Chapter 4: Professional Codes of Ethics and Conduct

Objective: To explain the ACCA Code of Ethics and Conduct, which students and members of
ACCA must comply with.

1.1 Complying with the Code

Key Point

The Code establishes five fundamental principles:

1. integrity;
2. objectivity;
3. professional competence and due care;
4. confidentiality; and
5. professional behaviour.
As a member of IFAC, ACCA's Code of Ethics and Conduct is based on IESBA's International Code of
Ethics for Professional Accountants.
All students and members of the Chartered Association (e.g. in practice, commerce, internal audit,
education) must observe proper standards of professional conduct and refrain from misconduct. Failure to
observe standards may result in disciplinary proceedings. The ACCA Code of Ethics and Conduct can be
downloaded from Code of Ethics and Conduct | ACCA Global.
References to relevant paragraphs of the Code have been provided throughout this chapter for information
only; they are not to be learnt. “R” denotes requirements and “A” application material.

1.2 Fundamental Principles

1.2.1 Integrity (R111)
In all professional, business, personal and financial relationships, the professional accountant
should be straightforward and honest. This implies fair dealing, truthfulness and having
the strength of character to act appropriately, even when facing pressure to do otherwise or
when doing so creates potential adverse personal or organisational consequences. This means,
for example, standing one’s ground when confronted by dilemmas or difficult situations or
challenging others when circumstances warrant.
Professional accountants should not knowingly be associated with reports, returns,
communications or other information which they believe:
 contains materially false or misleading statements;
 contains statements or information provided recklessly; or
 omits or obscures required information where such omission or obscurity would be misleading.
Note that issuing a modified opinion (e.g. in an auditor’s report on historical financial statements)
does not breach this principle.

Key Point

The critical test here is association. Integrity is a state of mind; however, it can only be judged
based on the information the professional accountant is associated with (whether the accountant
produced it or provided assurance on it).

Activity 1 Integrity

Describe THREE situations in which the integrity of a professional accountant may be threatened.
*Please use the notes feature in the toolbar to help formulate your answer.
1. As an auditor, if a set of financial statements contain a material misstatement that the directors refuse to
change, an unmodified opinion would not be issued.
2. In the context of other work (e.g. preparing a cash flow forecast), if asked to verify misleading data, the
member would refuse to accept the engagement or withdraw as soon as he becomes aware that the
data is misleading and the client refuses to change.
3. For an accountant in business, being asked by the CFO to sign off on management accounts for the
bank that contain significant differences from the underlying records.

1.2.2 Objectivity (R112)

The professional accountant’s exercise of professional or business judgements must not be
compromised by:
 bias;
 conflict of interest; or
 undue influence of, or undue reliance on, individuals, organisations, technology and other factors.

Key Point

A professional accountant should not undertake a professional activity if a circumstance or relationship

unduly influences the accountant’s professional judgment regarding that activity.

1.2.3 Professional Competence and Due Care (R113)

A professional accountant must:
 Attain and maintain the level of professional knowledge and skill required to ensure
their competence based on current standards and relevant legislation; and
 Act diligently and in accordance with applicable technical and professional standards.
Maintaining professional competence requires a continuing awareness and understanding of relevant
technical, professional and business and technology-related developments. This is achieved through
continuing professional development (CPD).
Professional accountants must take reasonable steps to ensure that those who work in a professional
capacity under their authority have appropriate training and supervision.
Diligence encompasses the responsibility to act according to the assignment’s requirements carefully,
thoroughly and on a timely basis.
Where appropriate, clients or the employing organisation should be informed of the limitations inherent in
the services or activities.
 Key Point

In providing assurance services, levels of assurance on information, may range from “reasonable” assurance
to “limited” assurance (see Chapter 1).
Professional judgement is required on the amount of sufficient appropriate evidence to be obtained for the
level of assurance to be provided by an assurance report.

1.2.4 Confidentiality (R114)

The principle of confidentiality requires an accountant to respect the confidentiality of information
acquired as a result of professional and business relationships.
An accountant must be alert to the possibility of inadvertent disclosure (e.g. in a social
environment and to close business associates or family members).

Key Point

Confidential information should not be:

 disclosed to third parties without proper and specific authority or unless there is a legal, professional right or
duty to disclose;
 used for any personal advantage or the advantage of a third party.

Confidentiality is considered in more detail in s.4.

1.2.5 Professional Behaviour (R115)
An accountant must:
 comply with relevant laws and regulations; and
 avoid any conduct that might discredit the profession.
In marketing and promoting themselves and their work, professional accountants should not bring
the profession into disrepute. They should be honest and truthful and not make:
 exaggerated claims for their services, qualifications or experience; or
 disparaging references or unsubstantiated comparisons to the work of others. A claim such as "We are
the best, better than all the rest" is not professional.
Professional accountants should behave with courtesy and consideration towards everyone they
encounter in a professional capacity.
1.3 Conceptual Framework (R120.3-R120.5)
 Key Point

The Code provides a conceptual framework that professional accountants must apply to identify,
evaluate and address threats to compliance with the fundamental principles.
The framework requires professional accountants to consider the threats they face and to match
those threats with the appropriate action. It is not a set of rigid rules in a fixed framework.
If identified threats are not at an “acceptable level”, the professional accountant must implement
safeguards to eliminate the threats or reduce them to an acceptable level so that compliance with
the fundamental principles is not compromised.

Definition

Acceptable level – a level at which a reasonable and informed third party would likely conclude
that the professional accountant complies with the fundamental principles.
The framework should be applied to the particular circumstances. If a situation does not match any
of the examples, as a general rule, "if in doubt, avoid; do not do." Just because a situation or
circumstance is not prohibited, does not mean it is permitted.
1.4 Threats (R120.6)
An accountant must identify threats to compliance with the fundamental principles.
Compliance with the fundamental principles may potentially be threatened by a broad range of
circumstances which generally fall into one or more of the following categories:
 Self-interest threat;
 Self-review threat;
 Advocacy threat;
 Familiarity threat; and
 Intimidation threat.
The term "management threat" is widely used to describe the threats that arise when an audit firm
undertakes an activity that is management's responsibility. However, it is not a separate category
of threat in the Code.

Exam advice

A scenario or situation in a question might pose multiple threats. This means various actions might
need to be taken to mitigate the threats.
For example, a close family member of the auditor who is an executive director of an audit client
gives rise to both self-interest and familiarity threats (and perhaps intimidation).

