QUESTIONS AND ANSWERS Auditing Help

Discuss fundamental ethical principles relating to all chartered accountants

Refer to paragraph 1 of the text

Give some examples of safeguards created by profession and legislation against threats to fundamental ethical principles

Refer to paragraph 2.2 of the text

Explain with examples, threats for non compliance of fundamental principles as they relate t 0 chartered accountants in practice.

Threats are possible reasons for non compliance with fundamental
ethical principles:

(a) Self – interest threat

Self – interest threat results from financial or other interests of a chartered accountant or close family members

Examples

− Financial interest in a client
− Undue dependence on total fees
− Concerns about loosing a client
− Potential employment with client
− Contingency fee
− Loan to or from client

(b) Self – review threat

Self review threats occur when a previous judgment needs to be re-evaluated by a chartered accountant responsible for the judgment.

Example

Reporting on a system after being involved in the system design.
Writing up books for audit client.

(c) Advocacy threat

Advocacy threat occurs when a chartered accountant promotes an opinion to the point that subsequent objectivity may be compromised.

Examples

Promoting shares of the audit client

Acting as an advocate on behalf of audit client in litigation with third parties

(d) Familiarly threat

Familiarity threat occurs when a chartered accountant becomes too sympathetic to the interest of others because of close relationships

Examples

A member of engagement team having a close family relationship with a director or officer of the client Former partner of the firm being director or officer of the client

Acceptance of gifts

Long association of senior personnel with the client

(e) Intimidation threat

Intimidation threat occurs because of aca,a or perceived threats by the client.

Examples

− Threat for removal or dismissal
− Threat for litigation
− Inappropriate reduction of work in order to reduce fees

Give some examples of safeguards in work environment relating to firmwide and engagement specific environment

Examples offirm – wide safeguards

− Leadership of the firm that stresses importance of ethical code
− Firm policies and procedures to implement quality control
− Documented policies on compliance with ethical requirements including independence.
− Policies and procedures to manage the reliance on fee received from a single client
− Use of different partners and staff on various assurance work
− Effective communication of firm’s policies to the4 personnel
− Monitoring of the ethical policies by a designated partner
− Examples of engagement – specific work environment
− Involving another chartered accountant to review the work done
− Discussing ethical issues with those charged with governance
− Rotating senior audit team personnel on a client

Discuss requirements of ICAP Code of ethics as regards professional appointment of a chartered accountant in practice

CLIENT ACCEPTANCE PROCEDURES

(a) Consider whether the acceptance will create any threats to ethical requirements
(b) Integrity of management, for example, client’s involvement in illegal activities, such as money laundering
(c) Ability to serve the client, that is, only those clients should he accepted where the chartered accountant in practice is competcn: to perform services.

CHANGES IN PROFESSIONAL APPOINTMENT

The auditor who, is asked to replace another auditor should consider whether there are any reasons why the audit should not be accepted. This requires direct communication with the existing auditor. It is possible that the auditor is replaced due to disagreement with the client on professional matters. .
The existing accountant is bound by confidentiality principle: In disclosing the affairs of the client the chartered accountant will consider whether client’s permission has been obtained. If the permission is refused, the audit should not be accepted.
If a chartered accountant in practice is asked to undertake work that is additional to the work of existing chartered accountant, the proposed chartered accountant should notify existing chartered accountant of the proposed work so that the existing chartered accountant may provide all relevant information.
If the existing chartered accountant is removed by the management
before he has completed the audit and submitted has report, the existing chartered accountant must immediately inform ICAP with relevant facts. The proposed chartered accountant should not accept the offer without prior clearance from ICAP.
Where existing chartered accountant, through willing for re-appointment has not been re-appointed, he shall file with the ICAP a copy of the statement which he may have sent to the Board of directors of the company for circulation among the shareholders under section 253 of the Companies Ordinance, 1984. It shall be obligatory on the proposed chartered accountant before accepting the appointment, to obtain a copy of such a communication.

Give some examples of other occupations in which chartered accountant in practice can engage without council’s permission

A chartered accountant in practice may engage in the following occupations without obtaining the prior approval of the Council:

(a) Employment under chartered accountant in practice or firms of such chartered accountants.
(b) Private tutorship.
(c) Attending classes and appearing for any examination, either academic or accountancy or any examination relating to the other professions and obtaining membership of such bodies/ associations.
(d) Authorship of books.
(e) Appearing before any Court of Law for representing clients etc., in respect of the “other functions” as stated in the Bye-Laws of
the Institute, if so eligible.
(f) Proprietorship, partnership or directorship of educational and training institutions extending professional or business education and training.
(g) Part-time lecturer-ship in Universities or other institutions including those relating to or accredited by the Institute or those run under the auspices of the Institute or the Regional Committees.
(h) Acting as examiner/paper-setter for educational and professional institutions and to be a member of Universities/Colleges, Committees, Board etc.
(i) Honorary editorship of professional journals.
(j) Holding membership/office in any charitable, religious, social or educational organization without remuneration.
(k) Engaging in research and report writing and assisting national and international organizations in the preparation of their research reports.
(1) Accepting directorship of any company as non-executive director.
(m) Holding public elected offices such as Member Provincial Assembly, Member National Assembly, Senator etc.; or offices such as Special Assistant or Advisor to a Minister or Prime Minister etc.

Under what circumstances a conflict of interest may arise and what safeguards should be taken against such conflict of interest, in accordance with lCAP code of ethics.

Conflict of interest arises when:

(a) An auditor competes directly with a client or has a joint venture with major competitor of the client.
(b) The auditor performs services for clients who are competitors
(c) Clients are in dispute with each other in relation to the matter or transaction in question
(b) Notifying the competing clients that the auditor is acting for both the parties in respect of a matter where their interests are in conflict and obtaining their consent to so act.
(c) Notifying the client that the auditor does not act exclusively for anyone client in the provision of services, for example a particular market sector, and obtaining their consent to act.
(d) Use of separate engagement teams
(e) Procedures to prevent access to information

Where the conflict of interest cannot be eliminated or reduced to an acceptable level through application of safeguards, resignation from one or more conflicting engagements is appropriate.
Where an auditor has requested consent from a client to act for another party in respect of conflict of interest and the consent has been refused. the auditor must not continue to act for one of the parties.

Discuss requirements of lCAP code of ethics regarding:
1. Second opinion
2. Fees
3. Public notices, announcements and communication
4. Gifts and hospitality
5. Custody of client’s assets

1. SECOND OPINION
(a) Seek client’s permission to contact existing auditor and provide the existing auditor with a copy of opinion.
(b) If the client refuses to give permission, the auditor should consider appropriateness of giving second opinion.

2. FEE
1. Undercutting is not allowed. That is, the proposed auditor should not accept a fee lower than charged by existing auditor unless the scope and quantum of work materially reduced.
2. Compliance is required with ATR-14, Minimum Hourly Charge Out Rates.
3. The threat for.non compliance of the rules can be reduced if the client is made aware of the terms of engagement including fee, appropriate staff is assigned and the time to complete the job is appropriate.
4. Contingent fee is not permitted, for example, fee charged on percentage basis (except where allowed by lCAP or by law)
5. Referral or commission charged or received for referring the client are not permitted
6. Safeguards include disclosure to the client about referral fee arrangements.

