Ethics PDF

Ethics Topic wise Selected Opinions
ICAP CODE OF ETHICS FOR CHARTERED ACCOUNTANTS
1. Public Sector bidding for auditors
Enquiry:
For the purpose of appointment of external auditors for the public sector entity against the tender
for the financial year 2017-18, few chartered accountant firms has quoted fee for financial year
2017-18 lower than as charged by our outgoing auditors, our revenue, expenses & balance sheet
size has also increased for the financial year 2017-18.
As per ICAP Code of Ethics for Chartered Accountants:
"Fee quoted lower than that charged by the chartered accountants in practice
previously carrying out the audit be regarded as undercutting."
You are therefore requested to kindly guide us whether can we avail the professional services for
the financial 2017-18 from those chartered accountant firms who have quoted fee lower than as
charged by our outgoing auditors or otherwise.
Opinion:
The Committee would like to clarify that the entity making appointment of the auditor is
responsible to appoint the auditor in accordance with legal and regulatory provisions applicable to
such entity.
It is pertinent to mention that the Code of Ethics for Chartered Accountants (the Code) issued by
ICAP applies to the members of the Institute.
Section 240.1 of the Code recognizes that audit fee is a commercial matter to be agreed between
the auditor and the appointing entity. When entering into negotiation regarding professional
services, an auditor may quote whatever fee is appropriate in commensuration with the nature
and service to be rendered. However, the quantum and scope of audit work are important and
relevant factors in the determination of auditor’s fee. In accordance with requirements of the
Code if the scope and quantum of audit work does not materially differ from the work carried out
by the previous auditor, the audit fee lower than the fee charged by the previous auditor could be
regarded as undercutting.
Based on the information provided in your enquiry the revenue, expenses and financial position of
the company has improved/increased from the previous audited year.
In accordance with section 240.1 of the Code, it is not permissible for the incoming auditor to
accept an audit engagement at a fee lower than that charged by the previous year external
auditor unless the scope and quantum of audit work has reduced compared to the previous
audited year. However, the provision of the relevant information (such as the fee being charged
by the previous auditor, the scope and quantum of work, the changes in scope and quantum of
The Institute of Chartered Accountants of Pakistan 1

work etc.) by the appointing entity, prior to the submission of the proposal, to the proposing
auditor for determining/ quoting audit fee is also to be given consideration.
It is advisable that the appointing entity’s management or those charged with governance may
engage in a dialogue with the proposed auditor(s) to ensure that the auditor(s) have the complete
information (such as the previous year audit fee, quantum and scope of the current year’s audit
work etc.), necessarily required for the determination of the audit fee. This approach will help in
avoiding any miscommunication and/or misunderstanding in relation to the determination and
agreement of audit fee. Accordingly, the reporting entity may proceed in the matter in
accordance with the guidelines provided by section 240.1 of the Code, the legal and regulatory
provisions and the procurement policies and rules applicable in the circumstances.
(May 09, 2018)
2. Query on statutory positions
Enquiry:
Mr. ZAMS is a qualified Chartered Accountant and holds following positions in a same group:
 Head of Internal Audit, Risk and Compliance in a Listed Modaraba, (on its payroll,
dedicated function);
 Head of Internal Audit (acting as coordinator to a outsourced auditor's firm) of an
Investment Bank;
 Head of Internal Audit (acting as coordinator to a outsourced auditor's firm) and
Compliance Officer of a brokerage house; and
 Head of Internal Audit (acting as coordinator to an outsourced auditor's firm) of an
asset management fund and its three associated funds.
Does COCG allow one person to hold multiple statutory positions?
Opinion:
The Committee considered the requirements given in the Code of Corporate Governance, 2012
(the Code) and the requirements given in the Companies Act, 2017.
The Code
The revised ICAP Code of Ethics for Chartered Accountants 2015 (the Code of Ethics) institutes the
fundamental principles of professional ethics and provides a conceptual framework for applying
those principles. One of the basic elements of the framework is ‘Independence’. It is important to
note that independence of mind and in appearance is necessary to enable the chartered
accountants to enable them to perform their functions without bias, conflict of interest or undue
influence.
Your attention is drawn to the following sections of Part C of the Code of Ethics relating to
Chartered Accountants in Business:
300.6 A chartered accountant in business shall not knowingly engage in any business,
occupation, or activity that impairs or might impair integrity, objectivity or the

good reputation of the profession and as a result would be incompatible with the
fundamental principles.
310.1 A chartered accountant in business may be faced with a conflict of interest when
undertaking a professional activity. A conflict of interest creates a threat to
objectivity and may create threats to the other fundamental principles. Such
threats may becreated when:
• The chartered accountant undertakes a professional activity related to a

particular matter for two or more parties whose interests with respect
to that matter are in conflict; or
• The interests of the chartered accountant with respect to a particular
matter and the interests of a party for whom the chartered accountant
undertakes a professional activity related to that matter are in conflict.
A party may include an employing organization, a vendor, a customer, a lender, a

shareholder, or another party.
A chartered accountant shall not allow a conflict of interest to compromise

professional or business judgment.
310.3 When identifying and evaluating the interests and relationships that might create
a conflict of interest and implementing safeguards, when necessary, to eliminate
or reduce any threat to compliance with the fundamental principles to an
acceptable level, a chartered accountant in business shall exercise professional
judgment and be alert to all interests and relationships that a reasonable and
informed third party, weighing all the specific facts and circumstances
available to the chartered accountant at the time, would be likely to conclude
might compromise compliance with the fundamental principles.
In view of the above, the Committee is of the view that the Head of Internal Audit of one group
company of a listed company can hold similar position in any other listed company of the same
group, only where independence is not impaired and conflict of interest is not created while
performing his/her statutory responsibilities with the other role.
Further, appropriate safeguards should be applied, when necessary, to eliminate the threats to
compliance with the fundamental principles created by the conflict of interest or reduce them to
an acceptable level.
The Companies Act, 2017
You are advised to ensure compliance, to the extent applicable in your case, with the related
definitions and sections of the Companies Act, 2017 which have been reproduced below for
reference: (underline is ours)
2(45) “officer” includes any director, chief executive, chief financial officer, company
secretary or other authorised officer of a company;
206. Interest of officers. (1) Save as provided in section 205 in respect of directors, no
other officer of a company who is in any way, directly or indirectly, concerned or
interested in any proposed contract or arrangement with the company shall,
unless he discloses the nature and extent of his interest in the transaction and
obtains the prior approval of the board, enter into any such contract or
arrangement.
(2) ………………………
208. Related party transactions. (1) A company may enter into any contract or
arrangement with a related party only in accordance with the policy approved by
the board, subject to such conditions as may be specified, with respect to-
a) to e) ……………………………
f) such related party's appointment to any office or place of profit in the
company, its subsidiary company or associated company:
Provided that where majority of the directors are interested in any of the above
transactions, the matter shall be placed before the general meeting for approval
as special resolution:
Explanation.- In this sub-section:
(a) the expression “office of profit” means any office:
(i) …………….
(ii) where such office is held by an individual other than a director or by any firm,
private company or other body corporate, if the individual, firm, private
company or body corporate holding it receives from the company anything by
way of remuneration, salary, fee, commission, perquisites, any rent-free
accommodation, or otherwise;
(c) the expression “related party” includes-
(i) a director or his relative;

(ii) a key managerial personnel or his relative;……………….
(July 07, 2017)
3. Appointment of Auditors
Enquiry: Background Information:

1- Audit Firm issued quotation of audit fee against a request from Private
Limited Company.
2- The Company appointed them as their auditors in AGM, without complying
with the requirements of Section 253 of the Companies Ordinance, 1984.
3- On intimation of appointment from Company, the new Auditors inquired, if
the Company has complied with the requirements of Section 253 of the
Companies Ordinance, 1984 and wrote to retiring Auditor for professional
clearance.

