Code of ethics and conduct p7

Exam focus


Professional and ethical considerations are a key element of the syllabus and will feature in every exam.


A typical requirement will ask you to evaluate the ethical and professional issues in a scenario. Note that this incorporates all of the fundamental principles, not just objectivity, as well as professional issues discussed in the next chapter.


Evaluation requires more than just identification and explanation of the threats. You will also need to consider the significance of the threat.


You should consider any safeguards available to reduce the threat to an acceptable level as part of your evaluation.


A question on ethics will require you to state the rules and principles and apply them to a scenario.


        Conceptual framework


Ethical guidance can either use a principles-based approach or rules-based approach.


A conceptual framework relies on a principles-based approach.


Both IFAC and the ACCA adopt a principles-based approach.



Principles-based approach Rules-based approach
Ø   Flexible, so can be applied to Ø May be easier to follow because
new, unusual or rapidly changing it is clearly defined.
situations. Ø Needs frequent updating to
Ø   Principles may be applied across ensure the guidance applies to
national boundaries where laws new situations.
may not. Ø May encourage accountants to
Ø   Requires the accountant to use interpret requirements narrowly in
professional judgment. order to get round the spirit of the
Ø   Requires compliance with the requirements.
spirit of the guidance. Ø Virtually impossible to be able to
Ø   Can still incorporate specific rules deal with every situation that may
arise, particularly across various
for ethical situations likely to
national boundaries and in a
affect many firms.
dynamic industry.
The fundamental principles


IESBA develops and promotes the IFAC Code of Ethics for Professional Accountants, which applies to all professional accountants, whether in public practice or not. The IFAC Code serves as the foundation for codes of ethics developed and enforced by member bodies of IFAC. All ACCA members and students are obliged to follow the fundamental principles.

Conflicts within the fundamental principles


An auditor or accountant may find themselves being asked to breach the fundamental principles by an employer e.g. if being asked to misrepresent the financial statements or being asked to lie to the auditor.


The professional accountant should always apply the conceptual framework, which requires assessment of the significance of the threat and the application of an appropriate safeguard.


Appropriate safeguards include:


Seeking advice from within the employer    e.g. Human Resources department   .


Seeking advice from the ACCA or other independent professional advisor. Using the organisation’s formal dispute resolution process.


Seeking legal advice.


Fundamental principles definitions


Integrity: Members should be straightforward and honest in all professional and business relationships.


Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgments.


Professional competence and due care: Members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. Members should act diligently and in accordance with applicable technical and professional standards when providing professional services.


Confidentiality: Members should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of members or third parties.


Professional behaviour: Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.


[ACCA Rulebook    0   7, Section    00.5]


        Ethical threats

Assuming management responsibilities


Assuming management responsibilities for an assurance client may also create threats to independence. In some jurisdictions this is referred to as the management threat . A firm must not assume management responsibilities as part of an assurance engagement or for an audit client.



Activities considered management responsibility:


Setting policies and strategic direction. Hiring or dismissing employees.


Directing and taking responsibility for employee’s actions.


Authorising transactions.


Deciding which recommendations to implement.


Taking responsibility for the preparation and fair presentation of the financial statements.


Taking responsibility for designing, implementing and maintaining internal controls.


[ACCA Rulebook    0   7, Section    90.   60]


The firm should take steps to ensure that client management make all judgments and decisions.


Administrative services which are routine and do not involve professional judgment are generally not considered a threat. However, the significance of any threat created should be evaluated and safeguards applied if necessary. [Section    90.   63]


The auditor must ensure informed management is in place. This means the auditor believes management is capable of making decisions for the company based on the information available    rather than based solely on the auditor’s advice   .



Ethical implications for non-audit services



When a practitioner provides non-audit services, ethical implications must still be considered before accepting the work.


A practitioner must always be competent to provide the service being requested.


In addition, if assurance is being provided, the practitioner must be objective as a conclusion is being provided on a subject matter which will be relied upon by an intended user. For example, if a practitioner prepared a forecast for a client and then gave assurance on that forecast, a self-review threat would arise in the same way as a self-review threat would arise if the auditor prepared the financial statements they were auditing.


Therefore the threats listed above must still be assessed and safeguards implemented to reduce the threat to an acceptable level.


Assessing the significance of threats


The assessment of and response to ethical threats is a key consideration for the audit firm. It is therefore critical that you can discuss the significance of a threat and recommend an appropriate safeguard.


Factors affecting the significance of the threat include:


Value – e.g. when considering gifts and hospitality.


Seniority of staff – e.g. when considering rotation of staff.


Impact to the audit firm – e.g. when considering fee dependency.


Materiality to the financial statements – e.g. when considering whether a non-audit service can be provided.




The ACCA Code of Ethics divides safeguards into two broad categories:


Safeguards created by the profession, legislation or regulation: These include: requirements for entry into the profession, continuing professional development, corporate governance, professional standards, monitoring and disciplinary procedures.


Safeguards created by the work environment: These are discussed below, but include, rotation/removal of relevant staff from the engagement team, independent quality control reviews, using separate teams, etc.


[ACCA Rulebook Section    00.   3]


Self-interest threats


Where the auditor has a financial or other interest that will inappropriately influence their judgment or behaviour.


Threat Safeguards
Fee dependency Non-listed clients
Over-dependence on an audit client If fees from an audit client represent a
could lead the auditor to ignore large proportion of the firm’s total fees,
adjustments required in the financial the firm should implement safeguards
statements for fear of losing the client. such as:
Reducing dependency on the
Consulting with a third party on
key audit judgments
Having an external quality control
[Section    90.      5]


Listed clients
A firm’s independence is threatened,
and should be reviewed if total fees
from a listed audit client exceed    5%
of the firm’s total fees for two
consecutive years.
The firm should disclose the
issue to those charged with
governance at the client.
An independent engagement
quality control review should be
performed by a person not a
member of the audit firm
expressing the opinion or by the
professional regulatory body.
[Section    90.      7]
Gifts and hospitality Gifts may be accepted if:
Acceptance of goods, services or Trivial and inconsequential.
hospitality from an audit client can Offered in the normal course of
create self-interest and familiarity
business without intention to
threats as the auditor may feel
influence decision-making.
indebted to the client.
Approved by a partner.
[Section    90.      5]
The offer of gifts and hospitality must
be documented in the audit file even if
Owning shares/financial interests Any member of the audit team or their
The auditor will want to maximise immediate family must not have a
financial interest in the audit client
return from the investment and
therefore they must dispose of the
overlook audit adjustments which
shares immediately or be removed
would affect the value of their
from the team.
[Section    90.   04]
Any member of the audit team who
has a close family member who owns
shares should be removed from the
audit team or the family member
should dispose of their shares.
[Section    90.   05]


