ethic and other professional matter Flashcards
(50 cards)
What is the exam focus for ethics questions in ACCA AAA?
Focus on application and evaluation, not just knowledge recall. Use the Identify -> Explain -> Evaluate Significance -> Safeguards -> Conclude approach. Always link points back to specific scenario facts. Marks are often for identifying the specific threat and explaining why it’s a threat in context (1 mark), and proposing appropriate safeguards (1 mark per valid safeguard).
What is the basis of the ACCA Code of Ethics and Conduct and the key approach used?
The ACCA Code is based on IESBA’s Code and adopts a conceptual framework approach. All members must comply with the five fundamental principles.
What are the five fundamental principles of the ACCA Code of Ethics and Conduct?
- Integrity
- Objectivity
- Professional Competence and Due Care
- Confidentiality
- Professional Behaviour
Define the fundamental principle of Integrity and give an AAA application example.
To be straightforward and honest in all professional and business relationships. Involves fair dealing and truthfulness.
AAA Application:
Resisting pressure for an inappropriate audit opinion,
being honest about fees,
reporting misstatements/fraud truthfully,
considering client management integrity.
Define the fundamental principle of Objectivity and give an AAA application example.
Not to compromise professional or business judgements because of bias, conflict of interest or undue influence of others.
AAA Application: Central to auditor independence.
Avoiding situations creating threats (**self-interest, self-review **etc.),
applying professional scepticism,
ensuring non-audit services don’t compromise audit judgement.
Define the fundamental principle of Professional Competence and Due Care and give an AAA application example.
To attain and** maintain professional knowledge and skill **at the required level for competent service and act diligently per standards.
AAA Application:
Having necessary skills for complex audits,
allocating** sufficient resources/time,
supervising/reviewing work properly,
keeping up-to-date with standards.**
Define the fundamental principle of Confidentiality and give an AAA application example.
To respect confidentiality of information from professional relationships; do not disclose without proper authority or use for personal advantage.
AAA Application:
Not disclosing client info without authority, unless **legal/professional right/duty **(e.g., reporting money laundering, regulatory requests, reporting NOCLAR/fraud where required/permitted - seek legal advice first).
Ensuring secure data handling.
Define the fundamental principle of Professional Behaviour and give an AAA application example.
To comply with relevant laws/regulations and avoid conduct that might discredit the profession.
AAA Application:
**Acting professionally **with clients,
avoiding actions damaging firm/ACCA reputation,
ensuring advertising is honest,
dealing professionally with fee disputes.
What is the first step in the conceptual framework approach to dealing with ethical threats?
Step 1: Identify Threats.
* Recognise circumstances from scenario facts compromising principles (especially objectivity/independence).
* Name the specific threat(s) (e.g., Self-interest, Self-review).
* Explain the reason why it’s a threat based on the scenario.
What is the second step in the conceptual framework approach?
Step 2: Evaluate Significance of Threats.
* Assess seriousness considering qualitative (e.g., role of individual, nature of relationship/service, subjectivity) and quantitative factors (e.g., fee percentage, materiality of item - note: FS materiality differs but can indicate significance).
* Explain why the threat is significant in the context.
* Consider if a reasonable third party would conclude principles are compromised.
What is the third step in the conceptual framework approach, if threats are significant?
Step 3: Apply Safeguards.
* Identify available safeguards (firm-wide or engagement-specific) that could eliminate or reduce the threat to an acceptable level.
* Be specific (e.g., “use a separate team”).
* Explain how the proposed safeguard addresses the specific threat.
* Consider IESBA Code.
What is the fourth step in the conceptual framework approach?
Step 4: Conclude on Necessary Action.
* State if safeguards are sufficient to reduce the threat to an acceptable level, allowing the engagement/service.
* If no adequate safeguards exist, or if the circumstance is explicitly prohibited by the Code (e.g., certain NAS for PIEs, audit contingency fees), the firm must eliminate the circumstance or decline or withdraw from the engagement/service.
Define the Self-interest Threat to independence and objectivity and give AAA examples. (11 examples)
A financial or other interest inappropriately influencing judgement/behaviour.
AAA Examples:
* Direct financial interest (shares),
* Loans,
* Close business relationships,
* Potential employment,
* High fee dependency (>15% PIE),
* Contingent fees (prohibited for audit),
* Overdue fees,
* Significant gifts/hospitality,
* Incentive for future work,
* High fee for NAS,
* Purchases not at arm’s length.
Define the Self-review Threat and give AAA examples.
Not appropriately evaluating results of previous judgement/service by the firm (Audit team reluctant to query firm’s prior work included in FS).
AAA Examples:
Preparing accounting records/FS (prohibited for PIEs), Internal audit services (prohibited for PIEs re ICFR),
Valuation services (prohibited for PIEs if material/subjective),
**Tax **calculation (prohibited for PIEs if material),
IT systems services (prohibited for PIEs),
Recent service with client (ex-IA joins team),
DD/Corp Fin followed by audit,
Investment advice followed by audit,
Consolidation adjustments,
Advice on accounting treatment,
Reviewing systems firm designed/implemented. (Often also create Management Responsibility Threat).
