Mia Aud689 Advanced Auditing PDF

AUD 689 ADVANCED AUDITING TOPIC 1 M I A By-Laws on Professional Ethics,C onduct and Practice 1 YMI/AUD689/O CT2020 Learning Objectives ⚫ To understand the requirements of MIA By-Laws ⚫ To understand the applicability of MIA By- Laws...

AUD 689 ADVANCED AUDITING TOPIC 1 M I A By-Laws on Professional Ethics,C onduct and Practice 1 YMI/AUD689/O CT2020 Learning Objectives ⚫ To understand the requirements of MIA By-Laws ⚫ To understand the applicability of MIA By- Laws to the auditors 2 MIA By-Laws (on Professional Ethics,Conduct and Practice) ⚫ In Malaysia,FOR AC C O U N TAN TS,MIA issued the“MIA By- Laws [on Professional Ethics,Conduct and Practice]”: ◦ Provide standard of conduct in daily professional life ◦ Important for gaining public confidence in auditors’ services ◦ Exhibit the highest standards of ethics,professionalism and professional conduct that are expected of the profession ⚫ The current By-Laws is amended as of 28 Aug 2023(come into effect 15 Dec 2023). ⚫ A breach of these By-Laws will prima facie give rise to a complaint of unprofessional conduct against the member concerned. As such,members who fail to observe proper standards of ethics and professional conduct as set out in these by-laws may be required to answer a complaint before the Investigation and the Disciplinary Committees of the MIA. 3 C ontents of MIA By-Laws PA RT A : B Y-LAW S O N PRO FESSIO N A L ETH I C S ⚫ PART 1 - C O MPLYIN G W ITH THE C O D E,FUN D AMEN TAL PRIN C IPLESAN D C O N C EPTUAL FRAMEW O RK ⚫ PART 2 – PROFESSIONALACCOUNTANTS IN BUSINESS ⚫ PART 3 – PRO FESSIO N ALAC C O UN TAN TSIN PUBLIC PRAC TIC E ⚫ PART 4A – IN D EPEN D EN CE FO R AUD ITAN D REVIEW ENGAGEMENTS ⚫ PART 4B – INDEPENDENCE FOR ASSURANCE ENGAGEMENTS OTHER THAN AUD ITAN D REVIEW EN GAGEMEN TS (NOTCOVERED IN OUR SYLLABUS) PA RT B: BY-LAW S O N PRO FESSIO N A L C O N D U C T A N D PRACTI CE ⚫ PART 1 -ALL PROFESSIONALACCOUNTANTS ⚫ PART 2- MEMBERS IN PUBLIC PRAC TIC E 4 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K ⚫ SECTION 100 - C O MPLYIN G W ITH THE C O D E ⚫ SECTION 110 - THE FUNDAMENTAL PRINCIPLES ◦ SUBSEC TIO N 111 – INTEGRITY ◦ SUBSEC TIO N 112 – O BJEC TIVITY ◦ SUBSEC TIO N 113 – PROFESSIONAL COMPETENCE A N D DUE CARE ◦ SUBSEC TIO N 114 – CONFIDENTIALITY ◦ SUBSEC TIO N 115 – PRO FESSIO N AL BEHAVIO R ⚫ SECTION 120 - THE CONCEPTUAL FRAMEWORK 5 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 110 – FU N DA M E N TA L PRIN C IPLES ⚫ Professional accountants shall comply with the following fundamental principles of ethics: 1. Integrity 2. Objectivity 3. Professional C ompetence and Due C are 4. Confidentiality 5. Professional Behaviour ⚫ Auditor in performing professional services may face many threats to compliance with the fundamental principles. ⚫ Therefore,auditor should be able to identify threats,apply safeguards to eliminate the threats or reduce to acceptable level to make sure the auditor comply with fundamentalprinciples. 6 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 111 – IN T EGRIT Y ⚫ The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in all professional and business relationships. ⚫ Integrity also implies fair dealing and truthfulness. ⚫ A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the professional accountantbelieves that the information: ( a ) C ontains a materially false or misleading statement; (b) Contains statements or information furnished recklessly;or (c) Omits or obscures information required to be included where such omission or obscurity would be misleading. ⚫ When a professional accountant becomes aware that the accountant has been associated with such information, the accountant shall take steps to be disassociated from that information. 7 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 112 – O BJECT IV IT Y ⚫ The principle of objectivity imposes an obligation on all professional accountants not to compromise their professional or business judgment because of bias,conflict of interest or the undue influence of others. ⚫ A professional accountant may be exposed to situations that may impair objectivity. It is impracticable to define and prescribe all such situations. A professionalaccountant shall not perform a professionalservice if a circumstance or relationship biases or unduly influences the accountant’s professional judgment with respect to that service. 8 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 113 – PRO FESSIO N A L C O M PETE N C E A N D D U E CARE ⚫ A professional accountant shall comply with the principle of professional competence and due care,which requires an accountant to: (a)Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation;and (b)Act diligently and in accordance with applicable technical and professional standards. ◦ Serving clients and employing organizations with professional competence requires the exercise of sound judgment in applying professional knowledge and skill when undertaking professional activities. 