A partner of the firm in the office
connected with the audit engagement,
or any partner providing non-audit
services to the audit client should not
have a financial interest in the client.
[Section    90.      0]
Loans and guarantees Loans and guarantees between audit
A loan or guarantee from    or deposit clients and audit team members and
their immediate family that are not in
with    an assurance client will not
the normal course of business or not
create a threat to independence
on commercial terms are not
provided that:
it is on commercial terms, and
[Section    90.      7]
made in the normal course of If the loan is made to the firm    rather
business. than a member of the audit team   , it
must be immaterial to both the firm
and the client. If it is material, a self-
interest threat may arise and
appropriate safeguards should be put
into place, e.g. an external review of
the work performed.
[Section    90.         ]
Business relationships In the case of audit firms, or partners
If audit firms    or members    enter into of those firms, unless immaterial, no
safeguard can reduce this threat to an
business relationships with clients
acceptable level.
   e.g. joint ventures, marketing
arrangements   , this leads to self- In the case of audit team members,
interest because the auditor would the individual with the connection to
have an interest in the successful the audit client should be removed
operation of the client. from the audit team.
The purchase of goods and services [Section    90.      3]
from an assurance client would not If the purchase of goods and services
normally give rise to a threat to by an audit team member represents a
independence, provided the material amount, that person should
transaction is in the normal course of be removed from the audit team or
business and on commercial terms. they should reduce the magnitude of
the transactions.
[Section    90.      5]


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Potential employment with an audit The policies and procedures of the
client firm should require such individuals to
If a member of the engagement team notify the firm of the possibility of
employment with the client.
has reason to believe they may
become an employee of the client they Remove the individual from the
will not wish to do anything to affect assurance engagement.
their potential future employment. Perform an independent review of any
significant judgments made by that
[Section    90.   36]
Overdue fees Do not perform any further work for, or
The overdue fees may be regarded as issue any reports to, the client until the
outstanding fees are paid or
a loan    loans are not permitted to an
arrangements have been agreed with
audit client   .
the client for payment.
An independent review of the work
should be performed.
[Section    90.         ]
Contingent fees Fees based on a particular outcome,
The auditor would have incentive to e.g. level of profits of the company, are
not permitted for assurance services.
ensure a particular outcome is
[Section    90.      0]
achieved in order to maximise the
audit fee. E.g. overlook audit
adjustments that would reduce profit if
the fee is a percentage of the profit.
Compensation and evaluation A key audit partner shall not be
policies evaluated on or compensated based
A self-interest threat is created when a on that partner’s success in selling
non-assurance services to the
member of the audit team is evaluated
partner’s audit client.
on or compensated for selling non-
[Section    90.      4]
assurance services to that audit client.
For other staff the firm shall either
The significance of the threat will
revise the compensation plan or
depend on:
evaluation process for that individual
The proportion of the individual’s
or apply safeguards such as:
compensation or performance Removing such members from
evaluation that is based on the
the audit team.
sale of such services.
Having a professional accountant
The role of the individual on the
review the work of the member of
audit team.
the audit team.
Whether promotion decisions are
[Section    90.      3]
influenced by the sale of such
[Section    90.      3]


Actual or threatened litigation It may be possible to continue other
Litigation could represent a breakdown assurance engagements, depending
of trust in the relationship between on the significance of the threat by:
auditor and client. This may affect the Discussing the matter with the
impartiality of the auditor, and lead to a client’s audit committee.
reluctance of management to disclose If the litigation involves an
relevant information to the auditor.
individual, removing that
The significance of the threat depends
individual from the engagement
on the materiality of the litigation and team.
whether the litigation relates to a prior Obtaining an external review of
assurance engagement.
the work done.
If adequate safeguards cannot be
implemented the firm must withdraw
from or decline the engagement.
[Section    90.      6]
Familiarity threats


When the auditor becomes too sympathetic or too trusting of a client and loses professional scepticism, or where the relationship between the auditor and client goes beyond professional boundaries.

Threat Safeguards
Long association of senior Non-listed clients
personnel Rotate senior personnel.
Using the same senior personnel in an
Independent partner/quality
engagement team over a long period
control reviews.
may cause the auditor to become too
trusting/less sceptical of the client [Section    90.   4   ]
resulting in material misstatements Listed clients
going undetected.
Key audit partners must be
The firm should consider:
rotated after no more than seven
The length of time on the audit years with a minimum break of
team. two years. If the client becomes
The structure of the firm. listed, the length of time the
partner has served before
Whether the client’s management becoming listed is taken into
team has changed. account.
Whether the complexity of the [Section    90.   49]
subject matter has changed.
[Section    90.   4   ]



In exceptional circumstances, a
maximum one year extension is
permitted where necessary to
maintain audit quality.
[Section    90.   50]
Tutorial note: Large listed companies
must put the audit out to tender at
least every ten years. However, this is
the responsibility of the company not
the audit firm.
Family and other personal Remove the individual from the
relationships engagement team.
A familiarity threat    and self-interest Structure the engagement team so
that the individual does not deal with
threat or intimidation threat    may occur
when a member of the engagement matters that are the responsibility of
the close family member.
team has a family or personal
[Section    90.         ]
relationship with someone at the client
who is able to exert significant
influence over the financial statements
   or subject matter of another
assurance engagement   .
Consideration should be given to the
possibility that such a threat may also
arise when a partner    or employee    of
the firm has a family or personal
relationship with someone at the client
who is able to exert significant
influence over the subject matter, even
when the individual is not a member of
the engagement team.
[Section    90.   30]
Recruitment services Listed clients
Familiarity, self-interest and The firm cannot provide recruitment
intimidation threats may occur if the services in respect of directors or
firm is involved in recruiting senior senior management who would be in a
personnel for the client. position to exert significant influence
The firm may also be considered to be over the financial statements.
[Section    90.      0]
assuming management
Reviewing qualifications and
interviewing applicants to advise on
financial competence is allowed.
[Section    90.   09]


Audit staff leave the firm to join the client


A self-interest, familiarity or intimidation threat may arise where an employee of the firm becomes a director or employee of an assurance client    in a position to exert significant influence over the financial statements or subject matter of another assurance engagement   . The threat is significant if significant connection remains between the employee and the firm such as entitlement to benefits or payments from the firm, or participation in the firm’s business and professional activities.

[Section    90.   33]


The firm should consider:


The position taken at the client.


The involvement the person is likely to have with the audit team.


The length of time since the individual was a member of the audit team.


[Section    90.   34]


Assign individuals to the audit team who have sufficient experience in relation to the individual who has joined the client.


Perform a quality control review of the engagement.


[Section    90.   34]


For partners joining public interest

entities, independence would be

deemed to be compromised unless,

subsequent to the partner ceasing to

be a key audit partner or senior

partner, the public interest entity had

issued audited financial statements

covering a period of not less than

twelve months and the partner was not


a member of the audit team with

respect to the audit of those financial


[Section    90.   37]


Self-review threats


Where non-audit work is provided to an audit client and is then subject to audit, the auditor will be unlikely to admit to errors in their own work, or may not identify the errors in their own work.

Threat Safeguards
Accounting and bookkeeping services Non-listed clients
A firm can provide a non-listed
audit client with accounting and
bookkeeping services, including
payroll services, of a routine or
mechanical nature.
Separate teams must be used.



