Chapter 15 - Integrity, objectivity and independence

Question 1

How is integrity defined?

Answer 1

Being straightforward and honest in all professional/ business relationships

Question 2

How is objectivity defined?

Answer 2

State of mind that excludes bias

Question 3

What do FRC prohibit for public interest entity audit clients?

Answer 3

• Tax services
• Bookkeeping
• Legal services
• Valuation services

Question 4

How can self interest threats arise?

Answer 4

• Employment with an assurance client
• Partner on client board
• Familiarity
• Low balling
• Close business relationships

Question 5

What is a financial interest?

Answer 5

An interest in the equity or other security, debenture loan or other debt instruments of the entity

Question 6

What is a direct financial interest?

Answer 6

Directly owned financial interest by an individual or entity

Question 7

What is an indirect financial interest?

Answer 7

Financial interest beneficially owned by a collective investment vehicle

Question 8

Which parties are not allowed to own a direct interest or indirect material financial interest in the client?

Answer 8

• Assurance firm
• Assurance firm partner
• Any person who can influence
• Immediate family member

Question 9

What safeguards are there against a self interest threat?

Answer 9

• Disposing of interest
• Remove team member
• Inform audit committee
• Engagement quality control reviewer

Question 10

Is dual employment permitted?

Answer 10

NO

Question 11

What does FRC section 2 state?

Answer 11

When a partner leaves to take up a key management position at the client, the firm may have to resign

Review of employees work should also take place

Question 12

Are loan staff assignments prohibited?

Answer 12

Yes

Question 13

Should a firm or member of an assurance team accept gifts or hospitality?

Answer 13

No

Question 14

What is the exception of gifts and hospitality?

Answer 14

If they are considered trivial and inconsequential

Question 15

Can audit firms get involved in loans with a client?

Answer 15

No

Question 16

What is the exception with loans?

Answer 16

Client is a bank

Question 17

If a loan is made under normal lending procedures, is it acceptable?

Answer 17

Yes, providing appropriate safeguards are implemented

Question 18

What does the ICAEW state about overdue fees?

Answer 18

Payment required before the assurance report for the following year can be issued

Question 19

What is a contingent fee?

Answer 19

Fee calculated on a predetermined basis relating to the outcome of the transaction

Question 20

What are the safeguards relating to contingent fees?

Answer 20

• Discuss issues with audit committee
• Reduce client dependency
• Control reviews
• Consult 3rd party (ICAEW)

Question 21

What threat does lowballing present?

Answer 21

Significant self interest threat

Question 22

What rules does the FRC section 4 have?

Answer 22

Audit team must allocate appropriate time and skill to perform audit

Question 23

What does the FRC state that the total non-audit fee must not exceed?

Answer 23

70% of average total fees based on fees from the last 3 years

Question 24

What is the key area which there is likely to be a self-review threat?

Answer 24

Assurance firm provides more than one service

Question 25

What is a valuation?

Answer 25

Making of assumptions and use of methodologies to compute a certain value for an asset

Question 26

What threats arise if an audit firm performs a valuation?

Answer 26

Self-review Management

Question 27

What does FRC section 5 state?

Answer 27

Audit firms shall not carry out valuations which have material effect on listed company financial statements or involve subjective judgement

Question 28

What can the auditor not do in relation to tax?

Answer 28

- Promote tax structure - Tax engagement which involves audit firm taking managerial role - Current/deferred tax calcs for listed entity

Question 29

What did the revision of the 2019 FRC prohibit?

Answer 29

Providing internal audit services to an audit client

Question 30

Are assurance firms allowed to promote an assurance client's shares?

Answer 30

No

Question 31

How can an advocacy threat arise?

Answer 31

Assurance firm is in the position of taking the client's role in the dispute or somehow acting as their advocate

Question 32

What does FRC section 5 prohibit?

Answer 32

Audit firm providing legal services where it would involve acting as a solicitor

Question 33

When does a management threat arise?

Answer 33

When the audit firm undertakes work involving making judgements and taking decisions that are management's responsibility

Question 34

Are assurance providers allowed to make decisions on behalf of management

Answer 34

No, it's prohibited

Question 35

What must be considered according to the ICAEW Code when resolving ethical conflicts?

Answer 35

- Relevant facts - Relevant parties - Ethical issues involved - Related fundamental principles - Internal procedures - Alternative courses of action

Question 36

What non-audit services are exempt from the 70% cap?

Answer 36

- Services required by law - Reporting on internal financial controls - Specified auditors

Question 37

What is the standard presumption of dependence for a non-listed client?

Answer 37

There is a presumption of dependence when annual fee income from all services to the client will regularly exceed 15% of gross practice income.

Question 38

What relationship automatically formed when overdue fees aren't paid?

Answer 38

Loan relationship, threat to independence

Question 39

In general, can you provide extra services to listed companies?

Answer 39

No