9 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 113 – PRO FESSIO N A L C O M PETE N C E A N D D U E CARE (Cont.) Maintaining professional competence requires a continuing awareness and an understanding of relevant technical,professional and business developments.Continuing professional development enables a professional accountant to develop and maintain the capabilities to perform competently within the professional environment. Diligence encompasses the responsibility to act in accordance with the requirements of an assignment,carefully,thoroughly and on a timely basis. In complying with the principle of professional competence and due care,a professional accountant shall take reasonable steps to ensure that those working in a professional capacity under the accountant’s authority have appropriate training and supervision. Where appropriate, a professional accountant shall make clients, the employing organization, or other users of the accountant’s professional services or activities,aware of the limitations inherent in the services or activities. 10 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 114 – C O N FI D E N T IA LIT Y ⚫ The principle of confidentiality imposes an obligation on all professional accountants to refrain from: (a)Disclosing outside the firm or employing organization confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose;and (b)Using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties. ⚫ A professional accountantshall maintain confidentiality even in a social environment, being alert to the possibility of inadvertent disclosure, particularly to a close or immediate family member. ⚫ A professional accountant shall maintain confidentiality of information disclosed by a prospective client or employer. 11 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K S E C T I O N 114 – C O N F I D E N T I A L I T Y (cont.) ⚫ A professionalaccountant shall comply with the principle of confidentiality,which requires an accountantto respect the confidentiality of information acquired as a result of professional and business relationships.An accountantshall: (a) Be alert to the possibility of inadvertent disclosure, including in a social environment,and particularly to a close business associate or an immediate or a close family member; (b)Maintain confidentiality of information within the firm or employing organization; (c) Maintain confidentiality of information disclosed by a prospective client or employing organization; (d)Not disclose confidential information acquired as a result of professional and business relationships outside the firm or employing organization without proper and specific authority,unless there is a legal or professionalduty or right to disclose; 12 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K S E C T I O N 114 – C O N F I D E N T I A L I T Y (cont.) (e) Not use confidential information acquired as a result of professional and business relationships for the personal advantage of the accountant or for the advantage of a third party; ( f ) N ot use or disclose any confidential information, either acquired or received as a result of a professional or business relationship, after that relationship has ended;and (g) Take reasonable steps to ensure that personnel under the accountant’s control, and individuals from whom advice and assistance are obtained, respect the accountant’s duty of confidentiality. 13 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SEC T IO N 114 – C O N FID EN TIA LITY (cont.) ⚫ Nevertheless,the following are circumstances where professional accountants are or might be required to disclose confidential information or when such disclosure might be appropriate: ( a ) D isclosure is requiredby law,for example: (i) Production ofdocuments or other provisionofevidence in the course of legal proceedings;or (ii) Disclosure to the appropriate public authorities of infringements of the law that came to light; (b) Disclosure is permitted by law and is authorized by the client or the employing organization;and (c)There is a professional duty or right to disclose,when not prohibitedby law: (i) To comply with the qualityreview of a professionalbody; (ii) To respond to an inquiry or investigation by a professional or regulatory body; (iii) To protect the professional interests of a professional accountant in legal proceedings;or (iv) To complywith technical and professionalstandards, including ethics requirements. 