Test your Chapter 4 –
understandi Professional ethics
ng
*including
You need to have a good understanding of: independe
nc e
1. ethics principles* itself – what they are, what each principle means
etc. Principle
2. situations that may cause ethics principles to be violated (i.e., the Reference
threats to the ethics principles)
3. how to put in safeguards so that the practitioner can still execute
the engagements properly without violating the ethics principles. 3 most commonly
tested areas:
Example of questions: 1. Integrity
– Management
4. Discuss the ethical issues arising from the following scenarios… – Practitioner
2. Objectivity
5. Identify and explain the ethical issues arising in this situation…
3. Independence
In both situations, you are to identify BOTH, the principles AND threats
At times, the question may also ask you on how to
3. put in the safeguards to address the ethical issues.
*including
You need to have a good understanding of: independe
nc e
1. ethics principles* itself – what they are, what each principle means
etc.
2. situations that may cause ethics principles to be violated (i.e., the
threats to the ethics principles)
3. how to put in safeguards so that the practitioner can still execute
the engagements properly without violating the ethics principles.
Have you watch it?
Example of questions:
4. Discuss the ethical issues arising from the following scenarios…
If you
5. Identify and explain the ethical issues haveinnot,
arising thisyou may be “lost”
situation…
during our discussions afterwards
In both situations, you are to identify BOTH, the principles AND threats
At times, the question may also ask you on how to
3. put in the safeguards to address the ethical issues.
*including
You need to have a good understanding of: independe
nc e
1. ethics principles* itself – what they are, what each principle means
etc.
2. situations that may cause ethics principles to be violated (i.e., the
threats to the ethics principles)
3. how to put in safeguards so that the practitioner can still execute
the engagements properly without violating the ethics principles.
Example of questions:
4. Discuss the ethical issues arising from the following scenarios…
Microsoft Edge
PDF Document
Microsoft Edge
PDF Document
5. Identify and explain the ethical issues arising in this situation…
In both situations, you are to identify BOTH, the principles AND threats
At times, the question may also ask you on how to
3. put in the safeguards to address the ethical issues.
*including
You need to have a good understanding of: independe
nc e
1. ethics principles* itself – what they are, what each principle means
etc.
2. situations that may cause ethics principles to be violated (i.e., the
threats to the ethics principles)
3. how to put in safeguards so that the practitioner can still execute
the engagements properly without violating the ethics principles.
Example of questions:
4. Discuss the ethical issues arising from the following scenarios…
Microsoft Edge
PDF Document
Microsoft Edge
PDF Document
5. Identify and explain the ethical issuesAfter
arising inwatched
you have this situation…
the video and studied the codes
of ethics, you will then be ready to answer the ICAEW
In both situations, you are to identify BOTH, the principles AND
questions threats
on ethics
At times, the question may also ask you on how to FOR EXAMPLE…
3. put in the safeguards to address the ethical issues.
Test your understanding 1
Any threats to any ethics To name the threats AND the ethics principles involved
principles?
Discuss the ethical issues arising from the following scenarios.
1. John has acted as audit engagement partner on Maxi Ltd for 20 years.
John and his wife recently spent two weeks on a cruise as guests of the
managing director of Maxi Ltd.
2. Penfold Ltd, an audit client of your firm, has asked you to advise on the
selection and installation of a new computerised accounting system.
3. Your audit client, Lowlands plc, has been growing rapidly via acquisitions.
In the coming year, total fees from the company are expected to reach
11% of your practice income.
*including
You need to have a good understanding of: independe
nc e
1. ethics principles* itself – what they are, what each principle means
etc.
2. situations that may cause ethics principles to be violated (i.e., the
threats to the ethics principles)
3. how to put in safeguards so that the practitioner can still execute
the engagements properly without violating the ethics principles.
Example of questions:
4. Discuss the ethical issues arising from the following scenarios…
Microsoft Edge
PDF Document
Microsoft Edge
PDF Document
5. Identify and explain the ethical issuesAfter
arising
you haveinwatched
this situation…
the video and studied the codes
of ethics, you will then be ready to answer the ICAEW
In both situations, you are to identify BOTH, the principles AND
questions threats
on ethics
At times, the question may also ask you Leton how tosome of the provisions using an extract of the FRC
me highlight
Ethical Standard Microsoft Edge
3. put in the safeguards to address the ethical issues. PDF Document
Test your understanding 1
Any threats to any ethics To name the threats AND the ethics principles involved
principles?