1.4.1 Self-Interest Threat

A self-interest threat may occur due to the financial or other interests of the professional
accountant (including immediate or close family members). For example:
 undue dependence on total fees from a client;
 loans or guarantees made to or from a client;
 close personal or business relationships with a client;
 audit team member negotiating employment with a client;
 financial interest in a client;
 gifts and hospitality; and
 concern over losing a client or employment security.
 Example 1 Self-interest Threats
1. Breuger Co has offered the auditor an additional fee for issuing an unmodified audit opinion for the
current reporting year.
2. Douglas Lu, the auditor of Ayeland Bank, is also a customer of the bank. Ayeland Bank has offered
Douglas Lu preferential rates on his loan and overdraft facilities.
3. Tucker Chartered Accountants, a relatively new audit firm, is conducting the audit for Tubbletown Co.
During a recent conversation, Tubbletown’s CEO wished Tucker success in its future ventures and
promised to take up the offer of non-audit services from Tucker if an unmodified audit opinion is issued
on completion of the audit.

1.4.2 Self-Review Threat

 A self-review threat may arise when a professional accountant does not appropriately evaluate the
results of a previous judgment made by either themselves or another individual within their firm or
employing organisation, which they will rely on when forming a judgment in providing a current service.
 Examples include, but are not limited to:
o reporting on the operation of systems after being involved in their design or implementation;
o a member of an engagement team having previously been employed by the client in a position that
directly influenced the subject matter (e.g. financial statements); and
o business decisions or data being reviewed and justified by the person responsible for making those
decisions or preparing those data.

Example 2 Self-review Threats

1. Dregger & Co, currently appointed as the auditor of Turnbally Co, was previously engaged by Turnbally
Co to design and implement its digitalised financial control system.
2. Mariana, the audit manager for the statutory audit of Ruger Co, was previously engaged as a non-
executive director of Ruger and the chair of Ruger’s audit committee.

1.4.3 Advocacy Threat

An advocacy threat is created when the professional accountant promotes a client's or employer's
position or opinion to the point that subsequent objectivity may be compromised. If the position
has changed later, there may be pressure to ignore that change.
Examples of advocacy threats include:
 promoting shares in an audit client;
 acting as an advocate on behalf of an audit client in litigation or disputes with third parties;
 commenting publicly on future events in particular circumstances, having made assertions without
detailing the assumptions; and
 where information is incomplete or advocating an argument which is unlawful.

Example 3 Advocacy Threats

1. Pally & Co has been asked to make representations supporting its audit client, Baroo Co, in applying
for loan facilities from a consortium of banks because Pally & Co had issued unmodified opinions on
Baroo’s financial statements for a few years.
2. Balsyer Co, impressed with the quality of work performed by TT Chartered Accountants on its statutory
audit, has invited TT to be its reporting accountants for its upcoming initial public offering (IPO) and
accompanying promotions to institutional investors.

1.4.4 Familiarity Threat

A familiarity threat can arise when a professional accountant, because of a long or close
relationship, becomes too sympathetic to the interests of a client or employer or too willing to
accept their work and explanations.
 Key Point

There is a significant risk that professional scepticism will not be sufficiently applied.

Examples of familiarity threats include:

 Over-familiarity (e.g. close or immediate family member) with management such that professional
judgement could be compromised;
 Long association with business contacts influencing business decisions;
 Acceptance of gifts or preferential treatment, unless the value is insignificant; and
 A former partner of the audit firm becoming a director, officer or employee of a client in a position to
exert direct influence over the financial statements (or other subject matter of the engagement).

Example 4 Familiarity Threats

1. The CEO of Rublus Co is also the wife of the engagement partner for the company’s statutory audit.
2. Patrick, a former partner in Delim & Co has joined Pack Co as finance director. Patrick was the audit
engagement partner of Pack Co in previous years and Delim & Co is still Pack Co’s auditor this year.

1.4.5 Intimidation Threat

An intimidation threat arises where the professional accountant may be deterred from acting
objectively by actual or perceived pressures, including attempts to exercise undue influence over
the accountant.
Examples of intimidation include:
 the threat of dismissal (as an employee) or replacement (as an auditor), for example, over a
disagreement about the application of an accounting principle;
 a dominant personality attempting to influence the presentation of financial information or controlling
relations with auditors (e.g. their appointment);
 being threatened with litigation; and
 being pressurised to reduce necessary work to reduce costs or fees.

Example 5 Intimidation Threats

1. The finance director of Belmont Co has informed the auditor that the company might start looking
for a new auditor in the event of an unfavourable audit opinion.
2. Balsi Co’s management has informed the auditor, Truf & Co, that it would hold Truf & Co liable for
any drop in share price if the audit opinion is unfavourable.

Key Point

A circumstance might create more than one threat, and a threat might affect compliance with more than one
fundamental principle.

1.5 Addressing Threats (R120.10)

There are three ways to address threats to the fundamental principles:
1. Eliminate the circumstances, including interests or relationships, that are creating the threats;
a. For example, a member of the audit team may sell any direct holdings in a client’s
shares before the commencement of the audit.
2. Apply safeguards, where available and capable of being applied, to reduce the threats to an
acceptable level; or
3. Decline or end the specific professional activity. This may be the only course of action (i.e.
when a threat cannot be eliminated or reduced to an acceptable level through safeguards).
For example, an auditor may decline to advise a client on a takeover bid where the target
company is another audit client.

Definition

Safeguards – actions, individually or in combination, taken by the professional accountant that

effectively eliminate threats to compliance with the fundamental principles or reduce them to an
acceptable level.

This means that:

 A safeguard must be an action by the professional accountant (not just a consideration).
 Some actions which may be necessary to evaluate an ethical threat (e.g. taking advice from
a third party) may not themselves be a safeguard. A safeguard would still need to be
actioned (e.g. in response to the advice received).

Key Point

The professional accountant’s action is not a safeguard unless it is effective.

2.1 Independence, Objectivity and Integrity (400.5, R400.11)

Independence is a requirement for all professional accountants and their firms when performing
audit engagements.

Key Point

An auditor's integrity and objectivity must be beyond question. Objectivity can only be assured if the
auditor is, and is seen to be, as independent as possible.

Independence requires both independence of mind and independence in appearance.

Independence of mind means that the state of mind:
 permits the expression of a conclusion without being affected by influences that compromise
professional judgement; and
 allows an individual to act with integrity and exercise objectivity and professional scepticism.
Independence in appearance means avoiding instances in which the facts and circumstances are
so significant that a reasonable and informed third party, knowing all relevant information
(including safeguards applied), would reasonably conclude that a auditor's integrity, objectivity or
professional scepticism had been compromised.
The following examples describe specific circumstances and relationships that may cause threats
to independence. Although they mainly relate to professional accountants in practice (i.e. audit
and assurance), they can equally apply to the provision of non-assurance services and
professional accountants in industry, commerce, etc.
2.2.1 General (410.3-410.4)
Fees for professional services are usually negotiated with and paid by an audit client. This practice
is generally recognised and accepted by intended users of financial statements. However, it
creates a self-interest threat and might create an intimidation threat to independence.
The level of threats created will depend on many factors, for example:
 the level of the fees (having regard to the resources required);
 the extent of any dependency between the fee and the outcome of the service;
 the operating structure and compensation arrangements of the firm;
 the significance of the client to the firm, office or partner;
 the nature of the client (e.g. whether it is a public interest entity); and
 the involvement of those charged with governance (TCWG) in appointing the auditor and agreeing fees.