14 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 115 – PRO FESSIO N A L B E H AV IO U R ⚫ A professionalaccountant shall comply with the principle of professional behaviour,which requires an accountant to comply with relevant laws and regulations and avoid any conduct that the accountant knows or should know might discredit the profession. ⚫ A professionalaccountant shall not knowingly engage in any business, occupation or activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and as a result would be incompatible with the fundamentalprinciples. ⚫ Conduct that might discredit the profession includes conduct that a reasonable and informed third party would be likely to conclude adversely affects the good reputation of the profession. 15 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 115 – PRO FESSIO N A L B E H AV IO U R (cont.) ⚫ When undertaking marketing or promotional activities, a professional accountant shall not bring the profession into disrepute. A professional accountant shall be honest and truthful and shall not make: ◦ (a) Exaggeratedclaims for the services offered by,or the qualifications or experience of,the accountant;or ◦ (b) D isparagingreferences or unsubstantiated comparisons to the work of others. ⚫ If a professional accountant is in doubt about whether a form of advertising or marketing is appropriate,the accountantis encouraged to consult with the relevant professional body. 16  The C onceptual Framework Source: https://whitecollaraccountant.com/threats-to-auditor-independence/ 17 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 120 – T H E C O N C EPT U A L FRA M EW O RK ⚫ The conceptual framework specifies an approach for a professional accountant to: (a) Identify threats to compliance with the fundamentalprinciples; (b) Evaluate the threats identified;and (c)Address the threats by eliminating or reducing them to an acceptable level. ⚫ Types ofThreats: a) Self-interest threat – the threat that a financial or other interest will inappropriately influence a professional accountant’s judgment or behavior; 18 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 120 – T H E C O N C EPT U A L FRA M EW O RK (cont.) (b)Self-review threat – the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made; or an activity performed by the accountant, or by another individual within the accountant’s firm or employing organization,on which the accountant will rely when forming a judgment as part of performing a current activity; (c)Advocacy threat – the threat that a professional accountant will promote a client’s or employing organization’s position to the point that the accountant’s objectivity is compromised; (d)Familiarity threat – the threat that due to a long or close relationship with a client, or employing organization, a professional accountant will be too sympathetic to their interests or too accepting of their work;and (e)Intimidation threat – the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant. 19 PART A:PART 1 C O M PLY IN G W IT H T H E C O D E,FU N D A M EN TA L PRINCIPLES A N D C O N C E P T U A L F R A M E W O R K SE C T IO N 120 – T H E C O N C EPT U A L FRA M EW O RK (cont.) ⚫ Professional accountants shall address the threats by eliminating them or reducing them to an acceptable level by: (a) Eliminating the circumstances,including interests or relationships, that are creating the threats; (b) Applying safeguards,where available and capable of being applied, to reduce the threats to an acceptable level;or (c) Declining or ending the specific professional activity. ⚫ Safeguards are actions, individually or in combination, that the professional accountant takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level. 20 PART A:PART 2 PR O FES S IO N A L A C C O U N TA N T S IN BU S IN ES S (Note: PAIB is not really our focus for AUD689.This part will be covered together with Part 3. Having said that,the requirements in Part 2 are mostly similar with Part 3) ⚫ SECTIO N 200 - APPLYING THE CO N C EPTUAL FRAMEW O RK – PROFESSIONAL ACCOUNTANTS IN BUSINESS ⚫ SECTIO N 210 - *CO NFLICTS O F INTEREST ⚫ SECTIO N 220 - PREPARATIO N AN D PRESENTATIO N O F INFORMATION ⚫ SECTIO N 230 - ACTING W ITH SUFFICIENT EX PERTISE ⚫ SECTIO N 240 - FIN AN C IALINTERESTS, CO MPENSATIO N AND IN C ENTIVES LINKED TO FIN AN C IALREPO RTING AN D D ECISIO N MAKING ⚫ SECTIO N 250 - *IN D UCEMENTS,IN C LUD ING GIFTSAND HOSPITALITY ⚫ SECTIO N 260 - *RESPONDINGTO NON-COMPLIANCE W ITH LAWS AN D REGULATIO NS ⚫ SECTIO N 270 - PRESSURETO BREACH THE FUN DAMEN TAL 21 PRINCIPLES PART A:PART 3 PR O FES S IO N A L A C C O U N TA N T S IN PU B LIC PRACTICE ⚫ SECTION 300 - APPLYING THE C O N C EPTUAL FRAMEWORK – PROFESSIONAL AC C O U N TAN TS IN PUBLIC PRAC TICE ⚫ SECTION 310 - C O N FLICTS OF INTEREST ⚫ SECTION 320 - PROFESSIONALAPPOIN TMEN TS ⚫ SECTION 321 - SECO N D OPINIONS ⚫ SECTION 330 - FEESAN D OTHERTYPES OF REMUNERATION ⚫ SECTION 340 - INDU C EMENTS,INC LUDIN G GIFTS AN D HOSPITALITY ⚫ SECTION 350 - C USTO DY OF C LIENTASSETS ⚫ SECTION 360 - RESPO NDI N G TO N O N -C O MPLIAN CE W ITH LAW SAN D REGULATIONS 22 S E C T I O N 300 – Applying the Conceptual Framework ⚫ Identifying threats: Types of Examples threats* Self-interest A professional