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CHAPTER 5 (Part 2) - Coggle Diagram
CHAPTER 5 (Part 2)
Threats arising from employment
Business relationship
Self-interest
Intimidation
Eg
Holding an interest in a joint venture with a client
Arrangements to combine products/services with each other & to market the package with reference to both parties
Distributions of client's products/ services
Safeguards
Disposal of firm's interest unless clearly insignificant
Removal of any individual audit team member who has an interest from the audit team
Personal relationships
Family /personal relationship
Immediate family of an audit team member
Spouse / equivalent /dependent
Employee of client
In a position to exert significant influence over client's FS
Threats
Depends on
2 more items...
Familiarity
Self-interest
Intimidation
Close family
Parent/ child/ siblings/ who is not immediate family member
Director/officer/ employee in a position to exert significant influence
Restructure audit team's responsibilities so that no person will deal with something related to his immediate family
Removal of individual from audit team
Relationship of partners & employees of the firm
Between
Partner/ employee of the firm who is not an audit team member
Director/ officer/ employee in a position to exert significant influence
Partner/ employees of the firm shall consult in accordance with firm policies & procedures if they are aware of the above
Safeguards
Structure employee's responsibilities to reduce potential influence over the audit engagement
Independent partner review
Employment
A former employee of the firm leaves to join client
Non-public interest entities
Consider modification of audit plan
Change members of audit team
Independent partner review
Quality control review
Public interest entities
If the former employees is key audit partner, then he joins client as director/officer/employee in a position
Independence is compromise
Unless
Subsequent to the individual ceasing to be a key audit partner
Client has issued audited fs covering a period of not less than 12 months and
The individual was not an audit team member with respect to audit of above fs
Threats
Familiarity
Intimidation
Self-interest
A former director/officer of client leave to join audit firm
Threat
Self-interest
Self-review
Familiarity
Safeguard
Individual should not be assigned to the audit team
If the work they performed whilst employed by the client is to be reviewed/evaluated
Long association
Threats
Familiarity
Self-interest
Safeguards
Independent partner review
Independent quality control review
Rotate senior staff
Public interest entities
Compulsory cooling off period
Engagement partner
Rotate after
7 years
Cooling-off period
5 years
Individual responsible for quality control review
Rotate after
7 years
Cooling-off period
3 period
Key audit partner
Rotate after
7 years
Cooling-off period
2 years
Actual & threatened litigation
Litigation with audit client occurs
Threats
Self-interest
Intimidation
Safeguards
Disclose to audit committee
Removal of individual from assurance team
Refuse to perform the assurance engagement
Threats arising from financial matters
Financial interest
Threats
Self-interest
They benefit personally if client's FS exceed market expectations
Eg.
Ownership of shares in client by
Audit firm
Disposal of shares
Inform audit committee
Independent partner review
An audit team member
Remove the individual from audit team
Inform audit committee
Independent partner review
Immediate family member of audit team member
Inform audit committee
Independent partner review
Loans & guarantees
Self-interest
Threats
Client
Bank
To audit firm, audit team member, their immediate family
No threat exist
Immaterial
On normal terms
Threat exist
Material
Review work performed by prof. accountant from outside the firm
Not bank
To & from audit firm, audit team member, their immediate family
No safeguard unless immaterial
So, should be avoided
Fees
Relative size
Fees are of large proportion of total fees of audit firm
Self-interest & intimidation
Dependence on audit client
Concern about losing them
Safeguards
Increase client base to reduce dependence
Resign from some service
Discuss with audit committee
External quality control review
Consult ACCA on any key audit areas requiring judgements
Public interest entity
Additional ethical requirements
Fess received is more than 15% of total fees for two consecutive years
Disclose to TCWG
Pre-issuance review on 2nd year FS prior to auditor's opinion being issued
Post-issuance review on 2nd year FS after auditor's opinion being issued
Overdue fees
Part of fees is not paid b4 audit report for following year is issued
Self-interest threat
Issue favourable opinion rather than losing amounts owed
Obtain partial payments of overdue fees
Discuss with audit committee
Consider resignation id overdue fees not paid
Contingent fees
Fees calculated on a predetermined basis relating to the outcome
Self-interest
No safeguards acceptable
Contingent fees are not allowed for audit services
Adequate safeguards implemented
Non-assurance work
Allowed
Gifts & hospitality
Gifts
Self-interest
Auditor/ audit firm might feel obliged to give favourable opinion
Should not be accepted unless value is trivial & inconsequential
It is also a bribe
Hospitality
Familiarity
Should not be accepted unless value is trivial & inconsequential
Threats arising from provision of non-assurance work
Preparing accounting records & FS
Threats
Self-review
Firm will unlikely to critisize its own work/ decision
Not public interest entity
Accounting services should not be performed by audit team staff
Client must provide all source data
Client must approve all journal entries
Discuss mom-audit services with audit committee
Public interest entity
Provision of accounting or bookkeeping services is not permitted
Tax services
Threats
Self-review
Advocacy
4 categories
Tax return preparation
Does not usually create threat
Why
Based on historical info
Management must take responsibility for the tax return
Tax calculations
Prepare acc. entries
Self-review
Calculation must not be performed by member of audit team
Independent review on audit work by reviewer not involvbed in the service
Public interest entities
Tax calculations should not be performed
Tax planning & advice
Threats
Self-review
Advocacy
Services must not be performed by member of audit team
Independent partner review
Obtain pre-clearance from tax authorities
Services should not be performed where advice depends on accounting treatment but auditor has doubt on the accounting treatment & advice will have a material impact on FS being audited
Assistance in the resolution of tax disputes
Threats
Self-review
Advocacy
Must not be performed by audit team member
Independent partner review
If auditor act as an advocate for audit client & amount is material
May not be performed
Internal audit service
If auditor plan to rely on internal audit work
Self-review
It is client's responsibility to maintain IC & report to TCWG
Independent partner review
Appropriate reliance is placed on IC
Public interest entities
Internal audit service must not be performed if
Relate to significant part of IC over FS
Financial acc. that is material to FS / records
Amounts/ disclosure that is material to FS
A threat to objectivity
Firm makes decision on behalf of client when providing internal audit service
Client must evaluate & determine which recommendation of firm should be implemented
Recruiting service
Threats
Self-interest
Familiarity
Intimidation
Audit firm must not make management decision
Recruiting services limited to
Review the professional qualifications of applicants & provide advice on suitability of their position
Interview candidates & advise on candidate's competence for FA, admin & control position
Should not provide service if relate to & for position of directors/officers/ member of senior position to exert significant influence
Searching for or seeking out candidates
Undertake reference checks of prospective candidates
Key aduit partner
Responsible for key decision/judgment on significant matter