The existence of a system of quality management implemented (see Chapter 5) may also affect
the evaluation of whether threats are at an acceptable level.
2.2.2 Level of Audit Fees (410.5)
Factors that are relevant in evaluating the level of self-interest and intimidation threats created by
the level of the audit fee paid by the audit client include:
 The firm’s commercial rationale for the audit fee; and
 Whether undue pressure has been, or is being, applied by the client to reduce the audit fee.
Actions that might be safeguards to address such threats include having an appropriate reviewer
who does not take part in the audit engagement:
 assess the reasonableness of the fee proposed, having regard to the scope and complexity of the
engagement;
 review the work performed.

2.2.3 Contingent Fees (410.8)

Definition

Contingent fees – fees calculated on a predetermined basis relating to the outcome of a transaction
or the result of the services performed.

Key Point

A firm must not charge directly or indirectly a contingent fee for an audit engagement.

Contingent fees are also prohibited for non-assurance services (NAS) to audit clients if:
 the fee is material (or expected to be material) to the firm; of
 the outcome of the NAS, and therefore the amount of the fee, depends on a future or current judgment
related to the audit of a material amount in the financial statements.

2.2.4 Total Fees – Proportion of Fees for Other Services (410.11)

The level of the self-interest threat might be increased when a large proportion of fees is
generated from other services to an audit client, due to concerns about the potential loss of either
the audit engagement or other services. Such circumstances might also create an intimidation
threat.
Factors that are relevant in evaluating the level of such threats include:
 the ratio of fees for other services to the audit fee;
 the length of time during which a high ratio has existed;
 the nature, scope and purposes of the other services (e.g. whether they are recurring).

Examples of safeguards include:

 Having an appropriate reviewer who was not involved in the audit or the other services review the
relevant audit work;
 Reducing the extent of other services provided to the audit client.

2.2.5 Total Fees – Overdue Fees (410.12)

The level of the self-interest threat might be increased if fees payable by an audit client are
overdue during the period of the audit engagement.
It is generally expected that the firm will obtain payment of such fees before the audit report is
issued.

Factors that are relevant in evaluating the level of such a self-interest threat include:
 the significance of the overdue fees to the firm;
 the length of time the fees have been overdue; and
 the ability and willingness of the audit client to pay the overdue fees.

Examples of safeguards include:

 Obtaining partial payment of overdue fees;
 Having an appropriate reviewer who did not take part in the audit engagement review the audit work.

Key Point

When a significant part of the fees due from an audit client remains unpaid for a long time, the Firm must
determine whether:
 the overdue fees might be equivalent to a loan to the client (see s.2.7); and
 it is appropriate for the firm to be re-appointed or continue the audit engagement.

2.2.6 Total Fees – Fee Dependency – All Audit Clients (410.14)

When the total fees generated by an audit client represent a large proportion of a firm's total fees,
the dependence on, and concern about the potential loss of, fees increase the self-interest threat
and create an intimidation threat.
The level of the threats will depend on factors such as:
 the operating structure of the firm;
 whether the firm is expected to diversify (such that dependence is reduced).

A self-interest or intimidation threat is similarly created when the fees generated by a firm from an
audit client represent a large proportion of the revenue of one partner or one office of the firm.
2.2.7 Public Interest Entities (R410.18)

Definition

Public interest entity (PIE) – a listed entity, or an entity required by a regulator to be audited as if it were
listed, or an entity of significant public interest due to size or business (e.g. banks).

When for each of two consecutive years, the total fees from a PIE client represent more
than 15% of the firm’s total fees, the firm must:

 determine whether, prior to issuing the audit opinion on the second year’s financial statements, a “pre-
issuance review” (equivalent to an engagement quality review) might be a safeguard to reduce the
threats to an acceptable level; and
 if so, apply it.
(Engagement quality reviews are described in Chapter 5.)
 Key Point

If these circumstances continue for five consecutive years, the firm must cease to be the auditor after the
audit opinion for the fifth year is issued.

The only exception to this requirement is if:

 a regulatory professional body in the relevant jurisdiction agrees that there is a compelling reason to
continue “having regard to the public interest”; and
 a pre-issuance review is performed before the audit opinion is issued on the sixth and any subsequent
year’s financial statements.

2.2.8 Fee Dependency – Not PIEs (410.15)

When for each of five consecutive years, the total fees from a not PIE client represent more
than 30% of the firm’s total fees, the firm must determine whether either of the following actions
might reduce the threats to an acceptable level, and if so, apply it:

 prior to issuing the audit opinion for the fifth year, a professional accountant who is not a member of the
firm, reviews that year’s audit work; or
 after the fifth year’s audit opinion has been issued (and before the sixth year’s), a professional
accountant reviews the fifth year’s audit work.

2.3 Inducements, including Gifts and Hospitality (R420.3)

Offering or accepting inducements might create a self-interest, familiarity or intimidation threat to
compliance with the fundamental principles, particularly the principles of integrity, objectivity and
professional behaviour. An inducement can take many forms, for example:
An inducement can take many forms, for example:
 Gifts
 Hospitality and entertainment
 Political or charitable donations
 Appeals to friendship and loyalty
 Employment or other commercial opportunities
 Preferential treatment, rights or privileges.
The professional accountant must comply with relevant laws and regulations that prohibit the offer
or acceptance of inducements in certain circumstances (e.g. those related to bribery and
corruption).
A firm or audit team member must not accept gifts and hospitality from an audit client unless the
value is trivial and inconsequential.
Any gift that is intended to influence behaviour improperly should not be accepted (even if the
value is trivial and inconsequential).

Key Point

Offering or accepting of inducements that are not prohibited might still threaten compliance with the
fundamental principles.

Safeguard include:
 Informing senior management of the firm or TCWG of the client regarding the offer;
 Amending or terminating the business relationship with the client.
2.4 Actual or Threatened Litigation (430.3 A)
Actual or threatened litigation typically involves the issue (or threat) of a writ against the firm for
negligence or failure to conduct activities professionally resulting in a breakdown of trust.
When litigation with an audit client occurs or appears likely, self-interest and intimidation threats
are created.
The firm and client may be placed in adversarial positions, therefore:
 the auditor may be unable to report impartially; and/or
 the client may be unwilling to disclose relevant information.
The significance of the threat will depend on:
 the materiality of the litigation;
 whether the litigation relates to a prior audit engagement.
Safeguards that may be applied include:
 independent review of the work carried out and subject to the litigation; and
 if the litigation involves a member of the audit team, removing that individual from the audit
team.