accountant having a direct financial interest in a client. A professional accountant quoting a low fee to obtain a new engagement and the fee is so low that it might be difficult to perform the professional service in accordance with applicable technical and professional standards for that price. A professional accountant having a close business relationship with a client. A professional accountant having access to confidential information that might be used for personal gain. A professional accountant discovering a significant error when evaluating the results of a previous professional * For definition of each threat service of independence,refer performed by a memberto ofSlide the #18 and #19. firm. 23 accountant’s SEC T IO N 300 - A pplying the C onceptual Framework (cont.) ⚫ Identifying threats: Types of Examples threats* Self-review A professional accountant issuing an assurance report on the effectiveness of the operation of financial systems after implementing the systems. A professional accountant having prepared the original data used to generate records that are the subject matter of the assurance engagement. Advocacy A professional accountant promoting the interests of, or shares in, a client. A professional accountant acting as an advocate on behalf of a client in litigation or disputes with third parties. A professional accountant lobbying in favor of legislation on behalf of a client. 24 SEC T IO N 300 - A pplying the C onceptual Framework (cont.) ⚫ Identifying threats: Types of Examples threats* Familiarity A professional accountant having a close or immediate family member who is a director or officer of the client. A director or officer of the client, or an employee in a position to exert significant influence over the subject matter of the engagement,having recently served as the engagement partner. An audit team member having a long association with the audit client. Intimidation A professional accountant being threatened with dismissal from aclient engagement or the firm because of a disagreement about a professional matter. A professional accountant feeling pressured to agree with the judgment of a client because 25 SEC T IO N 300 - A pplying the C onceptual Framework (cont.) ⚫ Examples of Safeguards: Types of Examples threats Self-interest Dispose off or reduce the shareholding in the client to an acceptable level. Minimize reliance on one single client (audit fee), expand client base. Self-review Having an appropriate reviewer who was not a member of the team review the work performed Using different partners and engagement teams with separate reporting lines for the provision of non-assurance services to an assurance client, segregation of departments within the firm Advocacy Ensuring that the individual auditor does not continue to participate or appear to participate in the firm’s business or professional activities. Familiarity Excuse from involving in the audit of that particular client. Rotating engagement partner Intimidation Ensure audit evidence gathered is sufficient. Further reading refer to https://whitecollaraccountant.com/threats-to-auditor-independence/26 S E C T I O N 310 – Conflict of Interest ⚫ Examples of circumstances that might create a conflict of interest: ◦ Providing a transaction advisory service to a client seeking to acquire an audit client,where the firm has obtained confidential information during the course of the audit that might be relevant to the transaction. ◦ Providing advice to two clients at the same time where the clients are competing to acquire the same company and the advice might be relevant to the parties’competitive positions. ◦ Providing services to a seller and a buyer in relation to the same transaction. ◦ Preparingvaluations of assets for two parties who are in an adversarial position with respect to the assets. ◦ Representing two clients in the same matter who are in a legal dispute with each other, such as during divorce proceedings, or the dissolution of a partnership. ◦ In relation to a license agreement, providing an assurance report for a licensor on the royalties due while advising the licensee on the amounts payable. 27 S E C T I O N 320 – Professional appointments C lient acceptance ◦ The auditor should investigate the background and business activities of the audit client and he should consider: 🞄 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 🞄 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 laundering 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. 