Chapter 2 Flashcards
(30 cards)
What are the 5 key threats to independence?
Self-interest threats
Self-review threats
Advocacy threats
Familiarity threats
Intimidation threats
What are self-interest threats?
When a member or firm has a financial interest in the client or business relationship with the client
What are examples of self-interest threats?
Member or immediate family owning shares
Client fees are significant in relation to total fees of the firm
Loan made by client to member that is outside of normal lending terms
What is self-review threats?
When a member is in position of having to review their own work or work done by others in the firm
What are examples of self-review threats?
Member was recently an employee or director of the client
Member prepared information or performed services for client which is then audited by member or firm
What is advocacy threats (definition)?
Occurs when a member or firm acts or is perceived to act on behalf of its assurance client/ Causing the objectivity of the assurance provider to be questioned
What are examples of an advocacy threat?
Member or firm promotes sale of shares of client and may or many not receive a commission for such sales.
Member or firm represented client in legal dispute.
Member or firm represents client in negotiations with third party.
What are familiarity threats?
Occurs when there is a close relationship between a member or firm and client, making it difficult to exercise professional scepticism
What are examples of familiarity threats?
Member or firm has long standing association with client.
Former member of firm holds senior position at client (CFO or CEO).
Acceptance of gifts and/or hospitality from client (other than minor tokens or gestures).
What are intimidation threats?
Occurs where the client intimidates a member or firm.
What are examples of intimidation threats?
Client threatens to use different assurance firm next year.
Undue pressure from client to reduce audit hours to reduce fees.
What are the steps to do before accepting an audit
Assess the clients integrity
Communicate with outgoing auditor
Assess the firms ability to meet ethical requirements
Assess independence
Preprare engagement letter (if it all good)
What does professional behaviour mean?
Upholding the profession’s reputation, following rules, not making false claims or discrediting others
What does integrity and due care require?
Being honest, thorough, timely, and complying with standards
What is professional competence?
Staying updated, maintaining skills, and not taking on work beyond your expertise
What does confidentiality mean for accountants?
Keeping client info private unless permitted or legally required to disclose
What is objectivity in auditing?
Being unbiased and independent, avoiding conflicts of interest
What is independence in fact vs appearance?
Fact: Unbiased in decision-making. Appearance: Public perceives you as independent.
How do auditors address independence threats?
Use safeguards like removing staff, rotating partners, or resigning from the engagement
What is professional skepticism?
A questioning mind, alertness to fraud/error, and critical evaluation of evidence
What are 4 cognitive biases auditors face?
Availability bias, Confirmation bias, Overconfidence bias, Anchoring bias
What are common ethical issues for auditors?
Misleading info, hiding facts, bribes, insider trading, ignoring unethical actions
What increases ethical risk in a company?
Poor governance, bad culture, weak ethics training, pressure to perform
What are steps to resolve ethical issues?
1) Define issue, 2) Gather facts, 3) Analyze, 4) Decide, 5) Document