Managerial decisions must not be
made by the firm, and the source
data, underlying assumptions,
and subsequent adjustments
must be originated or approved
by the client.
[Section    90.   6   ]
Listed clients
A firm cannot provide a listed
audit client with accounting and
bookkeeping services.
[Section    90.   69]
A firm can provide accounting
services for divisions or related
entities of a listed client if
separate teams are used and the
service relates to matters
immaterial to the division/ related
[Section    90.   70]
Internal audit services A firm cannot provide internal audit
In addition to the self-review threat, the services for a listed audit client, where
the service relates to internal controls
auditor needs to be careful not to over financial reporting, financial
assume management responsibilities. accounting systems, or in relation to
amounts or disclosures that are
material to the financial statements.
[Section    90.   95]
Where services are provided, separate
teams must be used.
[Section    90.   94]
Taxation services Non-listed clients
Tax calculations for inclusion in the Advice should be obtained from
financial statements and tax planning an external tax professional.
advice create a self-review threat. Where an audit team member
Completion of tax returns is not
performs the tax calculation the
deemed to create a self-review threat. work should be reviewed by a
[Section    90.   79] senior person with appropriate
expertise that has not been
involved with the audit.
[Section    90.      0]



Listed clients
A firm cannot prepare tax
calculations for a listed audit
[Section    90.         ]
Tax advice The firm should not provide tax advice
that depends on a particular
accounting treatment and is material to
the financial statements.
[Section    90.      5]
Other tax advice is allowable with
[Section    90.      4]
IT services The firm can only provide IT services
IT services may create a self-review which involve:
threat and also be considered to be Design or implementation of IT
assuming management systems unrelated to internal
responsibilities. controls or financial reporting.
Implementation of off-the-shelf
accounting software.
Evaluating and making
recommendations on a system
designed or operated by another
service provider or by the entity.
[Section    90.   97]
Valuation services Non-listed clients
Valuation of matters that are
material to the financial
statements and involve a
significant degree of subjectivity
should not be provided.
Where the threat is not deemed
significant, different personnel
should be used.
[Section    90.   7   ]
A professional should review the
valuation work performed.
[Section    90.   75]



Listed clients
Valuation services that are
material to the financial
statements    regardless of
subjectivity    should not be
provided to listed audit clients.
[Section    90.   76]
Temporary staff assignments Staff may be loaned to the client
A self-review threat will be created if provided:
staff are loaned from the audit firm to The loan period is short.
the client. The person does not assume
If the person was assigned to the audit
management responsibilities.
they would be evaluating work for The client is responsible for
which they had been responsible
during the temporary assignment and directing and supervising the
may not detect errors in their work.
The loaned staff member is not a
member of the audit team.
[Section    90.   40]
Corporate finance services If there is doubt over the accounting
Self-review and advocacy threats may treatment or if the outcome will
materially affect the financial
be created if a firm:
statements, the service should not be
assists an audit client in
developing corporate strategies [Section    90.      3]
Identifies possible targets for the Where services can be provided, the
audit client to acquire firm should:
Advises on disposal transactions Use professionals who are not
Assists finance raising members of the audit team to
perform the service, or
Have a professional who was not
Provides structuring advice.
involved in providing the
Consideration should be given to:
corporate finance service to the
The degree of subjectivity client advise the audit team on
the service and review the
accounting treatment and any
Whether the outcome will have a
financial statement treatment.
material impact on the financial [Section    90.         ]
Whether the effectiveness of the
corporate finance advice
depends on a particular
accounting treatment.



Client staff joins audit firm


A self-interest, self-review, or familiarity threat may arise where a director or employee of an assurance client    in a position to exert significant influence over the financial statements or subject matter of another assurance engagement    becomes an employee of the firm.


Such individuals should not be assigned to the audit if that person would be evaluating elements of the financial statements for which they had prepared accounting records.


[Section    90.   4   ]


An employee or partner of a firm cannot also be an employee or director of an assurance client, as the self-interest and self-review threats created would be so significant that no safeguard could reduce the threats to an acceptable level.


[Section    90.   4   ]


Advocacy threats


Promoting the position of a client or representing them in some way would mean the audit firm is seen to be ‘taking sides’ with the client.


Examples include:


Representing the client in court or in any dispute where the matter is material to the financial statements.


Negotiating on the client’s behalf for finance.


Where the amounts are material The audit firm must not act for the audit client in this way. Any request for such services must be politely declined.


[Section    90.   06]


Where the matter is not material to the financial statements the firm should:


Use professionals who are not members of the audit team to perform the service, or


Have a professional who was not involved in providing the legal services advise the audit team on the service and review any financial statement treatment.


[Section    90.   07]


Providing services involving promoting, dealing in, or underwriting an audit client’s shares would create an advocacy or self-review threat so significant that no safeguards could reduce the threat to an acceptable level. Accordingly, a firm shall not provide such services to an audit client.


[Section    90.      4]


Intimidation threats


Actual or perceived pressures from the client, or attempts to exercise undue influence over the assurance provider create an intimidation threat, e.g. actual or threatened litigation between the auditor and audit client    in which case it may be necessary to resign from the engagement   .


Intimidation can arise from some of the same situations mentioned above, for example:


Fee dependency


Personal relationships


Audit partner joining the client


Litigation between the audit firm and client.


The safeguards to address these threats are the same as to address the other threats.



Public interest entities    PIEs  



A public interest entity is one which is:




Defined by regulation or legislation as public interest


Audited under the same independence requirements as a listed entity.


Audit firms are also encouraged to treat entities where there are a wide range, or significant number of stakeholders, as public interest entities e.g. banks, insurance companies and credit institutions.



UK syllabus – Safeguards from the FRC Ethical Standard



The FRC has issued a UK specific ethical standard designed to ensure practitioners comply with ethical requirements. The standard refers to ‘covered persons’, ‘persons closely associated’ and ‘other close family relationships’.


Covered persons include the partners and staff involved in the engagement, but could also be:


Any other person placed at the disposal of the audit team e.g. an expert.


Anyone in the audit firm with supervisory, management or other oversight responsibility for the partners involved in the engagement.


Any other person in the firm who is in a position to influence the conduct or outcome of the audit.



Persons closely associated include immediate family members i.e.


spouse and dependents.


Other close family relationships comprise parents, non-dependent children and siblings.


An individual can usually be presumed to be aware of matters concerning persons closely associated with them and to be able to influence their behaviour.


Many of the requirements extend to affiliated companies    i.e.

subsidiaries   .


Section     – General requirements and guidance


The audit firm shall establish policies and procedures to ensure that the firm, and all those involved in the audit, act with integrity, objectivity and independence.


The leadership of the audit firm shall take responsibility for establishing a control environment that places adherence to ethical principles above commercial considerations.


The audit firm shall designate an ethics partner.


The audit firm shall establish policies and procedures to prevent employees from taking decisions that are the responsibility of management of the audited entity.


The audit firm shall establish policies and procedures to assess the significance of threats to the auditor’s objectivity:


  • When considering whether to accept or retain an audit or non-audit service


  • When planning the audit


  • When forming an opinion on the financial statements


  • When considering whether to provide non-audit services


  • When potential threats are reported.