28 S E C T I O N 320 – Professional appointments (cont.) Engagement acceptance o The auditor should only accept audit engagements that he is competent to perform. He should consider whether acceptance would create any threats to compliance with the fundamental principles.After identified the threats,the auditor need to eliminate or reduce threats to an acceptable level, by applying the following safeguards:- 🞄 Acquiring understanding of the nature and complexity of the client’s business 🞄 Acquiring knowledge of relevant industries 🞄 Obtaining experience with regulatory & reporting requirements 🞄 Assigning sufficient staff with the necessary competencies 🞄 Using expert where necessary 🞄 Agreeing on the realistic time frame for performance of the engagement 🞄 Comply with quality control policies and procedures 29 S E C T I O N 321 – Second Opinions Providing asecond opinion to an entity that is not an existing client might create a self-interest or other threat to compliance with one or more of the fundamentalprinciples. Examples of actions that might be safeguards to address such a self- interest threat include: o With the client’s permission,obtaining information from the existing or predecessor accountant. o Describing the limitations surrounding any opinion in communications with the client. o Providing the existing or predecessor accountant with a copy of the opinion. 30 SEC T IO N 330 – Fees and O ther Types of Remuneration ⚫ Fees charged for all engagements should be a fair reflection of the value of the work involved and should take into account,among others: (a) the skill and knowledge required for the type of work involved; (b)the level of training and experience of the persons necessarily engaged on the work; (c) the time necessarily occupied by each person engaged on the work;and (d) the degree of responsibility and urgency that the work entails. ⚫ Quoting a fee lower than another accountant is not in itself unethical. However, the level of fees quoted creates a self-interest threat to compliance with the principle of professional competence and due care if the fee quoted is so low. 31 SEC T IO N 330 – Fees and O ther Types of Remuneration ⚫ The factors that may create self-interest threats: 🞄 A large portion of the audit firm’s total earning from one client the audit firm’sfinancial heavily dependence on that client may create self-interest threat. E.g.All cases involving listed entities, ifthe 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. 🞄 O verdue 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 be required before the report is issued or before starts the new engagement. 🞄 C ontingent fee Fee should not be charged on a contingentbasis 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. 32 SEC T IO N 340 – Inducem ents, including G ifts and Hospitality ⚫ An inducement can take many different forms,for example: ◦ Gifts. ◦ Hospitality. ◦ Entertainment. ◦ Political or charitable donations. ◦ Appeals to friendship and loyalty. ◦ Employment or other commercial opportunities. ◦ Preferential treatment,rights or privileges. ⚫ Accepting gifts from audit clients may create self-interest, familiarity and intimidation threats, but generally is permissible ifthe 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. 33 SEC T IO N 340 – Inducem ents, including G ifts and Hospitality ⚫ Examples of safeguards: ◦ Being transparent with senior management of the firm or of the client about offering or accepting an inducement. ◦ Registering the inducement in a log monitored by senior management of the firm or another individual responsible for the firm’s ethics compliance or maintained by the client. ◦ Having an appropriate reviewer,who is not otherwise involved in providing the professional service, review any work performed or decisions made by the professionalaccountant with respect to the client from which the accountant accepted the inducement. ◦ Donating the inducement to charity after receipt and appropriately disclosing the donation, for example, to a member of senior management of the firm or the individual who offered the inducement. ◦ Reimbursing the cost of the inducement,such as hospitality, received. ◦ As soon as possible,returning the inducement,such as a gift, after it was initially accepted. 34 SEC T IO N 350 – Custody of Client A ssets A professional accountant shall not assume custody of client money or other assets unless permitted to do so by law and in accordance with any conditions under which such custody may be taken. ⚫ As part of client and engagement acceptance procedures related to assuming custody of client money or assets,a professional accountant shall: (a)Make inquiries about the source of the assets;and ( b ) C onsider related legal and regulatory obligations. ⚫ A professional accountant entrusted with money or other assets belonging to others shall: (a) C omply with the laws and regulations relevant to holding and accounting for the assets; (b) Keep the assets separately from personal or firm assets; (c)Use the assets only for the purpose for which they are intended; (d)Be ready at all times to account for the assets and any income, dividends, or gains generated, to any individuals entitled to that accounting. 