COMPLIANCE WITH ETHICAL REQUIREMENTS

Auditing – Study Notes Chapter 7 Compliance with Ethical Requirements
CHAPTER SEVEN
COMPLIANCE WITH ETHICAL
REQUIREMENTS
LLOO ##** LLEEAARRNNIINNGG OOBBJJCCTTIIVVEE
IICCAAPP''SS SSTTUUDDYY TTEEXXTT
RREEFFEERREENNCCEE****
LLOO 11
✯✯✯✯
FFUUNNDDAAMMEENNTTAALL PPRRIINNCCIIPPLLEESS OOFF EETTHHIICCSS
1144..11..22,, 1144..11..33
1144..44..11,, 1144..44..22
LLOO 22
✯✯✯✯✯✯
TTHHRREEAATTSS TTOO FFUUNNDDAAMMEENNTTAALL PPRRIINNCCIIPPLLEESS
1144..22..11
1144..22..22
LLOO 33
✯✯
SSAAFFEEGGUUAARRDDSS TTOO FFUUNNDDAAMMEENNTTAALL EETTHHIICCAALL PPRRIINNCCIIPPLLEESS 1144..22..33
LLOO 44
✯✯
EETTHHIICCAALL CCOONNFFLLIICCTT RREESSOOLLUUTTIIOONN 1144..55..11
*Explanation of Symbol:
Symbol ✯✯ shows importance of the concept from exam point of view.
 If a concept is tagged with three stars i.e. ✯✯✯✯✯✯, it is very very important concept. Such concepts should be focused
most during preparation, should be revised atleast 10 times in the last month before exam, and should be revised
first on last day before exam.
 If a concept is tagged with two stars i.e. ✯✯✯✯, it is very important concept. Such concepts should be focused highly
during preparation, should be revised atleast 6 times in the last month before exam, and should be revised after
three-star concepts on last day before exam.
 If a concept is tagged with single star i.e. ✯✯, it is important concept. Such concepts should be focused moderately
during preparation, should be revised atleast 3 times in the last month before exam, and should be revised after
two-star concepts on last day before exam.
((NNoottee tthhaatt nnoonnee ooff tthhee ccoonncceepptt iiss uunniimmppoorrttaanntt,, tthheerreeffoorree nnoonnee sshhoouulldd bbee sskkiippppeedd))
****Coverage from Question Bank:
After completion of this chapter, you will be able to attempt following questions in ICAP’s Question
Bank:
Question # in ICAP’s
Question Bank
Type of Question
Question # in ICAP’s
Question Bank
Type of Question
Q. # 1a (ICAP Code of Ethics) Concept Review Question
Q. # 10 (Fundamental
principles)
Concept Review Question
Q. # 1b (ICAP Code of Ethics) Case Study Q. # 11 (Oops) Concept Review Question
Q. # 3 (Shamsuddin) Case Study
Q. # 12 (Independence of
external auditors)
Concept Review Question
Q. # 5 (Threats) Concept Review Question Q. # 14 (Saad Co) Case Study
Q. # 6 (Burewala and Kamal) Case Study
1 By: Muhammad Asif, ACA

LLOO 11:: FFUUNNDDAAMMEENNTTAALL PPRRIINNCCIIPPLLEESS OOFF EETTHHIICCSS:: ✯✯✯✯✯✯
Integrity:
A chartered accountant should be straight forward, honest, fair and truthful in his professional
dealings and business relationships.
A chartered accountant should not be associated with reports, returns or communications which
(in his belief):
 are false.
 are furnished recklessly.
 Omit information where such omission would be misleading.
Objectivity:
A chartered accountant should not allow bias, undue influence or conflict of interest in his
professional judgments. A way to achieve objectivity is to be Independent.
Independence has two aspects:
 Actual Independence: (also called “Independence of Mind/Fact)
Actual independence means auditor should make his professional judgment and opinions
with freedom of mind, and without any bias or influence.
 Perceived Independence: (also called “Independence in Appearance”)
The auditor must be seen to be independent, i.e. the auditor should avoid actions and
circumstances due to which a third party may conclude that his independence has been
compromised.
Confidentiality:
Confidentiality Principle:
A chartered accountant, acquiring confidential information in the course of professional
relationship:
 should not disclose such information to any third party except when permitted by client or
required by law or where there is professional right or duty to disclose.
 should not use such information for personal advantage or for advantage of third parties.
Confidentiality principle applies even within the firm, in social environment, and after termination
of relationship.
Exceptions of Confidentiality Principle:
Confidential information may be disclosed in following circumstances:
− If disclosure is permitted by client or
− If disclosure is required by law or court e.g.
o There is non-compliance of law (e.g. money laundering) which is required to be
disclosed, or
o Court orders chartered accountant to produce documents in a legal proceedings.
− When there is professional duty or right to disclose:
o To comply with Quality Control Review Program of the ICAP.
o To respond to an inquiry/investigation by the ICAP/SECP.
o To comply with requirements of international standards of auditing or ethics (e.g.
when required to communicate with lawyer, professional or regulatory authorities)

