the more powerful or influential
party.

It most COMMONLY occurs when a more powerful party

exerts its influence over a less powerful party in order to
achieve its desired outcome.
 Depending on the measure of influence and if there In complying with the principle of professional
were any extraneous factors involved, some competence and due care, a professional accountant shall
agreements can be LEGALLY VOIDED. take REASONABLE steps to ensure that those working in
a professional capacity under the accountant's authority
Undue influence varies widely in SIZE from the have appropriate training and supervision.
basic favor to multi-billion-dollar transactions.
And where appropriate, a professional accountant shall
An example of undue influence would be when a make clients, the employing organization, or other users
senior partner OVERRIDES the professional judgment of the accountant's professional services or activities
of a junior partner to render an otherwise modified aware of the limitations inherent in the services or
opinion on a client's financial statement activities.

4. Confidentiality
3. Professional Competence and Due Care Confidentiality serves the public interest because it
A professional accountant SHALL COMPLY with the facilitates the free flow of information from the
principle of professional competence and due care professional accountant’s client or employing organization
which requires him to attain and maintain to the accountant in the knowledge that the information will
professional knowledge and skill at the level not be disclosed to a third party
required to ensure that the client or employing
organization receives competent professional Aside from the statutory requirements imposed by the
service based on current technical and professional Data Privacy Act of 2012, a professional accountant
standards and relevant legislation, and act diligently SHALL COMPLY with the principle of confidentiality
and in accordance with applicable technical and which requires an accountant to respect the
professional standards including those related to confidentiality of information acquired as a result of
relevant ethical requirements. professional and business relationships.
Serving clients and employing organizations with An accountant shall:
professional competence requires the exercise of sound a. be alert to the possibility of inadvertent disclosure
judgment in applying professional knowledge and skill including in a social environment (like when
when undertaking professional activities. you're having a party) and particularly to a close
business associate or an immediate or a close
maintaining professional competence requires a family member (like your wife or your children ).
continuing awareness and an understanding of
b. maintain confidentiality of information within the
relevant technical professional and business
field or employing organization number
developments.
c. maintain confidentiality of information disclosed by
a prospective client or employing organization
Continuing professional development enables a
d. not disclose confidential information acquired as a
professional accountant to develop and maintain the
result of professional and business relationships
capabilities to perform competently within the
outside the firm or employing organization without
professional environment.
proper and specific authority, unless there is a legal
or professional duty or right to disclose
DILIGENCE encompasses the RESPONSIBILITY
e. not use confidential information are acquired as a
TO ACT in accordance with the requirements of an
result of professional and business relationships for
assignment carefully, thoroughly, and on a timely basis.
the personal advantage of the accountant or for the
advantage of a third party
 f. not use or disclose any confidential information o comply with technical and professional
is either acquired or received as a result of a standards including ethical requirements
professional or business relationship AFTER that
relationship has ended In DECIDING whether to disclose confidential information,
g. take reasonable steps to ensure that personnel factors to consider depending on the circumstances
under the accountant’s control and individuals include whether:
from whom advice and assistance are obtained • the interests of any party including third parties
respect the accountant’s duty of confidentiality whose interests might be affected could be
HARMED if the client or employing organization
A professional accountant SHALL CONTINUE to consents to the disclosure of information by the
comply with the principles of confidentiality even professional accountant
AFTER the end of the relationship between him and a • all the relevant information is known and
client or employing organization. substantiated to the extent practicable. Factors
affecting the decision to disclose include:
When changing employment or acquiring a new client, o unsubstantiated facts
the accountant is ENTITLED to use prior experience but o incomplete information
shall not use or disclose any confidential information o unsubstantiated conclusions
acquired or received as a result of a professional or business o the proposed type of communication and to
relationship. whom it is addressed
• the parties to whom the communication is
addressed are appropriate recipients

