Ethics and Acceptance Master Class

Solution:

Part (a): Conflict of interest

Wimble & Co must inform both clients of the conflict and obtain their consent to act. Separate engagement teams should be used for each audit, and physical barriers should be put in place to limit access to confidential files. An independent review partner should be assigned to ensure the safeguards are effective.

Part (b): Ethical threats and safeguards

Ethical Threat	Possible Safeguard
Financial interest: The audit manager owns shares in Murray Co, creating a self-interest threat.	The audit manager must dispose of the shares immediately.
Previous employment: The audit manager used to work for Murray Co, creating a self-review and familiarity threat.	The audit manager should not be assigned to the audit, especially if they would be auditing their own prior work.
Gifts and hospitality: The offer of free equipment creates a self-interest and familiarity threat.	The firm should decline the offer, as it is not trivial or inconsequential.
Long association: The engagement partner has been with Barker Co for 12 years, creating a familiarity and self-interest threat.	Rotate the senior personnel and perform an independent quality control review of the engagement.
Personal relationship: The audit senior's sister is the financial controller, creating a familiarity, self-interest, and intimidation threat.	Tim Andrews must be removed from the audit team.
Advocacy: The request to represent the company in a tax dispute would be promoting the client's position.	The firm must politely decline this service.
Overdue fees: Unpaid fees from Barker Co create a self-interest threat.	Request payment immediately and do not perform further work until fees are paid.
Provision of other services: Preparing financial statements and providing tax services creates a self-review threat.	Use separate, non-audit staff for these services and arrange for an independent review of the work.

Question: Explain each of the FIVE fundamental principles of ACCA's Code of Ethics and Conduct.

Solution:

• Integrity: A professional accountant must be straightforward and honest in all professional and business relationships.
• Objectivity: An accountant must not allow bias, conflicts of interest, or undue influence to compromise their professional judgment.
• Professional Competence and Due Care: An accountant must maintain professional knowledge and skill to ensure a client receives competent service, acting diligently and in accordance with applicable standards.
• Confidentiality: An accountant must respect the confidentiality of information acquired and not disclose it without proper authority.
• Professional Behaviour: An accountant must comply with relevant laws and regulations and avoid any conduct that might discredit the profession.

Required:

(a) State the circumstances in which a person is not eligible to act as an auditor.

(b) Describe the steps required to remove an auditor from an engagement.

(c) Identify and explain THREE threats to objectivity if Whilling and Abel accept Truckers Co as a new audit client. For each threat, recommend how the threat can be managed.

(d) Explain the matters, other than ethical threats, that should be considered by Whilling and Abel prior to accepting the engagement.

Solution:

Part (a): Ineligibility to act as an auditor

A person is not eligible to act as an auditor if they are not a member of a Recognised Supervisory Body (RSB), or are an officer, employee, business partner, or a close family member of an officer or employee of the company.

Part (b): Removal of an auditor

To remove an auditor, a decision must be made by the shareholders at a general meeting. Advance notice must be given to the company and the auditors, and the auditors have the right to attend and speak at the meeting or have representations read on their behalf.

Part (c): Threats and safeguards

Ethical Threat	Possible Safeguard
Familiarity Threat: The audit manager knows the finance director, creating a familiarity threat where they might be too trusting and not apply sufficient professional skepticism.	A different audit manager should be assigned to the audit of Truckers Co.
Advocacy Threat: The audit firm has been asked to prepare a tender and present with the client, which is an act of promoting the client.	The auditor should politely decline this invitation, as it would compromise objectivity.
Self-Interest Threat: The potential fee represents 14% of the firm's total income, creating a fee dependency.	The firm should increase its client base to reduce dependency and have an independent review of the audit work.
Intimidation Threat: The directors are refusing to make adjustments, which indicates a threat to impartiality.	The firm should carefully consider whether they can stand up to management pressure and maintain objectivity. If not, they should decline the engagement.

Part (d): Other considerations

In addition to ethical threats, Whilling and Abel should consider:

• Professional clearance: The current auditors are owed fees, which is a significant issue.
• Management integrity: The refusal to make adjustments to prevent a loss raises a serious question about management's integrity.
• Preconditions for an audit: The firm must ensure management acknowledges their responsibilities.
• Resources: The firm must have adequate resources to complete the audit on time.
• Client's financial status: The company's loss-making history and potential financial difficulties increase the risk of the engagement.