The audit engagement partner shall not accept or shall not continue an audit engagement if he or she concludes that any threats to the auditor’s objectivity and independence cannot be reduced to an acceptable level.


In the case of listed companies, an Engagement Quality Control Reviewer must be appointed who must:


  • Reach an overall conclusion on independence


  • Communicate to those charged with governance at the client all significant matters that bear upon the auditor’s objectivity.


Section     – Financial, business, employment and personal relationships


The audit firm, partners, or persons closely associated with them shall not hold any financial interest in an audited entity.


Audit firms, covered persons and persons closely associated with them shall not make loans to, or guarantee the borrowings of, an audited entity    and vice versa   .


Audit firms, covered persons and persons closely associated with them shall not enter into business relationships with an audited entity.


An audit firm shall not second partners or employees to an audit client unless:


–    the secondment is for a short period of time, and


– the audited entity agrees that the individual concerned will not hold a management position.


Where a partner or employee returns to a firm on completion of a secondment to an audit client, that individual shall not be given any role on the audit involving any function or activity that they performed or supervised during that assignment.


Where a partner joins an audited entity, the audit firm shall take action to ensure that no connections remain between the firm and the individual.


Where a partner leaves a firm and is appointed as a director or to a key management position with an audited entity, having acted as audit engagement partner at any time in the two years prior to this appointment, the firm shall resign as auditor.


A partner, or employee of the audit firm who undertakes audit work, shall not accept appointment:


–    to the board of directors of the audited entity, or


–    to any subcommittee of that board.


Section 3 – Long association with engagements and with entities relevant to engagements


The audit firm shall establish policies and procedures to monitor the length of time that senior staff serve as members of the engagement team for each audit.


Where senior staff have a long association with the audit, the audit firm shall assess the threats to the auditor’s objectivity and independence and shall apply safeguards to reduce the threats to an acceptable level. Such safeguards include partner rotation or appointment of an EQCR. Where appropriate safeguards cannot be applied, the audit firm shall either resign as auditor or not stand for reappointment, as appropriate.


Once an audit engagement partner on a non-listed client has held this role for ten years, careful consideration must be given as to whether their objectivity would be perceived to be impaired and rotation of the partner should be considered. If the partner is not rotated, other safeguards must be applied and the reason for not rotating must be communicated to those charged with governance.


In the case of listed companies, the audit firm shall establish policies and procedures to ensure that no one shall act as audit engagement partner for more than five years, and should not return within five years. The audit committee may approve an extension of two years in certain circumstances.


When the audit client becomes listed, if the audit engagement partner has already served four or more years they may continue for a maximum of two years.


In the case of listed companies, the audit engagement partner shall review the safeguards put in place to address the threats arising where senior staff have been involved in the audit for a period longer than seven years.


Note: Listed companies are required to put the audit out to tender every ten years in accordance with EU regulations. This is an action that the company must take rather than the auditor.


Section 4 – Fees, remuneration and evaluation policies, gifts and hospitality, litigation


Sufficient partners and staff with time and skill to complete the audit should be assigned, regardless of the audit fee charged.


Audit fees should not be influenced by the provision of non-audit services to the clients.


An audit shall not be undertaken on a contingent fee basis.


The audit fee for the previous audit and the arrangements for its payment shall be agreed with the audited entity before the audit firm formally accepts appointment as auditor in respect of the following period.


Listed client: fees for providing non-audit services shall be limited to 70% of the average audit fee for the last 3 years. Where the fees charged for non-audit services for a financial year exceed the audit fee for that year, disclose to the Ethics Partner and consider the need for safeguards.


Where it is expected that the total fees receivable from a listed audited entity will regularly exceed    0% of the annual fee income       5% if non-listed    of the audit firm, the firm shall not act as the auditor of that entity.


Where regular fee income is expected to exceed 5%    listed   /   0%    non-listed    of the firm’s fee income – disclose to the Ethics Partner and those charged with governance and consider whether safeguards need to be applied.


New firms may find the economic dependence requirements difficult to comply with so should consider the use of an external quality control reviewer.


The audit firm shall establish policies and procedures to ensure that the objectives and appraisal of members of the audit team do not include selling non-audit services.


Where litigation with a client is already in progress, or where it is probable, the audit firm shall either not continue with or not accept the audit engagement.


The audit firm, including employees, shall not accept gifts from the audited entity, unless the value is trivial.


Audit firm employees shall not accept hospitality from the audited entity, unless it is reasonable in terms of its frequency, nature and cost.



Section 5 – Non-audit/additional services


Anyone in the audit firm considering providing a non-audit service to one of the firm’s audit clients must communicate the details to the audit engagement partner.


Before accepting non-audit work, consider whether a reasonable and informed third party would regard the non-audit work as impairing the firm’s objectivity and independence.


Where safeguards are insufficient to mitigate the threats to independence, the non-audit work should not be accepted.


General safeguards for non-audit services include separate teams for the audit and non-audit work and engagement quality control review of the work and conclusions of the audit team in relation to the non-audit service.


Consider whether there is informed management i.e.


–    Objective and transparent information provided to the client.


– The client has a genuine opportunity to decide between alternative courses of action.


– A member of management has been designated to receive the result of non-audit services – this individual must have the capability to make judgments and decisions on the basis of the information provided.


Without informed management it is unlikely that any safeguards could be effective against the management threat.


Communicate matters that have a bearing on the auditor’s objectivity and independence related to the provision of non-audit services to those charged with governance.


Prohibited non-audit services for listed clients:


Tax services


Taking part in management or decision-making


Bookkeeping and preparing accounting records or financial statements


Payroll services


Design and implementation of internal controls, risk management procedures or information technology systems relating to financial information


Valuation services    including actuarial valuation    where the valuation would have a material effect on the financial statements


Legal services


Internal audit


Corporate finance services    including financing, investment strategy and promoting/dealing in or underwriting shares


Human resources services.


Section 6 – Provisions available for audits of small entities


When auditing the financial statements of a small entity the audit firm is not required to:


Comply with the requirement that an external independent quality control review is performed.


Comply with Section 5, relating to providing non-audit services. The firm is not required to apply safeguards to address the self-review threat provided there is informed management, more regular ‘cold review’ of audits where non-audit services have been provided and disclosure of the non-audit services in the auditor’s report.


Comply with the requirement that where an audit partner joins the client the firm should resign and cannot accept appointment as auditor until     years have passed. The firm can continue as auditor provided there is no significant threat to the audit team’s integrity, objectivity and independence and disclosure of the partner joining the client is made in the auditor’s report.


Comply with the requirement for an external independent quality control review if fees from a client are expected to exceed    0% but not exceed    5%. There is no requirement for the independent quality control review, but the issue must be disclosed to the Ethics Partner and those charged with governance at the client.


3      Confidentiality


Members acquiring information in the course of their professional work should not disclose such information to third parties without first obtaining proper and specific authority, unless there is a professional right or duty to disclose.