4- Retiring Auditor responded that due to non-compliance by the Company,
they believe new appointment is invalid and question of professional clearance
does not arise.
5- On receiving information from the Company, regarding non-compliance with
section 253, the new auditors sought views of SECP and ICAP on the matter,
who suggested that the new appointment is valid.
6- Views of SECP and ICAP were shared with retiring Auditors, whereas no
response was received thereafter, despite several reminders.
Queries:
A) Would the new auditor be guilty of professional misconduct in terms of

clause 7 & 8 of Part 1 of 1st Schedule to Chartered Accountants Ordinance,
1961, if he accepts the appointment, even after obtaining attached
clarification from SECP and ICAP;
B) If the Institute believes that accepting this engagement would lead to a

professional misconduct, would the new auditor be required to resign from the
position (since Company believes, based on SECP opinion, that they have
appointed the auditors) or should he simply refrain from accepting the
engagement (since, the appointment has not yet been accepted by the new
Auditors);
C) If the new auditor resign, and the Company fills in casual vacancy by
appointment of another firm other than retiring auditors, would that other firm
be guilty of professional misconduct in terms of Clause 8 of Part 1 of 1st
Schedule to Chartered Accountants Ordinance, 1961;
D) If the new auditor refuses to accept the appointment, based on non-serving

of notice and Commission appoints them again u/s 252(6) of the Companies
Ordinance, 1984 or SECP appoints any firm other than retiring auditors, would
the new auditor appointed by the Commission be guilty of professional
misconduct, if they accept the engagement.
Opinion: The Committee discussed your enquiry and its views on each of the questions
are as follows:
On Query A, B & C, the Committee is of the view that provisions related to

professional misconduct in case of acceptance of appointment of auditor by
practicing member are appropriately covered in Schedule 1 of Part 1 of the
Chartered Accountants Ordinance, 1961 and under section 210 ‘Professional
Appointment’ of the revised ICAP Code of Ethics 2015.
On Query D, the Committee is of the view that an auditor appointed under

section 252(6) is also required to communicate in writing with the outgoing
auditor before accepting the appointment.
(February 06, 2017)
4. Conflict of Interest
Enquiry: Our firm has been appointed by Communication & Works Department,
Government of the Punjab (GOPb) to carry out the assignment relating to M/s.
ABC Private Limited (“the company”), which has undertaken a road project on
Build Operate Transfer (BOT) basis, for the following scope of work:
a) to review and certify, monthly statement of transactions undertaken from
the project maintenance/escrow account in accordance with the provisions of
the agreement related to the project.
b) To audit and certify, the basis and computation of the claim by the RBOC
related to compensation for cost resulting from changes in design in
accordance with the provisions of the agreement related to the project.
c) To audit and certify, the basis and computation of the claim by the RBOC
or GOPb related to request for the revision of toll rates and for an appropriate
amendment in the toll escalation rules and where necessary in accordance
with the provisions of the agreement related to the project.
d) To audit and verify the claim of loss by RBOC and provide amount due and
payable with respect of the claim in accordance with the provisions of the
agreement related to the project.
e) To audit and verify the basis of computation of any other claims under this
agreement ﬁled by RBOC or the GOPb as deﬁned in clause 33.2.1 of the
f) To review any and all audit reports issued by the RBOC auditor for
correctness and compliance in accordance with the provisions of the
The period relating to the above assignment is from October, 2003 to

September, 2028. The financial statements of the company are audited by
another firm M/s. XYZ & Co. Chartered Accountants. Our partners, Mr. G & Mr.
F were partners of M/s. XYZ & Co. Chartered Accountants till May 2006. During
the period, the financial statements of the company for the half year ended
Dec 31, 2004 & year ended June 30 2005 were audited by M/s. XYZ & Co.
Chartered Accountants as per accounts provided by M/s. ABC Private Limited
and the audit reports were signed by Mr. G.
In the light of the above, kindly give us Committee’s opinion if there is a

conflict of interest under either of the following circumstances:
i. Partner who remained the partners in M/s. XYZ & Co. is engagement
partner of the assignment.
ii. Another partner of M/s. XYZ & Co. who never remained part of M/s. XYZ
& Co. is engagement partner of the assignment.
Opinion: We would like to refer revised ICAP Code of Ethics for Chartered Accountants
(the Code) which institutes the fundamental principles of professional ethics
and provides a conceptual framework for applying those principles. One of the
basic elements of the framework is ‘Independence’. It is important to note that
independence of mind and in appearance is necessary to enable the practicing
chartered accountants to enable them to express a conclusion, without bias,
conflict of interest or undue influence.
Practicing chartered accountants are expected to provide an assurance and

variety of non-assurance services that are consistent with their skills and
expertise. While rendering other services to an audit client, practicing
chartered accountants are required to apply the conceptual framework to
identify threats to compliance with the fundamental principles and assess their
significance and implication.
The onus of evaluation of such threats to compliance with the fundamental

principles rests on the practicing chartered accountants and they should
consider qualitative as well as quantitative factors while performing such
evaluation. Such obligation on the part of a practicing chartered accountant
becomes more critical in a situation where the applicable guidelines or
regulations do not clearly prohibit any specific service. Relationships should be
avoided which allow prejudice, bias or influences of others to override
objectivity.
In this connection, the Committee would also like to refer the following paras
of section 220 ‘Conflict of Interest’ of the Code which states:
“220.1 A chartered accountant may be faced with a conflict of interest when

undertaking a professional activity. A conflict of interest creates a threat to
objectivity and may create threats to the other fundamental principles. Such
threats may be created when:
• The chartered accountant provides a professional service related to a

particular matter for two or more clients whose interests with respect to
that matter are in conflict; or
• The interests of the chartered accountant with respect to a particular
matter and the interests of the client for whom the chartered accountant
provides a professional service related to that matter are in conflict.
(Underline is ours)
A chartered accountant shall not allow a conflict of interest to compromise

professional or business judgment. When the professional service is an
assurance service, compliance with the fundamental principle of objectivity
also requires being independent of assurance clients in accordance with
Sections 290 or 291 as appropriate.”
“220.3 When identifying and evaluating the interests and relationships that
might create a conflict of interest and implementing safeguards, when
necessary, to eliminate or reduce any threat to compliance with the
fundamental principles to an acceptable level, a chartered accountant in
practice shall exercise professional judgment and take into account whether a
reasonable and informed third party, weighing all the specific facts and
circumstances available to the chartered accountant at the time, would be
likely to conclude that compliance with the fundamental principles is not
compromised.”
“220.5 If the threat created by a conflict of interest is not at an acceptable

level, the chartered accountant in practice shall apply safeguards to eliminate
the threat or reduce it to an acceptable level. If safeguards cannot reduce the
threat to an acceptable level, the chartered accountant shall decline to
perform or shall discontinue professional services that would result in the
conflict of interest; or shall terminate relevant relationships or dispose of
relevant interests to eliminate the threat or reduce it to an acceptable level.”
“220.6 Before accepting a new client relationship, engagement, or business

relationship, a chartered accountant in practice shall take reasonable steps to
identify circumstances that might create a conflict of interest, including
identification of:
• The nature of the relevant interests and relationships between the parties
involved; and
• The nature of the service and its implication for relevant parties.
The nature of the services and the relevant interests and relationships may
change during the course of the engagement. This is particularly true when a
chartered accountant is asked to conduct an engagement in a situation that may
become adversarial, even though the parties who engage the chartered
accountant may not initially be involved in a dispute. The chartered accountant
shall remain alert to such changes for the purpose of identifying circumstances
that might create a conflict of interest.”
In the light of above, the Committee views on your queries are as follows:
1. To avoid a risk of conflict of interest, the Code requires that safeguards

should be applied, when necessary, to eliminate or reduce any threat to
compliance with the fundamental principles to an acceptable level. In
Committee’s view, there is a self-review threat for partners, Mr. G & Mr. F as
their previous firm has done external audit for the half year ended 31
December, 2004 and year ended 30 June, 2005. Therefore, they should not act
as engagement partners or technical/ quality review partners for those years.
The Committee is also of the view that it is the duty of the incoming auditor to
guard against independence/ familiarity threats, if any, including the cooling-
off period of the outgoing partner(s). Section 290.149 of the Code requires
cooling off period of two years for clients who are public interest entities. For
private companies no such requirement is given. However, firms may have
longer cooling-off periods as per their respective partnership arrangements