o To protect the professional interest of a chartered accountant in legal proceedings
(e.g. in case of unpaid fee or defending case of negligence).
Factors to Consider in deciding whether to disclose confidential information:
 Whether all the relevant information is known and substantiated. If any information is
unsubstantiated, professional judgment should be applied to determine type of disclosure
to be made.
 Whether the interest of any party (including third parties) could be harmed.
 Type of communication to be made and whom it is to be addressed.
Professional competence and due care:
Professional competence and due care means attaining and subsequently maintaining (through
continuing professional development) professional knowledge and skill at the level required to
ensure that clients receive a quality service, based on latest developments in profession, legislation
and techniques.
Consequences of not exercising professional competence and due care:
 Legal claims against the auditor in the law of contract or the law of tort.
 Disciplinary proceedings against the auditor by ICAP
 Firm may lose clients due to bad reputation
Professional behavior:
A chartered accountant should comply with relevant laws and regulations. He should always
behave with courtesy in professional dealings and should avoid misconduct and actions that
discredit profession.
CONCEPT REVIEW QUESTION
A professional accountant is required to comply with the five fundamental principles
described in “Code of Ethics for Professional Accountants”. What are these principles? Explain.
(10 marks)
(ICMA Pakistan, Summer 2009)
LLOO 22:: TTHHRREEAATTSS TTOO FFUUNNDDAAMMEENNTTAALL PPRRIINNCCIIPPLLEESS:: ✯✯✯✯✯✯
In many circumstances, there arises possibility that a Chartered Accountant may not comply with
above fundamental principles. These circumstances are called Threat (given below).
Self-interest threat:
Definition:
Threat that judgment or behavior of a team member will be inappropriately influenced because of a
financial interest held by an assurance team member (or his relatives).
Examples:
1. Holding of shares in assurance client by team member or his relatives
2. Loan or Guarantee from an assurance client by team member or his relatives.
3. Business relationship between firm (or assurance team member) and client (or
management)
4. Contingent fee arrangements (also called incentive based fee).
5. Overdue fee.

6. Undue dependence on total fee from a client
7. An assurance member entering into employment negotiations with client.
8. An audit team member is evaluated or compensated on the basis of selling non-assurance
services to assurance client.
Familiarity threat:
Definition:
Threat that an assurance team member will be too sympathetic to the interest of client or too
accepting work of client because of long or close relationship with client.
Examples:
1. Immediate or close family member of an assurance team member is a director or officer of
client, or an employee in a position to significantly influence financial statements.
2. Long association of a senior team member with assurance client.
3. Acceptance of significant gifts or preferential treatment.
4. An assurance team member has been a director officer, or employee of client in a position to
significantly influence financial statements (and vice-versa).
Self review threat:
Definition:
Threat that an assurance team member will not appropriately evaluate results of previous service
performed by himself or by another individual of his firm.
Examples:
1. Performing non-assurance services that directly affect subject matter of assurance services
(e.g. preparation of accounting records or valuation of assets and liabilities).
2. A member of assurance team has been a director, officer or employee of client.
3. A member of the audit team has provided temporary staff services to client during
engagement period.
4. A firm reviewing the operations of financial system after designing and implementation of
the system.
Intimidation threat:
Definition:
Threat that an assurance team member is deterred from acting objectively because of threats,
undue influence or pressure.
Examples:
1. Threat of dismissal of auditor from client.
2. Threat of dismissal of auditor (or his relative) by client from proposed engagement (e.g. in
case of disagreement).
3. Threat of litigation by client
4. A pressure by client to inappropriately reduce the extent of work (to reduce fee).
5. An engagement partner threats team member not to promote unless he agrees with client’s
inappropriate accounting treatment.
Advocacy threat:
Definition:
Threat that an assurance team member will promote client’s position on a matter (to third parties)
and compromises his own objectivity.