Confidential information may be obtained from:


The firm or employing organisation


Business relationships i.e. current clients Prospective clients and employers


Circumstances in which disclosure is permitted or required


The general rule is that disclosure should only be made if:


Disclosure is permitted by law and permission has been given.


Disclosure is required by law e.g. to provide evidence in legal proceedings or disclosure is required to a regulatory authority. This would include   reporting.


There is a professional right or duty to disclose e.g.


–    To comply with a quality review


–    To respond to an enquiry by a regulatory authority


–    To protect the member’s interests in legal proceedings


– To comply with technical and professional standards including ethical requirements.


[ACCA Rulebook, Section    40]



Disclosure of confidential information – specific examples


In deciding whether to disclose confidential information, relevant factors to consider include:


  • Whether the interests of any parties could be harmed if the client or employer consents to the disclosure of information.


  • Whether all the relevant information is known and substantiated. When the situation involves unsubstantiated facts, incomplete information or unsubstantiated conclusions, professional judgment shall be used in determining the type of disclosure to be made, if any.


  • The type of communication that is expected and to whom it is addressed.


  • Whether the parties to whom the communication is addressed are appropriate recipients.


Permitted or required by law


The most common offences members are likely to encounter in their professional work are in relation to:


Fraud or theft including fraudulent financial reporting, falsification or alteration of accounting records or other documents and misappropriation of assets


Taxation law


Insider dealing, market abuse, and bribery


Health and safety law Employment law


Environmental offences.


Public interest


An auditor may disclose information if they consider it to be in the public interest. There is no official definition of ‘public interest’. The auditor must employ a combination of judgment and legal advice. A good rule of thumb is that if a member of the public could incur physical or financial damage that the auditor could knowingly have prevented it is likely that the auditor has failed in their public duty.


In determining the need to disclose matters in the public interest the auditor should consider:


Whether those charged with governance have rectified the matter or are taking effective corrective action


Whether members of the public are likely to be affected


The gravity of the matter


The likelihood of repetition


The reasons for the client’s unwillingness to make the disclosures


Relevant legislation, accounting standards and auditing standards Legal advice obtained.

The auditor will be protected from the risk of liability for breach of confidence provided that disclosure is made in the public interest, disclosure is made to an appropriate body or person, and there is no malice motivating the disclosure.

Conflicts of interest


A conflict of interest arises when the same audit firm is appointed for two companies that interact with each other, for example:


Companies which compete in the same market Companies which trade with each other

A conflict of interest may create a threat to the fundamental principles of objectivity and confidentiality.


It may be perceived that the auditor cannot provide objective services and advice to a company where it also audits a competitor.


Professional accountants should always act in the best interests of the client. However, where conflicts of interest exist, the firm’s work should be arranged to avoid the interests of one being adversely affected by those of another and to prevent a breach of confidentiality.


In order to ensure this, the firm must notify all affected clients of the conflict and obtain their consent to act. The following additional safeguards should be considered:


Separate engagement teams    with different engagement partners and team members   .


Procedures to prevent access to information, e.g. physical separation of the team members and confidential/secure data filing.


Signed confidentiality agreements by the engagement team members.


Regular review of the application of safeguards by an independent person of appropriate seniority.


Advise the clients to seek independent advice.


If adequate safeguards cannot be implemented    i.e. where the acceptance/ continuance of an engagement would, despite safeguards, materially prejudice the interests of any clients    the firm must decline or resign from one or more conflicting engagements.


[ACCA Rulebook, Section       0]


Current issue: Revisions pertaining to safeguards


Exposure Draft: Proposed Revisions Pertaining to Safeguards in the Code – Phase    


Phase     of the exposure draft covers revisions to the Code of Ethics, primarily in relation to non-audit services. The aim is to provide greater clarity of safeguards that should be applied by the assurance firm to manage threats to the fundamental ethical principles.


The changes will be effective for audits of financial statements for periods beginning on or after June    5,    0   9.


Phase     of the project established an enhanced and more robust conceptual framework with more explicit requirements and application material to explain how to identify, evaluate and address threats to compliance with the fundamental principles.


The enhanced conceptual framework:


  • Explicitly states that a professional accountant is required to address threats to compliance with the fundamental principles by eliminating them or reducing them to an acceptable level.


  • Clarifies the safeguards and no longer includes safeguards that the IESBA determined were inappropriate or ineffective.


  • Includes new requirements to assist professional accountants in evaluating and addressing threats.


The IESBA believes that the enhanced conceptual framework will better support all professional accountants in fulfilling their responsibility to act in the public interest, including with respect to audits of financial statements, and thereby will contribute to support audit quality.


Note: Students are reminded that exposure drafts are examinable to the extent that relevant articles are published by the examining team.



Current issue: Long association


Changes to the Code Addressing the Long Association of Personnel with an Audit or Assurance client


The following changes are effective for audits of financial statements for periods beginning on or after December    5,    0      . Early adoption is permitted.


Time-on period


In respect of an audit of a public interest entity, an individual shall not act in any of the following roles, or a combination of such roles, for a period of more than seven cumulative years    the ‘time-on’ period   :


  • The engagement partner


  • The individual appointed as responsible for the engagement quality control review, or


  • Any other key audit partner role.


After the time-on period, the individual shall serve a ‘cooling-off’ period.


In calculating the time-on period, the count of years cannot be restarted unless the individual ceases to act in any one of the above roles for a consecutive period equal to at least the cooling-off period.


Cooling-off period


If the individual acted as the engagement partner for seven cumulative years, the cooling-off period shall be five consecutive years. [Section    90.   55]


Where an engagement quality control reviewer has acted for seven cumulative years, the cooling-off period shall be three consecutive years. [Section    90.   56]


If the individual has acted in any other capacity as a key audit partner for seven cumulative years, the cooling-off period shall be two consecutive years. [Section    90.   57]


Service in a combination of key audit partner roles


If the individual acted in a combination of key audit partner roles and served as the engagement partner for four or more cumulative years, the cooling-off period shall be five consecutive years. [Section    90.   5   ]


If the individual acted in a combination of key audit partner roles and served as the key audit partner responsible for the engagement quality control review for four or more cumulative years, the cooling-off period shall, subject to paragraph    90.   60   a   , be three consecutive years. [Section    90.   59]


If an individual has acted in a combination of engagement partner and engagement quality control review roles for four or more cumulative years during the time-on period, the cooling-off period shall be:


  • Five consecutive years where the individual has been the engagement partner for three or more years, or


  • Three consecutive years in the case of any other combination. [Section    60]


If the individual acted in any other combination of key audit partner roles, the cooling-off period shall be two consecutive years. [Section    90.   6   ]


Service at a prior firm


In determining the number of years that an individual has been a key audit partner, the length of the relationship shall, where relevant, include time while the individual was a key audit partner on that engagement at a prior firm. [Section    90.   6   ]


Restrictions on activities during the cooling-off period


For the duration of the relevant cooling-off period, the individual shall not:


  • Be a member of the engagement team or provide quality control for the audit engagement.


