Which of the following is not correct about independence of mind

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Terms in this set (40)

Part A
Fundamental Principles and Conceptual Framework

Professional Accountant is required to comply with the following fundamental principles:
1. Integrity
2. Objectivity
3. Professional Competence and Due Care
4. Confidentiality
5. Professional Behaviour

1. Integrity

- The principle of integrity is be straightforward and honest in professional and business relationship. Integrity also implies fair dealing and truthfulness.
- No member shall make false and misleading report.

2. Objectivity

-Principle of objectivity: not to compromise their professional judgment because of bias, free of conflict of interest and influence by others
-A member shall be and be seen to be free of any interest which cause problem to his objectivity.
-For example: pressure, multiple services,

3. Professional Competence and Due Care

-Strive continually to improve his professional services, keep his technical knowledge up to date, enhance professional competence.
-Members shall not undertake professional work which he is not competent to perform unless the member obtains such advice and assistant as will enable him to carry out the work completely.
-Comply with Continuing Professional Education (CPE) requirement, standards and guidelines issued by MIA council.
-Due care means should conduct with courtesy and responsible toward person who engage him and also to the public.
-It also includes consideration of completeness of working paper, sufficiency of audit evidence, appropriateness of audit report

4. Confidentiality

-To treat client information acquired as confidential - cannot use or appear to use that information for his personal advantage or third party advantage.
Example: Members dealing in the shares of the company using information obtained during his engagement.

-Confidential information of the client shall be not disclosed except:
1. Consent to do so obtained from client
2. There is legal right or duty to disclose.
3. Provisions of written law (non-compliance, criminal act)

5. Professional Behaviour

- to comply with relevant laws and should also perform the job to maintain good name of institute (MIA) as well as other members.
-Auditor should refrain from acting in a manner that would discredit the profession.
-Auditors also required to take consideration of how they promote their services

Part B
Introduction
Categories of Threat

1. Self-interest threat; e.g. financial interest in a client, huge audit fee
2. Self-review threat; e.g. Performance other services to audit client
3. Advocacy threat; e.g. promoting shares in a audit client
4. Familiarity threat; e.g. close relationship between auditor and audit client
5. Intimidation threat; e.g. Being threatened with dismissal and non-payment of audit fee

210 Professional Appointment
Client acceptance
The auditor should investigate the background and business activities of the audit client and he should consider:

1. Whether the acceptance of the nomination would create any threats to compliance with the fundamental principles; for example any blood relationship between auditor and audit client; or
2. Whether there are any client issues that would threaten compliance of fundamental principles; for example the audit client involves in illegal business activities such as money laundry etc.

To accept the appointment, the auditor need to eliminate or reduce the threats to an acceptable level with proper safeguards. Otherwise the auditor should decline the appointment.

210 Professional Appointment
Engagement acceptance
Auditor need to eliminate or reduce threats to an acceptable level, by applying the following safeguards:

1. Acquiring understanding of the nature and complexity of the client's business
2. Acquiring knowledge of relevant industries
3. Obtaining experience with regulatory & reporting requirements
4. Assigning sufficient stat with the necessary competencies
5. Using expert where necessary
6. Agreeing on the realistic time frame for performance of the engagement
7. Comply with quality control policies and procedures.

210 Professional Appointment
Changes in Professional Appointments
Potential Auditor DO...

-A member who is asked to accept nomination as auditor is required to communicate with the existing auditor (with the permission the prospective client), for the purposes:
-To obtain information about client
-To know the professional reasons for such changes before proposed auditor accept the appointment.

-If the client does not granted the permission, the potential auditor shall decline the appointment.

-If the proposed auditor unable to obtain satisfactory reply from existing auditor within reasonable time, he should follow up by A.R. Register.
-And if still no reply after a few attempt by letter and calls, further letter to be send to existing auditor stating he assume that "there is no professional reasons why he should not accept appointment".

210 Professional Appointment
Changes in Professional Appointments
Existing Auditor DO...

-The existing auditor, on receipt of a communication, within 14 days to reply that, the existing auditor should get permission from the client.
-If permission granted: existing auditor should reply in writing whether there are reasons why the new auditor should not accept appointment.
-If permission not granted: existing auditor should report the fact to the proposed client.