35 S E C T I O N 360 – Responding to Non-compliance with Laws and Regulations ⚫ N on-compliance with laws and regulations (“non-compliance”) comprises acts of omission or commission, intentional or unintentional, which are contrary to the prevailing laws or regulations committed by the following parties: (a)A client; (b)Those charged with governanceof a client; (c)Management of a client;or ( d ) O ther individuals working for or under the direction of a client. ⚫ How to address the non-compliance: (a) Rectify,remediate or mitigate the consequences of the non- compliance; (b) Deter the commission of the non-compliance where it has not yet occurred;or (c) Disclose the matter to an appropriate authority where required by law or regulation or where considered necessary in the public interest. 36 S E C T I O N 360 – Responding to Non-compliance with Laws and Regulations ⚫ Examples of non-compliance with laws and regulations that deal with: ◦ Fraud,corruption and bribery. ◦ Money laundering,terrorist financing and proceeds of crime. ◦ Securities markets and trading. ◦ Banking and other financial products and services. ◦ D ata protection. ◦ Tax and pension liabilities and payments. ◦ Environmentalprotection. ◦ Public health and safety. 37 PART A:PART 4A IN D EPEN D EN C E FO R A U D IT A N D REVIEW ENGAGEMENTS ⚫ SECTION 400 - APPLYIN G THE C O N C EPTUAL FRAMEW O RK TO IN D EPEN D EN C E FO R AUD IT A N D REVIEW ENGAGEMENTS ⚫ SECTION 410 - FEES ⚫ SECTION 411 - COMPENSATION A N D EVALUATION POLICIES ⚫ SECTION 420 - GIFTSA N D HO SPITALITY ⚫ SECTION 430 - AC TUAL O R THREATEN ED LITIGATIO N ⚫ SECTION 510 - FINANCIAL INTERESTS ⚫ SECTION 511 - LOANS A N D GUARANTEES ⚫ SECTION 520 - BUSINESS RELATIONSHIPS ⚫ SECTION 521 - FAMILY A N D PERSONAL RELATIONSHIPS ⚫ SECTION 522 - REC EN T SERVIC E W ITH A N AUD IT C LIEN T ⚫ SECTION 523 - SERVIN G AS A D IREC TO R O R O FFIC ER O F AN AUDIT CLIENT ⚫ SECTION 524 - EMPLOYMEN T W ITH A N AUD IT C LIEN T ⚫ SECTION 525 - TEMPO RARY PERSO N N ELASSIGN MEN TS ⚫ SECTION 540 - LONG ASSOCIATION OF PERSONNEL (IN C LUD IN G PARTN ER RO TATIO N )W ITH AN AUDIT CLIENT ⚫ SECTION 600 - PRO VISIO N O F N O N -ASSURA N C E SERVIC ESTO A N AUD IT C LIEN T 38 S E C T I O N 400 - Applying the Conceptual Framework to Independence for Audit and Review Engagements ⚫ Independence is linked to the principles of objectivity and integrity. It comprises: (a)Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism. (b)Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s, or an audit team member’s, integrity, objectivity or professional skepticism has been compromised. 39 S E C T I O N 410 – Fees ⚫ When the total fees generated from an audit client by the firm expressingthe audit opinion represent a large proportion of the total fees of that firm, the dependence on that client and concern about losing the client create a self-interest or intimidation threat. ⚫ A self-interest threat might be created if asignificant part of fees is not paid before the audit report for the following year is issued. It is generally expected that the firm will require payment of such fees before such audit report is issued. ⚫ When a significant part of fees due from an audit client remains unpaid for a long time, the firm shall determine: (a)Whether the overdue fees might be equivalent to a loan to the client;and (b)Whether it is appropriate for the firm to be re-appointed or continue the audit engagement. 40 S E C T I O N 410 – Compensation and Evaluation Policies ⚫ When an audit team member for a particular audit client is evaluated on or compensated for selling non-assurance services to that audit client, the level of the self-interest threat will depend on: (a)What proportion of the compensation or evaluation is based on the sale of such services; (b)The role of the individual on the audit team; and (c)Whether the sale of such non-assurance services influences promotion decisions. ⚫ A firm shall not evaluate or compensate a key audit partner based on that partner’s success in selling non-assurance services to the partner’s audit client.This requirement does not preclude normal profit-sharing arrangements between partners of a firm. 41 S E C T I O N 420 – Gifts and Hospitality ⚫ A firm,network firm or an audit team member shall not accept gifts and hospitality from an audit client,unless the value is trivial and inconsequential. ⚫ Refer Section 340 42 S EC T IO N 430 – A ctual or T hreatened Litigation ⚫ Factors that are relevant in evaluating the level of such threats include: ◦ The materiality of the litigation. ◦ Whether the litigation relates to a prior audit engagement. ⚫ If the litigation involves an audit team member, an example of an action that might eliminate such self-interest and intimidation threats is removing that individual from the audit team. 43 S E C T I O N 510 – Financial Interest ⚫ D irect and indirect financial interests by: (a)The firm or a network