2. No apparent conflict of interest arises in the inquired situation.
(November 25, 2016)
5. Performing accounting and audit of Public Interest Entity
Enquiry: The Public Interest Entity (PIE) floated a tender inviting bid from CA firms for
accounting and audit work. There was no mention in the tender document that
firms could apply in consortium/ JV for the assignment. Moreover, as per text
of the terms of reference of the bid only technically and financially
qualified firm (singular connotation) is to be selected for the above mentioned
services. Keeping in view the above scenario, we request to provide technical
advice on the following matters:
1. For PIE, is a firm allowed to undertake both accounting work and audit of
financial statements.
2. If not allowed, then can conflict of interest be avoided in either of the

following circumstances:
a. In response to the tender, one firm submits bid for the providing both
accounting and auditing work in its own name. To avoid conflict of interest it
mentions in the bid documents that it has entered into an agreement (internal
agreement) with another firm that either of the assignments shall be
performed by one of them. Although, the responsibility for the execution of
both assignments would rest on the applicant firm.
b. Two firms submit one bid by forming JV/ consortium for both the
assignments together and enter into agreement (internal agreement) between
themselves defining the allocation of the work. Can conflict of interest be
avoided under such an arrangement, whereas submission of joint bid implies
that both the firms shall be jointly responsible for both the assignments.
It is requested to kindly provide technical guidance on each of the scenario

stated above.
Opinion: The ICAP revised Code of Ethics for Chartered Accountants 2015 (the Code)
provides a conceptual framework for applying fundamental principles of
professional ethics, one of which is ‘Independence’.
A practicing chartered accountant is required to apply the conceptual

framework to identify threats to compliance with the fundamental principles
and assess their significance and implication. The responsibility of evaluation of
such threats to compliance with the fundamental principles rests on the
practicing chartered accountants and they should consider qualitative as well
as quantitative factors while performing such evaluation. In case where
practicing chartered accountants render such services which may coincide with
management functions and management decision making, the threat of “Self
Review” could exist.
In this connection the Committee would also like to refer the paragraphs
290.164 - 290.167 of the Code which states:
Preparing Accounting Records and Financial Statements
General Provisions
“290.164 Management is responsible for the preparation and fair

presentation of the financial statements in accordance with the applicable
financial reporting framework. These responsibilities include:
 Originating or changing journal entries, or determining the account
classifications of transactions; and
 Preparing or changing source documents or originating data, in
electronic or other form, evidencing the occurrence of a transaction
(for example, purchase orders, payroll time records, and customer
orders).”
“290.165 Providing an audit client with accounting and bookkeeping services,

such as preparing accounting records or financial statements, creates a self-
review threat when the firm subsequently audits the financial statements.”
Para 290.166 - 67 describes the activities that are considered to be a normal

part of the audit process and do not, generally, create threats to
independence.
Para 290.168 of the Code allows the audit firm that may provide accounting
related services only in case of audit clients that are not public interest
entities, subject to applying certain safeguards. Such services are considered to
be of a routine or mechanical nature, so long as any self-review threat created
is reduced to an acceptable level. This relaxation does not exist for audit
clients that are public interest entities.
In the light of above, the Committee views on your queries are as follows:
1. Audit firm is not allowed to undertake both accounting work and audit
of financial statements of public interest entities simultaneously.
2. The independence of mind and in appearance is necessary to enable the

practicing chartered accountants to express a conclusion, without bias, conflict
of interest or undue influence. Therefore, in Committee’s view, the
fundamental principle of ‘Independence’ will be impaired in both the given
circumstances.
(December 15, 2016)

6. Notice U/S 161/205 of the Income Tax Ordinance, 2001 issued to
Corporation for Tax Year 2013-14
Enquiry: This query is related to ABC Corporation on which FBR had some observations
related to code of ethics compliance for tax year 2013-14.
Background:
ABC Corporation is established in China as a state-owned hydropower project

contractor during the 1950s. It has dynamic network including regional divisions
and offices in Asia, Africa, Oceania, South America and Europe, supervising 113
overseas branches / representative offices in 84 countries. In Asia, their head
office is located in Islamabad. ABC Corporation Limited is listed as a registered
taxpayer.
Extract of FBR observation on audit firm of Corporation, M/s XYZ & Company,
Chartered Accountants, is reproduced below:
“…..It is further pertinent to mention that not only your firm, M/s XYZ &
Company, Chartered Accountants, prepared the Financial Statements and
Audited Accounts of the company, in fact they are also the engaging partner of
the concerned company which shows either professional incompetence of the
firm or deliberate attempt aiming at misleading the undersigned.
It has also been observed that preparation of financial statements and
conducting of audit by the same firm and simultaneously representing the
taxpayer being tax attorney before the Inland Revenue Authorities is not only
morally wrong but also against the professional ethics and the best
international practice in vogue all across the world. In Pakistan, after realizing
the same, SECP has changed this practice for public listed companies.”
Opinion: The relevant Committee of the Institute (the Committee) has considered the
matter and would like to inform you that in 1990 the Institute adopted the
International Federation of Accountants’ (IFAC) Code of Ethics for Professional
Accountants for the first time with some amendments so that the services
provided by its members should be in accordance with the internationally
accepted norms and principles. Since then the Institute is following IFAC’S
Code. In April 2015, the International Ethics Standards Board for Accountants
(IESBA) of IFAC issued a revised Code of Ethics for Professional Accountants,
clarifying requirements for all professional accountants and significantly
strengthening the independence requirements of auditors in providing their
services, which was adopted by the Institute subject to some changes as per
local regulatory requirements.
The Committee would like to refer the following paragraphs of ICAP Code of
Ethics (the Code) issued in 2008, as the query relates to tax year 2013-14:

290.159 The potential threats to independence will most frequently arise
when a non-assurance service is provided to a financial statement audit client.
……. Threats to independence, however, may also arise when a firm provides a
non-assurance service related to the subject matter information, of a non-
financial statement audit assurance engagement. In such cases, consideration
should be given to the significance of the firm’s involvement with the subject
matter information, of the engagement, whether any self-review threats are
created and whether any threats to independence could be reduced to an
acceptable level by application of safeguards, or whether the engagement
should be declined. ……..
290.164 The provision of certain non-assurance services to financial

statement audit clients may create threats to independence so significant that
no safeguard could eliminate the threat or reduce it to an acceptable level.
However, the provision of such services to a related entity, division or discrete
financial statement item of such clients may be permissible when any threats
to the firm’s independence have been reduced to an acceptable level by
arrangements for that related entity, division or discrete financial statement
item to be audited by another firm or when another firm reperforms the non-
assurance service to the extent necessary to enable it to take responsibility for
that service.
290.165 Assisting a financial statement audit client in matters such as

preparing accounting records or financial statements may create a self-review
threat when the financial statements are subsequently audited by the firm.
290.166 It is the responsibility of financial statement audit client

management to ensure that accounting records are kept and financial
statements are prepared, although they may request the firm to provide
assistance. If firm, or network firm, personnel providing such assistance make
management decisions, the self-review threat created could not be reduced to
an acceptable level by any safeguards. Consequently, personnel should not
make such decisions. Examples of such managerial decisions include:
• Determining or changing journal entries, or the classifications for accounts or

transaction or other accounting records without obtaining the approval of the
financial statement audit client;
• Authorizing or approving transactions; and
• Preparing source documents or originating data (including decisions on
valuation assumptions), or making changes to such documents or data.
In addition to above, please refer the safeguards provided in the paragraph

290.162 of the Code when non-assurance services are provided to assurance
clients.
Financial Statements Audit Clients that are Not Listed Entities

290.169 The firm, or a network firm, may provide a financial statement
audit client that is not a listed entity with accounting and bookkeeping
services, including payroll services, of a routine or mechanical nature, provided
any self-review threat created is reduced to an acceptable level.
Examples of such services include:

• Recording transactions for which the audit client has determined or approved
the appropriate account classification;
• Posting coded transactions to the audit client’s general ledger;
• Preparing financial statements based on information in the trial balance; and
• Posting the audit client approved entries to the trial balance.
The significance of any threat created should be evaluated and, if the threat is
other than clearly insignificant, safeguards should be considered and applied
as necessary to reduce the threat to an acceptable level. Such safeguards
might include:
• Making arrangements so such services are not performed by a member of the

assurance team;
• Implementing policies and procedures to prohibit the individual providing
such services from making any managerial decisions on behalf of the audit
client;
• Requiring the source data for the accounting entries to be originated by the
audit client;
• Requiring the underlying assumptions to be originated and approved by the
audit client; or
• Obtaining audit client approval for any proposed journal entries or other
changes affecting the financial statements.
In the light of above, the Code allows unlisted company’s auditor to prepare
financial statements and also to perform audit, provided safeguards are in
place.
With regard to providing tax related advisory services, the Committee would
also like to draw your attention to para 290.176 of the Code:
290.176 The firm may be asked to provide taxation services to a financial

statement audit client. Taxation services comprise a broad range of services,
including compliance, planning, provision of formal taxation opinions and
assistance in the resolution of tax disputes. Such assignments are generally not
seen to create threats to independence.
The Committee is of the opinion that the external auditor may engage in tax
advisory services. However, certain tax services may also pose a threat in the
form of self-review and/or advocacy for which the auditor needs to take care
of by applying the necessary safeguards.