2.5 Financial Interests

Financial interests may be held and controlled directly (e.g. personal shareholdings) or indirectly
(e.g. through a pension fund).
Holders of a relevant interest (e.g. direct interest or material indirect interest) in an assurance
client are at risk, and the self-interest threat should be assessed.
The threat depends on whether the relevant interest is held by:
 a partner (regardless of any involvement in the audit);
 an employee; or
 an immediate or close family member.

2.5.1 Audit Team Members and Partners (R510.4)

A relevant interest in an audit client cannot be held by:
 An audit team member; or
 Any partner in the office of the engagement partner; or
 Their immediate family (i.e. spouse, partner or dependent).
If held, there are no safeguards that would reduce the threat to an acceptable level, so:
 the individual must dispose of the interest; or
 the firm disengage from the audit; or
 the audit team member/partner resigns from the firm.
If the individual receives the interest unintentionally (e.g. an inheritance or gift), it must be
disposed of immediately.
As an exception, an immediate family member may hold a relevant interest in an audit client,
provided that:
 It was received as an employment right (e.g. through a pension or share option plans) and, when
necessary, the firm addresses the threat created by the financial interest (e.g. by removing the team
member from the audit); and
 When he obtains the right to dispose of the interest, he does so as soon as (or otherwise forfeits that
right).
 Key Point

Many firms require all professional employees not to hold any interest in any audit client. Where an
immediate family holds an interest, the employee should not be assigned to that audit.

2.5.2 Close Family Member (R510.5)

A close family member is a parent, child or sibling (brother/sister) who is not an immediate family
member.
When a close family member holds a relevant interest in an assurance client, their relationship
with the audit team member (partner or employee) and the materiality of the interest should be
taken into account in assessing the significance of any threat.
Disposal of the interest or removing the individual from the audit team would eliminate the threat.
An example of a safeguard is an independent review of the work carried out by the audit team
member.

2.6 Family and Other Personal Relationships (R521.5-R521.8)

Personal relationships (e.g. through mutual business interests or close friendship) or family
relationships (e.g. by marriage or birth) between a member of the audit team and a client's
directors, officers and other employees create self-interest, familiarity or intimidation threats.
The significance of the threats will depend on factors such as:
 the nature or closeness of the relationship;
 the position held by the family member/client's employee; and
 the role of the audit team member.

The more senior the individuals involved, the greater the threat. Therefore, an
individual cannot be a member of an audit team if an immediate family member:
 Is a director or officer of the audit client;
 Is an employee in a position to exert significant influence over the preparation of the client’s accounting
records or the financial statements on which the firm will express an opinion; or
 Was in such a position during any period covered by the engagement or the financial statements.
In other situations, safeguards include restructuring the responsibilities of the audit team, so the
team member does not deal with the areas of responsibility of the family member/client employee.
Activity 2 Family and Other Personal Relationships

Suggest how the threats arising in each of the following situations should be addressed:
1. A trainee's uncle is a director of an assurance client.
2. A trainee's friend from university is the credit controller of an audit client.
3. An audit manager's fiancée is the credit controller of an audit client.
4. A partner's sister is a director of a company.
*Please use the notes feature in the toolbar to help formulate your answer.

1. The trainee should not be a member of the assurance team.

2. If the trainee remains on the team, he cannot be involved in auditing sales or receivables.
3. The manager should not be involved with the audit as he would be responsible for directing and
reviewing the audit work on receivables carried out by trainees.
4. The firm should not provide assurance services to the company. If requested to tender for the
audit, the firm should decline. If the sister is recruited as a director by the company, which is
already an audit client, the firm should resign from the audit.
2.7 Loans and Guarantees (R511.4-R511.7)
Loans and guarantees to an audit client by a firm, audit team member or immediate family are
prohibited unless immaterial to both:
 the firm (or individual) making the loan or guarantee; and
 the client.
Loans and guarantees from an audit client that is not a bank (or similar institution) are similarly
prohibited.
Where the client is a bank (or similar institution), loans (including mortgages, bank overdrafts and
credit card balances) and guarantees cannot be accepted unless made under routine lending
procedures, terms and conditions. Even in this situation, a self-interest threat may arise if the loan
is material to the loan recipient.
Where such loans are material, safeguards are required to address the self-interest threat (e.g. an
independent review of audit work).
Many firms prohibit their partners (and the firm) from having any material loan from financial
institution clients. This is particularly the case for the engagement partners. Where a loan is
material to an employee (which is likely to be the case), that employee would not be assigned to
the audit of the financial institution concerned.
2.8 Provision of Non-assurance Services to Assurance Clients
2.8.1 General (R600.8)
There is no objection to providing non-assurance services (NAS) to audit clients. In doing so, the
firm better understands its clients' processes, controls, business and financial risks. However,
auditors are barred from providing additional NAS to listed company clients in some jurisdictions.
Under corporate governance codes (e.g. the UK Corporate Governance Code), audit committees
must specifically approve non-audit services provided by auditors, ensuring that independence
has not been impaired and that there is no threat to any fundamental principle.
Before accepting an engagement to provide a NAS to an audit client, the firm must establish if
providing the service would create a threat to independence.

Key Point

If a threat cannot be reduced to an acceptable level by applying safeguards, the NAS cannot be provided.

2.8.2 Evaluating Threats (600.9 A1)

Factors to consider include:
 The nature, scope, intended use and purpose of the service.
 The degree of reliance that will be placed on the outcome of the service in the audit.
 The legal and regulatory environment in which the service is provided.
 Whether the client is a public interest entity.
o Whether it is material;
o The degree of subjectivity involved.
 The client’s level of expertise concerning the type of service provided.
 Whether the outcome will affect the accounting records or matters reflected in the financial statements,
and, if so:
o Whether it is material;
o The degree of subjectivity involved.
 The extent of the client’s involvement in determining significant matters of judgment.
 The degree of reliance that will be placed on the outcome of the service in the audit.
 Whether the client is a public interest entity.
 The fee for the NAS.
 Key Point

Where the Code expressly prohibits the provision of a NAS to an audit client, that is regardless of the
materiality of the outcome or results of the NAS on the financial statements.

2.8.3 Prohibition on Assuming Management Responsibilities

Key Point

A firm must not assume management responsibility for an audit client.