Not with-standing the strict adherence to confidentiality

of information, the following are circumstances where 5. Professional Behavior
professional accountants are or might be required to A professional accountant shall comply with the principle
disclose confidential information or when such of professional behavior which requires an accountant to
disclosure might be appropriate: comply with relevant laws and regulations and avoid
any conduct that the accountant knows or should know
a. Disclosure is required by law might discredit the profession.
For example:
o production of documents or other provision A professional accountant shall not knowingly engage in
of evidence in the course of legal any business, occupation, or activity that results in
proceedings impairment or might impair the integrity, objectivity, or
o disclosure to the appropriate public good reputation of the profession and as a result, will be
authorities of infringements of the law that incompatible with the fundamental principles.
come to life
b. Disclosure is permitted by law and is authorized Conduct that might discredit profession includes conduct
by the client or the employing organization that a reasonable and informed third party would be
c. There is a professional duty or right to disclose likely to conclude adversely affects the good reputation
when not prohibited by law to: of the profession.
o comply with the quality review of a
professional body The reasonable and informed third party test is a
o respond to an inquiry or investigation by a consideration by the professional accountant about
professional or regulatory body whether the same conclusions would likely be reached by
o protect the professional interest of a another party.
professional accountant in legal
proceedings
Such consideration is made from the perspective of a In addition, they deter accountants from CONCLUDING
reasonable and informed third party who weighs all the that a situation is permitted solely because that situation is
relevant facts and circumstances that the accountant not specifically prohibited by The Code.
knows or could reasonably be expected to know at the
time the conclusions are made. The conceptual framework SPECIFIES an
APPROACH for a professional accountant to:
The reasonable and informed third party does not need • identify threats to compliance with the
to be an accountant but would possess the relevant fundamental principles
knowledge and experience to understand and evaluate • evaluate the threats identified
the appropriateness of the accountant's conclusion in an • address the threats by eliminating or reducing
impartial manner them to an acceptable level

When undertaking marketing or promotional activities, a When dealing with an ETHICS ISSUE, the professional
professional accountant shall not bring the profession accountant shall CONSIDER the CONTEXT in which the
into this repute. issue has a risen or might arise.

A professional accountant shall be honest and truthful When applying the conceptual framework, you shall:
and shall not make exaggerated claims for the
services offered by the qualifications or experience of the  exercise professional judgment
accountant or disparaging references or  remain alert for new information, changes in facts and
unsubstantiated comparison to the work of others circumstances
 use the reasonable and informed third-party test
If a professional accountant is in doubt about whether a described earlier
form of advertising or marketing is appropriate, the
accountant is encouraged to consult with the relevant
professional body.

What is professional judgment?

Professional judgment involves the:

• application of relevant training
The circumstances in which professional accountants • professional knowledge, skill, and experience
operate might create threats to compliance with the • commensurate with the facts and circumstances
Fundamental Principles. including the nature and scope of the particular
professional activities, interests, and relationships
Section 120 of The Code sets out requirements and involved
application material including a conceptual
framework: In relation to undertaking professional activities, the
• to assist accountants in complying with exercise of professional judgment is required when the
the fundamental principles professional accountant applies the conceptual framework
• meeting their responsibility to act in the public in order to make informed decisions about the courses of
interest actions available and to determine whether such
decisions are appropriate in the circumstances.
Such requirements and application material
accommodate the wide range of facts and An understanding of known facts and circumstances is
circumstances including the various professional PREREQUISITE to the proper application of the
activities, interests, and relationships that create threats conceptual framework.
to compliance with the fundamental principles.
Determining the actions necessary to obtain this Examples of these conditions are:
understanding and coming to a conclusion about • corporate governance requirements
whether the fundamental principles have been complied • educational training and experience requirements for
with also REQUIRE the exercise of professional the profession
judgment. • effective complaint systems which enable the
professional accountant and the general public to
In exercising professional judgment to obtain this draw attention to unethical behavior
understanding, the professional accountant might • an explicitly stated duty to report breaches of ethics
consider among other matters whether: requirements
1. there is reason to be concerned that potentially • professional or regulatory monitoring and
relevant information might be MISSING from the disciplinary procedures
facts and circumstances known to the accountant
2. there is an INCONSISTENCY between the loan These conditions might also be FACTORS that are
facts and circumstances and the accountant's relevant in evaluating the level of threats.
expectations
3. the accountant’s EXPERTISE AND EXPERIENCE Threats to compliance with the fundamental principles
are SUFFICIENT to reach a conclusion might be created by a broad range of facts and
4. there is a need to CONSULT with others with circumstances.
relevant expertise or experience
5. the information provides a REASONABLE BASIS
on which to reach a conclusion It is NOT POSSIBLE to define EVERY situation that
6. the accountant's own pre-conception or BIAS creates threats.
MIGHT BE AFFECTING THE ACCOUNTANT'S
EXERCISE OF PROFESSIONAL JUDGEMENT In addition, the nature of engagement and work
7. there might be OTHER REASONABLE assignments might differ and consequently, different types
CONCLUSIONS that could be reached from the of threats might be created.
available information
Threats fall into one or more of the following
categories:
1. Self-interest threat. The threat that a financial or
other interest will inappropriately influence a
professional accountant's judgment or
behavior.