In addition to above, the Committee would also like you to refer section
290.175-290.188 pertaining to the taxation services of the revised ICAP Code of
Ethics 2015 which is effective for audits of financial statements for periods
beginning on or after July 01, 2015. In section 290.179-290.180, the revised
Code distinguishes between the requirements for listed and unlisted clients,
otherwise it allows external auditor to perform varied taxation services that
are mentioned in the Code.
The full copy of the ICAP Code of Ethics can be accessed at:
http://www.icap.net.pk/wp-content/uploads/2013/12/Code-of-Ethics-
2008.pdf
http://www.icap.net.pk/wp-content/uploads/2013/12/ICAP-revised-Code-of-
Ethics-2015.pdf
(May 09, 2016)
7. Indebtedness of Auditors
Enquiry: We would like to obtain an opinion regarding the indebtedness of external

auditors of a banking company, where the firm has obtained an unfunded
facility from that banking company.
Relevant Requirements of Companies Ordinance 1984
Clause (d) of sub section 3 section 254 states that a person who is indebted to
the Company shall not be appointed as auditor of a company.
Sub section 3A clarifies that a person shall not be deemed indebted to the
company if a person who owes:
(a) a sum of money not exceeding five hundred thousand rupees to a credit
card issuer: or
(b) a sum to a utility company in form of unpaid dues for a period not
exceeding ninety days
ICAP Code of ethics for Chartered Accountants (revised April 28, 2015)
Loans and Guarantees
290.117 states that “a loan, or a guarantee of a loan, to a member of the audit

team, or a member of that individual’s immediate family, or the firm from an
audit client that is a bank or a similar institution may create a threat to
independent. If a loan or guarantee is not made under normal lending
procedures, terms and conditions, a self-interest threat would be created that
would be so significant that no safeguards could reduce the threat to an
acceptable level. Accordingly, neither a member of the audit team, a member
of that individual’s immediate family, nor a firm shall accept such a loan or
guarantee.”

290.118 states that “if a loan to a firm from an audit client that is a bank or
similar institution is made under normal lending procedures, terms and
conditions and it is material to the audit client or firm receiving the loan, it
may be possible to apply safeguards to reduce the self-interest threat to an
acceptable level. An example of such a safeguard is having the work reviewed
by a chartered accountant from a network firm that is neither involved with
the audit nor received the loan.”
290.119 states that “a loan, or a guarantee of a loan, from an audit client that
is a bank or a similar institution to a member of the audit team, or a member
of that individual’s immediate family, does not create a threat to
independence if the loan or guarantee is made under normal lending
procedures, terms and conditions. Examples of such loan include home
mortgages, bank overdrafts, car loans and credit card balances.”
Dictionary meaning
As per Oxford Dictionary:

- indebtedness: the condition of owing money
- indebted: owing money
(source: http://www.oxforddictionaiers.com/definition/english/indebtedness )
Our queries
Considering the above requirements of law and ICAP Code of Ethics for
Chartered Accountants, we would like to have an opinion of the Committee on:
Would a firm be deemed indebted to a banking company in following cases:
a. If firm has obtained and utilized unfunded facility (guarantee) only?

b. If firm has obtained funded facility from the banking company but has
not utilized that facility?
Opinion: The Committee would like to draw your attention to the section 254(3) of
Companies Ordinance, 1984 and section 290.117 to 290.118 of revised ICAP
Code of Ethics for Chartered Accountants (the Code), already reproduced in
your query. These sections of the Code explain scenario and safeguards where
loan or guarantee of loan is obtained under normal lending terms or not.
However, the requirements of section 254(3)(d) of the Companies Ordinance,
1984 are stricter than the Code and disqualify a person to become an auditor if
he/she is indebted to client.
With regard to your queries, the Committee is of the view that if a firm has
obtained and utilized unfunded facility that is guarantee, a liability has been
created; hence it appears to create indebtedness to firm. In this case, the
Committee is of the view that self-interest threat would be created that would
be so significant that no safeguards could reduce the threat to an acceptable
level. Accordingly, a firm should not accept such guarantee.
For second query, the Committee is of the view that loan comes under funded
facility and therefore, guidance can be taken from requirements of section
290.117-290.119 of the Code. In this scenario, as non-utilization of a funded
facility is temporary and the facility is obtained with the objective of availing
it, therefore, it would also create indebtedness and a risk to self-interest
threat as soon as it is utilized. Therefore, the firm should avoid taking such
banking facilities from the banking clients in both the scenarios.
Note: In addition to above, the enquirer was also advised to take opinion from
legal advisor as it could have legal implications.
(November 09, 2015)
8. Appointment of Consultant for Internal Audit Assignments
Enquiry: ABC Ltd (hereinafter referred to as ‘Company’) is a Public Sector Enterprise

listed at all Stock Exchanges of Pakistan. The Company complies with Code of
Corporate Governance 2012 and Public Sector (Corporate Governance) Rules
2013, both issued by Securities and Exchange Commission (SECP) of Pakistan.
The Company has a well-equipped Internal Audit Department, headed by a

Qualified Professional (FCA), and the Department carries out all Internal Audit
Assignments in-house, except for few third party audits which are outsourced,
keeping in view availability of staff resources.
Public Sector (Corporate Governance) Rules 2013 (hereinafter referred to as

‘Rules 2013’) requires all Public Sector Enterprises to implement, as far as
practicable, International Standards for the Professional Practice of Internal
Auditing (the Standards) issued by the Institute of Internal Auditors (the IIA).
External Quality Assessment Review: The Board Audit Committee (BAC) of the
Company decided to conduct an External Quality Assessment Review (QAR) of
Internal Audit Department, keeping in view the provisions of the IIA Standard
1312. The objective of this review was to assess the effectiveness of Audit
Function, and to identify areas where improvement can take place.
Furthermore, another objective of this review was to obtain independent
assurance that all legal and regulatory requirements associated with Internal
Audit Function are being complied with and that sufficient procedures exists
within the Internal Audit Department to ensure that Quality work is performed.
Draft Internal Audit Manual: The Internal Audit Department has also prepared
a Draft Internal Audit Manual, detailing procedures that should be implemented
in the Audit Department, so as to achieve more efficiency and standardization
of audit work. The procedures are in draft form, and are different from
existing procedures being followed. Keeping in view that an External QAR may
take place, it was envisaged that results of QAR are likely to impact the Draft
Procedures which may require amendment/ improvement. Therefore, it was
decided that results of QAR will be incorporated in the draft Manual, so that its
implementation will not cause any inconsistency with the results and
recommendations of QAR.
Scheme of Work:
For this purpose, Internal Audit Department wants to appoint a Consultant, to

broadly cover the following work:
1. Carry out QAR in line with guidelines of the Standards issued by IIA, and
produce a report highlighting areas in Internal Audit Department where
improvement is sought, including the blend of staff and core competencies
required, scope of work, effectiveness of existing procedures, etc.
2. To take the results of QAR and review the Draft Audit Manual and
ensure that the draft procedures are in line with the results and
recommendations of QAR. Where any inconsistency is noted, the Consultant
will be required to make suitable amendments or additions in draft procedures
to bring them in line with results of QAR.
Question:
The Management of the Company is evaluating whether the above scheme of

