Practice Question – Code of Ethics

You are the audit manager of the audit of Microfinance PLC (MF), a company engaged in the
provision of microfinance loans and mobilization of public deposits. MF is incorporated
under the Finance Business Act No. 42 of 2011 and licensed and monitored by the Central
Bank of Sri Lanka. Your firm, M&S Associates (M&S), has been the auditor of MF for the last
3 years. You have been informed by your engagement partner that M&S has agreed to
provide some additional non-audit services to MF from this year onwards. These non-audit
services are considered permitted services. The fees to be received from MF for audit and
non-audit services will represent 17% of the total fee income of M&S for the current year
(15.5% last year). During the course of the audit a suspicious transaction was discovered.
The transaction is not material to the financial statements. However, the team reported this
transaction to the engagement partner of the audit and the Money Laundering Reporting
Officer (MLRO) of the firm. After analyzing the information available on the transaction, the
MLRO decided that this suspicious transaction must be reported to the Financial Intelligence
Unit (FIU), which is established within the Central Bank of Sri Lanka. However, the
engagement partner of the audit of MF asked the MLRO to consider whether they can refrain
from reporting this matter to the FIU due to the fear of losing the audit client.

Based on the information given in the scenario above,

I. Assess ethical threat that may affect the independence of M&S. (3 marks)
II. Considering the fact that MF is a listed company, discuss two (02) specific actions that
M&S is required to perform in relation to the ethical threat assessed in (b) above, per
the Code of Ethics for Professional Accountants issued by CA Sri Lanka

(Extracted Question)