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Chapter 4 - Professional code of ethics and quality control procedures,…
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SAFEGUARDS
In order to guard against these threats, real or perceived, firms should establish procedures to enable them to:
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Usually this will be done through the use of checklists. Whilst ethics should always be of paramount consideration it must be considered at these vital junctures:
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Whenever additional, non audit services are provided to an audit client; and
If any event, or change in circumstance, occurs to either the auditor or the client.
Conflict of interest
Any advice given should be in the best interests of the client. However, where clients' interests conflict (for example, clients in the same line of business), the firm's work should be arranged to avoid the interests of one being adversely affected by those of another.
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once a conflict is noted, you should advise both clients of the situation
reassure the client that adequate safeguards will be implemented, e.g. separate engagement leaders for each, separate teams to prevent the transfer of client information between teams and a second partner review
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if adequate safeguards can't be implemented, the auditor should resign.
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SAFEGUARDS
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Self review threat
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audit firm should consider barriers to independence to threat could reduce to an acceptable low level
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Advocacy threat
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should not advise on debt restructing as part of corporate finance dont enter negotiations with banks on client's behalf
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Obtaining engagement
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advertising
Before accepting , THINK of potential issues
Risk analysis
-management integrity
-past performance of business
-internal control
-complexity of transaction
-unusual transactions
-money laundering risk
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Information should only be disclosed under certain circumstances. In some circumstances the auditor must disclose the information and in others the auditor may chose to disclose the information, as follows:
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=implementing policies and procedures (done by firm) to ensure quality control at the individual engagement level
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A conceptual framework relies on a principles rather than a rules based approach. This provides guidance so that the principles may be applied to wide ranging and - potentially - unique circumstances.
-money laundering
-if court order has been obtained
-if required by regulatory body e.g financial legislation
-drug trafficking
-terrorism
-if client gave consent
-if it is the public interest to do so
-if member has to defend themselves in court hearing
Low balling - offering audit services at less than the market rate, undercutting others in tender.
:check:lower rate to win clients over
:check:seek money back by raising future fees or by doing lucrative other services for clients
:check:there is no outright ban for this, but it is dangerous (not ethical but legal)
:check: firm may win client but see no way of getting money back other than reducing the quantity of audit procedures (less time=insufficient evidence = quality affected =wrong opinion)
Opinion shopping - whilst shareholders appoint auditors, the directors typically seek out potential firm for the SHH to vote on.
:check: the board might be tempted to interview several firms until it found one that accepted it's accounting method
:check: any firms of auditors aware that a potential client is engaged in this process should not accept nominations
Advertising, publicity and obtaining professional work (in exam lookout what auditor shouldnt use)
AUDITORS
:green_cross::should not obtain or seek work in an unprofessional manner
:green_cross: can advertise but should have regard to relevant advertising codes/standards
:green_cross:should not make disparaging reference to/ comparisons with the works of others (compare kpmg wiht deloitte)
:green_cross:should not quote fees without great care not to mislead (based on time spent + position)
:green_cross:should not offer fees, commission or reward to 3rd parties for introducing clients
:check: ensure professionally qualified to act (on legal and ethical grounds)
:check: ensure existing resources adequate (consider time, staff and technical expertise)
:check: evaluate independence
:check: obtain references (screening test)
:check: communication with present auditors
The steps to be performed:
:star:evaluate integrity of client
:star:ensure current operating and financial situation of the company
:star:the industry and prospects for the client's business
:star:assess previous year's audit report (modified)
:star:access competence of management
for an audit are present and confirming a common understanding between auditor and management of the terms of engagement
- determine whether financial reporting framework is acceptable
- management's agreement that acknowledges and understands it's responsibilities - preparing f/s in accordance with the applicable financial reporting framework
-internal control for the preparation of f/s which are free from material misstatements
-provide auditor access to all information is aware that is relevant to the preparation of f/s
-provide additional information that the auditor may request
-unrestricted access to entity staff from whom the auditor determines it necessary to obtain audit evidence
- rights of auditors
- if preconditions not present, -auditor determined the financial reporting framework to be applied is not acceptable
-management's agreement not been obtained on the above
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Form and content of the audit engagement letter :1. Objectivity and scope of the audit (ref to legislation, regulations, ISAs, ethical)
- Auditor's responsibilities
- Management's responsibilities
- Fees and billing arrangements (hours spent + position)
- Expectation that management will provide written representation (support evidence)
- Identification of applicable financial reporting framework for the preparation of f/s
- Involvement of other auditors and experts
- Form of other communication (management letter)
- Expected form and content of any report
- Arrangements regarding planning and performance arrangement (how many seniors, junior, partners involved)
Recurring audits
- the auditor shall assess whether the terms of engagement need to be revised and whether the terms of the engagement need to be revised
- if any indication on misunderstands the term of engagement as stated above, would be appropriate to revise eg. the entity misunderstand objective and scope of audit
=Competent?
=consider any threats to their independence & objectivity, yes, establish safeguards
=assess integrity of owners, director, entity
=comply with ethical requirements of professional accountancy bodies in relation to change in appointment
=Competent staff?
= Professional education & development
= Practical experience
= Knowledge of specific industry
= Understands firm's quality control policies & procedures
= Understanding applicable accounting, auditing, ethical & other technical standards
=Promote culture where quality is regarded as essential
=Provide training to ensure all staff understand quality objectives and procedures
=recruiting professional who are capable to undertake project
=with right competence and commitment to ethical principles to perform engagements in accordance with professional standards and regulatory requirements
=evaluating quality control procedures to ensure that they remain relevant, adequate and effective and are complied with