Examples:
1. Firm promoting shares of an assurance client.
2. Acting as an advocate of assurance client in litigations or disputes (e.g. tax disputes) with
third parties.
State the FIVE threats contained within ACCA’s Code of Ethics and Conduct and for each threat list
ONE example of a circumstance that may create the threat. (05 marks)
(ACCA F8 – June 2010)
LLOO 33:: SSAAFFEEGGUUAARRDDSS TTOO FFUUNNDDAAMMEENNTTAALL EETTHHIICCAALL PPRRIINNCCIIPPLLEESS:: ✯✯
Safeguards are actions or other measures that may eliminate threats or reduce them to an
acceptable level.
They fall into two broad categories:
1. Safeguards created by the profession, legislation or regulation; and
2. Safeguards in the work environment.
Safeguards created by the profession, legislation or regulation: (i.e. by regulators)
 Education, training and experience requirements for entry into profession
 Continuing Professional Development (CPD)Requirements
 Professional standards e.g. Code of Ethics, Code of Corporate Governance
 External Quality Control Review Programs by professional/regulatory organizations.
 Disciplinary mechanism by professional and regulatory bodies.
Safeguards in the work environment: (i.e. by firm)
 Internal Quality Control Review of engagements
 Use of separate teams to provide assurance and non-assurance services.
 Use of information barriers between teams providing services to clients having conflict of
interest (e.g. competitors)
 Appointment of ethics partner.
 Rotation of senior team members.
 Terminating financial interest with clients.
 declaration of independence to be signed by all team members at start of audit.
 Policies and procedures to identify and communicate interests or relationships between
engagement team and client identified during audit.
 A disciplinary mechanism by firm
How do the audit firm's own systems and procedures provide safeguards against threats to its
independence? (05 marks)
(ICMA Pakistan, Winter 2006)

LLOO 44:: ETHICAL CONFLICT RESOLUTION:: ✯✯
When faced with an ethical conflict, a chartered accountant should consider relevant facts of the
situation and should:
1. Identify threat(s) involved in the situation.
2. Evaluate threat (i.e. whether significant or insignificant).
3. Apply relevant safeguards (or course of actions) to reduce threat to acceptable level.
4. All ethical issues and relevant considerations should be documented.
If a significant ethical conflict/threat cannot be resolved, chartered accountant should consider
withdrawal from engagement, if possible and practicable.

