ISAs – Summaries and Application Guide Code of Ethics

Section 510: FINANCIAL INTEREST:

Financial interest means holding shares/debentures of a company. It creates Self-Interest Threat.

Financial interest may be held:

 directly or
 indirectly (i.e. through intermediary e.g. mutual funds, over which firm does not have
control).
(evaluation and actions differ in case of direct and indirect).

Interest held by Firm, Team Members, Immediate Family and Other Connected: (510.4)
Following persons cannot hold direct or material indirect financial interest in audit client or its
controlling entity:
1. Firm or network firm
2. Engagement Team member, or their immediate family members.
3. Other connected partners/employees or their immediate family members (i.e. partners in
the same office, or partners/employees providing non-assurance services).

Exceptions:
1. Interest held Unintentionally: (510.9)
If such firms, members or immediate family hold interest unintentionally (e.g. as
inheritance, gift, merger), such interest will be disposed immediately.

2. Interest held in Common Entity alongwith audit client: (510.8)

Such firms, members or immediate family can hold interest in an entity in which audit client
also has interest if:
 Financial interest is immaterial, or
 Audit client cannot exercise significant influence over entity.

If above conditions are not met, he will have to dispose off the interest.

3. Interest held in Common Entity alongwith directors etc of audit client: (510.10 A1 – A4)
Self-Interest, Familiarity, Intimidation threat arises.

Factors relevant to evaluate threat:

 Nature of Interest i.e. director or indirect, material or immaterial, closely or widely
held.
 Role of Individual within the team.
 Whether directors etc. can exercise significant influence over entity.

Actions to eliminate threat or safeguard:

 Dispose off interest.
 Remove individual.
 Appropriate reviewer.

1
ISAs – Summaries and Application Guide Code of Ethics

4. Interest held as Trustee: (510.7)

Such firms, members or immediate family can hold interest as trustee if:
 They are not beneficiaries of trust.
 Interest held by trust is not material.
 They cannot significantly influence investment decisions involving financial interest
in audit client.
 Trust does not have significant influence over audit client.

5. Interest held by Immediate Family as Employee: (510.5)

Immediate family member can hold interest if:
 Received interest because of employment rights, and
 Dispose of interest as soon as possible.

Interest held in audit client by Close Family of Team Member: (510.10 A5 – A8, 510.8)
Factors relevant to evaluate threat:
 Nature of Interest i.e. director or indirect, material or immaterial.
 Nature of Relationship
 Role of Individual within the team.

Actions to eliminate threat or safeguard:

 Dispose off interest.
 Remove individual.
 Appropriate reviewer.

If such family holds interest unintentionally (e.g. as inheritance, gift, merger), such interest will be
disposed as soon as possible, and firm shall apply necessary safeguards until interest is disposed.

Interest held in audit client by other relatives or disconnected partners/employees: (510.10

A9 – A12)
Almost same requirements as of Close Family.

QUESTIONS TO PRACTICE
Sr. # Attempt Title of Question
1 Summer 2018 Nisar Khalid & Co.
2 Winter 2015, part a Nadir Limited
3 Summer 2012 Mr. Mahmood

2
ISAs – Summaries and Application Guide Code of Ethics

Section 511: LOANS AND GUARANTEES:

Loan or guarantee with an audit client creates Self-Interest Threat.

Loans and Guarantees to an Audit Client: (511.4)

Firms, team members or their immediate family can give loan or guarantee to an audit client only if
it is immaterial to both firm/member and client.

Loans and Guarantees from an Audit Client: (511.5, 6, 7)

If audit client is not a bank or similar institution:
Firms, team members or their immediate family can accept loan or guarantee from such an audit
client only if it is immaterial to both firm/member and client.

If audit client is a bank or similar institution:

Firms, team members or their immediate family can accept loan or guarantee from such an audit
client (or can have deposit or brokerage account) only if it is made under normal lending
procedures, and normal terms and conditions.