  • Consult with the engagement team or the client regarding technical or industry-specific issues, transactions or events affecting the audit engagement other than discussions with the engagement team limited to work undertaken or conclusions reached in the last year of the individual’s time-on period where this remains relevant to the audit   .


  • Be responsible for leading or coordinating the firm’s professional services to the audit client or overseeing the firm’s relationship with the audit client.


  • Undertake any other role or activity not referred to above with respect to the audit client, including the provision of non-assurance services, that would result in the individual:


  • Having significant or frequent interaction with senior management or those charged with governance, or


  • Exerting direct influence on the outcome of the audit engagement.


The provisions of this paragraph are not intended to prevent the

individual from assuming a leadership role in the firm, such as that of the

Senior or Managing Partner.

[Section    90.   64]


Audit client becomes a public interest entity


When an audit client becomes a public interest entity, the length of time the individual has served the audit client as a key audit partner before the client becomes a public interest entity shall be taken into account in determining the timing of the rotation.


If the individual has served the audit client as a key audit partner for a period of five cumulative years or less when the client becomes a public interest entity, the number of years the individual may continue to serve the client in that capacity before rotating off the engagement is seven years less the number of years already served.


If the individual has served the audit client as a key audit partner for a period of six or more cumulative years when the client becomes a public interest entity, the partner may continue to serve in that capacity with the concurrence of those charged with governance for a maximum of two additional years before rotating off the engagement. [Section    90.   67]


When a firm has only a few people with the necessary knowledge and experience to serve as a key audit partner on the audit of a public interest entity, rotation of key audit partners may not be an available safeguard. If an independent regulator in the relevant jurisdiction has provided an exemption from partner rotation in such circumstances, an individual may remain a key audit partner for more than seven years, in accordance with such regulation, provided that the independent regulator has specified other requirements which are to be applied, such as the length of time that the key audit partner may be exempted from rotation or a regular independent external review. [Section    90.   6   ]



Approach to exam questions: Ethical issues



Exam questions relating to ethical threats require you to evaluate the threats. Evaluation encompasses:


  • Identification of the threat


  • Explanation of the threat


  • Evaluation of the significance of the threat


  • Stating the actions the firm should take including the safeguards that should be implemented to manage the threat.


Example: the audit partner owns shares in the audit client


Identify the threat : This is a self-interest threat as the partner has a financial interest in the audit client.


Explain the threat: The partner may overlook misstatements that if corrected would impact the value of the investment such as potential dividend payment or share value.


Evaluate the significance of the threat: The shares are owned by the audit partner who has the greatest influence on the outcome of the audit as they are the person responsible for forming the opinion on the financial statements. Therefore the threat is significant.


Actions to be taken by the firm: The partner should sell the shares immediately and may need to be removed from the audit. An engagement quality control review should be performed to review the key judgments of the audit partner to ensure objectivity has not been impaired. It would be advisable for staff and partners of the firm to be reminded of the code of ethics in relation to financial interests such as the need to disclose financial interests in clients and not to own shares in audit clients.


Test your understanding    


You are an audit manager in Fox & Steeple, a firm of Chartered Certified Accountants, responsible for allocating staff to the following three audits of financial statements for the year ending 3    December    0X3.


Blythe Co is a new audit client. This private company is a local manufacturer and distributor of sportswear. The company’s finance director, Peter, sees little value in the audit and put it out to tender last year as a cost-cutting exercise. In accordance with the requirements of the invitation to tender your firm indicated that there would not be an interim audit.


Huggins Co, a long-standing client, operates a national supermarket chain. Your firm provided Huggins Co with corporate financial advice on obtaining a listing on a recognised stock exchange in    0X   . Senior management expects a thorough examination of the company’s computerised systems, and are also seeking assurance that the annual report will not attract adverse criticism.


Gray Co has been an audit client for seven years after your firm advised management on a successful buyout. Gray provides communication services and software solutions. Your firm provides Gray with technical advice on financial reporting and tax services. Most recently you have been asked to conduct due diligence reviews on potential acquisitions.




Identify and discuss the ethical and other professional issues raised, and recommend any actions that should be taken in respect of:


  • Blythe Co


  • Huggins Co


  • Gray Co.


      5 marks  



Test your understanding    


Aventura International, a listed company, manufactures and wholesales a wide variety of products including fashion clothes and audio-video equipment. The company is audited by Voest, a firm of Chartered Certified Accountants, and the audit manager is Darius Harken. The following matters have arisen during the audit of the group’s financial statements for the year to 3    March    0X4 which is nearing completion:


  • During the annual physical count of fashion clothes at the company’s principal warehouse, the audit staff attending the count were invited to purchase any items of clothing or equipment at 30% of their recommended retail prices.



  • The chief executive of Aventura International, Armando Thyolo, owns a private jet. Armando invoices the company, on a monthly basis, for that proportion of the operating costs which reflects business use. One of these invoices shows that Darius Harken was flown to Florida in September 0X3 and flown back two weeks later. Neither Aventura nor Voest have any offices or associates in Florida.


  • Last week Armando announced his engagement to be married to his personal assistant, Kirsten Fennimore. Before joining Aventura in January 0X4, Kirsten had been Voest’s accountant in charge of the audit of Aventura.




Identify and discuss the ethical issues raised in each of the scenarios and the responses required by the auditor in relation to these matters.


      5 marks  


Test your understanding 3


  • Explain the importance of the role of confidentiality to the auditor-

client relationship.      5 marks  


  • Your firm acts as auditor and adviser to Blake Seven and to its four directors. The company is owned 50% by Brad Capella, 5% by his wife Minerva and    0% by Janus Trebbiano. Brad is the chief executive and Janus the finance director. Janus’s sister, Rosella Trebbiano, has recently resigned from the executive board, following a disagreement with the Capellas. Rosella has now formed her own company, Blakes Heaven, in competition with Blake Seven.


Rosella is currently negotiating with her former co-executives the profit-related remuneration due to her and the sale of her    5% holding of shares in Blake Seven to one or all of them.


Rosella has contacted you to find out Brad’s current remuneration package since he refuses to disclose this to her.


She has also requested that your firm should continue to act as her personal adviser and become auditor and adviser to Blakes Heaven.




Comment on the matters that you should consider in deciding whether or

not your audit firm can comply with Rosella’s requests.                       0 marks  


   Total:    5 marks  



Test your understanding 4 – UK syllabus only


Weller & Co is facing competition from other audit firms, and the partners have been considering how the firm’s revenue could be increased. A proposal has been made that all audit managers should suggest to their audit clients that, as well as providing the external audit service, Weller & Co can provide the internal audit service as part of an ‘extended audit’ service.




Comment on the ethical and professional issues raised by the proposal to

increase the firm’s revenue.


Test your understanding    


  • Blythe Co


Intimidation and self-interest threats to objectivity may be created as the audit was put out to tender as a cost-cutting exercise. A threat to the fundamental principle of professional competence and due care also arises.


Peter may have applied pressure by stipulating that there should not be an interim audit in order to reduce fees.


This could mean the audit firm does not obtain sufficient appropriate evidence to form an appropriate opinion.


