CH4 professional ethics

Question 1

OPPIC and MASSIF are part of which code?

Answer 1

IFAC (international federation of accountants) Code of Ethics

Question 2

What is the other ethical code?

Answer 2

UK financial reporting code (FRC)

Question 3

Safeguards for ethical threats?

Answer 3

1. Training (how to identify and manage)
2. ICAEW support systems (local and central counselling and helpline)
3. Quality control systems in place at engagement, firm and professional levels:
   - Planning, supervision and review procedures
   - Hot and cold file reviews
   - Regulatory inspections

Question 4

Two parts of the FRC’s ethical standards?

Answer 4

Part A: overarching principles and supporting ethical provisions
Part B: 6 sections that go through specific situations

Question 5

What are the 6 sections in Part B of the FRC ethical code?

Answer 5

1. general requirements and guidance: Policies, procedures and roles to be put in place to help facilitate compliance with the other sections
2. financial, business employment and personal relationships
3. long association with audit engagement
4. fees, remuneration and evaluation policies, litigation, gifts and hospitality
5. non audit/additional services
6. provisions available for small entities (ESPASE)

Question 6

FRC ethical code Part B, section 1 - what does it involve?

Answer 6

Control environment:
- policies
- monitor compliance (discipline)
- reporting systems (whistleblow, ethics partner)
- evaluate implications of identified possible/potential breaches

Engagement team:
- Report the following:
1. family and other personal relationships
2. financial interests in audited entity
3. decisions to join audited entity

Question 7

Three fundamental concepts in FRC ethics code, part A?

Answer 7

Integrity (trustworthy, straightforward, honest)
Objectivity (state of mind, acting impartially without bias)
Independence (how we appear to others)

Question 8

Criteria for clos business relationships?

Answer 8

1. Ordinary course of business
2. Arms length
3. not material to either party
4. Inconsequential in view of objective, reasonable, informed third party

Question 9

FD of audited entity becomes audit partner. What are the rules?

Answer 9

Not assigned to audit that entity for 2 years

Question 10

Audit partner becomes FD of audited entity. What is the threat? What are the rules?

Answer 10

Familiarity. The audit team may be too trusting of the new FD’s judgements.
The whole audit firm must resign and can’t accept an audit assignment for two years.

Question 11

Can the audit firm or a partner or employee of the audit firm perform a role as an officer or member of the board for an audited entity?

Answer 11

NO

Question 12

Long association rotation rules: listed companies

Answer 12

1. FIVE YEARS: ENGAGEMENT PARTNER has audited the entity for FIVE years, they must be rotated off. They cannot be a partner again until a further FIVE YEARS have elapsed.
2. Can be EXTENDED for a further TWO YEARS if necessary to safeguard audit quality eg. new FD about to be appointed, big restructure.
3. SEVEN YEARS: ANY OTHER PARTNER has audited the entity for SEVEN years, they must be rotated off. They cannot be a partner again until a further FIVE YEARS have elapsed.

Question 13

Long association rotation rules: non-listed companies

Answer 13

Regular rotation: not mandatory.

After TEN YEARS, firm must consider if reasonable and informed third party would question the partners’ objectivity.

If so, safeguard should be implemented eg. involving additional partners, quality control reviews

Question 14

Listed companies: how often should an audit tender be carried out?

Answer 14

Every TEN YEARS

Question 15

How often should there be a mandatory rotation of audit firm for listed companies?

Answer 15

Every TWENTY YEARS

Question 16

What are the rules around high percentage fees for listed and non-listed companies?

Answer 16

Question 17

What is the additional rule around high percentage fees

Answer 17

Where non-audit services are permitted, they are limited to no more than 70% of the audit fee, calculated on rolling three year basis

Question 18

What are the potential issues with lowballing?

Answer 18

Question 19

For listed clients, do you have to have an external independent quality control review?

Answer 19

Yes

Question 20

What is a PIE?

Answer 20

Listed company/PLC/on the stock exchange
Credit institution (bank)
A person who would be an insurance undertaking

Question 21

What is informed management?

Answer 21

Where the client has a management that has the opportunity and capability to make informed decisions on their own

Question 22

Can we provide internal audit for PIE? Non PIE?

Answer 22

Neither

Question 23

Can we provide valuation/actuarial valuation for PIE? Non PIE?

Answer 23

Neither

Question 24

Can we undertake work on IT systems that would be part of the accounting system/production of FS for PIE? Non PIE?

Answer 24

Neither

Question 25

Can we provide tax work for PIE? Non PIE?

Answer 25

PIE: No, including deferred tax Non PIE: Yes, but not if it results in firm advocating for client

Question 26

Can we provide one-off transaction related services eg. due diligence for PIE? Non PIE?

Answer 26

PIE: no Non PIE: Subject to consideration of management role/advocacy

Question 27

Can we provide restructuring work for PIE? Non PIE?

Answer 27

PIE: No Non PIE: Subject to consideration of management role/advocacy

Question 28

Can we provide recruitment and remuneration advice for PIE? Non PIE?

Answer 28

Neither

Question 29

Can we provide accounting/payroll for PIE? Non PIE?

Answer 29

PIE: No Non PIE: Only as far as management role not adopted and services are routine/mechanical

Question 30

Exemptions for small entities: fee dependence

Answer 30

Exempt from requirement that an external independent quality control review be carried out where fee dependence is between 10-15% Reliance should be disclosed to ethics partner and TGWG of audited entity

Question 31

Exemptions for small entities: non audit services

Answer 31

Restrictions waived but: - Needs to be informed management - Audit firm must extend its cycle of cold reviews -Departure needs to be mentioned in audit report

Question 32

Exemptions for small entities: partner joining audit client

Answer 32

Waived provided no threat to audit team's integrity, objectivity or independence and disclosure is made in audit report

Question 33

What steps should you follow for an ethics qu?

Answer 33

1. Identify/classify: what issues are at stake? What ethical principles are at stake? What threats? Why a threat? 2. Justify/significance: significance of threat? This is significant because... 3. Manage by: is it prohibited? SGs?