Auditing – Case Studies Chapter 7 Compliance with Ethical Requirements
FREQUENTALLY ASKED CASES IN EXAMS & THEIR SOLUTIONS
Note: Cases starting from ✯✯ are comparatively more important than others.
✯✯ Case 1 Holding of financial interest (i.e. shares) in assurance client by team members or their relatives.
Threat:
Holding of shares in an audit client (or its associated entities) by assurance team members or by other partners practicing
in the same office or by other partners providing non-assurance services to same client or by their relatives creates Self-
Interest Threat.
Possible Course of Action/Safeguards:
Significance of threat should be evaluated. If threat is other than clearly insignificant, following safeguards should be
considered to reduce it to acceptable level:
1. Firm’s quality control policies and procedures should require team members to immediately communicate to
audit firm any financial interest in assurance client.
2. Team member (or his relative) should be convinced to dispose-off financial interest as soon as practicable.
3. If interest is not disposed, firm should remove concerned member from assurance team.
4. If any work is performed by concerned individual prior to disposal or removal, firm should involve an
independent chartered accountant to review the work performed by team member.
Situations Tested in Exam Questions
 Team manager inherited shares during audit.
 Son of engagement partner is a sales manager and receives shares as part of remuneration.
 A partner of the firm holds shares in subsidiary of audit client.
 Close relative of team manager holds shares in audit client.
 Brother of partner acquired shares in audit client.
 Father of trainee has financial interest in audit client.
✯✯ Case 2 Long Association with assurance client (e.g. more than 3 years).
Threat:
Using the same senior personnel on an assurance engagement over a long period of time creates Familiarity Threat and
Self-Interest Threat.
Significance of threat should be evaluated. If threat is other than clearly insignificant, firm should remove the concerned
team member from assurance engagement, and should involve independent chartered accountant to review the work
performed by senior personnel (if any).
If threat is insignificant, individual can stay as part of engagement team with following safeguards:
1. Firm should involve an independent chartered accountant to review the work performed by senior personnel.
2. Regular independent internal or external quality control reviews of engagement.
In case of listed companies in Pakistan, engagement partner shall be rotated after 5 years, and shall not resume for next 2
years.
 Engagement partner was rotated but manager was retained in team who were involved in audit for past 5 years.
 A past consultant of firm joins the firm and is deputed on audit of client.
 Because of time pressure, client requests to use same team member which has been auditing client for many
years.
 Engagement partner has been partner of the engagement for 6 years.
 Engagement partner has been partner for 5 years, now rotated and proposed to be quality control reviewer.
 Firm has been the auditor of client for 10 years.
 Engagement partner served for 4 years and client is now becoming a listed company.
1 By Muhammad Asif, ACA

✯✯ Case 3
If a director, officer or certain employee of client is Immediate family member, or Close family
member, or Close relative of an assurance team member or a partner of firm.
Threat:
If a director, officer or certain employee of client is Immediate family member, or Close family member, or Close relative
of an assurance team member or a partner of firm, it creates Familiarity Threat, Intimidation Threat, and Self-interest
Threat.
In case of a listed company in Pakistan, parents/spouse/children of CEO, CFO, Internal auditor or a director shall not be
involved in audit of company.
In case of unlisted company, significance of threat should be evaluated. If threat is other than clearly insignificant,
following safeguards should be considered to reduce it to acceptable level:
1. Firm’s quality control policies and procedures should require team members to immediately communicate to
audit firm close relationships with employees of assurance client.
2. Firm should remove concerned member from assurance team or, if possible, firm should restructure
responsibilities of team member so that the professional does not work on matters under the responsibility of
the relative.
 Engagement Partner’s brother-in-law joined audit client as CFO.
 Wife of the partner is Director Marketing in audit client.
 Engagement Partner’s son is a sales manager in audit client.
 Spouse of partner is a consultant and prepares tax return for client.
 Partner and Director Finance of audit client are friends and go on holidays.
 Engagement Partner’s daughter is Director Finance in audit client.
 Audit manager is married to the finance director of client.
 Audit client insists to appoint sister of finance controller as senior member of engagement team.
Case 4 Loan or Guarantee from an audit client.
Threat:
Obtaining a material loan from an audit client by Firm, Team member or their immediately family members creates Self-
Interest Threat.
Safeguards:
If loan is accepted from client:
Loan from a client which is NOT a
Bank or similar financial
institution
Loan from a client which is a Bank or similar
financial institution
Loan by an
assurance team
member or his
immediate family
member
If a loan is accepted from a client
which is NOT a bank or similar
financial institution, Self-interest
threat would be so significant that no
safeguard could reduce the threat to
acceptable level, unless loan is
immaterial to both:
a) Assurance client, and
b) Firm or Team member or
his immediate family
members.
If loan is NOT under normal lending procedures and
terms and conditions, Self-interest threat would be so
significant that no safeguard could reduce the threat to
acceptable level.
If loan is made under normal lending procedures and
terms and conditions, it does not create threat to
independence (e.g. Home Mortgage, Bank Overdraft, Car
loans and Credit card balances).
Loan by Firm
If loan is not under normal lending procedures and terms
and conditions, Self-interest threat would be so
significant that no safeguard could reduce the threat to
acceptable level.
If loan is made under normal lending procedures and
terms and conditions, but loan is material either to the
audit client or firm receiving the loan, firm should apply
safeguards to reduce the threat to acceptable level e.g.