Management responsibilities involve controlling and directing an entity, including making decisions
regarding acquiring, using and controlling human, financial, technological, physical and intangible
resources. Examples include:
 Setting policies and strategic direction.
 Hiring or dismissing employees.
 Directing and taking responsibility for employees’ actions concerning their work.
 Authorising transactions.
 Controlling or managing bank accounts or investments.
 Deciding which recommendations of the firm or other third parties to implement.
 Reporting to those charged with governance on behalf of management.
 Taking responsibility for designing, implementing, monitoring and maintaining internal control.
Assuming management responsibility in providing a NAS creates self-review and self-
interest threats. It can also create familiarity threat and even advocacy threat (because the firm
becomes too closely aligned with the views and interests of management).
Providing advice and recommendations to assist management in discharging its responsibilities
is not assuming management responsibility. (However, this might create a self-review threat.)

Key Point

To avoid assuming management responsibility when providing any NAS to an audit client, the firm must be
satisfied that management makes all judgments and decisions that are the proper responsibility of
management.

This includes ensuring that a designated individual (preferable senior management) with suitable
skill, knowledge and experience is responsible for the client’s decisions and overseeing the
services.
Activity 3 Management Decisions

Identify three areas, when preparing financial statements, that the accountant could be considered
to have made a management decision.
*Please use the notes feature in the toolbar to help formulate your answer.

Note: Only three were required.

1. Determining or changing journal entries (e.g. bad debt allowance) or the classifications for accounts or
transaction or other accounting records.
2. Determining accounting policies or estimates (e.g. useful lives of non-current assets).
3. Authorising or approving transactions.
4. Preparing source documents or making changes to such documents.
2.8.4 Accounting and Bookkeeping Services – Self-review Threat
Examples of accounting and bookkeeping services include:
 Preparing accounting records and financial statements;
 Recording transactions;
 Payroll services.
Key Point

Such services must not be provided to a PIE audit client.

Such services cannot be provided to an audit client that is not a PIE unless:
 The services are of a “routine or mechanical” nature (i.e. requiring little or no professional
judgment); and
 Any threats that are not at an acceptable level are addressed. For example:
o Using professionals who are not audit team members to perform the service.
o Independent review of the audit work or service performed.

2.8.5 Valuation Services – Self-review or Advocacy Threat (R603.4-R603.5)

A valuation involves making assumptions about future developments and applying specific
methodologies and techniques to compute a particular value, or range of values, for an asset, a
liability or the whole or part of an entity.
A self-review threat may be created when a firm performs a valuation for an audit client that will
affect the accounting records or the financial statements on which the auditor will express an
opinion.

PIE Not-PIE

If valuation might create a self-review If valuation involves a significant degree of subjectivity and will
threat, service cannot be provided. have a material effect, service cannot be provided.

Safeguards for a not-PIE client include:

 independent review of the audit or the valuation work; and
 excluding members of the valuation team from the audit.

2.8.6 Tax Services – Self-review or Advocacy Threat (R604.10–R604.26)

Tax services include activities such as:
 Tax return preparation;
 Tax calculations to prepare the accounting entries;
 Tax advisory and tax planning services;
 Tax services involving valuations; and
 Assistance in the resolution of tax disputes.

Providing tax services to an audit client might create a self-review threat when there is a risk that
the results of the services will affect the accounting records or the financial statements. Such
services might also create an advocacy threat.
 Tax return preparation services do not usually create a threat because:
o they are based on historical information presented under existing tax law; and
o tax returns are subject to review or approval by the tax authority.
 Preparing tax calculations (current and deferred) for the accounting entries that will be subsequently
audited creates a self-review threat.
o This is prohibited for a PIE audit client, if material;
o Appropriate safeguards should be applied to a not-PIE audit client.
 Tax advisory and tax planning services comprise a broad range of services which might create a
self-review or advocacy threat.
o Such services that might create a self-review threat for a PIE are prohibited;
o Where permitted, as well as the usual safeguards, the firm may obtain “preclearance” from the tax
authorities.
 For tax services involving valuations, the provisions of the Code for valuation services may apply
(s.2.8.5)
 Providing assistance in the resolution of tax disputes to an audit client might create a self-review or
advocacy threat. For example, when the tax authorities have notified the client that arguments on a
particular issue have been rejected and either the tax authority or the client refers the matter to a
tribunal or court.
Key Point

A firm must not assist in the resolution of any tax dispute which involves:

 Acting as an advocate for the audit client before a tribunal or court;
 Amounts which are material to the financial statements.

2.8.7 Internal Audit – Self-review Threat (R605.6)

Many internal audit services will not be directly related to the financial systems and preparation of
the financial statements. They may be undertaken without threat to independence by the external
auditors.
For a PIE audit client, internal audit services that relate to the following are prohibited:
 internal controls over financial reporting;
 financial accounting systems that generate information for the client's accounting records or financial
statements; or
 amounts or disclosures that relate to the financial statements.
For not-PIE audit clients, professionals who are not audit team members may perform the service
as a safeguard.
2.8.8 IT Systems Services – Self-review Threat (R606.6)
Providing services to an audit client that involve the design and implementation of financial
information technology systems that generate information forming part of that client's financial
statements, may create a self-review threat.
For a PIE audit client, a firm cannot provide services that involve designing or implementing IT
systems that:
 form part of the internal controls over financial reporting; or
 generate information for the client's accounting records or financial statements.

2.8.9 Recruiting Services – Self-interest, Familiarity or Intimidation Threats

(R609.5-R609.6)
The recruitment of senior management for an audit client may create current or future self-interest,
familiarity and intimidation threats.
The significance of any threat will depend on:
 the role of the person to be recruited;
 the nature of the assistance requested; and
 any conflicts of interest or relationships between the candidates and the firm providing the advice or
service.
 Key Point

An audit firm is prohibited from acting as a negotiator on an audit client’s behalf.

The following recruiting services are prohibited for any audit client for the positions of director,
officer or senior management in a position to exert significant influence over the accounting
records or financial statements:
 Searching for candidates;
 Undertaking reference checks;
 Recommending who to appoint;
 Advising on terms of employment, remuneration or benefits of a particular candidate.

2.8.10 Corporate Finance Services – Self-review or Advocacy Threat (R610.5-

R610.8)
Examples of corporate finance services include:
 assisting an audit client in developing corporate strategies;
 identifying possible targets for the audit client to acquire;
 advising on disposal transactions;
 assisting in finance raising transactions;
 providing restructuring advice; and
 providing advice on financing arrangements that will directly affect amounts reported in the financial
statements.

The significance of the threats created will depend on factors such as:
 the degree of subjectivity involved;
 the extent to which the outcome will directly affect amounts recorded in the financial statements and
their materiality; and
 whether the effectiveness of the advice depends on a particular accounting treatment or presentation
about which there are doubts.

Safeguards that may be applied include:

 Using professionals who are not members of the audit team to perform the service;
 Independent review of the audit work or service.