Define the Advocacy Threat and give AAA examples. (5)
Promoting a client’s position to the point objectivity is compromised (Firm promotes client’s interests, impacting objectivity).
AAA Examples:
- Promoting shares/assisting listing (prohibited),
- Acting as advocate in **legal/tax disputes **(prohibited if material & public),
- Assisting with loan applications/forecasts where incentivised,
- Corporate finance advice (potentially),
- **Valuation **services (potentially).
Define the Familiarity Threat and give AAA examples. (7)
Long/close relationship leading to being too sympathetic or accepting.
AAA Examples:
- Long association (PIE rotation rules apply),
- Close personal/family relationships,
- Recent service with client,
- Accepting significant gifts/hospitality,
- Close friendship between partner and client fin director,
- Partner joining component auditor firm,
- Previous partner now director at client.
Define the Intimidation Threat and give AAA examples.
Deterred from acting objectively by actual/perceived pressures.
AAA Examples:
- Threat of dismissal,
- Fee pressure (low fee, pressure to reduce scope),
- Litigation threat,
- Dominant personality,
- Pressure re forecasts/deadlines,
- Limitation on scope by client,
- Threat** not to award future contracts**.
Define the** Management Responsibility** Threat and give AAA examples.
Firm makes judgements/decisions that are management’s responsibility (Auditors must not assume management responsibilities). Often linked to Non-Audit Services (NAS).
AAA Examples:
* Making choices on accounting policies/methods,
* Designing/implementing internal controls,
* Making key assumptions in valuations/forecasts,
* Taking lead in negotiations/disputes,
* Making **hiring decisions **(recruitment).
What are three categories of Safeguards?
- Created by Profession/Legislation/Regulation (Education, CPD, Corp Gov rules, Standards, Monitoring).
-
Firm-wide
(Tone at the top,
Quality Management,
Independence/NAS policies,
Rotation,
Gift policies,
AML, etc.). -
Engagement-specific
(EQCR,
Third-party consultation,
Discussing with TCWG,
Team rotation/removal,
Disclosing fees/NAS,
Mgmt acceptance of responsibility,
Conflict management,
Fee management,
Modifying audit plan,
Legal advice).
When considering Lowballing (very low fee), what are the threats and safeguards?
- Identify: **Self-interest **(secure work), potential threat to Professional Competence/Due Care (cutting corners).
- Evaluate: Permitted, but significance depends on how low the fee is and if quality can be maintained. Very low fee raises concerns.
- Safeguard: **Strong quality management **(ISQM 1/ISA 220) ensuring adequate resources/time/staff.
Clear documentation of plan/fee justification.
Ensure client not misled.
Communication with TCWG. - Conclude: Accept only if quality demonstrably not compromised.
Document assessment.
When are Contingent Fees (fee depends on outcome) permitted for audit firms?
Prohibited for audit/assurance engagements as it creates an unacceptable incentive.
For permitted NAS (to non-audit clients), evaluate significance; if fee depends on audit judgement/outcome is material, likely prohibited or requires significant safeguards.
* Conclude: Decline prohibited arrangements (audit fee based on profit). Proceed with permitted NAS only if safeguards adequate.
What threats arise from Overdue Fees and what are safeguards?
- Identify: Self-interest threat (pressure for favourable report), resembles a loan.
- Evaluate: Significance depends on amount and time (>1 year often significant). Could be seen as providing finance.
- Safeguard:
Discuss with TCWG.
Request immediate payment before work/report.
**Independent reviewer **for key judgements.
Consider payment in advance. - Conclude: Proceed only if fees paid or safeguards reduce threat acceptably (e.g., payment plan + independent review).
May need to resign if significant fees unpaid before report.
What threats arise from Fee Dependency (large % of firm income from one client) and what are safeguards?
- Identify: Self-interest (dependency) and potential intimidation (fear of losing client).
- Evaluate: Significance based on % of firm/office/partner income AND client type (PIE/listed - 15% threshold for 2 years is highly significant). Calculate %.
- Safeguard:
- Discuss with TCWG.
- Implement pre-issuance EQR (mandatory for PIEs >15% for 2 yrs).
- External quality review.
- Actively reduce dependency (increase client base).
- Consider rotation/resigning from NAS.
- Conclude: Proceed with safeguards. For PIEs, resignation required if dependency persists beyond limits (e.g., 5 years >15%). For non-PIEs, evaluate if safeguards sufficient; consider resignation if threat remains high.
What threat arises from Referral Fees (paying/receiving fees for client referrals) and what is the key safeguard?
- Identify: Self-interest threat to objectivity and professional competence/due care (recommend based on fee, not best service).
- Evaluate: Significance depends on materiality of fee and nature of arrangement. Can compromise objectivity.
- Safeguard:
- Disclose existence and nature of referral fee to client before referral and obtain consent.
- Ensure referral is genuinely in client’s best interest and provider is competent.
- Conclude: Proceed only with full disclosure and client consent, ensuring appropriateness of referral.