Discuss the ethical issues arising from the following scenarios.
1. John has acted as audit engagement partner on Maxi Ltd for 20 years.
John and his wife recently spent two weeks on a cruise as guests of the
managing director of Maxi Ltd.
2. Penfold Ltd, an audit client of your firm, has asked you to advise on the
selection and installation of a new computerised accounting system.
3. Your audit client, Lowlands plc, has been growing rapidly via acquisitions.
In the coming year, total fees from the company are expected to reach
11% of your practice income.
l ve t hi s…
Let ’s so
Test your understanding 1
Any threats to any ethics To name the threats AND the ethics principles involved
principles?
Discuss the ethical issues arising from the following scenarios.
1. John has acted as audit engagement partner on Maxi Ltd for 20 years.
John and his wife recently spent two weeks on a cruise as guests of the
managing director of Maxi Ltd.
1st, there are two issues here: (can you name them?)
Test your understanding 1
Discuss the ethical issues arising from the following scenarios.
1. John has acted as audit engagement partner on Maxi Ltd for 20 years.
John and his wife recently spent two weeks on a cruise as guests of the
managing director of Maxi Ltd.
1st, there are two issues here: (can you name them?)
1. Long association
Test your understanding 1
Discuss the ethical issues arising from the following scenarios.
1. John has acted as audit engagement partner on Maxi Ltd for 20 years.
John and his wife recently spent two weeks on a cruise as guests of the
managing director of Maxi Ltd.
1st, there are two issues here: (can you name them?)
1. Long association
2. Gifts and hospitality
Test your understanding 1
Discuss the ethical issues arising from the following scenarios.
1. John has acted as audit engagement partner on Maxi Ltd for 20 years.
John and his wife recently spent two weeks on a cruise as guests of the
managing director of Maxi Ltd.
1st, there are two issues here: (can you name them?)
1. Long association
2. Gifts and hospitality
How do they “threaten” John and/OR the audit firm?
Too long an association will make the practitioner Part B Section 3 – Long association with engagements
become too close to client; therefore, too trusting Paragraphs 3.2, 3.3
n e r m a y put his
1. Familiarity threat The prac ti ti
w
o
n w hen he is to t
o
gua r d d o
e x a m p le, may jus
Although the rules for non-listed companies are more relaxed trusting (fo
li e
r
n t ’s w o r ds for it and
take the c r perform with
than for listed, it is possible that John’s independence and no longe
io n a l s kepticism)
objectivity is compromised by pro fe s s
acting for a prolonged period (“long association with client”)
receipt of gifts and hospitality from the client. Free two weeks vacation on a cruise ship
Part B Section 4 – Fees, remuneration and evaluation policies, gifts and hospitality,
litigation Paragraphs 4.40, 4.41
Long association and material gifts and hospitality may also result in a Self-interest
threat to independence and objectivity where the partner may not want to highlight
any issues during the audit
for fear of losing the audit client, and
in the hope of receiving more gifts and hospitality in the future.
Test your understanding 1
Any threats to any ethics To name the threats AND the ethics principles involved
principles?
Discuss the ethical issues arising from the following scenarios.
2. Penfold Ltd, an audit client of your firm, has asked you to advise on the
selection and installation of a new computerised accounting system.
Part B Section 5 – Non-audit services
Paragraph 5.47
2. Management threat and self-review threat
Independence and objectivity may be compromised.
Installing the system is the responsibility of client management, not the
auditor. There will be management threat if the auditor makes decisions
with regard to the new system. Their value could be too closely aligned with
that of the management’s.
In forming an opinion on the financial statements, the auditor will use
information generated by the system and may be unwilling to criticise the
accounting system due to the firm’s involvement in selection/installation.
This constitutes a self-review threat.
Test your understanding 1
Any threats to any ethics To name the threats AND the ethics principles involved
principles?
Discuss the ethical issues arising from the following scenarios.
3. Your audit client, Lowlands plc, has been growing rapidly via acquisitions.
In the coming year, total fees from the company are expected to reach
11% of your practice income.
Part B Section 4 – Fees, remuneration and evaluation policies, gifts and hospitality,
litigation
All firms face self-interest threat simply because the client pays the fee!!!
The auditor may therefore be tempted to allow inappropriate accounting treatments in order
to keep the client.