220 Conflict of Interest
The auditor should take reasonable steps to identify circumstances that could pose a conflict of interest because such circumstances may give rise to threats to compliance with fundamental principles.

Eg:
-The auditor competes directly with the audit client
-The auditor is a business partner of a major competitor of the audit client

If element of threats exist, safeguards should put in place; such as:
-Use separate engagement teams
-Provide clear guidelines on issues of confidentiality

240 Fees and Other Types of Remuneration
The factors that may create self-interest threats;

1. A large portion of the audit firm's total earning from one client
2. the audit firm's financial heavily dependence on that client may create self-interest threat.
E.g. All cases involving listed entities, if the total fee generated exceed 15% of the firm total fees in each year over two consecutive years, a self-interest threat to independence is created. The only way is to withdraw from the engagement.

240 Fees and Other Types of Remuneration
Overdue fee of an audit client

-Long overdue for significant amount of audit fee may also give rise to self-interest threat.
-Generally the payment of such fees should required before the report is issued or before starts the new engagement.

250 Marketing Public Practice Services
Solicitation

-various means that accounting firms use to engage new clients other than accepting new clients that approach the firm.
-Examples include taking potential client to lunch to explain firm's services.
-Solicitation of potential clients personally or through direct mail is acceptable within reasonable limits.
-Once potential client said "NO" for the invitation, no more further solicitation is allowed.

240 Fees and Other Types of Remuneration
Contingent fee

-Fee should not be charged on a contingent basis for audit engagements but can be used for certain types of non-audit engagements.
-Hence the auditor must have clear understanding with the client on the scope and fee of the audit engagement.

240 Fees and Other Types of Remuneration
Pricing - under charged

-The auditor need to consider whether the lower fee able to ensure him to comply with fundamental principles (e.g. professional competence and due care).
-The auditor may not be able to perform the audit in accordance to applicable technical and professional standards for the lower fee.

250 Marketing Public Practice Services
Advertising and Publicity

-use of various media such as magazines, radio to communicate favourable information about the good and service of the firm.

250 Marketing Public Practice Services
Advertising

the communication to the public of information as to the services or skills provided by professional accountants in public practice with a view of procuring professional business.

240 Fees and Other Types of Remuneration
Referral fee or commission

The auditor should not receive or pay a referral fee or commission (create self-interest) unless he/she established safeguards to eliminate or reduce them to an acceptable level by:
1. Disclosing to the client the fact of receive and pay a referral fee or commission
2. Obtaining advance agreement from the client.

250 Marketing Public Practice Services
Publicity

is the communication to the public of facts about a professional accountant.

250 Marketing Public Practice Services
APS shall:

1. Not discredit to member, MIA and profession;
2. Contain matters of fact which are true and not misleading;
3. Look professional;
4.Not contain exaggerated claims of services offered, qualifications possessed or the experience gained;
5. Avoid claiming superiority over others; and
6. Carried in accordance with the relevant legislation, where applicable.

250 Marketing Public Practice Services
APS by auditor can be in the following manner

- Members can issue circulars to persons whom he has already been established a professional connection.
-Member is allowed to publish the firm name and address for purposes such as advertisement for job vacancies or to announce change of address
-Advertise for seminars or conferences for the publics. Publication of audit report, can announce admission or retirement from practice of a partner and may send greeting cards confined with the message of his greetings, his name and add of the firms
-Member can print their business card But ensure that the business card or firm stationery or name plate foes not include a claim that he is a specialist in any particular aspect of public practice

260 Gifts and Hospitality

- Accepting gifts from audit clients may create self-interest and familiarity threats, but generally is permissible if the value is clearly insignificant.
- However, if the gifts are significant and cannot be reduced to an acceptable level by application any safeguard, the auditor should not accept such gifts.

280 Objectivity - All Services

- An auditor is required to be fair, intellectually honest and free of conflict of interest when rendering services.
- It is the duty of auditor to present or report on information without bias and free from any influence.