If loan is material to firm or client, following safeguards shall be applied e.g.:

 Appropriate reviewer.

QUESTIONS TO PRACTICE
Sr. # Attempt Title of Question
1 Summer 2009, part iii Rose Bank Limited

3
ISAs – Summaries and Application Guide Code of Ethics

Section 520: BUSINESS RELATIONSHIPS:

Close Business Relationship:
A close business relationship between engagement team and audit client or its management creates
self-interest or intimidation threat.

Examples of close business relationships:

 Joint-venture between firm, client or their individuals.
 Combining goods and services of firm and client and market them together.
 Firm distributing or marketing client’s products or services.

A firm or team member shall have close business relationship with an audit client only if it:
 Financial interest is immaterial, and
 Business relationship is insignificant.

Buying Goods or Services:

Buying goods and services does not create any threat if transaction is in the normal course of
business, and at arm’s length.

However, due to nature and magnitude of transaction, it may create self-interest threat. Following
safeguards should be applied in such case:
 Eliminate or reducing the magnitude of transaction
 Removing individual from the audit team.

QUESTIONS TO PRACTICE
Sr. # Attempt Title of Question
1 Winter 2017, part b Clearing agent
2 Summer 2013, part b Plot of land

4
ISAs – Summaries and Application Guide Code of Ethics

Section 521: FAMILY AND PERSONAL RELATIONSHIPS:

A self-interest, familiarity or intimidation threat is created by family and personal relationships.

Immediate family member of engagement team at client:

An individual shall not participate in audit engagement team if his immediate family member is a
director, officer or significant employee in audit client.

Close family member of engagement team at client:

Factors relevant to evaluate threat:
 Role of Individual within the team.
 Position of Relative at client
 Nature of Relationship

Actions to eliminate threat or safeguard:

 Remove individual.
 Restructure responsibilities.
 Appropriate reviewer.

Other relatives of engagement team at client:

Almost same requirements as of Close Family.

Relatives of other partners/employees at client:

Almost same requirements as of Close Family.

QUESTIONS TO PRACTICE
Sr. # Attempt Title of Question
1 Summer 2017, part b Sameer
2 Summer 2016, part a Tahir Limited
3 Summer 2015, part a Brother-in-law
4 Summer 2011, part ii Sherbano Limited

5
ISAs – Summaries and Application Guide Code of Ethics

Section 522: RECENT SERVICES WITH AN AUDIT CLIENT: (Client to Firm)

A self-interest, self-review or familiarity threat is created.

Served during period covered by audit report:

An individual shall not participate in audit engagement team if was a director, officer or significant
employee in audit client.

Served prior to period covered by audit report:

Factors relevant to evaluate threat:
 Role of Individual within the team.
 Position of Individual at client
 Length of time individual left the client

Actions:
 Remove individual.
 Restructure responsibilities.
 Appropriate reviewer.

6
ISAs – Summaries and Application Guide Code of Ethics

Section 523: SERVING (SIMULTANEOUSLY) AS OFFICER TO CLIENT:

A self-interest, or self-review threat is created if a partner or employee of the firm serves the client.

Serving as director or officer:

Not allowed.

Serving as Company Secretary:

Allowed if:
 Permitted under local laws.
 Duties are limited to routine and administrative nature only (e.g. preparing minutes,
maintaining records and returns etc.)
 Management makes all relevant decisions.

7
ISAs – Summaries and Application Guide Code of Ethics

Section 524: EMPLOYMENT WITH AN AUDIT CLIENT: (Firm to Client)

A self-interest, familiarity or intimidation threat is created by employment relationships.

For Public Interest Entities: (524.6, 7, 8)

A key audit partner can joint audit client only if he ceased to be a key audit partner before joining
client, and:
 Client has issued annual financial statements.
 Individual was not part of engagement team who audited those financial statements.

A Senior or Managing Partner (CEO or equivalent in the firm) can join audit client only if he
ceased to be a Senior or Managing Partner before joining client, and
 12 months have passed.