work raises any question of ‘Conflict of Interest’ or ‘Independence’ if the work
of QAR and Revalidation of Draft Audit Manual is given to a single consultant.
The Management has the following questions:
1. If the Consultant who is carrying out QAR is also required to revalidate

the Draft Procedures, will it create a ‘Conflict of Interest’, keeping in view the
requirements of IIA Standard?
2. Does QAR falls under the ‘Attribute’ Standards, and Review of Manual
falls under ‘Performance’ Standards, and if so, do the Standards require that
these work be carried out mandatorily by two separate consultants?
Internal Audit Department of the Company has reviewed the Standards in

detail, including Practice Advisory on QAR (1312-1) and finds that no such
conflict of interest prevails if a single consultant is required to carry out QAR
and revalidation of draft Internal Audit Manual. Furthermore, QAR covers
compliance of all Standards, and not just Attribute standards, and review of
existing procedures is also part of such QAR.
Request to ICAP Committee:
The Committee is requested to kindly provide its view on the questions 1 and 2
noted above. The opinion of honorable Committee will assist the Company in
opting a way forward.

Opinion: The Committee has considered your enquiry and would like to state in the
beginning that the Committee primarily deals with matters related to
accounting, auditing, governance and related laws and regulations.
Accordingly, the knowledge and expertise of standards issued by the Institute
of Internal Auditors are not available with the Committee and accordingly we
are constrained to issue any views and opinions on these standards.
However, since the matter relates to practicing members of the Institute, the
Committee is expressing its views in accordance with the ICAP Code of Ethics,
as applicable in Pakistan, which is obligatory on ICAP members.
Accordingly, we are expressing views on question 1 only.
Based on the available information the Committee considers that conflict of

interest situation does not appear to arise when both the engagements are
performed by a single consultant.
However, the Committee would like to emphasize that one of the primary
responsibilities of the Audit Committee is to assess independence while
approving engagement of consultants. The Audit Committee must take into
account relevant facts, including an inquiry from prospective consultants
regarding their own independence assessment of the engagement, and firm
level risk mitigation and threat safeguard procedures to be adopted by the
firm.
(April 22, 2014)
9. Appointment of External Auditors for FATCA Implementation Advisory

Services
Enquiry: Public sector is seeking FATCA implementation advisory services. The

Consultant will be responsible for performing a detailed FATCA assessment
followed by development of remediation plans and provision of implementation
advisory for assisting the Bank in its timely compliance with FATCA
requirements. The TOR of FATCA requirements are given below:
Introduction
Recent developments in the international. efforts for preventing tax evasion

including introduction of the Foreign Account Tax Compliance Act (FATCA) by
the US Internal Revenue Service (IRS) aimed primarily at facilitating global
information exchange have impacted the financial sector including banks across
the globe. As a response to these developments, financial institutions are
required to align their customer due diligence/ Identification and reporting
practices to be able to play their part in facilitating information exchange with
US under FA TCA.
The governmental, regulatory and other stakeholders in Pakistan are engaged

in joint efforts to respond to challenges arising out of the developments at

international level. The State Bank of Pakistan has advised Financial
Institutions/ Banks to initiate necessary actions and preparation to comply with
FA TCA as per the timelines in order to protect the financial sector from
negative implications.
In pursuance to SBP instructions, National Bank of Pakistan (NBP) is engaged in

preparatory efforts for ensuring timely compliance with F ATCA requirements
while a formal regulatory framework and issuance of necessary implementation
guidelines and circulars by SBP are in progress. As a part of these efforts, NBP
intends to put in place the required internal framework/ system for ensuring
ongoing and consistent fulfillment of its role towards information exchange and
introduce focused enhancements to functional aspects, structures, systems as
well as processes to provide a sound basis for implementing the framework/
system under SBP instructions and in accordance with FA TCA regulations.
Key Components of FATCA Exercise
The following are some key elements of the exercise:
• Legal entity analysis and documentation of the Bank's expanded affiliate

group structure (EAG) covering all subsidiaries/ related entities and all foreign
branches.
• Developing a detailed FATCA governance framework including
governance responsibilities/ structure, responsibilities for regulatory returns,
roles and responsibilities with respect to collection, screening and submission
of information etc. Developing a FA TCA project governance and management
structure for efficient management of different aspects of the project
With respect to NBP Pakistan Operations:
Collection of relevant information/ documentation for assessment of the

existing state of affairs in relation to readiness for FA TCA implementation
(including documentation of processes, products, policies, systems and controls
in-scope for FA TCA implementation) Assessment of existing! as-is state of
operating models/ policy and procedural documentation and practices,
templates, tools, checklists, organizational structures, data management
structure, systems and MIS/ reporting frameworks to identify gaps/ departures
from readiness for implementation of FATCA regulations both for new and pre-
existing accounts.
• Development of detailed remediation! implementation plans for

remediating the gaps identified to provide blue prints of tasks/ initiatives to be
undertaken during the implementation stage including the following:
../ Future state data framework identifying relevant information capturing

parameters/ fields, fields to be introduced, dropdowns/ LoVs etc .

../ Future state system functionalities/ capabilities including account opening
information flow dynamics, scrutiny/ authorization matrix automation,
centralized quality assurance review, submission and authorization queuing
functionalities etc.
../ Pre-existing account screening to provide stepwise tasks/ initiatives to be

undertaken for screening/ due diligence of pre-existing accounts, method for
their classification as per FATCA treatment, development of documentation/
cure procedures for positive screening of accounts etc.
../ Identifying the required enhancement to existing MIS; reporting framework

of the Bank and development of future state data reporting process flow;
,
../ Future state system functionalities/ capabilities including information flow
dynamics for monitoring and reporting purposes, MIS generation etc .
../ Transaction monitoring/ KYC/ reporting alignments including FATCAI indicia

scenario development and automation, trigger setting and devising procedures
for trigger follow ups
../ Updation/ enhancement of existing policy and procedural documentation of

the Bank including operations manual, compliance manual and other relevant
documentation
../ Development of templates including F ATCA compliant workflow for client

onboarding, documentation and cure procedures/ requirements,
documentation and operational checklists development, enhancement or
relevant templates including account opening, KYC/ CDD, change in customer
circumstances and other relevant templates, customer
correspondences/notices etc.
../ Development of a process for registration with the IRS; initial and ongoing
management of registration aspects
../ Implementation guidelines/ advisory for a defined period in relation to

future state models/ remediation/ implementation plans to meet the
requirements of FATCA
• With respect to foreign branches and foreign subsidiaries, technical (local

Oil-line based) advice/ feedback on various matters pertaining to
compliance with FATCA will be required.
The Bank intends to undertake the required tasks to be compliant while doing
everything in its power to minimize the impact of FATCA upon its customer
service, as far as possible. The Bank would attempt to ensure minimum
possible impact on customer service standards, TATs of the processes and
compliance to other regulatory requirements etc.
In this connection we seek your advice whether services of external auditors of

the bank can be hired for the FATCA implementation and conflict of interest
will not arise in such case.
Opinion: The Audit Committee of the Bank will need to assess the appointment of
external audit for the FATCA assessment engagement in relation to the
prohibitions placed under clause 2 and 9 of prohibited services mentioned
below. The auditor of a listed company is prohibited from providing financial
information technology system design and implementation services to the listed
audit clients which may be significant to overall financial statements and
performing management functions or decisions.
The Committee would like to draw your attention to the following guidance
provided in Code of Corporate Governance 2012 and ICAP Code of Ethics:
1. Revised Code of Corporate Governance 2012 read with clause 29-C of