290: Professional Independence
Professional independence

- Attitude of mind characterized by integrity and objective approach to professional work. Auditor should be and be seen to be free from any conflict of interest.
- The auditor must be independent from client in order to act professionally.
- The conceptual approach to independence requires that there is independence in mind and in appearance.

290: Professional Independence
Independence in mind/fact

Means opinion is formed without compromising professional judgment. It requires auditor to exercise skepticism and act with integrity and objectivity.

290: Professional Independence
Independence in appearance

More to the interpretation of users of financial statement of the auditors' independence.
Example; avoid receiving significant gifs and hospitality without proper safeguards as it will create threat to independence.

Auditors' Independence rules
Framework of Principles:

1. Identify Threats
- Self-review
- Self-interest
- Advocacy
- Familiarity
- Intimidation

2. Evaluate Threats
- Significant?
- Assurance team,
- firm,
- network firm?

3. Apply Safeguards
- Profession or legislation
- Assurance client
- Firm's Internal procedures
Eliminate the threats or reduce to an acceptable
level

4. Decide on Engagements/
Withdraw from engagement (In situation no safeguards available)

290: Professional Independence
Threats to independence
Self-interest threat

Occurs when an auditor or a member of the audit team is likely to benefit from a financial interest in, or has any other self-interest conflict with, an audit client.
e.g. financial interest in a client, huge audit fee. Loan to or from client, close business relationship with client.

290: Professional Independence
Threats to independence
Self-review threat

When a member of the audit firm was previously a director or officer of the audit client or was employee who hold significant post.
e.g. Ex-accountant of audit client, Performance other services to audit client such bookkeeping, consultancy.

290: Professional Independence
Threats to independence
Advocacy threat

Occurs when auditors promote an audit client's position.
e.g. promoting shares in a audit client, resolving disputes with creditors on behalf audit client, middleman promoting audit client's shares on restructuring;

290: Professional Independence
Threats to independence
Familiarity threat

Occurs by virtue of close relationship with an audit client. e.g. close relationship between auditor and audit client, acceptance gifts and hospitality

290: Professional Independence
Threats to independence
Intimidation threat

Occurs when a member of the audit team may be deterred from acting objectively and exercising professional skepticism by threats, actual or perceived, from directors, officers or employees of audit client.
e.g. Being threatened with dismissal, non-payment of audit fee, pressure to complete the audit in short period of time.

290: Professional Independence
Safeguards
The appropriate safeguards that can be applied fall into three broad categories:-

1. Safeguards creates by the profession, legislation or regulation - practice review by MIA, compulsory public practice programmes attended by auditor

2. Safeguards within the audit client - the internal control policies and procedures that reduce favouritism when appointing external auditors and good corporate governance and effective audit committee

3. Safeguards within the audit firm's own systems and procedures - audit ensures all members declare independence before engaging on the audit of public listed companies; rotating of auditors, comply to the quality control system implemented by the auditor.

290: Professional Independence
Safeguards for:
Financial interest:

Dispose the shares totally or reduce to insignificant amount or remove the member of the audit team from the audit engagement

290: Professional Independence
Safeguards for:
Close relationship or family member

Eliminating or reduce the magnitude of the transaction or remove the member from the audit engagement, discuss with those charged with governance such audit committee

290: Professional Independence
Safeguards for:
Loan and guarantees:

involve auditor from outside firm to review the work performed. However, if the loan from audit client that is a bank, this would not create threat to independence provided the loan is made under normal procedures.

290: Professional Independence
Safeguards for:
Provision of non-audit services to audit client such as bookkeeping, prepare financial statement, taxation, valuation services, temporary staff assignment, recruitment services

Significant threat if: audit client is public entity and involve in making decision

Insignificant threat if: merely posting data and preparing information from existing data (BS & PL & CF)

290: Professional Independence
Safeguards for:
Provision of non-audit services

Involving member of the firms to review the job of engagement team, confirming with client and acknowledgment of respective responsibility, making arrangement so that personnel providing such services do not involve in audit team, dislose to audit committee, avoid making significant decision on behalf of client.

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Which of the following will be considered a self interest threat?

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