firm; (b)An audit team member,or any of that individual’s immediate family; (c)Any other partner in the office in which an engagement partner practices in connection with the audit engagement,or any of that other partner’s immediate family; or (d)Any other partner or managerial employee who provides non-audit services to the audit client,except for any whose involvement is minimal,or any of that individual’s immediate family. ⚫ Factors that are relevant in evaluating the level of a self-interest threat created by holding a financial interest in an audit client include: ◦ The role of the individual holding the financial interest. ◦ Whether the financial interest is direct or indirect. ◦ The materiality of the financial interest. 44 S E C T I O N 511 – Loans and Guarantees ⚫ A firm,a network firm,an audit team member,or any of that individual’s immediate family shall not make or guarantee a loan to an audit client unless the loan or guarantee is immaterial to: (a)The firm,the network firm or the individual making the loan or guarantee,as applicable;and (b)The client. ⚫ Unless the loan or guarantee is made under normal lending procedures,terms and conditions (including for mortgages,bank overdrafts,car loans,and credit card balances). 45 S E C T I O N 520 – Business Relationships ⚫ In determining whether such a relationship is material to an individual,the combined net worth of the individual and the individual’s immediate family members may be taken into account. ⚫ Examples of a close business relationship arising from a commercial relationship or common financial interest include: ◦ Having a financial interest in a joint venture with either the client or a controlling owner, director or officer or other individual who performs senior managerial activities for that client. ◦ Arrangements to combine one or more services or products of the firm or a network firm with one or more services or products of the client and to market the package with reference to both parties. ◦ Distribution or marketing arrangements under which the firm or a network firm distributes or markets the client’s products or services, or the client distributes or markets the firm or a network firm's products or services. 46 S E C T I O N 521 – Family and Personal Relationship ⚫ A self-interest, familiarity or intimidation threat is created when an immediate family member of an audit team member is an employee in a position to exert significant influence over the client’s financial position,financial performance or cash flows. ⚫ Factors that are relevant in evaluating the level of such threats include: ◦ The individual’s responsibilities on the audit team. ◦ The role of the family member or other individual within the client,and the closeness of the relationship. ⚫ An individual shall not participate as an audit team member when any of that individual’s immediate family: (a) Is a director or officer of the audit client; (b)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; ( c ) Was in such position during any period covered by the engagement or the financial statements. 47 S EC T IO N 522 – Recent S ervice with an A udit Client ⚫ The audit team shall not include an individual who, during the period covered by the audit report: (a) Had served as a director or officer of the audit client; or ( b ) Was 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. ⚫ For example, a threat would be created if a decision made or work performed by the individual in the prior period, while employed by the client,is to be evaluated in the current period as part of the current audit engagement. ⚫ Factors that are relevant in evaluating the level of such threats include: ◦ The position the individual held with the client. ◦ The length of time since the individual left the client. ◦ The role of the audit team member. 48 S E C T I O N 523 – Serving as a Director of Officer as an Audit Client ⚫ A partner or employee of the firm or a network firm shall not serve as a director or officer of an audit client of the firm. ⚫ A partner or employee of the firm or a network firm shall not serve as Company Secretary for an audit client of the firm,unless: (a)This practice is specifically permitted under local law, professional rules or practice; (b)Managementmakes all relevant decisions;and (c)The duties and activities performed are limited to those of a routine and administrative nature, such as preparing minutes and maintaining statutory returns. 