3. PUBLIC NOTICES, ANNOUNCEMENTS AND COMMUNICATIONS
(a) The chartered accountant should not;

Use means which bring the profession into disrepute
Exaggerate claims for services
Denigate the work of other accountants

(b) The announcements and communications should be with a due sense of responsibility to the profession material should be in good taste both as to the content and presentation
(c) . Appointments of a national importance or awards received should not be used for personal professional advantage.
(d) A chartered accountant should not publicize services in a manner which could be interpreted as seeking to procure professional business.
(e) A chartered accountant and his firm may be listed ill telephone directories but the entry should be limited to information necessary to contact.
(f) The author of books should not give any information as to the services the firm provides.
(g) In professional literature, no information should be given as to the services the firm provides.. .
(h) As regards staff recruitment, information should not contain any promotional element.
(i) The use4 ofCA title on employer’s stationery is permitted. U) In case of greeting and invitation cards no information should be given regarding services that the firm provides.

4. GIFfS AND HOSPITALITY
Acceptance of valuable gifts or excessive hospitality is prohibited.

5. CUSTODY OF CLIENT’S ASSETS .

A chartered accountant in practice should not assume custody of client’s assets unless permitted to do so by law because it may create threats to professional behaviour and objectivity.

The safeguards include:

− Keep client assets separately
− Use such assets for intended purpose only
− Be ready to account for such assets at all times.

State the difference between independence of mind and independence in appearance

Independence of mind

Independence of mind means expression of conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity and exercise objectivity and professional skepticism.

Independence in appearance

Independence in appearance implies avoidance of acts and circumstances that are so significant that an outsider would conclude that integrity and objectivity of the chartered accountant or professional skepticism has been compromised.

Discuss threats to independence in case of:
1. Financial interests
2. Loans and guarantees
3. Close business relationship with assurance client
4. Family and personal relationships
5. Employment with assurance client
6. Recent services with assurance clients
7. Long association of senior personnel with assurance clients
8. Provision of non assurance services to assurance clients:
(a) Preparing accounting records and financial statements
(b) Valuation services
(c) Provision of taxation services to financial statement clients
(d) Provision of internal audit services to financial statement audit clients
(e) Provision of IT System services to financial statement audit client
(t) Temporary staff assignment to financial statement audit client
(g) Provision for litigation support services to financial statement audit clients.
(h) Provision of legal services to financial statement clients
(i) Recruiting senior management
(j) Corporate finance
(k) Fees and pricing
(1) Gifts and hospitality
(m) Actual or threatened litigation

1. FINANCIAL INTEREST

The degree of financial interest should be considered One type of financial interest is that the individual has to control over the financial interest held. For example, a mutual fund or unit trust or similar intermediary vehicle. Another type of financial interest is where the individual has control over the financial interest, for example, a trustee who is able to influence investment decision.
When control exists, the financial interest is considered direct. Conversely when the holder of financial interest has no ability to exercise such control, the financial interest is considered to be indirect.
If a member of the engagement team or their immediate family member, has a direct financial interest or a material indirect financial interest,· in the assurance client; the only safeguards available are:
(a) Dispose of the financial interest prior to the individual becoming a member of the assurance team;
(b) Remove the member of the assurance team from the assurance engagement.

Self interest threat may be created by the fmancial interests of individuals outside the assurance team and their immediate and close family members. Such individuals include:
Partners and their immediate family members who are not members of the engagement team Individuals who have a close personal relationship with a member of the assurance team.

2. LOANS AND GUARANTEES

A Loan, or guarantee of a loan, from an assurance client that is bank or a similar institution, to a member of the assurance team or their immediate family would not create threat to independence provided the loan or guarantee is made in the normal lending procedures and terms. Examples of such loans include home mortgage, bank overdraft, car loans and credit card balances.
If a member of the assurance team makes a loan or accepts a loan from an assurance client, which is not a bank, the selfinterest threat is created.

3. CLOSE BUSINESS RELATIONSHIP WITH AN ASSURANCE CLEINT

A close business relationship between a member of the assurance team and the assurance client or its management may create selfinterest threat. For example:
(a) Having a material financial interest in a joint venture with the assurance client.
(b) Arrangements to combine one or more services or products with the assurance client and to market the package with reference to both products.
(c) Distribution or marketing arrangement
In the above circumstances, the possible courses of action are:

(a) Terminate the relationship
(b) Reduce the magnitude to an immaterial level
(c) Refuse to perform the engagement

Purchase of goods or services from client at fair values, will not generally impair independence .

4. FAMILY AND PERSONAL RELATIONSHIPS

When an immediate family member of a member of assurance team is a director, officer or an employee of the assurance client in a position to exert direct and significant influence over the subject matter information the threat to independence can only be reduced by removing the individual from engagement team. (For example, spouse)
When a close family member of a member of assurance team is a director, officer or an employee of the assurance client is in a position to exert direct and significance influence over the subject matter information the threat to independence depends upon:
(a) The position the close family member holds with the client
(b) The role of the professional on the assurance team.

The safeguards include:

(a) Removal of the individual from the engagement team
(b) Structuring the responsibilities of the assurance team
Consideration should also be given as to whether the self interest, familiarity or intimidation threats are created by personal or family relationships between a partner or employee of the firm who is not a member of the assurance team and a director or officer of the assurance client.

5. EMPLOYMENT WITH ASSURANCE CLIENT

Independence of a member of the assurance team may be threatened if a director or officer of the assurance client has been a member of the assurance team of partner of the firm.

6. RECENT SERVICES WITH ASSURA: TCE CLIENT

To have a former officer or director of the a surance client serve as a member of the assurance team may crea e eif-interest, selfreview and familiarity threat . part”c larl; hen a member of assurance team has to report on a ad prepared.

If during the period covered by the assurance report, a member of the assurance team has served as an officer or director of the assurance client the treat created would be so significant that no
safeguards could reduce such threat.

Consequently such individual should not be assigned to the assurance team. If, prior to the period covered by the assurance report, a member of the assurance team had served as an officer or director of the assurance client, independence, may be impaired.

7. LONG ASSOCIATION OF SENIOR PERSONNEL WITH ASSURANCE CLIENTS
Using the same senior personnel on an assurance client over a long period of time may create a familiarity threat depending upon the length of time, role of the individual, and structure of the firm.

The safeguards include
− Rotating the senior personnel
− Involving additional chartered accountant
− Quality control review

Financial statement clients that are listed entities

Using the same engagement partner of the same individual responsible for the engagement quality control review= on a financial statement audit over a prolonged period may create a familiarity threat. This threat is particularly relevant in the context of the financial statement audit of a listed entity and safeguards should be applied in such situations to reduce such threat to an acceptable level. Accordingly in respect of the financial statement audit of listed entities the chartered accountants in practice shall take cognizance of the following requirements of the Code of Corporate Governance:
(a) All banks DFIs are required to ensure that the external auditors are rotated on expiration of five years. In case of banks / DFIs having two audit firms jointly auditing their accounts and both of them complete their five years period at the same time, one of them will be rotated 0 completion of five years and the other one in the year.
(b) All listed companies in the financial sector shall change their auditors every five years. Financial sector for this purpose means Non-Banking Finance Companies (NBFCs), Modarabas and Insurance Companies.
(c) All listed companies other than those mentioned at (a) and (b) shall at a minimum rotate the engagement partner after every five years.
(d) A partner rotating after five years should not resume the lead engagement’ partner role until a further period of time, normally two years has elapsed.