KSE Listing Regulations:
“(xxxvi) No listed company shall appoint its auditors to provide services in

addition to audit except in accordance with the regulations and shall require
the auditors to observe applicable IFAC guidelines in this regard and shall
ensure that the auditors do not perform management functions or make
management decisions, responsibility for which remains with the Board of
Directors and management of the listed company.” (underlining is ours)
“29-C (i) No Listed company shall, appoint or continue to retain any person as
an auditor who is engaged by the company to provide services that are
prohibited.
Explanation:
For the purposes of this regulation the services that are prohibited shall mean
the following:
1. Preparing financial statements, accounting records and accounting

services;
2. Financial information technology system design and implementation,
significant to overall financial statements;
3. Appraisal or valuation services for material items of financial
statements;
4. Acting as an Appointed Actuary within the meaning of the term defined
by the Insurance Ordinance, 2000;
5. Actuarial advice and reviews in respect of provisioning and loss
assessments for an insurance entity;

6. Internal audit services related to internal accounting controls, financial
systems or financial statements;
7. Human resource services relating to:-
i. Executive recruitment;
ii. Work performed (including secondments) where management
decision will be made on behalf of a listed audit client;
8. Legal Services;
9. Management functions or decisions;
10. Corporate finance services, advice or assistance which may involve
independence threats such as promoting, dealing in or underwriting of shares
of audit clients.
11. Any exercise or assignment for estimation of financial effect of a
transaction or event where an auditor provides litigation support services as
identified in paragraph 9.187 of Code of Ethics for Chartered Accountants.
12. Share Registration Services (Transfer Agents)” (underlining is ours)
2. ICAP Code of Ethics for Chartered Accountants
The Committee would also like to refer the Code of Ethics for Chartered
Accountants which institutes the fundamental principles of professional ethics
and provides a conceptual framework for applying those principles. One of the
basic elements of the framework is ‘Independence’. It is important to note that
independence of mind and in appearance is necessary to enable the practicing
chartered accountants to enable them to express a conclusion, without bias,
conflict of interest or undue influence.
As a value addition, practicing chartered accountants are expected to provide a

variety of non-assurance services that are consistent with their skills and
expertise, subject to the requirement of applicable regulations including those
which are stated above. While rendering other services to an audit client,
practicing chartered accountants are required to apply the conceptual
framework to identify threats to compliance with the fundamental principles
and assess their significance and implication.
The onus of evaluation of such threats to compliance with the fundamental

principles rests on the practicing chartered accountants and they should
consider qualitative as well as quantitative factors while performing such
evaluation. Such obligation on the part of a practicing chartered accountant
becomes more critical in a situation where the applicable guidelines or
regulations do not clearly prohibit any specific service. In case where
practicing chartered accountants render such services which may coincide with
management functions and management decision making, the threat of “Self
Review” could exist.

In this connection the Committee would also like to refer the following paras of
section 290 of Part B of Code of Ethics for Chartered Accountants which states:
“290.183 The provision of services by a firm or network firm to a financial

statement audit client that involve the design and implementation of financial
information technology systems that are used to generate information forming
part of a client’s financial statements may create a self-review threat.
290.184 The self-review threat is likely to be too significant to allow the

provision of such services to a financial statement audit client unless
appropriate safeguards are put in place ensuring that:
(a) The audit client acknowledges its responsibility for establishing and
monitoring a system of internal controls;
(b) The audit client designates a competent employee, preferably within
senior management, with the responsibility to make all management decisions
with respect to the design and implementation of the hardware or software
system;
(c) The audit client makes all management decisions with respect to the
design and implementation process;
(d) The audit client evaluates the adequacy and results of the design and
implementation of the system; and
(e) The audit client is responsible for the operation of the system
(hardware or software) and the data used or generated by the system.
290.185 Consideration should also be given to whether such non-

assurance services should be provided only by personnel not involved in the
financial statement audit engagement and with different reporting lines within
the firm.
290.186 The provision of services by a firm, or network firm, to a

financial statement audit client which involve either the design or the
implementation of financial information technology systems that are used to
generate information forming part of a client’s financial statements may also
create a self-review threat. The significance of the threat, if any, should be
evaluated and, if the threat is other than clearly insignificant, safeguards
should be considered and applied as necessary to eliminate the threat or
reduce it to an acceptable level.”
Based on the TOR of FATCA implementation provided to us, the Committee

believes that following services by the external auditor, may give rise to
conflict of interest, unless the management of the bank in accordance with the
requirements of para 290.184 of the Code of Ethics take ownership and
responsibility of the work performed and decide on recommendations made by
the consultant (auditor) and/or the data and information generated by the
consultant (auditor) is not material to the financial statements.:

Management functions or decisions and financial information technology
system design & implementation services
• Developing a detailed FATCA governance framework including

governance responsibilities/ structure, responsibilities for regulatory returns,
roles and responsibilities with respect to collection, screening and submission
of information etc. Developing a FATCA project governance and management
structure for efficient management of different aspects of the project.
• Collection of relevant information/ documentation for assessment of

the existing state of affairs in relation to readiness for FATCA implementation
(including documentation of processes, products, policies, systems and controls
in-scope for FATCA implementation).
• Assessment of existing/ as-is state of operating models/ policy and

procedural documentation and practices, templates, tools, checklists,
organizational structures, data management structure, systems and MIS/
reporting frameworks to identify gaps/ departures from readiness for
implementation of FATCA regulations both for new and pre-existing accounts.
Following remediation/ implementation plans may come under clause 2

‘management functions or decisions’ and/ or which may come under clause
9 ‘financial information technology system design and implementation
services’ of prohibited services:
 Identifying the required enhancement to existing MIS; reporting

framework of the Bank and development of future state data/ reporting
process flow;
 Future state system functionalities/ capabilities including information

flow dynamics for monitoring and reporting purposes, MIS generation etc.
 Updation/ enhancement of existing policy and procedural

documentation of the Bank including operations manual, compliance manual
and other relevant documentation.
 Development of templates including FATCA compliant workflow for

client onboarding, documentation and cure procedures/ requirements,
documentation and operational checklists development, enhancement or
relevant templates including account opening, KYC/ CDD, change in customer
circumstances and other relevant templates, customer
correspondences/notices etc.
(May 13, 2014)
10. Professional Clearance Letter

Enquiry: We are a firm of chartered Accountant and this letter aims at requiring a
professional advice regarding the following situation:
Our firm has been appointed as auditors of the company and as per the
requirements of code of ethics, a professional clearance letter has been sent to
previous auditor. However, no response is received from previous auditor'.
Based on the above situation, kindly guide us the procedures we are required
to perform if there is no response from previous auditor on this matter despite
a reminder has also been sent to them.
Opinion: We would like to draw your attention to the following paragraphs of the ICAP
Code of Ethics for Chartered Accountants: (underline is ours)
210.16 A chartered accountant in practice will ordinarily need to

obtain the client’s permission, preferably in writing, to initiate
discussion with an existing accountant. Once that permission is
obtained, the existing accountant should comply with relevant legal and
other regulations governing such requests. The existing accountant
should promptly transfer to the new chartered accountant in practice
all books and papers of the client, which are or may be held after the
change in appointment has been effected and should advise the client
accordingly, unless he has a legal right to withhold them. Where the
existing accountant provides information, it should be provided honestly
and unambiguously. If the proposed accountant is unable to
communicate with the existing accountant, the proposed accountant
should try to obtain information about any possible threats by other
means such as through inquiries of third parties or background
investigations on senior management or those charged with governance
of the client.
210.17 Where the threats cannot be eliminated or reduced to an
acceptable level through the application of safeguards, a chartered
accountant in practice should, unless there is satisfaction as to
necessary facts by other means, decline the engagement.
Conclusion:
The Committee emphasize that it is a professional and moral obligation for a
Chartered Accountant, especially one in practice, to respond to communication
from other Chartered Accountants. However, in case such a response is not
forthcoming, a Chartered Accountant should take account of section 210.16
and 210.17 referred above.
(November 08, 2013)
11. Removal of Auditor before completion of their term and acceptance of

appointment by the Proposed Auditors

Enquiry: We seek your technical opinion and guidance in the following circumstances for
accepting the appointment of Auditor of a Private Limited Company.
The existing auditors of the company were removed by a special Resolution of