Senior staff assigned to Blythe should be alert to the need to exercise a high degree of professional scepticism in light of Peter’s attitude towards the audit. The audit senior allocated to Blythe will need to be experienced in standing up to client management such as Peter.


As Blythe is a new client, detection risk will be higher and an engagement quality control review partner should be assigned.


  • Huggins Co Selfinterest


The self-interest threat may be great for Huggins as the company is listed on a recognised stock exchange which may give prestige and credibility to Fox & Steeple.


Fox & Steeple could be pressured into overlooking material misstatements to avoid the loss of a listed client.


The engagement fee may be significant and Fox & Steeple may not wish to do anything to risk losing this client. This may include issuing an inappropriate opinion on the financial statements.


The fee level should be monitored to ensure that recurring fees from Huggins do not exceed the level set out by the profession for more than two consecutive years [INT:    5% of the firm’s total fee income, UK:    0% of the firm’s total fee income].




The familiarity threat of using the same lead engagement partner on an audit over a prolonged period is particularly relevant to Huggins, which is now a listed entity.


The audit firm may lack professional scepticism when performing the audit and fail to detect material misstatements.


The engagement partner should be rotated after a predefined period [INT: 7 years, UK: 5 years].




A self-review threat is created when the audit firm provides non-audit services which affect the financial statements such as providing assurance over the computerised systems relevant to financial reporting.


The auditor may be unlikely to identify errors in their own work. If errors are found, they may be unlikely to admit to them.


The threat is significant as Huggins is a national chain and a listed client therefore significant reliance may be placed on the systems by the auditor.


As Huggins is listed, the examination of the computerised systems should not be undertaken if the systems relate to financial reporting or internal controls as the threat would be too significant.


If the systems do not relate to financial reporting or internal controls, separate teams should be used for each service. The team assigned to the systems examination should have appropriate skills.




As Huggins are seeking assurance the annual report will not attract adverse criticism, an intimidation threat may be created.


Huggins may put pressure on the auditors to allow them to omit disclosures which would generate adverse criticism.


The team must be aware of this risk and apply sufficient professional scepticism when performing the audit.


  • Gray Co Familiarity


Gray has been a client for seven years therefore a familiarity threat may be created if the same partner has been assigned for that time. The partner may become complacent and lack professional scepticism, possibly failing to challenge the client to the extent they would if it was a new client.


The threat is not significant at this time. Partner rotation will only be required if Gray becomes listed but the firm may wish to consider appointing an engagement quality control review partner in the future to ensure the audit is being performed with sufficient professional scepticism.




Fox & Steeple provide technical advice on financial reporting as well as tax services. A due diligence engagement has also been requested. These additional services create a self-review threat.


The auditor will be auditing financial statements that have been prepared based on the advice of the firm and may therefore be reluctant to criticise the accounting treatment of certain elements as it would be seen to be criticising their own firm.


The threat may be considered significant depending on the nature of the advice and tax services provided. However, as Gray is not listed, the firm can still provide these services with safeguards applied.


Separate teams must be used and each team must have the relevant skills and competence for the service provided. Gray will require senior audit staff to be experienced in financial reporting matters specific to communications and software solutions e.g. in revenue recognition issues and accounting for internally generated intangible assets.


Assuming management responsibilities/Management threat


The provision of advice may be seen to be acting in the capacity of management if the advice provided is acted on without any consideration of Gray’s management.


Activities such as authorising transactions, taking responsibility for the preparation and fair presentation of the financial statements, taking responsibility for designing, implementing and maintaining internal controls relevant to financial reporting or determining or changing journal entries, should not be performed without obtaining Gray’s approval and acknowledgement that they are ultimately responsible.


Tutorial Note: General matters affecting Fox & Steeple


All three assignments have the same financial year-end, therefore resourcing of each engagement will need to be carefully planned.


As a listed company, Huggins is likely to have the tightest reporting deadline.


Time budgets will need to be prepared for each assignment to determine manpower requirements and to schedule audit work.


Test your understanding    


  • Goods


The acceptance of gifts or hospitality, particularly during the inventory count, may be perceived to be a self-interest threat to objectivity. The count should be performed in an entirely neutral way but staff may ignore this in order to ensure they get their ‘perk’ of the engagement.


From an external perspective, this may be considered to be a bribe for a more relaxed inventory count check.


Inventory counts should be performed with the least disruption possible. Movements in inventory during the count vastly increase the risk of incorrect procedures being performed. If staff are purchasing items during the day this constitutes inventory movement.


The offer should not have been accepted during the physical count and all offers of goods should be discussed with senior audit management.


The value of the goods in question should be considered. 30% of manufacturer’s recommended price amounts to a 70% discount. This is unlikely to be material to the client but may be significant enough to the audit team to be considered more than a ‘trivial’ gift.


The offer should be compared to any current staff discount schemes which Aventura offers to its employees. If Aventura does not offer staff discounts, the offer of discounted goods should have been declined.


In general it is prudent to avoid accepting gifts. If it later transpired that there was a problem with the count or the subsequent inventory valuation there would be increased risk of negligence claims    i.e. the audit team were not sufficiently diligent or that they had accepted bribes   .


  • Services/hospitality


Darius Harken has received a substantial benefit from his association with the audit client creating a self-interest threat. Darius may feel indebted to the client because of the gift and therefore overlook issues identified during the audit.


In addition it could be argued that Darius Harken is over-familiar with the chief executive Armando Thyolo. Darius may lack professional scepticism when auditing Aventura.


The value of this gift is likely to be significant and could be perceived to be outside the boundaries of a normal, professional relationship.


Darius Harken should not have accepted the use of the jet without the express permission of the audit engagement partner. It is possible that Darius may have paid for the use of the jet. However, the question of over-familiarity would still be relevant, as he could have used a commercial airline.


The fact that this arrangement only came to light during the audit of certain invoices suggests that Darius was intentionally withholding information about this beneficial transaction. Whilst there is no evidence that he tried to conceal it, a manager should understand his ethical position and concerns should be raised about his conduct.


Darius Harken should be removed from the audit immediately and potentially disciplined.


The requirement to have all gifts approved by a senior member of the audit team should be communicated to all staff to ensure this does not happen again.


All Darius’ previous work on the client should now be reviewed again before the auditor’s report is signed to ensure that appropriate procedures have been carried out and that he has remained objective. Particular attention should be paid to all matters of the audit manager’s judgment.


Darius should be asked whether he has used the jet on other occasions and this should be confirmed with Armando.


  • Ex-audit staff employed by client


As Kirsten was the accountant in charge    AIC   , not the audit manager or partner, it is unlikely that a significant lack of objectivity could have impaired the audit opinion for the year ended 3    March    0X3 or for any interim work done in    0X4.


However, her work may have been influenced given that she has developed a personal relationship with Armando Thyolo.


Upon beginning the relationship with Armando, Kirsten should have been immediately removed from the audit engagement. Either the senior management team are responsible for a lack of professional due care when assigning team members, or Kirsten has acted with a lack of professional behaviour and not informed the firm of the relationship.