Key Point

The following corporate finance services are prohibited for any audit client:

 Those involving promoting, dealing in or underwriting an audit client's shares.

 Those whose effectiveness depends on a particular accounting treatment which is in doubt and material.

2.9 Long Association of Senior Personnel (R540.4-R540.20)

A familiarity threat arises when senior staff have been involved with an audit engagement for a
significant time.
A self-interest threat might be created due to an individual’s concern about losing a long-standing
client or interest in maintaining a close personal relationship with a member of senior management
or TCWG. Such threats might influence the individual’s judgment impairing objectivity and
reducing professional scepticism.
 Key Point

A long association can adversely affect objectivity and professional scepticism, which are essenti
contributors to audit quality.

For a PIE, an individual cannot act in any of the following roles (or a combination thereof) for more
than seven cumulative years (the “time-on” period):
 The engagement partner;
 The individual responsible for the engagement quality review (see Chapter 5);
 Any other key audit partner role.
After the time-on period, the “cooling-off” period is:
 Five years – engagement partner;
 Three years – engagement quality reviewer;
 Two years – other key audit partners.

When an audit client becomes a PIE, a key audit partner with a time-on of five years or more may
remain with the client for two additional years before rotating off the engagement.
For other entities, the factors to take into account when assessing the threat include:
 how long the individual has been a member of the audit team;
 the extent to which their work is directed, supervised and reviewed;
 the extent to which the individual, due to their seniority, can influence the outcome of the audit;
 their closeness to senior management/TCWG;
 the nature, frequency and extent of interaction between the individual and the client;
 whether the client's management team has changed; and
 whether the nature or complexity of the client's accounting and reporting issues has changed.

Safeguards that can be applied include:

 rotating senior personnel off the engagement;
 involving an experienced, independent professional to review the work of the senior team
members; or
 subjecting the whole assignment to internal or external quality control reviews.

2.10 Employment with an Audit Client

Employment relationships with an audit client might create a self-interest, familiarity or
intimidation threat.
A familiarity or intimidation threat might be created if a director or officer of an audit client (or an
employee in a position to exert significant influence over the financial statements) was a partner of
the audit firm or a member of the audit team.
2.10.1 Former Partner/Audit Team Member Restrictions (R524.4)
When a partner or audit team member joins an audit client as a director or in a position of
influence, the firm must ensure that no significant connection remains between the firm and the
individual who has left. However, even if there is no significant connection (e.g. the individual does
not receive any payments from the firm or participate in its business), a familiarity or intimidation
threat might still be created.
The significance of the threat will depend on the specific circumstances, for example:
 the position the individual has taken at the client;
 the amount of any involvement the individual will have with the audit team;
 the length of time since the individual was a member of the audit team or firm; and
 the individual's former position in the audit team or firm.
Safeguards to address familiarity or intimidation threats include:
 modifying the audit plan;
 assigning a sufficiently experienced audit team; and
 quality review.

2.10.2 Audit Team Member Entering Employment with a Client (R524.5)

A firm must have policies and procedures that require audit team members to notify the firm when
entering employment negotiations with an audit client.
A self-interest threat is created when an audit team member participates in the audit knowing that
they will, or might, join the client in future.
The threat may be eliminated by removing the individual from the audit team.
A safeguard would be to review any significant judgments made by the individual while on the
team.
For a PIE, a key audit partner joining the client will compromise the audit firm’s independence
unless he was not concerned with the audit of financial statements for not less than 12 months.

2.10.3 Temporary Personnel Assignments (R525.4)

The loan of personnel to an audit client might create a self-review, advocacy or
familiarity threat.
Safeguards include:
 Conducting an additional review of the work performed by the loaned personnel.
 Not including the loaned personnel in the audit team.
 Not giving the loaned personnel audit responsibility for any function or activity they performed
during the temporary assignment.
2.11 Close Business Relationships (R520.4)
A close business relationship between a firm (or an audit team member or his immediate family)
and the audit client (or its management) will involve a commercial or common financial interest
and may create self-interest and intimidation threats.
Examples of close business relationships include:
 financial interests in joint ventures with a client, directors, officers or employees who perform
managerial functions;
 combining one or more products or services of the firm with one or more products or services
of the client; and
 distribution or marketing arrangements between the firm and a client for a joint product or the
other's products and services.

In such circumstances, unless the financial interest is immaterial and the relationship
insignificant, no safeguards would be able to reduce the risk to an acceptable level, Therefore, the
auditor must:
 terminate such business relationships already established;
 decline any such business relationships offered; or
 decline the audit assignment.

2.12 Recent Service (R.522.3)

An audit team member who recently served as a director, officer or employee of the audit client
might create a self-interest, self-review or familiarity threat. Therefore, an audit team
should not include an individual who served with the audit client during the period covered by the
audit report.

2.13 Serving as a Director (R523.4)

Serving as a director or officer of an audit client creates self-review and self-interest threats.

Key Point

A partner or employee of the firm must not serve as a director or officer of an audit client of the firm.

Serving as Company Secretary for an audit client is similarly prohibited unless:

 Specifically permitted under local law, professional rules or practice;
 Management makes all relevant decisions; and
 Duties and activities performed are limited to routine and administrative (e.g. preparing minutes and
maintaining statutory returns).
Activity 4 Independence for Audit Engagements

Comment and conclude on the following THREE situations.

1. Trainees of Porterhouse, a firm of Certified Accountants, have been offered overdraft facilities up to
$3,000, on student terms, by a client bank.
2. Ambit Co is preparing to apply for listing (admission) to a recognised stock market while offering a
proportion of its shares to the public. The directors have asked Schilling & Co, as their auditors, to set
up and maintain the company's share register on a computer database.
3. Sean & Co is the auditor of Starck Co. During the current year, Starck has expanded rapidly,
taken over three other companies and is currently preparing to float a proportion of its shares
on a recognised stock exchange. As a result of several special assignments connected with
these events, total fees from Starck amount to 19% of the total fee income of Sean & Co for
the year.
In addition, Sean & Co's senior tax manager owns a small number of shares in Starck, acquired
several years ago when the company issued shares under a business expansion scheme.

*Please use the notes feature in the toolbar to help formulate your answer.
1. Comments - Loans (including overdrafts) on normal commercial terms may be accepted by
staff members (including trainees).
"Student terms" may be standard commercial terms if the bank offers them to all accountancy
trainees, not just Porterhouse’s. If these terms are not normal commercial terms, the next step is
to determine if the benefit is more than "modest".
Conclusions - Porterhouse's engagement and compliance partners may decide that acceptance
of the offer will not appear to threaten objectivity even if the terms are special. However, as a
safeguard, it should be confirmed that the terms are no more favourable (or no less unfavourable!)
than those offered to other trainees. If more favourable, the loans (overdrafts) should be declined.