firm should involve an independent chartered accountant
to review the work done by firm.
If loan is given to client:
If firm or an assurance team member or his immediate family member gives loan to assurance client, Self-interest threat
would be so significant that no safeguard could reduce the threat to acceptable level, unless loan is immaterial to both:
a) Assurance client, and
b) Firm or Team member or his immediate family members.
If deposit is made with a client which is a Bank or similar financial institution:
It does not create threat to independence if deposit is made under normal commercial terms.
 Audit manager has obtained Lease Finance from audit client.
 A partner has obtained house loan from audit client.
 Two team members obtained significant loans from audit client.
 Finance director offers loan at reduced interest rate to a team member.
✯✯ Case 5
If a director, officer or certain employee of client leaves the client and joins firm as an assurance
team member.
Threat:
If a director, officer or employee (in a position to significantly influence preparation of financial statements) of client
leaves the client and joins firm as an assurance team member, it creates Self-Review Threat, Familiarity Threat and Self-
Interest Threat.
Course of Action/Safeguards to reduce significant threat to acceptable level:
If the concerned assurance team member has served the client during the period covered by audit report, threat would be
so significant that no safeguard can reduce it to acceptable level. Consequently, such individual shall not be assigned to
assurance team.
If the concerned assurance team member has served the client before the period covered by audit report, significance of
threat should be evaluated and necessary safeguard should be applied e.g. review of the work performed by individual as
a member of the audit team.
 Assistant finance director of client has joined audit firm as a partner and is proposed to be a review partner on
audit of client.
 Finance director of the client has joined audit firm as engagement partner of client.
✯✯ Case 6
If an assurance team member leaves the firm and joins client as a director, officer or certain
employee.
Threat:
If an assurance team member or a partner of the firm leaves the firm and joins client as a director, officer or employee (in
a position to significantly influence preparation of financial statements), it creates Familiarity Threat, and Intimidation
Threat.
Ensure that there is no significant connection remaining between firm and individual i.e.:
 Individual is not entitled to any benefits or payments from firm unless these are made in accordance with fixed
pre-determined arrangements; and any amount owed to individual is not material to firm, and
 Individual does not continue to participate in firm’s business or professional activities.
If significant connection remains, threat would be so significant that no safeguard can reduce it to acceptable level.
If no significant connection remains between firm and individual, significance of threat shall be evaluated and following
safeguards may be applied to reduce threat to acceptable level:
1. Firm should modify the audit plan.

2. Firm should assign staff to audit team who have sufficient experience in relation to individual who joined firm.
3. Having a chartered accountant review the work of the former member of the audit team.
 An audit manager on previous audit, has recently joined audit client as GM Finance.
 An audit manager on last year’s audit of client, has jointed client as Manager Finance, prior to commencement of
the current year’s audit.
 Former member of firm’s staff who had managed the audit of client for last 4 years, has replaced client’s finance
director.
Case 7
A partner, employee or assurance team member is simultaneously appointed director, officer or
employee of client (i.e. simultaneous employment)
Threat:
If a partner or employee of the firm simultaneously serves as a director or officer of an audit client, it creates Self-Interest
Threat and Self-Review Threat.
Course of Action/Safeguards:
This threat is so significant that no safeguards could reduce the threats to an acceptable level. Accordingly, no partner or
employee shall serve as a director or officer of an audit client.
However, a partner can attend board meetings of client to discuss audit related matters; but he should not participate in
management decisions at meeting.
 Client requested engagement partner to attend board meetings on monthly basis.
 Directors suggested that a partner in your firm should join the board as a non-executive director.
✯✯ Case 8 An assurance team member is willing to join client in future.
Threat:
If an engagement team member is willing to join client in future, it creates Self-Interest threat.
Firm’s quality control policies and procedures should require team members to immediately notify audit firm when
entering employment negotiations with client. (team member lacks integrity if he does not notify firm)
On receiving such notification, firm should evaluate significance of threat and should apply safeguards to reduce threat to
acceptable level e.g.
1. Firm should remove the individual from audit team, or
2. A review of any significant judgments made by that individual while on the team.
 Two assurance team members have applied (or being interviewed) for vacancies in accounts department of
audit client.
 Audit manager has been offered a job of CFO in audit client, to be joined after the completion of audit.
 CEO of an audit client sent an email to engagement partner that one of engagement team member has been
short-listed for position as finance director.
 An audit manager notified firm that she is to join audit client as finance director after three months.
✯✯ Case 9 Purchase of Goods and Services from client.
Threat:
Purchase of goods or services from client by firm or assurance team member or his immediately family member generally
does not create a threat
1. Magnitude of transaction is immaterial for client and firm, and
2. Transaction is within normal course of business of client, and
3. Transaction is on arm’s length basis.