3. Self-interest threat
Independence and objectivity may be compromised.
If Lowlands plc is listed, recurring fees of 11% of fee income are unacceptably
high.
If Lowlands plc is not listed, then fees could rise to 15% of fee income but
should be monitored and proper safeguards initiated.
Part B Section 5 – Non-audit services
Paragraph 5.53
There is also a potential self-review and management threat if your firm has
advised on any of the acquisitions which will then be included in the financial
statements.
*including
You need to have a good understanding of: independe
nc e
1. ethics principles* itself – what they are, what each principle means
etc.
2. situations that may cause ethics principles to be violated (i.e., the
threats to the ethics principles)
3. how to put in safeguards so that the practitioner can still execute
the engagements properly without violating the ethics principles.
Example of questions:
4. Discuss the ethical issues arising from the following scenarios…
5. Identify and explain the ethical issues arising in this situation…
In both situations, you are to identify BOTH, the principles AND threats
At times, the question may also ask you on how to
3. put in the safeguards to address the ethical issues.
Test your understanding 2
Your firm is the external auditor of Costello Ltd. The directors of Costello Ltd
have requested that your firm provides a member of staff to assist in the
preparation of its annual financial statements.
Explain the threats to your firm’s objectivity arising from the above and
describe the safeguards, if any, which should be put in place to mitigate
those threats.
(4 marks)
½ mark per point
Assistance with the preparation of financial statements
Threats to objectivity
Management threat
Firm is expected to make decisions
Firm becomes too closely aligned with the views and interests of management
Self-review threat
Results of a non-audit service are reflected in the amounts included or disclosed
in the financial statements (such as calculations)
Audit team reluctant to identify shortcomings in their colleague’s work or
May place too much reliance on that work
Safeguards
Refer to ethics partner
Not prohibited in the UK as company is not listed
Limit the length of time for which assistance is provided
Informed management in place:
– management makes all decisions requiring the exercise of judgement and
– has prepared the underlying accounting records
– staff member does not initiate transactions or
– make decisions
Audit documentation demonstrates that management has made all decisions
Responsibilities set out in engagement letter
Staff member must have no involvement in the audit of the financial statements
Independent partner review of:
– audit work
– accounting services
Note: This 4-mark question has 11.5 marks available in the marking key showing the
wide range of responses that would have scored marks.
Other types
of
questions
Test your understanding 3
Describe two procedures that an assurance firm should have in place to
ensure that members of an audit team act with objectivity and
independence.
(2 marks)
et h ic s a n d its
p le q u estions on
Short , sim rovisions in general
p
Ans:
1 mark per point for the first two procedures given only from the following list:
Rotation of engagement partners – partners of listed clients must be rotated every
five years/partners of non-listed clients should be considered for rotation every ten
years.
Independence declarations – signed annually/at start of each audit.
Formal process in place for partners/employees to report family/personal
relationships, financial interests in audited entity or decision to join audited entity –
adequately communicated to employees.
Training/development/appraisal processes – including employees’ understanding
of how to identify threats to objectivity and independence and actions to take when
threats identified.
Formal processes for considering appropriateness of appointment/reappointment
– such as evaluation of client integrity, press/internet searches, obtaining references
and discussion with directors/background checks.
Appointment of ethics partner – consulted on safeguards to ensure they are
sufficient to address potential threats.
Requirement for engagement partners to be responsible for forming a conclusion
on compliance with independence requirements for each engagement – includes
identifying and evaluating circumstances/relationships that cause threats and taking
action to eliminate them.
Engagement quality reviewer – consider the adequacy of documentation of
engagement partner's consideration of auditors' objectivity and independence.
Monitoring of compliance with firm’s policies and procedures – periodic review, on
a test basis, of audit engagement partners’ documentation of consideration of
objectivity and independence.
Test your understanding 4
Jane Harp is the engagement partner responsible for the external audit of
Oboe plc (Oboe), a listed company. Jane is due to be rotated off the audit
team, having been the engagement partner for the last five years. However,
following the unexpected resignation of Oboe’s finance director, the audit
committee has requested that Jane continues as engagement partner.
Identify and explain the professional and ethical issues arising in the
situation above. State, with reasons, how Jane’s firm should respond to the
audit committee’s request.
es comprehens
ive (5 marks)
t q u e sti o n s b u t requir isu alize and
Shor v isio n s to v
e rsta n d in g o n ethics pro
u nd rationalize.