2. Comments - Provided this is a simple matter of entering data into the database and the
directors of Ambit have approved the specific programme used by the auditor, the nature of
additional service is unlikely to threaten objectivity (i.e. no managerial involvement).
As a public interest company (intention to list), recurring fees (audit + maintenance) should not
exceed 15% of gross practice income. In addition, a pre-issuance review of the audit file must
occur.
Conclusions - The additional service is likely to be acceptable within ethical constraints.

3. Comments - Starck Co will become a public interest entity when the shares are listed. The
19% of total fees may not affect independence if the recurring element is less than 15%.
However, 19% may be undesirably high in appearing to detract from objectivity.
Safeguard: Ensure that the recurring element of the fee will be less than 15% of the firm’s total fee
income. If not, determine whether a “pre-issuance review” of the audit might be a safeguard to
reduce the threats to an acceptable level.
The scenario implies that Sean & Co permits non-partner staff to hold shares in clients.
Accordingly, the senior tax manager should not be involved with Starck’s audit (e.g. calculating tax
liabilities, reviewing tax audit working papers) to avoid a self-interest threat
Safeguard: Ensure that the senior tax manager does not have any involvement with the audit of
Starck. If he does, he must dispose of his shares immediately.
Staff involved in the special assignment should not have similar responsibilities on the audit to
avoid a self-review risk. The more senior the staff, the higher the familiarity risk.
Conclusions - Provided that the recurring element of fees does not exceed 15% of total fee
income and appropriate safeguards (as above) are implemented, any threats to the fundamental
principles should have been reduced to an acceptable level.

3.0 Introduction
A second opinion is when a professional accountant is asked for an opinion on the application of
accounting, auditing, reporting or other standards or principles by an entity that is not an existing
client. This is also sometimes referred to as "opinion shopping".
Key Point

Providing a second opinion to an entity that is not an existing client may threaten compliance with
the fundamental principles, unless the advice sought is insignificant.

3.1 Threats to the Fundamental Principles (321.3 A)

A self-interest threat to compliance with the principle of professional competence and due care
arises when the second opinion is not based on the same set of facts that were made available to
the existing accountant, or is based on inadequate evidence.
The second opinion may create undue pressure on the judgement and objectivity of the entity’s
appointed auditor (i.e. threatening another professional accountant’s independence).
3.2 Actions to Address
Examples of actions that might be safeguards to address such a self-interest threat include:
 Obtaining information from the current auditor with the client's permission.
 Describing the limitations surrounding any opinion in communications with the client.
 Providing the current auditor with a copy of the opinion.
The client's current auditor should:
 Seek the client's permission to reply to the request for information.
 If given, provide all information, facts and assumptions relevant to its professional opinion.

4.0 Introduction
The Code highlights two aspects of confidentiality: improper disclosure and improper use.

4.1 Disclosure of Confidential Information (R114.1)

Key Point

Information acquired in the course of professional work should not be disclosed to third parties
(including other clients or another employer) without first obtaining the permission of the
client/employer.

Confidentiality is an implied term of a contract between an auditor and client, employee and
employer. Therefore it cannot be disclosed against a client's/employer's wishes. It is in the public
interest that this professional duty of confidence exists.
 Definition

Public interest – the collective well-being of the community of people and institutions the
professional accountant serves.

However, there are circumstances in which disclosure may be required or appropriate.

There is a statutory (legal) duty to disclose without first obtaining permission to do so, for
example:
 under the obligation of a court order; or
 disclosure to the appropriate public authorities of law infringements (where required).

The firm has a professional duty or right to disclose (when not prohibited by law), for example:
 to comply with quality-control reviews of regulatory bodies such as ACCA;
 to respond to an inquiry or investigation by ACCA or other regulatory body; or
 to comply with technical standards and ethics requirements.
Where there is a right (as opposed to a duty), disclosure should only be made to pursue a public
duty or professional obligation. (ISA 250 Consideration of Laws and Regulations in an Audit of
Financial Statements is covered in Chapter 11.)

Duty (obligatory disclosure) Right (voluntary disclosure)

UK examples include actual or In certain circumstances, information may be disclosed, whatever
suspected offences of: its nature. Categories of disclosure include:
 Money laundering  In the "public interest" to a person having proper interest to
 Proceeds of crime receive information (e.g. the police, the stock exchange for a
 Drug trafficking listed client).
 Terrorism  To protect the auditor's interests (e.g. defending against ACCA
 Corruption disciplinary proceedings).
 Tax evasion  If not prohibited by statute.
 Insider dealing

Example 6 Improper Disclosure

During the current year's interim audit, the auditor becomes aware that the client has
misrepresented its sales tax return to the tax authorities, resulting in an underpayment of sales tax.
The client refuses to accept the auditor's advice to notify the tax authorities and negotiate and
correct the returns.
The auditor informs the client that he is no longer prepared to act for them in any professional
capacity. He also tells the client that he will be informing the taxation authorities that he no longer
acts for the client. Because of client confidentiality, he should not disclose to the tax authorities why
he has resigned (unless the client gives permission for him to do so, which is highly unlikely).
In addition, in certain jurisdictions (e.g. the UK), the deliberate underpayment of taxation is
classified as proceeds of crime and possibly money laundering. Therefore, the auditor is under a
legal duty to report his suspicions to the appropriate authorities (dealing with proceeds of crime),
giving full details, even though he does not provide a complete report to the taxation authorities.
It is essential for professional accountants to seek legal advice in such circumstances.

4.2 Use of Confidential Information (R114.2)

 Key Point

A professional accountant acquiring information in the course of their professional work should neithe
use, nor appear to use, that information for his or a third party's advantage.

When a professional accountant changes firm or employment, he should distinguish between:

 experience gained in the previous firm or employment; and
 confidential information and documents acquired there.
A member should not deal in the shares of a company with which he has a professional
association, as it might appear that he was turning information obtained in his professional
capacity to his advantage.

5.1 Two Types (310.2)

A conflict of interest creates threats to compliance with the principle of objectivity (and might
threaten compliance with the other fundamental principles). Such threats might arise when there is
a conflict between:
1. the professional accountant's interests and the client's interests.
2. the interests of two or more clients.

5.2 Professional Accountant v Client

Key Points

 Professional accountants should place clients' interests before their own.

 A firm should not accept or continue an engagement in which there is or is likely to be a
significant conflict of interest between the firm and the client.
 Any financial gain that accrues or is likely to accrue to the firm as a result of the engagement
(other than properly earned fees, etc) will always amount to a significant conflict of interest.