8. PROVISION OF NON – ASSURANCE SERVICES TO ASSURANCE CLIENTS

Provision of non assurance service to assurance clients are beneficial for audit firm as t he assurance team will have more in
depth knowledge about the client. Assurance clients value the benefits that are derived from having these firms which have a good understanding of the business as they bring knowledge and skill to bear in other areas. However, such services may create self-interest or self review threats particularly when the firm is
involved in:

− Authorizing or executing a transaction
− Determining which recommendations of the firm should be implemented.
− Reportingin a management role.

The safeguards are:

Avoidance of making management decisions for the management client or assuming responsibility for such decisions.
Discussing independence issues with those charged with governance. Involving additional chartered accountant outside the firm. Disclosing to those charged  the goverment and fees charges Personnel providing non assurance services should not participate in the assurance engagement.
(a) Preparing accounting records and financial statements Assisting financial statement audit client in preparing accounting records or financial statements may create a self-review threat. If the audit firm providing such assistance make management decisions, the self review threat could not be reduced to an acceptable level by any safeguards. Consequently, personnel  should not make such decisions. Examples of such management decisions include:
Determining or changing journal entries, or the classification of accounts, or other accounting records without obtaining approval of the client.

Authorizing transactions

Preparing source documents or originating data If the auditor gives significant input regarding accounting policies and disclosures, the appropriateness of control and methods used in determining amounts of assets and liabilities, the firm’s independence is not threatened. These services are normal part of audit process.
Self – review threat also occurs when a chartered accountant, for example develops and prepares prospective financial information and subsequently provides assurance on such information. Financial statements audit client that are not listed companies The firm, or a network firm, may provide a financial statement audit client that is not a listed entity with accounting and bookkeeping services, including payroll services, of a routine or
mechanical nature, provided any self-review threat created is reduced to an acceptable level. Examples of such services include:
Recording transactions for which the audit client has determined or approved the appropriate account classification;
Posting coded transactions to the audit client’s general ledger;

Preparing financial statements based on information inthe trial balance; and  Posting the audit client approved entries to the trial
balance. The significance of any threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:
Making arrangements so such services are not performed by a member of the assurance team; Implementing policies and procedures to prohibit the individual providing such services from making any managerial decisions on behalf of the audit client;
Requiring the source data for the accounting entries to be originated by the audit client; Requiring the underlying assumptions to be originated and approved by the audit client; or Obtaining audit client approval for any proposed journal entries or other changes affecting the financial statements.

(b) Valuation services

If the valuation is material and involves significant subjectivity, self-review threat cannot be avoided. Such services should therefore not be provided or the audit should not be accepted. If the valuation is not material and does not involve significant subjectivity, self-review threat can be reduced by taking following safeguards: .
Involving another chartered accountant who is not a member of the assurance team Obtaining audit client’s acknowledgement of responsibility for the results of the work performed by the firm.
Personnel providing such services do not participate in audit engagement.

(c) Provision of taxation services to fmancial statement clients Provision of taxation services are not considered a threat to independence.
(d) Provision of internal audit services to financial statement audit clients Provision of internal audit services to financial statement audit clients creates a self-review threat.
Internal audit services relating to operational audit are not considered to be threat of self – review. Services involving an extension of the procedures required to conduct financial statement audit in accordance with ISAs are not considered to impair independence provided that firm’s personnel do not act in capacity equivalent to a member of audit client management.
When an audit firm provides assistance in the performance of a financial statement audit client’s internal activities or undertakes the outsourcing of some of the activities, self-review threat may be reduced by ensuring that there is a clear separation between the management of internal audit by client management and the internal audit activities themselves.

Safeguards include:

(a) The client is responsible for internal audit activities and acknowledges its responsibility for maintaining a system of internal control.
(b) The client designates a senior official to be responsible for internal audit activities
(c) The client approves the scope and frequency of internal audit work.
(d) Internal audit services should be provided by only by personnel not involved in audit.
(e) Provision of IT System Services to financial statement audit client Provision of IT services by a firm to financial statement audit client that involves design and implementation of financial information technology system to prepare financial statements may create self – review threat.

Safeguard include:

(a) The client acknowledges its responsibility for maintaining internal control system
(b) The client designates a senior official to be responsible for making all management decisions with respect to the design and implementation of IT system.
(c) The client is responsible for the data generated by the system
(f) Temporary staff assignment to financial statement audit client Temporary staff assignment to financial statement audit client may create self – review threat if the person is in a position to influence preparation of financial statements. In practice such assistance may be given in emergency situations.

The safeguards are:

(a) The firm personnel should not be involved in management decisions, approval of documents and exercising discretionary authority to commit the client.
(b) The client should acknowledge its responsibility for direction and supervision the activities of the audit firm.
(g) Provision for litigation support services to financial statement audit clients Provision for litigation support services to financial statement audit clients (e.g., acting as an expert witness, calculating damages receivable or payable as a result of litigation) may create self – review threat. The effect is on disclosures reflected
in fmancial statements.

The safeguards are:

(a) Avoidance of making management decisions on behalf of clients.
(b) Using personnel who are not the members of engagement team
(c) Involvement of others, such as experts.
(h) Provision oflegal services to financial statement clients The provision of legal services may create both, self-review threat and advocacy threat.

The safeguards are:

Avoidance of making management decisions for the client or assuming responsibility for such decisions. Discussing independence issues with those charged with governance Discussing to those charged with governance the nature and fees charged
Personnel providing non assurance services should not participate in the assurance engagement

(i) Recruiting senior management

Recruiting senior management involved in preparation of financial statements may create self-interest, familiarity and intimidation threats. The safeguard is that the audit firm should not make management decision (for example, to whom to hire should be left to the client).

U) Corporate finance

In case of certain corporate finance services (for example, underwriting of shares) the threat to independence is so significant that no safeguards could reduce the threat to acceptable level.
Other corporate finance services may create advocacy or selfreview
threats. However safeguards may be available to reduce threats to acceptable level. Example of such services include developing corporate strategies, assisting in identifying possible sources of finances and suggesting debt: equity ratios. Safeguards that should be considered include Avoidance of making managements decisions for the management client or assuming responsibility for such decisions.
Personnel providing non assurance services should not participate in the assurance engagement.

(k) Fees and pricing

Relative size

If the total fee received from one client represents a large portion of a firm’s total fees may create a self-interest threat. The safeguards include:

Discussing the extent and nature of fee charged with those charged with governance .

• Consulting ICAP
• External quality control review
• Overdue fees
•Overdue fees may create self-interest threat.

The safeguards are:

• Discussing the level of outstanding fee with those charged with governance.
• Involving an additional chartered accountant to provide advice. .
• Overdue fee may be regarded as loan to client, particularly if the fee remains unpaid for long time

• Contingent fees
•Contingent fee create self – interest and advocacy threat that cannot be reduced to an acceptable level. Accordingly the audit
firm should not enter into such fee arrangement.

(I) Gifts and hospitality

Gifts and hospitality may create self-interest and familiarity threats. The audit firm and members should, therefore not accept such gifts.
(m) Actual or threatened litigation Actual or threatened litigation may create a self-interest or intimidation threat.

Safeguards include:

(a) Disclosing to those charged with governance the extent and mature of the litigation Removing the individual from assurance team Involve additional chartered accountant who was not a member of assurance team If the above safeguards cannot be reduce the threat, the auditor should withdraw from engagement.