49 S EC T IO N 524 – Em ploym ent with an A udit Client ⚫ The firm shall ensure that no significant connection remains between the firm or a network firm and: (a)A former partner who has joined an audit client of the firm; or (b)A former audit team member who has joined the audit client, if either has joined the audit client as: (i)A director or officer;or (ii)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. ⚫ Factors that are relevant in evaluating the level of familiarity and intimidation threats include: ◦ The position the individual has taken at the client. ◦ Any involvement the individual will have with the audit team. ◦ The length of time since the individual was an audit team member or partner of the firm or network firm. ◦ The former position of the individual within the audit team,firm or network firm. 50 S E C T I O N 525 – Temporary Personal Assignments ⚫ Examples of actions that might be safeguards to address threats created by the loan of personnel by a firm or a network firm to an audit client include: ◦ C onducting an additional review of the work performed by the loaned personnel might address a self-review threat. ◦ Not including the loaned personnel as an audit team member might address a familiarity or advocacy threat. ◦ Not giving the loaned personnel audit responsibility for any function or activity that the personnel performed during the loaned personnel assignment might address a self-review threat. ⚫ A firm or network firm shall not loan personnel to an audit client unless: (a) Such assistance is provided only for a short period of time; (b)The personnel are not involved in providing non-assurance services that would not be permitted (c)The personnel do not assume management responsibilities and the audit client is responsible for directing and supervising the activities of the personnel. 51 S E C T I O N 540 – Long Association of Personnel (Including Partner Rotation) with an Audit Client ⚫ Although an understanding of an audit client and its environment is fundamental to audit quality, a familiarity threat might be created as a result of an individual’s long association as an audit team member with: (a)The audit client and its operations; (b)The audit client’s senior management;or (c)The financial statements on which the firm will express an opinion or the financial information which forms the basis of the financial statements. ⚫ Examples of actions that might be safeguards to address such familiarity or self-interest threats include: ◦ Changing the role of the individual on the audit team or the nature and extent of the tasks the individual performs. ◦ Having an appropriate reviewer who was not an audit team member review the work of the individual. ◦ Performing regular independent internal or external quality reviews of the engagement. 52 S E C T I O N 600 – Provision of Non-Assurance Services to an A udit Client ⚫ Factors that are relevant in evaluating the level of threats created by providing a non-assurance service to an audit client include: ◦ The nature,scope and purpose of the service. ◦ The degree of reliance that will be placed on the outcome of the service as part of the audit. ◦ The legal and regulatory environment in which the service is provided. ◦ Whether the outcome of the service will affect matters reflected in the financial statements on which the firm will express an opinion,and,if so: 🞄 The extent to which the outcome of the service will have a material effect on the financial statements. 🞄 The degree of subjectivity involved in determining the appropriate amounts or treatment for those matters reflected in the financial statements. 53 S E C T I O N 600 – Provision of Non-Assurance Services to an A udit Client (cont.) ◦ The level of expertise of the client’s management and employees with respect to the type of service provided. ◦ The extent of the client’s involvement in determining significant matters of judgment. ◦ The nature and extent of the impact of the service, if any, on the systems that generate information that forms a significant part of the client’s: 🞄Accounting records or financial statements on which the firm will express an opinion. 🞄Internal controls over financial reporting. ◦ Whether the client is a public interest entity. For example, providing a non-assurance service to an audit client that is a public interest entity might be perceived to result in a higher level of a threat. 54 PART B:PART 1 A LL PR O FES S IO N A L A C C O U N TA N T S ⚫ SECTION B100 INDUCTION COURSE UPON ADMISSION ⚫ SEC TIO N B110 C O N TIN UIN G PRO FESSIO N AL ED UC ATIO N ⚫ SECTION B120 DESCRIPTION A N D DESIGNATORY LETTERS ⚫ SEC TIO N B130 PUBLIC PRAC TIC E PRO GRAMME ⚫ SEC TIO N B140ATTEN TIO N TO C O RRESPO N D EN C EAN D ENQUIRIES ⚫ SECTION B150 COMPLIANCE WITH ORDERS, DIRECTIONS OR REQUIREMENTS 55 PART B:PART 2 MEMBERS IN PUBLIC PRACTICE ⚫ SEC TIO N B200 METHO D O F PRAC TIC E ⚫ SEC TIO N B210 PRO FESSIO N AL IN D EMN ITY IN SURAN C E ⚫ SEC TIO N B220 D EATH O R IN C APAC ITY O FA SO LE PRACTITIONER ⚫ SECTION B230 CLIENT DOCUMENTS A N D EXERCISE OF LIEN (WAS REMOVED ON 1 NOVEMBER 2013; EFFECTIVE 1 JANUARY 2014) ⚫ SEC TIO N B240 REFERRALS ⚫ SECTION B250 QUALITY ASSURANCE A N D PRACTICE REVIEW ⚫ SEC TIO N B260 EN GAGEMEN T PARTN ER ⚫ SECTION B270 PROSPECTIVE FINANCIAL INFORMATION 56 END OF TOPIC 1