Section 3

3.1 Certain "personal" independence rules (such as prohibitions on stock ownership in

an audit client) apply to a professional's close family members. State why you believe
this is so.

To begin with, Malaysia Institute of Accountants (MIA) stated that every professional
independence must have an attitude of mind characterised by integrity and an objective
approach to professional work. So, as a member in public practice, they must be free in each
professional assignment they undertake, of any interest which might distract from the
objectivity. Independence of mind is often referred to as being independent in fact.
Independent in appearance is the result of others’ interpretations of this independence. If
auditors are independent in fact but users believe them to be advocates for the client, most of
the value of the audit function is lost.

So, in my opinion, I believe that personal independence rules apply to a professional’s

close family members too. It is illegal for an auditor to work on an audit of a company in
which the auditor or a member of her immediate family has a direct or indirect financial
interest. And it illegal to participate in an audit of a corporation when a close relative works
in "an accounting or financial reporting oversight role." A staff member of a national
Certified Public Accounting (CPA) firm, for example, might possess stock in a client
corporation while not active in the engagement and not be in violation of the Independence
Rule. If the staff person is assigned to the engagement or becomes a partner in the office of
the partner responsible for the attest engagement, the stock must be sold otherwise the CPA
firm will lose its independence from that client.

Some CPA companies prohibit employees from owning stock in a client's company,
regardless of which office services the customer. These businesses have elected to set higher
standards than the minimums established by the rules of conduct.
3.2 All professionals in public accounting firms, whether they provide audit, tax, or
consulting services, should comply with the accounting firm's independence policies and
applicable independence rules. Why do you think this is?

All professionals in public accounting firms’ independence must be safeguarded in

order for the activity to be carried out objectively. Acceptance of the obligation to act in the
public interest is a distinguishable feature of the accounting profession. A professional
accountant should follow the Professional ethics while operating in the public interest. It says
that ethics are also important in professional firms of accountants. Besides, when we heard
about rules or policies, we know that it is one of the guidelines for the professional in public
accounting firms when doing their job.

It's just as crucial to ensure auditor independence as it is to ensure that revenues and
costs are accurately recorded and categorised. Auditor independence is a critical component
of the audit process since it directly impacts the auditor's judgement. Auditor independence
simply refers to the auditor's capacity to approach the audit process with honesty and
objectivity. This mainly needs the auditor's freedom to carry out his duties in a free and
objective manner. It allows him to form his thoughts free of any biases or external
constraints. As a result, in circumstances when the auditor is unable to take an unbiased
approach to the audit process, the opinion produced may be invalid and untrustworthy.

Wherever we are, we will not run away from the rules. In simple words, even in our
life we have our own guideline or rules that we must to follow. In the presence of rules, it
can shape a person’s personality and how he or she copes with problems without violate the
law. When we obey the instructions or rules, it will prevent us from violate any law that can
affect ourselves in the future.
3.3 In which situations might a firm's independence be affected by the type of non-audit
services provided to an audit client?

Any professional services done by a qualified public accountant during the course of
an audit engagement that are not related to an audit or review of an institution's financial
statements are referred to as non-audit services. If another member company is currently
offering audit or non-audit services to the potential customer, independence may be
threatened. If the proposed audit engagement team determines that the non-audit services
being delivered are forbidden by the independence standards, these services must be included
into the firm's capacity to execute the audit.

There are several factors that may impair the independence through non-audit services
which are self-interest threats, self-review threats, advocacy threats, familiarity threats and
intimidation threats. To begin with is the self-interest threats. It can be defined as threats
arising from auditors acting in their own interest. Self-interests can include auditors’
emotional, financial or other personal interests. Auditors may prioritise such self-interests
over their interest in completing a quality audit, whether consciously or subconsciously. For
example, the audit team is prepared to examine Ali’s Company in 2020. The audit team, on
the other hand, has yet to collect its audit fees from Ali’s Company for the 2019 audit. So, the
issue is the audit team may be tempted to publish a positive report in order for the firm to
obtain their payment for the unpaid expenses for 2019 audit.

Next, another factor is self-review threats. If the auditor is reviewing his own work or
the work of others in the same business, there is a risk of self-review. The auditor, for
example, compiles the financial accounts for High-end Company while also functioning as its
auditor. We can see that the auditor cannot be expected to make an unbiased assessment on
the financial accounts if he or she is required to examine his or her own work.

Furthermore, advocacy threats also one of the factors that could influence the
independent of the auditors. If the auditor is actively supporting the client, their objectivity
may be compromised. Encik Nazri as an auditor, is helping with the sale of Ahmad’s
Company while also working as the company's auditor. The problem is that the auditor,
Encik Nazri may give a positive report in order to raise the sale price of Ahmad’s Company.

Other than that, if the auditor is too close or familiar with workers, officials, or
directors of the client company, there is a risk of familiarity. Encik Naqib has been friend
with Hilmi for 10 years and Hilmi’s company appointed Encik Naqib as the auditor. So,
Encik Naqib may have become too familiar with the client and thus, lack objectivity in their
work.

Lastly, if the auditor is intimidated by management or its directors to the point that
they are unable to function objectively, there is an intimidation threat. Sarah Company is
dissatisfied with the audit report's result and has threatened to change auditors next year. The
auditor's most important customer is Sarah Company. Because Sarah Company is their
largest customer, the auditor's independence may be threatened. As a result, the auditor may
submit a report to Sarah Company that is satisfactory.

In conclusion, the threat purposes are to help the public practice can identify such
conflicts so that they can better maintain their objectivity and their independence when
auditing a client’s financial statements.
3.6 An audit client of Lindsay & Lee, CPA's wants the firm to perform tax services but
insists that the services be billed only if the client receives certain tax benefits as a result
of the firm's services (i.e., a "contingent fee"). If tax benefits were identified, the fee
would be 10% of the benefit received. Do you think the fee arrangement presents a
conflict?

I think the fee arrangement presents a conflict of interest. So, to support my answer is
the definition of the contingent fee. A contingent fee is an agreement in which no money is
paid until a certain result is achieved, or the fee amount is reliant on the outcomes of your
firm's services. A charge is not a "contingent fee" if it is set by courts or other public
authorities, or if it is established in tax cases based on the results of judicial proceedings or
the judgments of governmental agencies. Fees may differ based on the complexity of the
services provided, for example.

In this scenario, the fee structure specified should be considered contingent.

Contingent fee is prohibited by-laws on Professional Ethics, Conduct and Practice of MIA
and Code of Professional Conduct. According to Code of Professional Conduct, for a
contingent fee, a member in public practise may not prepare an original or revised tax return
or a claim for a tax refund for any client. Based on Professional Ethics by MIA, a registered
public accounting firm is not independent of its audit client if the firm, or any affiliate of the
firm, provides any service or product to the audit client for a contingent fee or commission, or
receives a contingent fee or commission from the audit client, directly or indirectly, during
the audit and professional engagement period.

In conclusion, the fee arrangement presents a conflict. If Lindsay & Lee accept the fee
arrangement, the firm's and its professionals' independence will be threatened.