Test your understanding 4
Jane Harp is the engagement partner responsible for the external audit of
Oboe plc (Oboe), a listed company. Jane is due to be rotated off the audit
team, having been the engagement partner for the last five years. However,
following the unexpected resignation of Oboe’s finance director, the audit
committee has requested that Jane continues as engagement partner.
Identify and explain the professional and ethical issues arising in the
situation above. State, with reasons, how Jane’s firm should respond to the
audit committee’s request.
es comprehens
ive (5 marks)
t q u e sti o n s b u t requir isu alize and
Shor v isio n s to v
e rsta n d in g o n ethics pro
u nd rationalize.
Test your understanding 4
Jane Harp is the engagement partner responsible for the external audit of
Oboe plc (Oboe), a listed company. Jane is due to be rotated off the audit
team, having been the engagement partner for the last five years. However,
following the unexpected resignation of Oboe’s finance director, the audit
committee has requested that Jane continues as engagement partner.
Identify and explain the professional and ethical issues arising in the
situation above. State, with reasons, how Jane’s firm should respond to the
audit committee’s request.
es comprehens
ive (5 marks)
t q u e sti o n s b u t requir isu alize and
Shor v isio n s to v
e rsta n d in g o n ethics pro
u nd rationalize.
Test your understanding 4
Jane Harp is the engagement partner responsible for the external audit of
Oboe plc (Oboe), a listed company. Jane is due to be rotated off the audit
team, having been the engagement partner for the last five years. However,
following the unexpected resignation of Oboe’s finance director, the audit
committee has requested that Jane continues as engagement partner.
Identify and explain the professional and ethical issues arising in the
situation above. State, with reasons, how Jane’s firm should respond to the
audit committee’s request.
es comprehens
ive (5 marks)
t q u e sti o n s b u t requir isu alize and
Shor v isio n s to v
e rsta n d in g o n ethics pro
u nd rationalize.
Test your understanding 4
Jane Harp is the engagement partner responsible for the external audit of
Oboe plc (Oboe), a listed company. Jane is due to be rotated off the audit
team, having been the engagement partner for the last five years. However,
following the unexpected resignation of Oboe’s finance director, the audit
committee has requested that Jane continues as engagement partner.
Can or Identify and explain the professional and ethical issues arising in the
cannot??
situation above. State, with reasons, how Jane’s firm should respond to the
Poning
den!!!
audit committee’s request.
es comprehens
ive (5 marks)
t q u e sti o n s b u t requir isu alize and
Shor v isio n s to v
e rsta n d in g o n ethics pro
u nd rationalize.
Ans: ½ mark per point
Professional and ethical issues
Threats to the firm’s objectivity and independence
Due to familiarity threat
Jane has been the engagement partner for 5 years
The FRC Ethical Standard requires that she be rotated off as she may have developed
close relationship with Oboe’s management
May be too trusting
And maybe insufficiently questioning Oboe’s management’s point of view
Response to request
Jane may continue as engagement partner
The FRC Ethical Standard allows an extension of up to two years/no longer than 7
years
To maintain audit quality
Permitted since there are unexpected changes in the senior management of the
audited entity
With safeguards
And no ongoing familiarity threat
Expanded review of audit work required
– By the engagement quality reviewer or an audit partner not involved in the audit
Notify ethics partner
Facts and reasons to be disclosed to shareholders as early as practicable
If no disclosure to shareholders, should refuse the request.
Any iss
ues?
Test your understanding 5
Conflict of interest
Your firm has recently accepted
appointment as external auditor of
Dooku Ltd, a competitor of Palpatine Ltd.
Your firm has acted as external auditor
of Palpatine Ltd for a number of years.
Both companies have provided your firm
with informed consent to act.
Outline the procedures that your firm
should implement to address any
potential conflicts of interest arising out
of this appointment. Due to acting for two
(3 marks) competing companies in
the same industry
Ans:
Procedures to address potential conflict of interest
Separate engagement teams (½)
Brief staff/clear guidelines on confidentiality issues/procedures (½)
Information barriers: (½)
physical separation/use staff from different offices (½)
confidential/secure data filing (½)
Procedures in place for dealing with any need to disseminate information beyond
barrier (½)
Staff to sign confidentiality agreements (1)
Regular review of the application of safeguards by a senior individual not involved in
the engagements. (1)