Discuss requirement of ICAP code of ethics as regards chartered accountants in business relating to following threats and relating safeguards:
(a) Self- interest
(b) Self-review
(c) Advocacy
(d) Familiarity
(e) Intimidation

a) SELF INTEREST THREAT

− Financial interest, loans and guarantees
− Incentives
− Inappropriate personal use of company assets
− Employment security

(b) SELF REVIEW THREAT

Self review threat arises when the business decisions or data being subject to review by the same chartered accountant in business responsible for making those decisions or preparing that data.

(c) ADVOCACY THREAT

Advocacy threat does not arise when the chartered accountant in business may promote the organization’s business in achieving its goals

(d) FAMILIARITY THREAT

Familiarity threat arises when (a) a chartered accountant in business is in a. position to influence financial reporting or business decisions having a family member who is in a position to benefit from that influence. (b) acceptance of excessive gifts or preferential treatment.

(e) INTIMIDATION THREAT

Example of intimidation threat is threat of dismissal over disagreement with accounting policy.

SAFEGUARDS

Safeguards fall into two categories:
(a) Safeguards created by the profession, legislation and regulation
(b) Safeguards in the work environment
Examples of safeguards in the work environment are:

• Code of ethics of the entity
• Commitment to competence
• Strong internal controls
• Disciplinary procedures

Discuss how potential conflicts may arise for chartered accountants in business and related safeguards

Potential conflict with fundamental principles may arise when a chartered accountant in practice may face pressures to:

− Act contrary to laws and regulations
− Act contrary to IFRS
− lllegal earnings management
− Mislead auditors and regulators
− Misrepresent facts in financial or non financial information
− Safeguards include:
− Obtain advice within the entity or ICAP
− Seeking legal advice

What matters a chartered accountant in business should consider relating to:
(a) Preparation and reporting information
(b) Acting with sufficient experience

(a) Preparing and reporting information

The information should be prepared fairly, honestly and in accordance with relevant professional standards Threats to compliance with fundamental principles may be created where the chartered accountant in business is pressurized for misleading information.
Safeguards include consultation with superiors in the entity or with ICAP
Where it is not possible to reduce the threat to ‘an acceptable level and the information is significant and persistently incorrect:

Consider informing appropriate authorities

Seek legal advice

(b) Acting with sufficient experience

The chartered accountants in business should undertake only those assignment where they possess sufficient training and experience. The employers should not be misled about expertise or experience. Also appropriate expert advice should be obtained when required.
Circumstances that threaten the chartered accountant in business to perform duties with professional competence and due care include:

• Insufficient time to perform the tasks
• Inadequate information
• Insufficient experience and training
• Inadequate resources
• Safeguards include:
• Additional training
• Ensuring that adequate time is available
• Obtaining assistance from someone with necessary expertise
• Consulting with superiors

If threats cannot be reduced to acceptable level the chartered accountant should consider refusal to take up the task.

What ethical issues are to be considered regarding financial interest and documents relating to chartered accountants in business.

FINANCIAL INTERSTS

Financial interest of chartered accountant in business may create threats to objectivity or confidentiality through the existence of opportunity to manipulate information in order to gain financially.

Examples are:

• Holds financial interest in the entity and the value of that financial interest could be directly affected by decisions made by the chartered accountant in business.
• Profit related bonus
• Holds share options
• Safeguards include:
• Policies and procedures to determine form of remuneration of senior management
• Disclosure of all relevant interests
• Consultation with superiors in the entity
• nternal and external audit

INDUCEMENTS

Receiving offers

A chartered accountant in business or his close family members may be offered gifts or preferential treatment. Offers of inducements may create threats to compliance with the fundamental principles. Self interest threats to objectivity or confidentiality are created where an inducement is made.

The chartered accountant in business should take safeguards to reduce the threats. When threats cannot be reduced the inducement should not be accepted.

The safeguards are:

When such offers are made, immediately inform higher level of management Inform third parties of the offer, for example professional body or the employer of the individual who made the offer. However before taking such step consider seeking legal advice. Making offers
A chartered accountant in business may be required to offer inducements to influence the judgment of another person or obtain confidential information. A chartered accountant in business should not associate himself for making such inducements.

Why independence is necessary for assurance clients?

Assurance engagements are designed to enhance intended user’s degree of confidence about the outcome of the evaluation or measurement of a subject against criteria. The confidence is enhanced only if the chartered accountant is independent.

Explain your understanding of subject matter information.

The outcome of the evaluation or measurement of a subject matter is the information that results from applying criteria to the subject matter. The term “subject matter information” means the outcome of the evaluation or measurement of subject matter.

For example:

The recognition, measurement and disclosure represented in financial statements (subject mutter information) result from applying financial statement framework for recogmnon, measurement and disclosure, such as IFRS to financial statements (subject matter).
An assertion about the effectiveness of internal control (subject matter information) results from applying for evaluating effectiveness of internal control such as COSO (criteria) to internal control, a process (subject matter).

Discuss pros and cons of allowing auditor to perform other services for the audit client

Arguments against providing other services
1. Independence is impaired.
2. Continuity of staff may be a problem. The same staff may not be available at all times for a specific client.
3. Frequent changes in the audit firm’s management. This would involve extra learning time whenever there is a change of staff or audit manager.

Arguments for providing other services to an audit client 

1. Special expertise is available as the auditor has experience with many other companies.
2. The client can save costs as some of the audit and other services
provided by the auditor may contribute to the purpose of another. Certain aspects of other services may be useful to carry out audit procedures.
3. Small entities may not afford to hire qualified accountants on a permanent basis. Appointment of external auditors may be economical and more professional advise may be available.
4. The audit firms will get additional busines .
5. The loss of independence may be compensated if different staff and partners are .responsible to carry ou a dit and those responsible to perform related services.

What constitutes “compilation services”?

Compilation services include assisting the client in:
(a) Writing up books of accounts
(b) Extracting a trial balance
(c) Preparing financial statements.

The auditor of a limited company is also auditor of partnership firm for year ended December 31, 20×7. On January 7, 20×8, there was a fire which destroyed all stock of the firm (uninsured), amounting to Rs. 40 million. Total assets of the firm including stocks were Rs. 60 million. The firm owes Rs. 25 million to the company. Total assets of the company are Rs. 200 million and net profit before making any allowance for doubtful accounts is Rs. 26 million.
The directors of the company being not aware of the serious subsequent event have not made any allowance for bad debts against the firm. The auditor has completed the audit fieldwork of the company by April 

4, 20×8. He has recommended the management of the company an audit adjustment for increasing the allowance for bad debts. In order to convince the justification for such adjustment can he disclose the weak financial position of the firm to the management of the company?

The auditor has a duty of confidentiality and therefore he should not
disclose the weak financial position of the firm to the limited company. He should however, recommend the provision on the grounds that there have been no subsequent collections from the firm. If this argument is not accepted by the management of the company as they contend that the firm may be slow payer as in the past but has never ever committed a default, the auditor will be in a delicate situation. If he qualifies and discloses the fact to the company he will be guilty of breach of code of ethics. If h re igns he will have to give reasons for resignation. If he issues unqualified opinion, he will be liable for knowingly issuing an inappropriate audit opinion.In such a case the auditor should take advice from the regulating authority or delay the audit if possible, till it becomes more evident that a write off is appropriate

Set out briefly legal, ethical and commercial requirements in acceptance of client

Legal

Appointment is valid in accordance with Companies Ordinance, 1984 Ethical

Independence requirements

Avoidance of conflict of interest such as advising two clients who are competitors

Ability to serve

Fee is not to large to avoid under dependence

Commercial

– Adequacy of fees

What matters are relevant as regards audit fee?