Question 1: Which of these is NOT a fundamental ethical principle?

• A. Integrity
• B. Independence
• C. Objectivity
• D. Professional competence and due care

Solution:
B. While independence is a crucial characteristic, it is not one of the five fundamental principles defined by the ACCA Code of Ethics.

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Question 2: Which of these statements provides the best explanation of integrity?

• A. Members should act diligently and in accordance with applicable technical and professional standards
• B. Members should not bring the profession into disrepute
• C. Members should not use client information for personal advantage
• D. Members should be straightforward and honest in all professional and business relationships

Solution:
D. Integrity is defined as being straightforward and honest.

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Question 3: A member was found guilty of ethical misconduct by failing to respond to the professional clearance requests from another audit firm. This is a breach of which fundamental principle?

• A. Integrity
• B. Independence
• C. Professional behaviour
• D. Professional competence and due care

Solution:
C. Professional behaviour includes professional courtesy, such as responding promptly to requests from other auditors.

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Question 4: Which of the following statements best describes the conceptual framework approach to ethics?

• A. A set of rules which must be followed in all circumstances
• B. A set of principles which the auditor applies based on professional judgment
• C. The conceptual framework is set out in company law
• D. A set of principles which the auditor applies at their discretion

Solution:
B. The conceptual framework is a principles-based approach that requires the auditor to use professional judgment to apply the principles in various situations.

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Question 5: Why do auditors need to be independent?

• A. To ensure users of the auditor's report can place reliance on it and have faith it is not biased
• B. To ensure the financial statements give a true and fair view
• C. To provide more regulation for auditors to increase the perception of quality
• D. The law requires it

Solution:
A. Independence ensures freedom from bias and influence, which is essential for users to trust the audit opinion.

You are the audit manager responsible for the audit of Broome Co, a listed company. You have been informed by one of the audit juniors that the finance director has offered to take the audit team to a World Cup Final at the expense of the client as a thank you for an efficient audit.

The finance director has requested that you attend a social event where the company will outline a new rights issue of ordinary shares to shareholders. The finance director believes that the presence of the external auditor will add credibility to the rights issue and increase the chance of raising the required finance.

Question 1: Which of the following is NOT a threat to objectivity?

• A. Independence
• B. Self-review
• C. Advocacy
• D. Intimidation

Solution:
A. The threats to objectivity are self-interest, self-review, familiarity, advocacy, and intimidation. Independence is the state of being free from these threats, not a threat itself.

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Question 2: Which ethical threat would be created if the audit manager attends the social event where the client will outline a new rights issue to shareholders?

• A. Familiarity
• B. Advocacy
• C. Self-review
• D. Self-interest

Solution:
B. Attending the event and appearing to support the rights issue would be an act of promoting the client, which is an advocacy threat.

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Question 3: Which of the following is likely to be the most significant threat created by the offer of tickets to the World Cup Final?

• A. Intimidation
• B. Advocacy
• C. Self-review
• D. Self-interest

Solution:
D. The offer is a valuable gift, which creates a self-interest threat as the auditor may feel they owe the client a favorable audit opinion in return.

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Question 4: What is the restriction, if any, on the level of fee income that can be received from recurring work from Broome Co before a situation of dependency is presumed to exist?

• A. 5%
• B. 10%
• C. 15%
• D. No restriction

Solution:
C. For a listed company, fee dependency is presumed when fees exceed 15% for two consecutive years.

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Question 5: For clients where the level of fees must be monitored, what safeguard can the firm apply to reduce the threat to an acceptable level?

• (i) Rotation of audit team members on an annual basis.
• (ii) Discussion of the matter with the audit committee.
• (iii) Assign an engagement quality control review partner.

• A. (i) and (ii) only
• B. (i) and (iii) only
• C. (ii) and (iii) only
• D. (i), (ii) and (iii)

Solution:
C. Discussing the matter with the audit committee and assigning an engagement quality control review partner are both valid safeguards for fee dependency. Rotation of the audit team does not directly address the fee dependency threat.