Exception to above requirements:

Independence is not compromised if above situations arise due to business combination. However,
conditions mentioned in Code will be fulfilled.

For all clients:

Audit team member entering employment (negotiations) with audit client:
Self-Interest threat is created.

Actions:
 Firm will have policies and procedures requiring individual to notify the firm.
 Remove individual.
 Appropriate reviewer.

Audit team member/a partner joined the client: (applies even if entity subsequently became audit client)
Factors relevant to evaluate threat:
 Position of Individual at client
 Role of Individual within the team or firm.
 Length of time individual left the firm.
 Level of involvement individual will have with audit team.

Actions:
 No significant connection.
 Modify plan.
 Assign individuals with sufficient experience.
 Appropriate reviewer.

QUESTIONS TO PRACTICE
Sr. # Attempt Title of Question
1 Winter 2009, part ii Offered a job

8
ISAs – Summaries and Application Guide Code of Ethics

Section 525: TEMPORARY PERSONNEL ASSIGNMENTS:

A self-review, advocacy, or familiarity threat is created by lending staff to audit client.

Firm shall loan staff to audit client only if:

 It is for a short period of time.
 Client will be responsible directing and supervising activities.
 Individual shall not make managerial decisions, and shall not be involved in providing non-
assurance services prohibited by Code.

Actions:
 Remove individual.
 Restructure responsibilities.
 Appropriate reviewer.

QUESTIONS TO PRACTICE
Sr. # Attempt Title of Question
1 Winter 2010, part iii EL would recruit the CIA
2 Summer 2007 Credit Manager left

9
ISAs – Summaries and Application Guide Code of Ethics

Section 540: LONG ASSOCIATION AND PARTNER ROTATION:

A self-interest, or familiarity threat is created by long association with audit client.

Long Association of team member:

Factors relevant to evaluate threat:
In relation to individual:
 Length of time individual has been a member of team.
 Role of Individual within the team i.e.
o extent of his influence over outcome of audit.
o Extent of direction, supervision and review of his work.
 Nature, frequency and extent of interaction of individual with management.
 Closeness of individual with management.

In relation to client:
 Nature and complexity of client’s accounting system.
 Recent change in senior management
 Structural changes in organization affecting interaction of individual with management.

Actions:
 Rotate the individual, and determine cooling-off period for such individuals.
 Restructure responsibilities.
 Appropriate reviewer.
 Independent QCR of engagement.

Partner’s rotation in case of Public Interest Entities:

A Key Audit Partner (KAP) can serve only for 7 cumulative years (called Time-on period) to a
listed company (or shorter period if specified by law).

Exceptions:
 If local regulatory body gives exemption from partner rotation, individual can act as KAP for
more than 7 years, provided other requirements specified by body are met.
 In rare cases (e.g. when rotation not possible due to serious illness of intended partner),
KAP can be appointed for an additional (8th) year with consent of TCWG.

Cooling-Off Period:
Count of years shall restart only if KAP ceased to be a KAP for a cooling-off period i.e.
 5 consecutive years (for engagement partner, or KAP who served 4 or more years as
engagement partner). If local laws specify shorter period, it will not be less than 3 years.
 3 consecutive years (for quality control reviewer, or KAP who served 4 or more years as
quality control reviewer)
 2 consecutive years (for other partners)

Notes:
 If an entity becomes PIE during the year, previous years will be counted, subject to
maximum of 05 years.
 If a KAP served client in a previous firm, previous years will be counted.

10
ISAs – Summaries and Application Guide Code of Ethics

Restrictions on Activities during the Cooling-Off Period: (540.20)

Code has specified activities which individual shall not perform during cooling-off period.

QUESTIONS TO PRACTICE
Sr. # Attempt Title of Question
1 Summer 2019 Alpha Textile Limited
2 Winter 2016, part a Kamran Limited
3 Summer 2010, part b Mr. Shams
4 Winter 2009, part iv XYZ Limited

11