The professional accountant should apply the "reasonable and informed third party" test.
Where any commission, referral fee or reward may be earned for the introduction of a client or as
a result of advice given to a client, a self-interest threat arises.
Safeguards include disclosing to the client, in writing:
 that such commission, etc will be received;
 as soon as practicable, of its amount and terms; and
 obtaining advance agreement from the client for the referral arrangement and fee.

5.3 Client v Client (R310.5, R310.9)

Key points

 The firm's work should be managed to avoid the interests of one client adversely affecting
those of another.
 Where the acceptance or continuance of an engagement would, even with safeguards,
materially prejudice the interests of any client, the appointment should not be accepted or
continued.

All reasonable steps should be taken to ascertain whether there are any conflicts of interest
between clients (both new and existing) or are likely to arise in the future.
 Relationships with existing clients must be considered before accepting a new appointment
and regularly after that.
 A relationship that ended more than two years ago is unlikely to lead to conflict.
 A material conflict of interest between existing or potential clients should be sufficiently
disclosed to all clients involved so that they may make an informed decision on whether to
engage or continue their relationship with the firm.

Safeguards include:
 Separate engagement teams are provided with clear policies and procedures for maintaining
confidentiality.
 Appropriate reviewer, who is not involved in providing the service or otherwise affected by the
conflict, reviews the work performed to assess whether the critical judgments and conclusions
are appropriate.

Where a conflict of interest poses a threat to one or more of the fundamental principles that cannot
be eliminated or reduced to an acceptable level, the professional accountant should conclude that
it is not appropriate to accept a specific engagement or resign from one or more conflicting
engagements. When disengagement is necessary, the process should be done as speedily as is
compatible with the interests of the clients concerned.
Example 7 Conflicts of Interest
All of the current Big Four firms were formed through the mergers of major firms (originally referred
to in the 1980s as the "Top 10"). As the number of audit and assurance firms reduced, it was not
uncommon for two major competitor companies to find that they became clients of the same firm.
Despite assurances given concerning the confidentiality of the information and being able to
minimise and control conflicts of interest, many competitor companies decided that one of them
would need to change advisers.

Activity 5 Ethical Issues

Comment and conclude on the following THREE situations:
1. The audit senior of Neutron Co has known the credit controller since they were at university. During the
week of the audit, the audit senior left the audit files in his car while they dined at a restaurant. There
are no other audit staff available that the client considers capable of replacing him on the assignment.
2. A part-time partner in Spoils & Co is also a councillor in the local authority. She has been acting for
Radnor, a limited liability company whose business venture now requires planning permission from the
local authority. The partner sits on the planning committee and recently vigorously opposed a similar
application.
3. To reduce audit fees, one of your corporate clients, Finders, has employed an accountant temporarily to
assist you with your audit work. The client feels that it will be cheaper for the temporary accountant to
perform some of the audit testing, replacing one member of your staff.

*Please use the notes feature in the toolbar to help formulate your answer.

1. Comments – Objectivity appears to be threatened by the personal relationship. Even if the

credit controller is not regarded as a senior employee at Neutron, the senior's objectivity may
be impaired (e.g. when reporting weaknesses in credit control).
Also, the audit senior is not keeping audit working papers in safe custody. This could result in a
breach of duty of confidentiality.
No audit senior is irreplaceable and it is not up to the client to determine who is capable of
undertaking the assignment. Letting the client decide would constitute undue influence.
Conclusions – The audit senior should be replaced immediately. The audit's timetable may have
to be put back. The audit senior's work should be reviewed as soon as possible and, if necessary,
reperformed.
2. Comments – A conflict of interest has arisen between the part-time partner and her client
Radnor. She must declare her position with the local authority to the client. She should also
declare her Radnor interest to the local authority.
Depending on the law applied by the local authority, to abstain from debating or voting on this
issue in council may be a breach of her duty as councillor. Therefore, another partner in the firm
may have to assume responsibility to act for Radnor in this matter.
Conclusions – The client may not accept that any safeguards will resolve the conflict. Therefore,
the partner should disengage if she is not otherwise removed from acting for Radnor.

3. Comments – The temporary accountant’s qualifications held/previous experience should be

assessed to determine if he is competent. The degree of supervision and review of his work
required may stretch the resources of more senior audit staff.
Independence of the temp will be impaired (e.g. if he's an employee of the client rather than a
temping agency). Further, his objectivity may be impaired (e.g. if he will be recording transactions
to be audited).
Conclusions – If suitable (e.g. low-risk) work could be allocated on the basis that the temp is
preparing client schedules to be audited by the engagement team, the conduct of the audit may
not be impaired. He cannot be considered as being a member of the audit team.

Syllabus Coverage
This chapter covers the following Learning Outcomes.
A. Audit Framework and Regulation
Professional ethics and ACCA's Code of Ethics and Conduct
1. Define and apply the fundamental principles of professional ethics of integrity, objectivity,
professional competence and due care, confidentiality and professional behaviour.
2. Define and apply the conceptual framework, including the threats to the fundamental principles
of self-interest, self-review, advocacy, familiarity and intimidation.
3. Discuss the safeguards to offset the threats to the fundamental principles.
4. Describe the auditor's responsibility with regard to auditor independence, conflicts of interest
and confidentiality.

Summary and Quiz

 The ACCA's Code of Ethics and Conduct applies to all students and members.
 The five fundamental principles are:
o Integrity
o Objectivity
o Professional competence and due care
o Confidentiality
o Professional behaviour

 The conceptual framework assists the auditor in identifying, evaluating and responding to
threats to compliance with the fundamental principles. The categories of threats are:
o Self-interest
o Self-review
o Advocacy
o Familiarity
o Intimidation

 Threats must be eliminated, reduced to an acceptable level or the professional activity

declined/relationship ended.
 Safeguards are actions taken by the professional accountant (e.g. independent review).
 Independence requires independence of mind and independence in appearance.
 A public interest entity (PIE) is a listed entity, or an entity required to be audited as if it were
listed, or an entity of significant public interest.
 The fee dependency threshold is 15% for a PIE client and 30% for a not PIE client.
 Many firms require all professional employees not to hold any financial interest in any audit
client.
 A partner or employee of the firm must not serve as a director or officer of an audit client of the
firm.
 A firm must not assume management responsibility for an audit client.
 Most accounting and bookkeeping services should not be provided to a PIE audit client.
 Exceptions to the duty of confidentiality include:
o a statutory duty to disclose (e.g. under court order);
o a professional duty to disclose (e.g. suspected money laundering); and
o a professional right to disclose (e.g. in defending the auditor against disciplinary
proceedings).

 A professional accountant should not use or appear to use information acquired during
professional work for personal advantage or the advantage of a third party.
 Conflicts of interest include conflicts between:
o the professional accountant's interests and the client's interests; and
o the interests of two or more clients.