• Fees should be mentioned in engagement letter
• Fees should not be charged on percentage or contingency basis.
• Where fee is not agreed before hand the auditor should charge the fee based on time spent.
• Undercutting may be allowed if:
a) Client is not misled as to the precise range of ervices that the quoted fees covers and
b) client is not misled for unsatisfactory
• If the auditor faces litigation for un an – a suspiciously 10 v fee is taken into account.

What are the restrictions in exercising lien over books of accounts for non payment of fees?

• An auditor has a particular lien over books and records, i.e., he can retain those books on which he has performed the work.
• The books and records must have come into auditor’s possession lawfully
• Fee note must have been raised
• Fee is not under dispute
• Lien cannot be exercised on those books which the company has to maintain by law.

What do you understand by the concept of self-regulation?

Self-regulation implies rrummum interference by Government in
regulating the accounting profession.

The professional bodies themselves:

• Prepare drafts of bye laws for the members and get approval of members
• Prepare quality controls guidelines for auditors
• Monitor quality controls
• Conduct examinations
• Monitor training requirement of students
• Monitor updated education for members
• Investigate complaints against auditors
• Take appropriate action against members for negligence and non compliance of code of conduct

If following authorities ask the auditor to disclose confidential
information about a client for ~iispected fraud or illegal act, should the auditor disclose the information?
(a) Police
(b) Tax authorities
(c) Court

(a) The auditor should see whether statutory documentation has been provided to disclose information and the information is requested by appropriate authofities.
(b) Tax authorities generally have powers under tax laws to demand
information both from the client and the auditor
.(c) The auditor is under obligation to provide information ordered by
the court.

Suggest some measures to be adopted by an audit firm to mmmuze litigations

Certain measures that the auditor should adopt to minimize litigation
claims include:
1. Obtain sufficient appropriate audit evidences
2. Carry out risk assessment procedures
3. Discuss with the staff the major risk areas
4. Study and evaluate internal controls
5. Consider compliance with laws and regulations
6. Carry out audit with an attitude to professional skepticism
7. Consider unusual relationship among data
8. Review the,work of assistants
9. Ensure that all outstanding matters have been satisfactorily resolved or reflected in audit opinion
10. Ensure adequate documentation of work performed including basis for selection of samples
11. Complete disclosure checklist
12. Carry out tests for subsequent events
13. Modify and extend audit procedures where suspicion arises
14. Verify compliance of accounting standards
15. Modify the opinion in case of material disagreement or scope limitation
16. Consider substance of transactions rather than apparent narration given
17. Compulsory CPD hours

What do you understand by the term “due diligence” in the context of mergers and acquisitions?

Due diligence is an independent investigation of the financial position of an enterprise at the request of acquirer of the business. Although, the auditor may not give any opinion as to the fair value of business, the process assists the proposed acquirer to decide upon the price to be paid for acquisition of an entity.
The auditor does not normally carry out detailed tests and tests of controls. Audit conclusions are based on inquires and analytical procedures. The auditor does not advise whether or no to take over the business. Only relevant and significant facts are disclosed to the proposed buyer. The focus is on those areas which may not be revealed by financial audit. For example:
• Whether the buyout will affect customer base of the entity being purchased?
• Whether existing key personnel will be willing to continue with new
management?
• Events subsequent to completion of financial audit.
• How the guarantees issued and other commitments made by the acquired entity will be dealt with?
• What will be tax impact of take over, particularly if there are carry forward losses?
• Based for ascertaining fair value.

What is professional clearance letter? Why is it required?

lCAP Ordinance provides that a position as auditor previously held by soine other member without first communicating with him would render a member guilty of professional misconduct.
In this regard ATR – 2 issued by lCAP is reproduced below: The strict meanings of the word is to “impart”, inform, convey, converse” and the impression created is that a member simply informs an other member of his appointment as auditor. Having complied with this professional courtesy, no further action is deemed to be called for. However, professional courtesy is not the end in itself. A beginning is made with the courteous approach but the major reason for doing so is to enable the member to ascertain why the change has been contemplated. There may be good reasons for the change e.g., the company may have changed hands and the group may wish to appoint the group auditors; the registered office may be transferred to a different location where the auditor may not have an office, relations may be strained and a break may be in the best interest of the auditor and the client. On the other hand the existing auditor may have taken a stand on an important matter of principle with which the client disagrees or may have been performing his duties with integrity which the client does not fmd acceptable. It is in such circumstances that the importance of communication arises and the incoming auditor must be fully informed to enable him to decide for himself whether or not it is professionally desirable for him to accept the nomination. Changes are sometimes made because the proposed auditor is agreeable to charge a lower fee than the existing auditor is. This practice must be frowned upon and calls for disciplinary action in view of the provisions of C.A. Ordinance.

Communication is essential because:

a) The legitimate interest of the public has to be considered and protected;
b) The interest of the incoming auditor has to be safeguarded; and
c) The integrity, independence and interest of the existing auditor must not, in any circumstances, be prejudiced.

Before accepting an appointment what matters should the proposed auditor consider as regards communication with existing auditor? What are the duties of the existing auditor in this context?

1. Before accepting an appointment involving recurring professional services hitherto carried out by another chartered accountant in practice, the proposed chartered accountant inpractice should:-
(a) Ascertain if the prospective client has advised the existing accountant of the proposed change and has given permission  preferably in writing, to discuss the client’s affairs fully and freely with the proposed chartered accountant in practice.
(b) When satisfied with the reply received from prospective client, request permission to communicate with the existing chartered accountant. If such permission is refused or the permission referred to in (a) above is not given, the proposed chartered accountant in practice should, in the absence of exceptional circumstances of which there is full knowledge, and unless there is satisfaction as to necessary facts by other means, decline the appointment.
(c) On receipt of permission, ask the existing accountant, preferably in writing:-
(i) to provide information on any professional reasons which should be known before deciding whether or not to accept the appointment and, if there are such matters; and
(ii) to provide all the necessary details to be able to come to a decision.
2. The existing accountant, on receipt of the communication referred to above should forthwith: (a) Reply, preferably in writing, advising whether there are any professional reasons why the proposed chartered accountant in practice should not accept the appointment.
(b) If there are any such reasons or other matters which should be disclosed, ensure that the client has given permission give details of this information to the proposed chartered accountant in practice. If permission is not granted the existing accountant should report that fact to the proposed chartered accountant in practice.
(c) On receipt of permission from the client, disclose all information needed by the proposed chartered accountant in practice to be able to decide whether or not to accept the appointment and discuss freely with the proposed chartered accountant in practice all matters relevant to the appointment of which the hitter should be aware.

If the proposed auditor does not receive, within reasonable time, reply from the existing auditor, what course of action should be taken by the proposed auditor?

If the proposed chartered accountant in practice does not receive, within a reasonable time, a reply from the existing accountant and there is no reason to believe that there are any exceptional circumstances surrounding the proposed change, the proposed chartered accountant in practice should endeavour to communicate with the existing accountant by some other means. If unable to obtain a satisfactory outcome in this way, the proposed chartered accountant in practice should send a further letter, stating that there is an assumption that there is no professional reason why the appointment should not be accepted and that there is an intention to do so.