Kirsten is now a member of staff at Aventura. There is likely to be a strong familiarity threat between her and the current audit team. The audit team may be less sceptical when auditing the client because they trust Kirsten having worked with her in the past.


The audit files for    0X3 and    0X4, in particular the work of Kristen, should be reviewed again. This should be done by an independent engagement partner.


The members of the audit team assigned to Aventura may need to be rotated in order to reduce the familiarity threat. A team from a different office could be used.



Test your understanding 3



  • The importance of confidentiality to the auditor-client relationship


Confidentiality and security of information is one of the fundamental ethical principles. It applies to all professional accountants.


In particular:


– Confidential information is only disclosed to those entitled to receive it.


– Information obtained in the course of professional work is not used for purposes other than the client’s benefit.


– Any decision to override the duty of confidentiality    e.g. if required by a court order    is taken after due consideration and discussion with professional colleagues.


– The duty of confidentiality continues even after an auditor-client engagement ceases.


– An accountant who moves into new employment must distinguish previously gained experience from confidential information acquired from their former employment.


– Prospective accountants must treat any information given by existing accountants in the strictest confidence.


As well as being a fundamental principal of the Code of Ethics, confidentiality will also undoubtedly be an implied contractual term.


In order to fulfil their duties, auditors require full disclosure of all information they consider necessary. A duty of confidentiality is therefore essential to ensuring that the scope of the audit is not limited as a result of information being withheld.


  • Matters to consider


Rosella has made three requests:


  • Disclosure of a former co-executive’s level of remuneration


  • Continuing to act as personal adviser


  • Accepting an appointment as auditor and adviser to Blakes Heaven.


  • Disclosure of remuneration package


In an audit appointment, the auditor owes a duty of confidentiality to the client    i.e. the company not individual shareholders or executives   . There is no legal or professional right or duty to disclose client information on an ad hoc basis merely because it is available to the auditor.


It would be a breach of the audit firm’s duty of confidentiality to Blake Seven    in acting as auditor    and Brad    in acting as adviser    to disclose the information requested when clearly there is no process of law or public interest involved.


The audit firm could only disclose the information to Rosella with Brad’s consent. This is highly unlikely since Brad has refused to do so.


In general, the audit firm’s working papers are its own property and any request for them    e.g. if Rosella requested a schedule of emoluments, etc    should be refused.


The latest audited financial statements    which are available to Rosella in her capacity as a shareholder    may disclose Brad’s remuneration for the previous year    e.g. as chairman and/or highest paid executive   . Rosella will need to wait for this information to be publicly available.


As a member of the company    i.e. shareholder   , Rosella would also be entitled to inspect any relevant documents required to be held at Blake Seven’s registered office    e.g. if Brad has a service contract with the company   .


  • Continuing as personal adviser


A conflict between the interests of Blake Seven    and its continuing directors    and Rosella Trebbiano    in a personal capacity    is likely to arise    e.g. over the valuation of Rosella’s shareholding   .


It would be inappropriate for one adviser to act for both parties in certain matters, such as negotiating a share price, without appropriate safeguards.


Valuing Rosella’s shareholding and negotiating her profit-related remuneration may appear to threaten the objectivity of the audit of Blake Seven. Rosella may try to exert influence to overstate profits    e.g. over Janus, as her brother and finance director, as well as the auditor   .


However, the interests of these clients may not be materially prejudiced in all matters if:


– adequate disclosure is possible    i.e. of all relevant matters to all parties   , and


– appropriate safeguards are implemented    e.g. advising one or all clients to seek additional independent advice   .


In particular it may be possible to advise Rosella on personal tax matters.


  • Appointment as auditor


A conflict between the interests of Rosella’s new company, Blakes Heaven, and Blake Seven is likely to arise as the former has been set up in competition with the latter.


There is nothing improper in having both companies as audit clients if there are appropriate safeguards    e.g. different reporting partners and teams of staff for each audit engagement   .


However, even with safeguards, the directors of Blake Seven    the Capellas in particular    may perceive that the involvement of the company’s auditor with a competitor    in the capacity of auditor and adviser    could materially prejudice their interests. Also, that the new company has been set up with so similar a name suggests that Rosella may be quite aggressive in targeting Blake Seven’s business.


In view of the adversarial relationship between Rosella and Blake Seven it would be prudent to include in their respective engagement letters a clause reserving the right to act for other clients subject to confidential information being kept secure.


The provision of other services    as adviser    could threaten the objectivity of the audit assignment. In particular, it would be inappropriate for the personal adviser to be the reporting partner or otherwise involved in the audit.




The request to disclose Brad’s remuneration must be declined. However, Rosella may be directed to alternative sources of information, which may be of use    though not strictly current   .


The firm may continue to act as Rosella’s personal adviser subject to appropriate conditions and safeguards being put in place in respect of matters which may materially prejudice either client. For example:


The agreement of Blake Seven    and the remaining directors    Rosella being advised to seek additional independent advice.

However, given the apparent acrimony between Rosella and her former associates, it seems unlikely that Blake Seven would agree to such an arrangement.


The audit appointment could only be accepted with appropriate safeguards    e.g. reporting partner and audit staff not involved in the audit of Blake Seven or the provision of other services   . However, even with safeguards, if Rosella’s appointments are accepted, Blake Seven may decide not to re-appoint the firm in future.



Test your understanding 4 – UK syllabus only


Weller & Co must ensure that any efforts to increase the firm’s revenue do not create any threats to objectivity and independence. Offering an ‘extended audit’ service to clients such as providing an internal audit service to an audit client creates a self-review threat if the firm uses the internal audit work in the course of a subsequent external audit.


The self-review threat arises because of the possibility that the audit team will use the results of the internal audit service, without appropriately evaluating those results or exercising the same level of professional scepticism as would be exercised when the internal audit work is performed by individuals who are not members of the firm.


Performing a significant part of the client’s internal audit activities increases the possibility that firm personnel providing internal audit services will assume a management responsibility. This threat cannot be reduced to an acceptable level.


Audit personnel should not assume a management responsibility when providing internal audit services to an audit client. Management responsibility may include, for example, performing procedures that are part of the internal control and taking responsibility for designing, implementing and maintaining internal control.


Section 5 of the FRC Ethical Standard states that the greatest threats to objectivity created by performing an internal audit service to an audit client are those of self-review and the management threat. It also acknowledges that the range of internal audit services is wide, and may not always be termed as such by the audited entity.


Audit firms are prohibited from undertaking an engagement to provide internal audit services to an audited entity where it is reasonably foreseeable that:


For the purpose of the audit of the financial statements, the auditor would place significant reliance on the internal audit work performed by the audit firm, or


For the purposes of the internal audit services, the audit firm would undertake part of the role of management.


Safeguards may be used to reduce the threat to an acceptable level, for example, by ensuring that external audit work and internal audit work are performed by separate teams. In addition, the audit work should be reviewed by a partner who is not involved with the audit.


Where internal audit services are supplied to an audit client, they should be the subject of a separate engagement letter and billing arrangement, and should also be pre-approved by those charged with governance of the audited entity.


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