Examples include:
• having a direct financial interest in a client, like
owning a considerable number of shares
• quoting a law fee to obtain a new engagement
and the fees is so low that it might be difficult
to perform the professional service in
1. Identify threat. Identify ANY THREAT to accordance with applicable technical and
compliance with the fundamental principles. professional standards for that price
• having a close business relationship with a
The prerequisite to this is UNDERSTANDING the facts client
and circumstances, the activities, interests, and • having access to confidential information
relationships as already mentioned earlier that might be used for personal gain
• discovering a significant error when
This should be done even BEFORE accepting the evaluating the results of a previous
engagement and throughout the engagement as professional service performed by a member
circumstances change. of the accountant sphere
2. Self-review threat. The threat that a professional
accountant will not appropriately evaluate the results
The EXISTENCE of certain conditions, policies and of a previous judgment made, or an activity performed
procedures established by the profession, legislation, by the accountant or by another individual within the
regulation, the firm, or the employing organization that can accountant's firm, or employing organization on
ENHANCE the accountant’s acting ethically might also which the accountant will RELY when forming a
help identify threats to compliance with the fundamental judgment as part of a performing current activity.
principles.
 Examples include:
It is POSSIBLE that the common circumstance might
• issuing an assurance report on the create more than one threat and a threat might
effectiveness of the operation of financial AFFECT compliance with more than one
systems after implementing the systems fundamental principle.
• having prepared the original data used to
generate records that are the subject matter
of the assurance engagement
3. Advocacy threat. The threat that a professional
accountant will PROMOTE a client's or employing
organization's position to the point that the
accountant's objectivity is compromised.

Examples include:
• promoting the interest of or shares in a
client
• acting as an advocate on behalf of a client
in litigation or disputes with third parties
• lobbying in favor of legislation on behalf
of a client
2. Evaluate threat. Evaluating the threat when the
4. Familiarity threat. The threat that due to a long or
professional accountant identifies a threat to compliance
close relationship with a client or employing
with the fundamental principles. The accountant shall
organization a professional accountant will be too
EVALUATE whether such a threat is at an
sympathetic to their interests or to accepting of their
ACCEPTABLE LEVEL.
work.

