Guide Questions in the Study of Part B of Code of Ethics for Professional Accountants

1. Give examples of threats to fundamental principles:

a. Self-interest
i. direct financial interest or material indirect financial interest in an audit client
ii. loan or guarantee to or from an audit client or any of its directors or officers
iii. undue dependence on total fees from an audit client
iv. concern about the possibility of losing the engagement
v. having a close business relationship with an audit client
vi. potential employment with an audit client, and
vii. contingent fees relating to audit engagements.
b. Self-review
i. member of the audit team being, or having recently been, a director, officer or
other employee of the audit client in a position to exert direct and significant
influence over the subject matter of the audit engagement
ii. performing services for an audit client that directly affect the subject matter of
the current, or a subsequent, audit engagement and
iii. preparing original data used to generate financial statements or preparing other
records that are the subject matter of the audit engagement.
iv. In an internal audit context this may occur where someone has recently
transferred within the company into an audit role, and is found to be auditing
their old department.
c. Advocacy
i. dealing in, or being a promoter of, shares or other securities in an audit client
and
ii. acting as an advocate on behalf of an audit client in litigation or in resolving
disputes with third parties.
d. Familiarity
i. a member of the audit team having a close family member who, as a director,
officer or other employee of the audit client, is in a position to exert direct and
significant influence over the subject matter of the audit engagement
ii. a former partner of the firm being a director, officer or other employee of the
audit client, in a position to exert direct and significant influence over the
subject matter of the audit engagement
iii. long association of a senior member of the audit team with the audit client and
iv. acceptance of gifts or hospitality, unless the value is clearly insignificant, from
the audit client, its directors, officers or employees.
v. In an internal audit context this is often an issue where auditors have worked
within a company for many years and have long-standing relationships with
employees and management across a number of departments.
e. Intimidation
i. threat of replacement over a disagreement regarding the application of an
accounting principle
 ii. pressure to reduce inappropriately the extent of work performed in order to
reduce fees and
iii. dominant personality in a senior position at the audit client, controlling dealings
with the auditor.
iv. In an internal audit context this may occur where the promotion prospects, pay
rises or other rewards of the auditor can be influenced by the manager of a
department being audited. The auditor may be put under pressure to provide a
clean audit report in return for a favourable appraisal.

2. In Part A, we learned that there are safeguards to reduce, if not eliminate, those threats to
fundamental principles. We learned that there are two kinds of safeguards: (a) safeguards
provided by the profession, legislation, or regulation; and (b) safeguards in the work
environment. Our discussion in Part A have covered safeguards provided by the profession,
legislation, or regulation. Safeguards in the work environment has two types:
a. Firm-wide safeguards; and
i. Policies and procedures to implement and monitor quality control of
engagements.
ii. Policies and procedures that will enable the identification of interests or
relationships between the firm or members of engagement teams and clients.
iii. Policies and procedures to monitor and, if necessary, manage the reliance on
revenue received from a single client.
iv. Using different partners and engagement teams with separate reporting lines
for the provision of non-assurance services to an assurance client.
v. Policies and procedures to prohibit individuals who are not members of an
engagement team from inappropriately influencing the outcome of the
engagement.
vi. Advising partners and professional staff of assurance clients and related entities
from which independence is required.
vii. A disciplinary mechanism to promote compliance with policies and procedures.
b. Engagement specific safeguards
i. Having a professional accountant who was not a member of the assurance team
review the assurance work performed or otherwise advise necessary.
ii. Consulting an independent third party, such as a committee of independent
directors, a professional regulatory body or another professional accountant.
iii. Discussing ethical issues with those charged with governance of the client.
iv. Disclosing to those charged with governance of the client the nature of services
provided and extent of fees charged.
v. Rotating senior assurance team personnel.

Provide examples of these two types of work environment safeguards.

3. What are the threats to fundamental principles and the safeguards to reduce, if not eliminate,
those threats relating to a CPA’s assurance services, specifically
a. Professional appointment
 i. Client acceptance
Potential threats to integrity or professional behavior may be created from, for
example, questionable issues associated with the client (its owners,
management or activities).

Client issues that, if known, could threaten compliance with the fundamental
principles include, for example, client involvement in illegal activities (such as
money laundering), dishonesty or questionable financial reporting practices.

Safeguards
• Obtaining knowledge and understanding of the client, its owners, managers
and those responsible for its governance and business activities; or
• Securing the client’s commitment to improve corporate governance practices
or internal controls.

ii. Engagement acceptance

iii. Changes to professional appointment
b. Conflicts of interest
c. Second opinions
d. Fees and other types of remuneration
e. Marketing professional services
f. Gifts and hospitality
g. Custody of client assets
h. Objectivity

4. Give examples of threats, and the safeguards to reduce or eliminate such threats, to
Independence related to a CPA’s audit and review engagement and his/her relationship to a
client in terms of
a. Financial interest
i. Self-interest threat
 Remove the auditor, who has financial interest with the client, from the
engagement team or decline the engagement
b. Loans and guarantees
i. Self-interest threat
 Remove the auditor, who has a loan or guarantees with the client, from
the engagement team or decline from the audit engagement
c. Business relationships
i. Self-interest threat
 Decline from the audit engagement
d. Family and personal relationships
i. Familiarity or self-interest threat
 First, find out if the immediate family has a financial interest or has a
significant influence to the subject matter of the engagement. If no, it is
 acceptable. If yes, remove the auditor, who has immediate family or has
a personal relationship, from the engagement team or decline from the
audit engagement
e. Employment with an audit client
i.
f. Temporary staff assignment
g. Recent service with an audit client
h. Serving as a Director or Officer or an audit client
i. Long association of senior personnel (including partner rotation) with an audit client
j. Provision of non-assurance services to an audit client
k. Management responsibilities
l. Preparing accounting records and financial statements
m. Valuation services
n. Internal audit services
o. IT systems services
p. Litigation support services
q. Legal services
r. Recruiting and corporate finance services
s. Fees, compensation and evaluation policies, and gifts and hospitality
t. Litigation
u. Reports that include a restriction on use and distribution