A number of threats exist against compliance of ethical code.

For example:

1. Familiarity threat
2. Self review threat
3. Advocacy threat
4. Self interest threat
5. Intimidation threat

Identify type of threat in the following situations:

(a) Undue dependence on one client
“(b) Threat for dismissal.
(c) The auditor finds a significant error during the audit. The error was committed by the auditor when he was involved in writing up books of accounts.
(d) Commenting on future of project in a published prospectus.
(e) Close business relationship with client.
(f) In case of an employee, ifbonus is based on performance.
(g) Involvement in design of internal control and subsequently
reporting over effectiveness of such controls.
(h) Pressure to reduce the extent of audit procedures to reduce the fees,
(i) Long association with a client.
G) Acting as lawyer on behalf of client in litigation with third parties.
(k) Threat by the client for litigation proceedings.
(l) Excessive hospitality.
(m) Acceptance of offer in a client by a former partner.
(n) Significant long outstanding fee.
(0) Auditor provides assistance to management in the preparation of
forecast.
(q) Promoting the client’s position to prospective lenders and shareholders.
(r) Providing valuation service.
(P) Personal relationship of a senior staff member with the client to the extent that the staff may not use professional skepticis
(q) Personal relationship of a senior staff member with the client to the extent that the staff may not use professional skepticism.
(R) Charging fee for custody of documents of clients. Charging referral fee..

1. Familiarity three
(a) (e) (i) (j) (m) (r)

2. Self review threat
(c) (g) (0) (q) (s)

3. Advocacy threat
(d) (j) (P)

4. Self interest threat
(e) (f) (n) (t)

5. Intimidation threat
(b)(h)(k)

What do you understand by money laundering?

Money laundering involves concealment of proceeds of criminal
activities. The cash received is transformed in a way that it appears to be genuine income. Thus an, attempt is made to conceal the cash received from illegal activities such as during trafficking, smuggling or bribes. The money is kept in financial products like travelers cheques, unit trusts or life policies. A series of transactions are created without any business rationale to conceal the origin of the source of income.

What matters the audit firm should consider to avoid offence for money laundering?

(a) A chartered accountant should avoid advising on use of criminal proceedings. Failure to comply with regulatory requirements for money laundering may make the auditor liable for offence. .
(b) Carry out client’s acceptance and continuation procedures.
(c) Establish firm’s policies to comply with regulatory requirements.
(d) The auditor should be alert for suspicious dealings relating to money laundering.
(e) The staff should be adequately trained to be cautions against money laundering.

State some of the matters to be considered as regards advertising and publicity in accordance with ICAP code of ethics

1. Advertising should not be misleading
2. Should be in compliance with local regulations
3. Should be in good taste
4. Should not make false claims
5. Should be truthful
6. Should not make any disparging remarks about other firms, for example “we are the best service providers”.

What do you understand by “lowballing”?

Lowballing refers to quoting a significant low fees to get the tender and then recover the difference by excessive charge for management consultancy or taxation services. Also, the fees are raised in subsequent years to make good the loss.

A prestigious company has approached your firm to accept appointment as its external auditor, State the matters that your firm should consider before accepting the engagement?

Before accepting the audit, our firm should consider the following:

(i) Whether the firm is technically competent to act as auditors?
(ii) Does it possess the resources necessary to carry out the engagement?
(iii) Could there by any self interest threat involved?
(iv) Are there any professional reasons for not accepting the engagement?

(a) Briefly highlight the management’s responsibilities relating to the financial statements?
(b) During the audit team planning meeting, a member of the audit team passed a comment that based on past experience with the client, he was confident that the management of the client was honest and there was no issue as regards management integrity or risk of fraud in the Company. The audit manager responded that the auditor should always maintain an attitude of professional skepticism throughout the audit.

Required

Briefly describe ‘Audit Skepticism’ and elaborate on the response of the audit manager.

(a) The management’s responsibilities in relation to the financial statements include the following:
The overall responsibility for the preparation and presentation of the financial statements. Identifying the financial reporting framework to be used in the preparation and presentation of the financial statements. Designing, implementing and maintaining internal controls relevant to the preparation and presentation of financial statements that are free from material misstatement whether due to fraud or error.
Selecting and applying appropriate accounting policies. Making accounting estimates that are reasonable in the circumstances.
(b) Audit Skepticism Audit skepticism is an attitude of professional skepticism which means that the auditor should recognize the fact that circumstances may exist that may cause the financial statements to be materially misstated. Consequently, he should make a critical assessment with a questioning mind of the validity of
audit evidence obtained. He should remain alert to audit evidence that contradicts or brings into question the reliability of documents and responses to inquiries and the reliability of other information obtained from management and those charged with governance. Elaboration on the response of the audit manager that auditor should always maintain an attitude of professional skepticism throughout the audit:
Although the auditor cannot be expected to disregard past experience of the honesty and integrity of the entity’s management and those charged with governance, the auditor’s attitude of professional skepticism is particularly important in considering the risks of material misstatement on account of changes in circumstances

Does the appointment of an auditor for lATA requirements require approval or ratification by shareholders?

Appointment of an auditor for lATA requirements is not a statutory appointment. It is an appointment by the directors and does not require approval or ratification by the shareholders. It will, therefore, be considered as a non-statutory audit different from what is required under the Companies Ordinance, 1984.

XYZ & Co., a firm of chartered accountants has four partners each having independent charge of different offices. Mr. A is a chartere accountant practicing as sole proprietor under the name and style of A & Co.,”
XYZ & Co., admits Mr. A as partner in its partnership with a condition that he shall change the name of his existing office in the name of XYZ &Co.
Before this arrangement the audits were accepted by Mr. A under the name “A & Co.”

Explain whether:

1. Mr. A should continue to complete his previous assignments as a sole proprietor (besides being partner in XYZ & Co.) particularly in case of limited companies, where his appointment as auditor has been made as a sole proprietor under the name “A Co.”

2. Mr. A shall complete his previous assignments under the name : and style of new partnership.

3. Despite the fact that he has merged· his sole proprietorship with XYZ & Co., a partnership firm and changed the name of his office, he shall complete the previous assignments as Mr. A
(although the appointment was made as “A & Co.” and now he is partner ofXYZ & Co.)

A member in practice intending to join a partnership may associate himself with two firms including his own sole-proprietary concern. It would be advisable that Mr. A should continue with his sole proprietary concern till he completes the existing audits. Discontinuation of audit practice of Mr. A would cause a casual vacancy to exist on the audit assignments of companies for which the audit report has not yet been issued.

At times an auditor has to face a situation where company and its bankers are involved in litigation. In such a situation where the company is not willing t 0 forward auditors’ standard request to bankers or the bankers do not reply such request, what is the option for the auditor to report on bank liability and securities held etc

Where the company is not willing to forward auditors’ standard request to bankers, or the banks do not reply such requests, the auditor should not issue an unqualified opinion, as inability t 0 obtain bank confirmation constitutes a scope limitation

Can a CA firm or management consultant use a logo along with its name?

Yes, a logo may be used.

A company has existing statutory auditors. AB & Co. audit firm has been appointed special auditors of said private limited company. AB & Co. has been asked to prepare accounts from books of accounts as of different dates.
AB & Co. has communicated to existing statutory auditors of
appointment as special auditors. Whether AB & Co. can issue accounts as special auditors.