the Board of Directors of the Company before completion of their term (This
being first year of operation of the company) and the proposed firm of
Chartered Accountants was offered appointment as statutory Auditors for the
referred year. Resultantly, in compliance with requirements of revised code of
ethics 210.10, the proposed auditors sent letter through URGENT MAIL SERVICE
asking for NOC from existing auditors. The existing Auditor did not respond to
the proposed auditor even after the laps of 30 days.
Your opinion is sought in this respect that what options does the proposed
auditor will have and what procedure should be adopted by the proposed
Auditors in above mentioned circumstances.
Opinion: We would like to draw your attention to the following paragraphs of the ICAP
Code of Ethics for Chartered Accountants, explaining the procedures where
existing auditor is removed before completion of his term: (underline is ours)
210.19 Where an existing chartered accountant is removed by

the proprietors of the business before he has completed the audit and
submitted his report, the existing chartered accountant must
immediately inform the Institute with relevant facts about his removal.
210.20 The proposed chartered accountant in practice should

not only follow the procedure detailed in the preceding paragraphs of
this Section, he should also inform the Institute about the offer of
appointment.
210.21 The proposed chartered accountant in practice should

not accept the offer without prior clearance from the Institute, which
clearance shall not be unreasonably withheld. Provided however, in
case the Institute refuses to give its clearance, it shall communicate its
decision within 15 (fifteen) days with reasons therefore.
210.16 …. If the proposed accountant is unable to communicate

with the existing accountant, the proposed accountant should try to
obtain information about any possible threats by other means such as
through inquiries of third parties or background investigations on senior
management or those charged with governance of the client.
210.17 Where the threats cannot be eliminated or reduced to an

acceptable level through the application of safeguards, a chartered
accountant in practice should, unless there is satisfaction as to
necessary facts by other means, decline the engagement.

The Committee advices all practicing accountants that where an auditor has
been removed before completion of the audit both the removed auditor and
the proposed auditor must inform the Institute about relevant facts.
Furthermore, the proposed auditor must not accept an audit if clearance from
Institute has not been obtained in such cases.
The Committee emphasize that it is a professional and moral obligation for a

Chartered Accountant, especially one in practice, to respond to communication
from other Chartered Accountants. However, in case such a response is not
forthcoming, a Chartered Accountant should take account of section 210.16
and 210.17 referred above.
(November 08, 2013)
12. External Auditor Conflict of Interest on review work directly related to

subject matter of Assurance Engagement
Enquiry: A brief synopsis of the matter and our query is as follows:
 The external auditors have been engaged by management for review work
(agreed upon procedures) on a matter that is directly related to the subject
matter of the assurance engagement and the auditor’s report/opinion.
 The Chairman Audit Committee has stated to the CFO that this is a conflict of
interest viz a vis the external auditor and Internal Audit has been
corresponding with the CFO to provide Management’s representation on the
engagement of the external auditors for this review work prior to Audit
Committee decision/approval. Internal Audit had requested the CFO to provide
the following information;
a. Representation from external auditor stating safeguards taken for

providing non audit services that directly affect the subject matter of the
assurance engagement;
b. Clarification from ICAP on non-audit work assigned to the external

auditor that directly affects the subject matter of the assurance engagement
to ensure compliance with applicable Code and Guidelines (i.e., Code of Ethics
etc.);
c. Clarification on what work the external auditor has been engaged for
and a copy of the ‘agreed upon procedures’ engagement letter between the
Company and the external auditor;
d. Legal opinion (management stated that it obtained two legal opinions to

validate the action of the Company) and statement of facts submitted for
obtaining the legal opinion. Internal Audit communicated to the CFO (all
correspondence on this has been with the CFO) that representation from

external auditor on safeguards for conflict of interest/threat mitigation and
clarifications obtained from Regulators (SECP, ICAP) viz a viz Code of Corporate
Governance and Code of Ethics etc. is more appropriate rather than legal
opinion as the latter is only an opinion on the interpretation of laws and
regulations.
 Chairman Audit Committee and Internal Audit’s view has been that
where an external auditor is engaged for a financial statement audit and in the
same period provides non audit services that directly affect that subject of the
engagement and the auditor opinion/report, there is an inherent conflict of
interest and self-review/independence threat. This however may be minimized
to an acceptable level and/or mitigated against by putting in place safeguards
(as also stated in the Code of Ethics for Chartered Accountants) and these
representations i.e. Management and external auditor be discussed with the
Audit Committee and the latter shall then decide if the external auditor can be
engaged for the review work.
 However, management responded stating that ‘after due discussions

with experts/professionals had decided to assign the work’ to the external
auditor and ‘has also obtained an independent legal opinion which confirms
that there is no conflict of interest for external auditors to carry out such
assignment related to audit services’. Management has been requested to
provide the above listed information but it has not provided the above as yet
and has responded that that ‘there is no conflict of interest and will give its
own representation to the Audit Committee and the Board’.
 The Chairman Audit Committee is not satisfied with Management’s
response and on it not providing information (as listed above) including the
external auditor representation (listed as point (a) above) for review when
queried and has directed me to refer the matter to the regulators for their
advice on the actions taken by the CFO and Management in violation of ICAP,
SBP, SECP and other regulations /Code of Conduct’, relating to the conflict of
interest and related self-review/independence threat (as stated the financial
statements for the year ended 31 December 2011 have still not been approved
thus the review work would fall under non-assurance service provided to a
financial statement audit client during the period of the audit engagement).
 Chairman Audit Committee has also stated ‘appropriate regulators may

also take necessary action against CFO’.
 As management has not provided the external auditor representation on

the said matter, please confirm if Internal Audit (on behalf of the Audit
Committee) is empowered to write to the external auditor and query it on the
said matter including mitigating factors put in place to minimize threats to an
acceptable level etc?

 Also, if your response confirms that Internal Audit/Audit Committee is
empowered to write to the external auditor and based on the reply received if
the Chairman Audit Committee is not satisfied with the external auditor
representation on the assignment and conflict of interest mitigation etc., then
what would the next steps be in regards to referring back to the ICAP?
Opinion: The Code of Ethics for Chartered Accountants institutes the fundamental
principles of professional ethics and provides a conceptual framework for
applying those principles. One of the basic elements of the framework is
‘Independence’. It is important to note that independence of mind as well as in
appearance is necessary for the practicing chartered accountants to enable
them to express a conclusion, without bias, conflict of interest or undue
influence.
Practicing chartered accountants are expected to provide a variety of non-
assurance services that are consistent with their skills and expertise. While
rendering other non-assurance services to an audit client, practicing chartered
accountants are required to apply the conceptual framework to identify threats
to comply with the fundamental principles and assess their significance and
implication.
The responsibility of evaluation of such threats rests on the practicing

chartered accountants and they should consider qualitative as well as
quantitative factors while doing so. The obligation on the part of a practicing
chartered accountant becomes more critical in a situation where the applicable
guidelines or regulations do not clearly prohibit any specific service.
With regard to your query whether Internal Audit (on behalf of the Audit
Committee) is empowered to write to the external auditor, the Committee
would like you to refer section 290.157, 290.159, 290.161 and 290.162 of Part B
of ‘Code of Ethics for Chartered Accountants’ for guidance.
The Committee is of the view that it is the prerogative of Audit Committee to

recommend the appointment of auditor to the BOD for conducting non-
assurance services. Likewise, the Audit Committee may recommend
termination if they foresee conflict of interest and threat of self-review and
independence arising by the acceptance of non-assurance services by the
external auditor. In such cases, the Audit Committee has a right to recommend
to the BOD appointment of a person having requisite qualification and
experience for performing non-assurance services.
To evaluate the various threats arising out of the acceptance of non-assurance

services by the external auditor, the Audit Committee may communicate
directly with the external auditor and request information about the safeguards
that may have been applied by them, in reducing the threats to an acceptable
level.
With regard to your second query, the Committee is of the opinion that if the
Chairman Audit Committee is not satisfied with the external auditor’s
representation then he should first discuss this within the Audit Committee and
then take to the Board (if Audit Committee agrees) before approaching ICAP. If
Board agrees with the recommendation of the Audit Committee to approach
ICAP then a formal complaint may be referred to ICAP.
(June 27, 2012)
13. Requirement to obtain NOC from the retiring Cost Auditor
Enquiry: Cost auditor is appointed by the board of directors of the company and
thereafter approval from SECP is obtained. Later on cost auditors resign for any
reason and board of directors appoint new cost auditor and obtain the approval
of SECP. Does new cost auditor require to obtain NOC from the retiring auditors
before holding the office? As per understanding the NOC mentioned in the law
is required for the financial audit because cost audits can also be carried on by
the CA, CMAs.
Opinion: We wish to draw your attention to the following relevant paragraphs of the
ICAP Code of Ethics for Chartered Accountants:
Definition of Existing Accountant
A Chartered Accountant in practice currently holding an audit appointment or