However, if any of above conditions is not met, it creates Self-Interest Threat.
Significance of threat should be evaluated. If threat is other than clearly insignificant, following safeguards should be
considered to reduce it to acceptable level:
 Eliminating or reducing the magnitude of transactions
 Removing the individual from assurance engagement.
 Accepting discount vouchers from audit client.
 Partners stay in hotel managed by audit client.
 Audit client offers 10% discount on purchase of goods to staff. Same is offered to audit team.
 Audit team members received/provided investment advice to client or its management.
 Firm rents office space from audit client.
Case 10 Threat of removal by client (e.g. on disagreement).
Threat:
Threat by client to remove the existing auditor over disagreement creates Intimidation Threat, and Self-Interest Threat.
 Discuss the issue with other partners (e.g. ethics partner), and also disclose to TCWG.
 Consider withdrawal from engagement (as threat by management indicates lack of trust and management
integrity)
 Conduct engagement quality control review, if not withdrawn from engagement.
 CEO threatened partner not to re-appoint for next year if partner did not agree on CEO’s accounting treatment
and disclosure of certain items.
 Managing director capitalized research cost and indicated to remove firm if opinion is modified.
✯✯ Case 11 Gifts and Hospitality.
Threat:
Accepting gifts or hospitality from an assurance client creates Self-Interest threat and Familiarity threats, unless value is
trivial and inconsequential.
Firm or member of assurance team shall not accept significant gifts or hospitality from client because threat would be so
significant that no safeguard could reduce threat to acceptable level.
 Finance director invited team to watch a football match followed by a luxury dinner.
 Client using yacht or balloon-flight to entertain audit team.
 Free subscription of a club for one year
 Client offering free stay for assurance team at a luxury resort.
Case 12 Litigation between assurance team and assurance client.
Threat:
When litigation takes place or is likely to take place between firm (or assurance team) and audit client, it creates
intimidation threat and self-interest threat.
Firm should disclose nature and extent of litigation to TCWG (e.g. audit committee).
If individual is involved in litigation, firm should remove individual from engagement.

If firm is involved in litigation, an independent chartered accountant should be engaged to review the work done. If threat
is not reduced, firm should withdraw from engagement.
 There is a litigation between client and a member of team about possession of a land.
Case 13 Large proportion (i.e. 15%) of revenue of firm coming from a single client.
Threat:
If a firm (or an office or a partner) is generating large portion of its revenue (e.g. more than 15%) from a single assurance
client, it creates Self-Interest Threat and Intimidation Threat.
1. Firm should take necessary steps to reduce this dependency e.g. increase client–base or withdraw from some of
services.
2. Regular internal or external quality control reviews.
3. Consulting a third party (e.g. an independent chartered accountant or a professional regulatory body) on key
audit judgments.
 Total fee received from client last year equated to 16% of firm’s total income. This year, increase in fee from
client is expected.
 Firm provides substantial non-assurance services to audit client.
✯✯ Case 14 Overdue Fee.
Threat:
If fee (or significant part of fee) due from an assurance client remains unpaid for a long period, it creates Self-Interest
Threat.
Firm should discuss the matter with audit committee and TCWG and should require that:
 Predecessor auditor’s fee should be paid before acceptance of engagement (initial engagements).
 Fee of previous year’s professional services (assurance as well as non-assurance) should be paid before issuance
of current year’s assurance report. (for recurring engagement).
If previous year’s fee is not paid before issuance of audit report, significance of threat shall be evaluated and following
safeguards may be applied:
1. Firm should involve an independent chartered accountant to review the work done or otherwise advice as
necessary.
2. Firm should consider whether overdue fee may be equivalent to loan.
3. Firm should also consider whether it is appropriate to be reappointed or continue the engagement.
 Previous year’s audit fee is still unpaid at completion of current audit. CFO committed to pay both years’ fee after
signing of current year’s audit report.
 20% of last year’s audit fee is still outstanding.
 Taxation fee for last year is still outstanding.
✯✯ Case 15 Contingent Fee.
Definition:
Contingent fees are fees calculated on the basis of outcome of a transaction or results of service performed by firm.
However, a fee is not regarded as being contingent if established by a court or other public authority.
Threat:
Accepting a contingent fee from an assurance client (for assurance or non-assurance service) creates Self-Interest Threat.