Examples include: An acceptable level is a level at which a professional

• having a close or immediate family accountant, using the reasonable and informed third party
member who is a director or officer of the test, would likely conclude that the accountant COMPLIES
client with the fundamental principles.
• a director or officer of the client or an
employee in a position to exert significant The consideration of qualitative, as well as quantitative
influence over the subject matter of the factors is RELEVANT in the professional accountant’s
engagement having recently served as the evaluation of threats, as is the combined effect of multiple
engagement partner threats if applicable.
• an audit team member having a long
association with the audit client The EXISTENCE of conditions, policies, and procedures
5. Intimidation threat. The threat that a professional described earlier might also be factors that are relevant in
accountant will be deterred from acting objectively evaluating the levels of threats.
because of actual or perceived pressures including
attempts to exercise and due influence over the Such conditions, policies, and procedures might relate to
accountant. the:
• client and its operating environment
Examples include: • firm and its operating environment
• being threatened with dismissal from a client
engagement or the firm because of a As regards to the CLIENT AND ITS OPERATING
disagreement about a professional matter ENVIRONMENT, the evaluation of the level of threat
• feeling pressured to agree with the judgment might be impacted by whether the client is:
of our client because the client has more
1. an audit client and whether the client is a public
expertise on the matter in question
interest entity
• being informed that a planned promotion will
2. an assurance client that is not an audit client
not occur unless the accountant agrees with
3. a non-assurance client.
an inappropriate accounting treatment
• having accepted a significant gift from a
client and being threatened that acceptance
of this gift will be made public.
For example, providing a non-assurance service to The professional accountant’s evaluation of the level of threat
another client that is a public interest entity might be is also impacted by the nature and scope of the professional
perceived to result in a higher level of threat to service.
compliance with the principle of objectivity with
respect to the audit. Consideration of new information or changes in facts and
circumstances
The corporate governance structure, including the
leadership of a client, might promote compliance with If the professional accountant becomes AWARE of new
the fundamental principles. information or changes in facts and circumstances that
might impact whether a threat has been eliminated or
Accordingly, a professional accountant's evaluation of reduced to an acceptable level, the accountant shall re-
the level of threat might also be impacted by a client's evaluate and address that threat accordingly.
operating environment.
REMAINING ALERT throughout the professional activity
For example: assists the professional accountant in determining whether
• the client REQUIRES appropriate individuals new information has emerged or changes in facts and
other than management to ratify or approve the circumstances have occurred that impact the level of a
appointment of a firm to perform an threat or affect conclusions about whether safeguards
engagement applied continue to be appropriate to address identified
• the client has competent employees with threats.
experience and seniority to make managerial
decisions If new information results in the identification of a new
• the client has implemented internal procedures threat, the professional accountant is REQUIRED to
that facilitate objective choices in tendering EVALUATE, and as appropriate, also ADDRESS this
non- assurance engagement threat.
• the client has a corporate governance structure
that provides appropriate oversight and Examples of new information or changes in facts and
communications regarding the firm's services. circumstances that might impact the level of a threat include:
• when the scope of a professional service is
As regards the FIRM AND ITS OPERATING expanded
ENVIRONMENT, a professional accountant's • when the client becomes a listed entity or acquires
evaluation of the level of threat might be impacted by another business unit
the work environment within the accountant sphere • when the firm merges with another firm
and its operating environment. • when the professional accountant is jointly engaged
For example: by two clients and a dispute emerges between
• leadership of the firm that promotes compliance the two clients
with the fundamental principles and establishes • when there is a change in the professional
the expectation that assurance team accountant's personal or immediate family
members will act in the public interest relationships
• policies or procedures for establishing a
monitoring compliance with the fundamental
principles by all personnel performance
• compensation, performance appraisal, and
disciplinary policies and procedures that promote
compliance with the fundamental principles
• management of the reliance on revenue received
from a single client
• the engagement partner having authority within
the firm for decisions concerning compliance
with the fundamental principles including
decisions about accepting or providing services
to a client
• education, training, and experience requirements 3. Address threats.
• processes to facilitate and address internal and
external concerns or complaints
If the threat is not serious, that is, the level of threat is • involving another firm to perform or re-perform
ACCEPTABLE, the professional accountant may just part of the engagement might address self-
IGNORE THE THREAT since it will not lead to non- interest, self-review, advocacy, familiarity, or
compliance to the fundamental principles. intimidation threats
• disclosing to clients any referral fees,
On the other hand, if the professional accountant commissions, or arrangements received for
determines that the identified threats are NOT AT recommending services or products might
AN ACCEPTABLE LEVEL, you shall address the address a self-interest threat
threats by ELIMINATING them or REDUCING • separating teams when dealing with matters of a
them to an acceptable level. confidential nature might address a self-interest
threat
The accountant shall do so by:
1. declining or ending the specific The professional accountant SHALL PERFORM an
professional activity when the overall conclusion about whether the actions of the
circumstances that created the threats cannot accountant takes or intends to take, to address the threats
be eliminated and safeguards are not capable created will eliminate those threats or reduce them to an
of being applied to reduce the threat to an acceptable level.
acceptable level number
2. eliminating the circumstances including Informing the overall conclusion, the accountant shall:
interests or relationships that are creating • review any significant judgments made or
the threats conclusions reached
3. applying safeguards where available and • use the reasonable and informed third party test
capable of being applied to reduce the
threats to an acceptable level In our discussion of the international independence
standards for audit, review, and other assurance
With regards to option 3, SAFEGUARDS are engagements we will consider the requirement that will
ACTIONS individually or in combination, that the help the professional accountant how to apply the
professional accountant takes that EFFECTIVELY conceptual framework to identify, evaluate, and address
REDUCE threats to compliance with the fundamental threats to INDEPENDENCE
principles to an acceptable level.

However, in real situations actions that were already

implemented as safeguards might no longer be
effective in addressing threats.

Accordingly, the application of the conceptual

framework REQUIRES that the professional
accountant re-evaluate and address the threats
accordingly.

Safeguards VARY depending on the facts

and circumstances

Examples of actions that in certain circumstances might

be safeguards to address threats include:
• assigning additional time and qualified
personnel to require tasks when an engagement
has been accepted might address a self-interest
threat
• having an appropriate reviewer who was not a
member of the team review the work performed
or advice as necessary might address a self-
review threat
• using different partners and engagement teams
with different reporting lines for the provision
of non-assurance services to an assurance client
might address self-review advocacy or
familiarity threats