Code Of Ethics Flashcards
Long Association of Personnel
Threat:
If an individual is involved in an audit engagement for a long period of time ( e.g using same team member for more than 3 years), Familiarity and self interest threat is created.
Factors in Evaluating Threat:
1) Length of time
2) role of individual
3) Closeness of individual with management
Safeguards:
- Rotate the individual and determine the time for each it will not become part of audit team again.
- Restructure responsibilities of the individual on the audit team
- Appoint appropriate reviewer
- Independent QCR of engagement
Temporary Personnel Assignment
Threat:
Loan of Personnel to an audit client creates self review threat, advocacy threat and familiarity threat
Safeguards:
Firm will not loan personnel to audit client unless:
*Such assistance is only for a short period of time
*Client will be responsible for directing and supervising activities
*Personnel does not take management responsibilities
If personnel is lent to audit client, following safeguards may be applied:
- Firm should not include the loanned staff in assurance team
- If loaned staff is included in assurance team, restructure responsibilities (he should not be given responsibility for any function or activity that he performed during temporary staff assignment)
- Conducting an additional review of the work performed by the loaned personnel.
Entering employment negotiations with client
Threat:
If a member of the audit team is planning to join the client in future, it creates self interest threat
Safeguards:
1) Member should notify firm about his willingness
2) Remove concerned member from audit team
3) Appoint appropriate reviewer
Employment with an audit client former member of firm
Threats:
If a former member of the firm joins client as director,officer etc, it creats a self interest threat, familiarity threat or intimidation threats
Factors
- current position with client
- former position in firm
- the length of time passed
- level of involvement, individual will have with audit team
Safeguards:
- No significant connection should remain between firm and individual
- Modify the audit plan
- Assign individuals to the audit team who have sufficient experience relative to individual who joined the client
- Conducting an additional review of the work of individual who joined the client.
Serving simultaneously as officer to audit client
A self interest or self review threat is created if a partner or employee of the firm serves the client
Serving as director or officer:
Not allowed
Recent service with an audit client
Threat:
If an audit team member has recently served as a director, officer or employee of the audit client,it creates self interest,self review or familiarity threat
Relevant factors:
- Position of the individual at client
- Role of individual as audit team member
- Length of time since the auditor left the client
Safeguards:
If individual served during period covered by the audit report➡️ individual shall not be included in the audit team
If individual served prior to period covered by the audit report➡️
- Remove individual
- Restructure responsibilities
- Engage an appropriate reviewer to to review the audit work performed
Family and Personal Relationships
Threat:
Family and Personal Relationships with client personnel creates self interest threat, familiarity threat or intimidation threat
Factors:
- Nature of relationship btw individuals
- Position of individual at client
- Role of audit team member
Safeguards:
- Restructure the responsibilities so that audit team member does not deal with matters that are within the responsibility of the individual with whom member has close relationship
- Engage an independent reviewer to review the audit work performed
- Remove the relevant audit team member from the audit client
Business Relationships
Examples:
- A team members runs a partnership or joint venture with client
- Client obtain good or other services from a team member
Threat:
A close business relationship with an audit client or its management might creat self interest or intimidation threat
Safeguards:
*If bussines relationship is insignificant,no action is required
*If business relation is significant:
➡️ It should be reduced to insignificant level or
➡️ Individual should be removed or firm should withdraw the engagement
Purchase of goods and services
Threat:
Purchase of goods and services from audit client may create self interest threat
Factors:
- Whether transaction is in ordinary course of business and at arm’s length basis
- Whether proper tendering process was followed
- Whether undue favours are accepted
- Magnitude of transaction
Safeguards:
If Threat is significant firm should
*Eliminate or reduce the size of transaction
*Remove the individual from the audit team
Loan and guarantees
Threat:
Loan or guarantee with an audit client creates self interest threat
Loans and guarantees to an audit client:
Loan can be given to an audit client only if it is immaterial to both firm/member and client
Loans and guarantees from an audit client
If audit client is a bank or similar institution:
- Loan shall be accepted only if it is under normal lending procedures and terms and conditions or
- If loan is material, appropriate reviewer should be appointed to review the work performed
If audit client is not a bank or similar institution:
- Loan shall be accepted only if it is immaterial for both firm/member and client
- If material,loan shall be repaid or concerned member should be removed ( or firm should withdraw)
Financial interests
Threat:
Holding financial interest ( shares) in audit client by team member or his relative creates self interest threat.
Factors:
- The role of the individual holding financial interest
- Nature of relationship if held by a relative
- The materiality of the financial interest
Safeguards:
- Member should notify firm about financial interest
- Member shall dispose off interest or so much interest that remaining becomes immaterial
- Remove the relevant audit team member from the audit team
- Appoint appropriate reviewer
Actual or threatened litigation with audit client
Threats:
It creates self interest or intimidation threat
Factors:
- Materiality of litigation
- Whether litigation relates to a prior audit engagement
Safeguards:
- Remove the individual form engagement or refuse the engagement if firm is involved
- Appoint appropriate reviewer
Examples of inducements
An inducement can take many different forms, for example
- Gifts
- Hospitality
- Entertainment
- Political or charitable donations
- Appeals to friendship and loyalty
- Preferential treatment,rights or privileges
Inducements
Threat:
Offer of inducement from client creates self interest threat, Familiarity threat or intimidation threat
Safeguards:
*Offer of significant inducements should not be accepted
* Such offer should be disclosed to senior management of the firm, and should be documented.
*If offer has been accepted by any team member
➡️ Inducement should be returned or cost of inducement should be reimbursed to client
➡️ He should be removed from engagement and his work should be reviewed by appropriate reviewer.
Compensation and evaluation policies
Threat:
A self interest threat is created if an audit team member is evaluated/compensated on the basis of selling non assurance services to audit client.
Actions:
- Revise compensation plan
- Remove the individual from audit team
Referral fee or commission
Threat:
A self interest threat is created if an auditor pays or receives referral fee or commission.
Course of Action:
- Disclosing the arrangement to client
- Obtaining advance agreement from client
Contingent fee
Threat:
Contingent fee means fee based on outcome e.v profit,type of opinion,success of case, or saving in tax. A fee is not regarded as being contingent if established by a court or other public authority.
Contingent fee creates self interest threat. Threat created is so significant that no safeguard can reduce the threat to acceptable level.
Contingent fee is not allowed for
* For assurance engagement
For non- assurance engagement provided to audit client.