If a firm of chartered accountants is specifically assigned the job of
preparing accounts from books of accounts, it may prepare such accounts as a special assignment even if any other firm of chartered accountants has been appointed as statutory auditors

Discuss possible threats in the context of recruitment for client and temporary staff assignment to clients?

(a) Recruitment for clients

Familiarity

The auditors may not disclose errors malpractices of the employee as they have themselves recruited the staff.

Self interest

The higher the larger will be fee for services. The firm will be more interested in the recruitment {ther than competency of the employee who is recruited. Management function If it appears that the recruit ent involves role of key management which is not permitted.

(b) Temporary staff assignment

Familiarity

Engagement team will not be too critical on the work of employees assigned to client.

Self review
The same staff may be involved in the audit which a self review
threat

The safeguards are:
• Firm’s staff will not be involved in
• Approval of the appointment
• Playing role of management .
• Authority to commit the client with third parties

You are the audit engagement partner for Mubarak Limited (ML), a listed company which is the subsidiary of a company registered in USA. You have received an email from your firm’s tax partner based in Lahore. He has informed you that in a recent meeting with the Chairman of ML in Lahore; he discussed an opportunity to pursue major assignments for the Company. He strongly urged you to have an urgent meeting with the CEO of ML as the company is in discussion with other
firms also and is due to take a final decision soon. The services include Internal Audit Outsourcing and Corporate Finance Services (CFS). CFS mainly involve negotiating the terms of restructuring / re profiling of long-term borrowings obtained by ML from one of its lenders. However, as the audit engagement Partner of Mubarak Limited you are of the opinion that it would not be possible for you to provide the above services.

Required

Write a comprehensive letter to the client explaining your point of view, giving appropriate reasons and references to the relevant standards and regulations.

Under the listing regulations of the stock exchange, the external auditors of listed companies are prohibited to provide internal audit services to listed companies, which are being audited by them .
The Code of Corporate Governance has placed certain restrictions on the external auditors and restricts the listed companies from appointing their auditors to provide services in addition to audit except in accordance with listing rules and requires the auditors to observe applicable IFAC guidelines in this regard and to ensure that the auditors do not perform management functions or make management decisions, responsibility for which remains with the management of the listed company. Also, according to ICAP code of ethics provision of corporate finance services to an audit client may create self advocacy and self-review threats. In the case of proposed corporate fmance service, the independence is impaired and there are no safeguards that could reduce the threat to an acceptable level. A self-review threat may be created when a firm provides internal audit services to an audit client.
The negotiation with the Company’s banker is purely a management
function and cannot be undertaken by the audit firm as it will be a violation of the listing rules and code of corporate governance. ML is a subsidiary company based in US which is subject t 0 US SEC Rules. The auditor will also need t 0 refer to the SEC to find out services allowed by external auditors to audit client

It was a long engagement for which you had to move out of the city of your residence. Consequently, a number of people around you, including family, friends and colleagues, are aware of the fact that you were job in charge on the said audit. Some of them are interested in having certain information as discussed below:
(a) One of your close relative has got an offer for appointment as director marketing of the said client. He wants to be aware of the levels of remuneration at comparable positions in order to negotiate his remuneration properly.
(b) A manager in your firm (other than the engagement manager for the said client) has inquired about the internal controls in place, in respect of a specific process. Assuming that the same would be effective, he intends to recommend the same as best practice to a local pharmaceutical client.
(c) Your sister has asked you about the ingredients of a specialized nutritional product for children, being marketed by the company, which she is using for her child. You are aware of all the details about the said product, as you got the opportunity to perform tests on the costing of that product.
(d) One of your friends is working in the Ministry of Health,Government of Pakistan. He has asked you as to whether the 
company has complied with certain statutory requirements. You are aware of the fact that the company is not complying with the same and you have already included the matter in the management letter. With reference to specific provision of law, he has convinced you that it is his duty to enquire about the same, and you are responsible to disclose the relevant information to the Ministry. He has also informed you that incase of no response, you may be served with a legal notice.
(e) Your younger brother intends to commence distribution business. He has asked you about the rate of commission and volume rebates being allowed by the said client to its distributors, as he wants to work out the feasibility of-business.
(f) Your father invests his surplus funds in the capital market. Being aware of the fact that companies like that always have a five to ten year’s plan in place. He has asked you about the trend of earnings per share of the said company for the last five years, and the expected growth in the net profits for t he next five years. 

Required

Discuss each situation to conclude as to whether or not you can provide the requisite information and the extent to which the same can be disclosed without compromising the professional ethics. Support your conclusions, with appropriate arguments. 

(a) Remuneration of the chief executive is a public information in case of listed company, and can be disclosed.
As regards executive directors, the information should not be disclosed. The disclosures in the financial statements are made on aggregate only.
(b) Information cannot be provided as the confidentiality is applicable even in case of staff within the firm
(c) Information can be disclosed if it is made public by the company.
(d) Confidential information may be required to be disclosed if:
(i) Permitted by law and authorized by the client
(ii) Required by the law
(e) Information cannot be disclosed.
(f) Historical earnings per share can be disclosed as it is public information. Projections should not be disclosed.

You are the partner in charge of your Firm’s risk management department and in the said capacity your responsibilities interalia include advising the firm’s engagement partners / managers on different aspects of the assurance and non assurance services, in accordance with the applicable regulatory and independence framework. You have been requested for guidance on the following issues:
(i) Olive Limited has appro a ‘ .ed your firm to act as their advisors to the first public issue of the company which shall be sued to finance a new project. Your responsibilities would include drafting the prospectus, assistance in completing listing formalities and negotiations with and appointment of Bankers to the issue. Previously you have also carried out a due diligence exercise in respect of the said project. Olive Limited has suggested different fee levels corresponding to the amount of eventual subscription received.
(ii) Crimson Limited, an unlisted audit client has engaged a software company to automate its accounting and finance functions. The company wants to engage your firm to help in the implementation of the system.
(iii) Your firm has availed credit facility from Rose Bank Limited. You have a long association with the bank and it has also been providing various other services to your firm and its partners. The amount of loan to the firm is approximately one percent of the firm’s total assets. The management of the bank has approached the firm for appointment as statutory auditors.

Required

(a) Advise the concerned partners/managers as regards the acceptance of the above assignments.
(b) Suggest possible modification in the scope or terms of engagement or possible safeguards, if any, to avail the opportunities within permissible limits.

(a) The audit firm can be appointed as advisors to the public issue because Olive Limited is not an audit client. Fee based on amount of subscriptions received is contingent fee and should not be agreed.
(b) The audit firm should not be involved in taking management decisions on behalf of client. Fee should be fixed or based on hours spent.

(ii) (a) The assignment in question may be accepted because the company is unlisted.
(b) Self review treat may be minimized by following safeguards.
Assign different staff members on the audit and on the . assignment requested.

Client should be asked to acknowledge its responsibility for internal controls and make management decisions as regards design and implementation. The client should be responsible to operate the system.
(iii) (a) Companies Ordinance 1984 states that a person who is indebted to the company is disqualified to be appointed auditors.
(b) The firm should settle all dues to the bank

Mr. Omar is incharge of the quality control department of an audit firm. While reviewing the working papers relating to some audit engagements of the firm the came across the following situations:
(i) The spouse of a partner in the firm is a legal consultant and is assisting an audit client of that firm in filing its tax return.
(ii) The audit manager engaged on the audit of a company has been offered a job by that company. He has been asked to join on March 1,2010 when the current CFO would retire. The audit is expected to be completed on December 15,2009.
(iii) A meeting of the CEO of ABC & Company Limited and the audit engagement partner was held to discuss the draft financial statements of the company for the year ended September 30, 2009. Serious difference emerged between the two sides on the accounting treatment and the disclosures of certain items and consequently the CEO informed the engagement partner that unless the auditors agree to the company’s point of view, they would not be reappointed for the next year.
(iv) The engagement partner on the audit of XYZ Limited has been its engagement partner for the past six years.