carrying out accounting, taxation, consulting or similar professional services
for a client.
210.10 A chartered accountant in practice who is asked to replace another

chartered accountant in practice, or who is considering tendering for an
engagement currently held by another chartered accountant in practice, should
determine whether there are any reasons, professional or other, for not
accepting the engagement, such as circumstances that threaten compliance
with the fundamental principles. For example, there may be a threat to
professional competence and due care if a chartered accountant in practice
accepts the engagement before knowing all the pertinent facts.
210.11 The significance of the threats should be evaluated. Depending on the

nature of the engagement, this may require direct communication with the
existing accountant to establish the facts and circumstances behind the
proposed change so that the chartered accountant in practice can decide
whether it would be appropriate to accept the engagement. For example, the
apparent reasons for the change in appointment may not fully reflect the facts
and may indicate disagreements with the existing accountant that may
influence the decision as to whether to accept the appointment.
Please also refer clause 7 of Part 1 of 1st Schedule of Chartered Accountants

Ordinance 1961 which mentions that:
“A Chartered Accountant in practice shall be deemed to be guilty of

professional misconduct, if he:
(7) Accepts a position as auditor previously held by another members of the

Institute without first communicating him in writing.”
Conclusion:
From the above, we can conclude that it appears to be necessary for a

chartered accountant in practice to communicate with the existing accountant
carrying out an audit appointment including cost audit.
(January 2010)
14. Appointment of one auditor in place of two Retiring Auditors
Enquiry: A brief description of the situation is that our company has appointed one
external auditor in place of two joint auditors in the Annual General Meeting.
The objective of which was to reduce audit costs. Both the retiring auditors
were working at a fee of say Rs. 100,000/= each. My question now is that
whether the incoming auditor can accept the engagement at a fee less than Rs.
200,000/=. The company’s management is of the view that the incoming
auditor is not appointed at a fee lower than the audit remuneration of the
single predecessor auditor i.e. Rs. 100,000/=. Whereas the incoming auditor is
of the view that this may provoke the provisions of under cutting.
Opinion: The Committee has examined your inquiry and would like to comment and
opine as follows:
Audit fee is a composite figure and it is presumed to have been fixed keeping in
view the scope and quantum of work of a particular audit engagement. In the
case cited by you, the Committee is given to understand that the audit fee for
the year is Rs.200,000/= that it is being shared by two auditors.
The Committee further observed that the term ‘undercutting’ itself has not
been precisely defined in International Standards of Auditing or Code of Ethics
prescribed by the Institute of Chartered Accountants of Pakistan. Literal
meaning of the verb ‘undercut’ means “to sell or work at lower price than”. To
Stretch the term, Undercutting may also mean to gain out of an event,
transaction or appointment at the cost of another. Accordingly, if the incoming
auditor takes up an audit appointment at lower fees to the detriment of the
existing auditor whether directly or indirectly, it would amount to
undercutting. To put it plainly, the Committee observed that charging a
smaller fee in itself is not a conclusive proof of undercutting since there may
be good reasons for it to prove otherwise. Undercutting is, therefore, always a
question of fact dependent on the circumstances of each case. For example in
the case of a philanthropic organization, the incoming auditor may decide not
to charge any fee, despite the fact that the outgoing auditor used to charge
the fee for the same assignment.

In the case cited by you the reason conveyed to us for lowering the fee does
not appear to be in line with section 240.1 of the Revised (May 2008) Code of
Ethics for Chartered Accountants which is reproduced below for your ready
reference.
Section 240
Fees and Other Types of Remuneration
“240.1 When entering into negotiations regarding professional services, a

chartered accountant in practice may quote whatever fee deemed to be
appropriate commensurate with the nature and service to be rendered.
However, in such cases, chartered accountants in practice should be careful
not to quote fee lower than that charged by the chartered accountants in
practice previously carrying out the audit unless scope and quantum of work
materially differs from the scope and quantum of work carried out by the
previous auditor, as it could then be regarded as undercutting.”
In view of the above the committee concurs with the view of the incoming
auditor that lowering the fee in this case would amount to under cutting.
May we remind you that our opinion is based on the particular information
supplied to us and in the nature of guidance only. As stated earlier It is solely,
the responsibility of the incoming auditor to display in each case that his
appointment did not amount to undercutting.
(June 5, 2009)

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Ethics Topic wise Selected Opinions

ICAP CODE OF ETHICS FOR CHARTERED ACCOUNTANTS

1. Public Sector bidding for auditors

As per ICAP Code of Ethics for Chartered Accountants:

The Institute of Chartered Accountants of Pakistan 1

2. Query on statutory positions

Does COCG allow one person to hold multiple statutory positions?

The Institute of Chartered Accountants of Pakistan 2

• The chartered accountant undertakes a professional activity related to a

A party may include an employing organization, a vendor, a customer, a lender, a

A chartered accountant shall not allow a conflict of interest to compromise

The Companies Act, 2017

Explanation.- In this sub-section:

(a) the expression “office of profit” means any office:

(c) the expression “related party” includes-

(i) a director or his relative;

Enquiry: Background Information:

The Institute of Chartered Accountants of Pakistan 4

A) Would the new auditor be guilty of professional misconduct in terms of

B) If the Institute believes that accepting this engagement would lead to a

D) If the new auditor refuses to accept the appointment, based on non-serving

On Query A, B & C, the Committee is of the view that provisions related to

On Query D, the Committee is of the view that an auditor appointed under

The period relating to the above assignment is from October, 2003 to

In the light of the above, kindly give us Committee’s opinion if there is a

Practicing chartered accountants are expected to provide an assurance and

The onus of evaluation of such threats to compliance with the fundamental

“220.1 A chartered accountant may be faced with a conflict of interest when

• The chartered accountant provides a professional service related to a

A chartered accountant shall not allow a conflict of interest to compromise

“220.5 If the threat created by a conflict of interest is not at an acceptable

“220.6 Before accepting a new client relationship, engagement, or business

1. To avoid a risk of conflict of interest, the Code requires that safeguards

The Institute of Chartered Accountants of Pakistan 8

(November 25, 2016)

5. Performing accounting and audit of Public Interest Entity

2. If not allowed, then can conflict of interest be avoided in either of the

It is requested to kindly provide technical guidance on each of the scenario

A practicing chartered accountant is required to apply the conceptual

Preparing Accounting Records and Financial Statements

“290.164 Management is responsible for the preparation and fair

“290.165 Providing an audit client with accounting and bookkeeping services,

Para 290.166 - 67 describes the activities that are considered to be a normal

2. The independence of mind and in appearance is necessary to enable the

The Institute of Chartered Accountants of Pakistan 10

ABC Corporation is established in China as a state-owned hydropower project

The Institute of Chartered Accountants of Pakistan 11

290.164 The provision of certain non-assurance services to financial

290.165 Assisting a financial statement audit client in matters such as

290.166 It is the responsibility of financial statement audit client

• Determining or changing journal entries, or the classifications for accounts or

In addition to above, please refer the safeguards provided in the paragraph

Financial Statements Audit Clients that are Not Listed Entities

The Institute of Chartered Accountants of Pakistan 12

Examples of such services include:

• Making arrangements so such services are not performed by a member of the

290.176 The firm may be asked to provide taxation services to a financial

The Institute of Chartered Accountants of Pakistan 13

Enquiry: We would like to obtain an opinion regarding the indebtedness of external

Relevant Requirements of Companies Ordinance 1984

Loans and Guarantees

290.117 states that “a loan, or a guarantee of a loan, to a member of the audit

The Institute of Chartered Accountants of Pakistan 14