Threat for contingent fee is so significant that no safeguard could reduce the threat to acceptable level. Consequently, a
firm shall not enter into any such fee arrangement. Fee should be based on required time and experience to complete job.
 Fee will be Rs. 200,000 if audit is completed in a month. If delayed, fee will be Rs. 150,000.
 Assisting client in issuance of securities and agreeing different fee level depending on amount of subscription.
 Fee for tax services will be 10% of tax relief allowed by tax authorities.
 Audit fee will be 10% of actual profit.
 Fee for assurance service will be paid only if bank approves loan.
 Fee based on type of opinion.
✯✯ Case 16 Accepting a fee lower than predecessor auditor or market rates
Threat:
Accepting a fee lower than that charged by predecessor auditor is regarded as undercutting.
Similarly,
An auditor should not quote fee lower than that charged by predecessor auditor unless the scope and quantum of work
materially differs from the scope and quantum of work carried out by the previous auditor, and following safeguards are
also applied:
 Appropriate time and qualified staff is assigned to engagement.
 Client should be made aware of scope of work and basis of fee.
Note: a slightly different concept is Lowballing which means accepting a fee lower than market rates (in hope of getting
lucrative non-assurance services in future). Above safeguards are also applied if a firm accepts a fee less than market rates.
 Client suffered heavily because of financial crisis and asked auditor to appoint them if they could quote fee less
than previous auditor.
 A limited assurance engagement has been accepted at a fee which is lower than predecessor auditor.
 Audit firm quoted a fee which is less than market rate with hope to get tax and advisory services in future.
✯✯ Case 17
Providing assurance services to two clients which have conflict of interest (e.g. competitors or
clients having disputes).
Threat:
Providing audit (or other) services to two clients which are competitors or have dispute causes Conflict of Interest. A
conflict of interest creates threat to:
 Objectivity (because auditor may not act in the best interest of both parties) and
 Threat to other fundamental ethical principles (e.g. Confidentiality as information from one client may be used
for benefit/loss of other).
̶ Both clients should be notified about the fact and their consent should be obtained to act as auditor of other company.
̶ Separate teams and engagement partners should be engaged to perform audit.
̶ Chinese Walls (i.e. Information barriers) should be implemented between teams to prevent leakage of confidential
information. These are implemented by:
giving clear guidelines to members of the engagement team on issues of security and confidentiality of
information.
strict physical separation of such teams
confidential and secure data filing.
Use of confidentiality agreement, signed by team members.
̶ An independent senior should regularly review safeguards applied.
If above safeguards cannot be applied, auditor should not act for one of the parties.