Required

Identify the category of threat involved in each of the situations described above and explain how would it affect the objectivity and independence of the auditor. Also explain the responsibility (if any) of the firm and the concerned member of the audit firm.

(i) No threat to independence or objectivity.
(ii) A self interest threat exists because subsequent employment with audit client will impair independence and objectivity. Further more in case of listed company in accordance with Code of Corporate Governance an entity cannot appoint a member of the audit team or his close relative as CEO, CFO, internal audit or a
director at any time during two years of his involvement in the audit.
(iii) A threat from CFO in case of disagreement is an intimation threat. The matter should be discussed with audit committee and the auditor may decide to withdraw from the engagement.
(iv) A close relationship arising from prolonged period of time as engagement partner creates a familiarity threat. . In case of listed company, the firm is required by Code of Corporate Governance requires rotation of the partner incharge after five years.

You are a charted accountant in practice. The following situations have arisen in connection with two of your clients?
(a) A multinational company (MNC) which is planning to establish a place of business in Pakistan by forming a public limited company under the Companies Ordinance, 1984, has requested your firm to provide the following services:
(i) Receive the funds remitted by the MNC.
(ii) Make disbursements in accordance with the instructions
of the MNC.

Required

Explain how you would meet your professional obligations and responsibilities while carrying out the above assignment. (b) Your firm is the external auditor of a listed company. Recently the management of the company has requested your firm to provide the following services:
(i) Reconciling the creditors’ ledger with the statements submitted by the suppliers.
(ii) Estimating the compensation payable to the employees who were seriously- injured while carrying out the trial run of the .plant.

Required

Explain the threats involved in accepting the above assignments and identify the steps the firm should take to fulfill its professional responsibilities and obligations.

(i) Following matters should be considered:

An audit firm should not assume custody of client’s monies unless permitted by law.
Safeguards include keeping client’s monies separately from firms’ cash. Be ready to ready to account for such monies, and use such monies for the purpose for which the money has been received.
For large sums auditors should be alert that the money is not derived from illegal sources.
(ii) Accepting such business is not prohibited as MNC is not an audit
client of the firm.
(i) Preparing such reconciliation may create a self – review threat.

The audit firm should not be involved in preparing source documents and authorizing the transactions or making any
managerial decisions. The safeguards include assigning different staff for such services and different staff for audit.

You are the quality control partner in a medium size audit firm and have been asked to give your views on the following situations:
(a) Pentagon Limited, an unlisted assurance client, has requested your firm to assist them in the recruitment of the Chief Financial Officer (CFO) of the company. While short listing the candidates, it was found that the applicants include CFOs of two of your existing assurance clients.
(b) One of your firm’ s large clients, a listed company, has requested that the current year’s audit should be carried out by the same team which audited the last year’s financial statements. The request has been justified on the grounds that the accounts department is extremely busy on a special assignment and a new team would take a lot of their time. You have also been informed that Mr. Shams has been the manager in charge of that audit during the last three years.

Required

Discuss the category of threat involved in each of the above situations. Also explain the safeguards available with the firm which may eliminate or reduce the threat to an acceptable level.

(a)
(i) Recruitment of CFO or other senior management may create current or future self interest threat and familiarity threat.
(ii) Application from CFOs of audit clients creates objectivity threat because the firm performs services for those clients hose interest will be in conflict with Pentagon regarding appointment of
CFOs.
(iii) The safeguards include not to make management decisions and the assignment should be restricted to advising appropriate qualification and making a list of suitable candidates. The audit firm should not take a decision as to the appointment.
(b) Client’s request for staff continuity
The audit firm should ascertain exact reasons requesting certain staff to be assigned to audit. ••ormally such request should not be accepted as it may impair objectivity.
Same senior persons on an audit continuously over a long period may create familiarity threat.

Comment on each of the following independent situations with reference to the applicable rules and regulations.
(a) Waqar is a partner in Sohail and Company, Chartered Accountants, who are the auditors ofWasim Limited for the year 2011. Aqib who was a partner of Waqar in 2008 in his food business, has recently been appointed as a Director of Wasim Limited.
(b) Aleem, Asif and Company (AAC), Chartered Accountants, has accepted an offer for appointment as auditors of Gul Limited (GL). Kamal who is a partner in AAC, held 5,000 shares in GL. Within thirty days of acceptance, he gifted the shares to his son Kamran, who is a manager in AAC.
(c) Sajid, Hameed and Company (SHC), Chartered Accountants, are the auditors of Mir Hasan Limited (MHL). Kashif is a senior
manager in SHC and is being promoted as a partner. He teaches auditing in a college. The college is owned by a trust whose trustees include two directors of MHL.
(d) You have recently signed the audit report of Sadiq Limited. The management has approached you for reduction in audit fee for the next year because the company has been suffering losses for the past three years,
(e) Saleem is a partner in Orange and Company, Chartered Accountants. He also practices as a sole proprietor and has received an offer for appointment as auditor of ~C Financial Services Limited which is a subsidiary of DEF Bank Limited. The balance outstanding against the credit card issued by DEF Bank Limited to a partner of Orange and Company is Rs. 510,500.

(a) Sohail and Company can continue to be the auditor of Wasim Limited. Waqar was a partner of Aqib, two years back, whereas the Companies Ordinance, 1984 restricts only a present partner or the director of a company, from becoming the auditor of that company.
(b) According to the Companies Ordinance, 1984, Kamal should disclose the fact that he holds shares in GL at the time of appointment. His decision to disinvest shares of GL within thirty days is in accordance with the requirements of the Companies
Ordinance, 1984.
Disposal of shares to his son who is the manager in AAC, does not attract any contravention of the Companies Ordinance, 1984 because there is a bar on the holding of shares by the auditor, his spouse and minor children, whoever there is no bar on holding of shares by his son Karnran who has attained the age of majority.
Moreover, the Companies Ordinance, 1934 and the Code of Ethics does not restrict the Manager of the Audit firm from holding shares in the Company. Hence the appointment of AAC as an auditor of GL is in order.
(c) The appointment of Sajid, Hameed and Company (SHC), Chartered Accountants is in order as Kashif is not the employee of any director of the company. He is employed by the trust in which the directors are the trustees.
(d) According to the Code of Ethics a chartered accountant in practice may quote whatever fee is deemed to be appropriate commensurate with the nature and service to be rendered. The Code of Ethics restricts the auditor from quoting lower fees than that charged by the previous auditor. However, there is norestriction as regards reduction in audit fees by the existing auditors.
(e) Orange and Company is not qualified for appointment as the auditor of ABC Financial Services as the credit card balance of a partner exceeds the threshold limit of Rs. 500,000, set by the Companies Ordinance, 1984. However, there is no restriction on the appointment of Saleem, in his sole capacity, as an auditor of ABC Financial Services Limited as Orange and Company and his Sole Proprietorship firm are separate entities.

Posted on November 4, 2015 in ICAP Code of Ethics

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