 Two assurance clients are in dispute with each other.
 Providing valuation/due diligence services to two different clients for same subject matter.
 Providing assurance services to two different clients which are competitors.
 Providing assurance services to two clients who trade with each other
 One assurance client intends to acquire other assurance client (not competitor), and asks advice of firm about
proposed acquisition.
Case 18 Advertisement and Publicity.
Threat:
Advertisement for solicitation and undue publicity by a chartered accountant in practice create Self-interest threat and
Threat to Professional Behavior.
Course of Action/Safeguards:
A chartered accountant should not make advertisement/publicity of his services in the manner as is done by other normal
businesses. However, a chartered accountant can use appropriate newspaper/magazine only to inform public (e.g. about
establishment of new practice, changes in partnership or address etc) provided such announcements are limited to bare
statement of fact.
Any announcement, communication and notices by a chartered accountant should not:
(a) Use means which bring the profession into disrepute.
(b) Exaggerate work of himself
(c) contain testimonials or endorsements;
(d) make comparisons with other chartered accountants in practice or degrade work of other accountants.
(e) create false expectations of favorable results
 Owner of an advertising agency offered firm to provide significant discount for publicity of his new practice.
 Advertisement with following statements:
“Contact us, if you are fed up of your accountants charging too much for poor quality services”.
“We are the largest firm with team of most professional and leading experts”.
“We guarantee to improve your business efficiency and save your tax”.
“For new clients we offer a 25% discount when both audit and tax services are provided”.
✯✯ Case 19 Preparing Accounting Records or Financial Statements
Threat:
Preparing accounting records or financial statements for audit client creates Self-Review Threat when financial
statements are subsequently audited by firm.
Services that can be offered:
In case of listed companies, a firm cannot provide bookkeeping or accounting services to listed audit clients.
A firm can provide bookkeeping and accounting services to an unlisted audit client if services are of a routine or
mechanical nature e.g.:
 Recording transactions approved by client.
 Posting transactions to general ledger and to trial balance.
 Preparing financial statements based on information in the trail balance.
 Providing payroll services based on client-originated data.
Safeguards for assurance service:
1. Individual performing non-assurance engagement should not be part of audit engagement team.
2. Firm should involve an independent chartered accountant to review the work.
Safeguards for non-assurance service:
3. Managerial functions/decisions should not be taken by firm/individuals (e.g. approval of transactions, preparing
or changing source data for transactions, determining or changing journal entries).
4. Obtaining the client’s acknowledgement of responsibility for the results of the work performed by the
firm/individual.

 CEO of audit client requested audit manager to carry out accounting work and prepare financial statements at a
mutually agreed fee.
 Engagement team prepares financial statements from trial balance and proposes adjusting entries.
 A listed audit client requested firm to reconcile creditors’ ledger with the statements submitted by suppliers.
 Director requested firm to provide a team member to assist in preparation of its annual financial statements.
✯✯ Case 20 Temporary Staff Assignments.
Permissibility:
A firm cannot provide temporary staff assignments to listed audit clients. However, temporary staff services can be
provided to unlisted audit clients for short period of time.
Threat:
The lending of staff by a firm to an assurance client will create Self-review threat.
Safeguards for non-assurance engagement:
 Staff should not assume management responsibilities, and
 Audit client shall be responsible for directing and supervising the activities of the loaned staff.
Safeguards for assurance engagement:
Significance of threat shall be evaluated and following safeguards should be applied to reduce the threat to acceptable
level:
 Firm should not include the loaned-staff in assurance team.
 If loaned-staff is included in assurance team, he should not be given responsibility for any function or activity
that he performed during temporary staff assignment.
 Firm should involve an independent chartered accountant to review the work performed by loaned staff.
 Client’s two accountants resigned and client requested auditor to send two staff members on secondment for
three months.
 Client requested that an audit team member be seconded for two months as temporary director finance or credit
manager.
 Person who provided temporary staff services, is proposed to be part of engagement team.
 Directors required that a team member in previous audit should be seconded to company to assist in
preparation of financial statements.
 CEO of an unlisted audit client asked firm to send audit manager of secondment to assist new chief internal
auditor.

COMPLIANCE WITH ETHICAL REQUIREMENTS

Recommended

Recommended

More Related Content

Similar to COMPLIANCE WITH ETHICAL REQUIREMENTS

Similar to COMPLIANCE WITH ETHICAL REQUIREMENTS (20)

More from MUHAMMAD HUZAIFA CHAUDHARY

More from MUHAMMAD HUZAIFA CHAUDHARY (20)

Recently uploaded

Recently uploaded (20)

COMPLIANCE WITH ETHICAL REQUIREMENTS