SECTION B NOTES – AAA WITH RUCHI GOYAL

TOPICS TO BE COVERED

1. Ethics
2. Adver sement
3. Tendering
4. Fees
5. Technical Ar cles
6. Examiner Report

PART – 1- ETHICS

Why do we need code of Ethics?

The main purposes of professional codes are:

 To provide professional accountants with guidelines for maintaining an appropriate

a tude and enhancing the accountancy profession.
 To give accountability to the public.
 To codify behaviour beyond that which is incorporated in legisla on.

IESBA INTERNATIONAL CODE OF ETHICS

Objec ves of the Accountancy Profession - Four basic needs to meet:

1. Credibility – of informa on and informa on systems

2. Professionalism – clear iden fica on as professional persons
3. Quality of services – assurance of highest standards
4. Confidence – framework of professional ethics governing services

FUNDAMENTAL PRINCIPLES

Principle Core Defini on Key Requirements Prac cal Applica on

for an Auditor

Integrity Being straigh orward, • Fair dealing and • Following up on all

honest, and fair in all truthfulness. inconsistencies in
professional and • Pursuing inquiries when audit evidence.
business rela onships. informa on is inconsistent or • Repor ng findings
incomplete. truthfully in the audit
• Having strength of report, regardless of
character to act correctly client pressure.
 under pressure. • Declining an
• Example: Challenging engagement if
management asser ons management lacks
despite pressure, refusing to integrity.
be complicit in misleading
repor ng.

Objec vity Not allowing bias, • Making judgements free • Maintaining

conflict of interest, or from bias or prejudice. independence in fact
undue influence to • Iden fying and and appearance.
compromise evalua ng conflicts of interest, • Applying
professional or rela onships, or external professional
business judgements. pressures. scep cism
• Considering the impact of consistently.
circumstances on judgements • Evalua ng whether a
about audit evidence. gi , close rela onship,
or financial interest
could impair
judgement.

Professional A aining and • A aining and • Undertaking CPD

Competence maintaining maintaining professional relevant to the audit
and Due Care the knowledge and knowledge and skill. sector.
skill required to • Ac ng diligently according to • Ensuring the audit
perform applicable team has the
services diligently in technical/professional necessary exper se
accordance with standards. for the engagement.
standards. • Con nuing awareness of • Applying ISAs
technical, professional, correctly and
business, and technological thoroughly.
developments.

Confiden ality Respec ng the • Informa on • Securing audit

confiden ality of from current/past/prospec ve working papers and
informa on acquired clients/employers is client data.
from professional confiden al. • Not discussing client
rela onships and not • Cannot disclose without affairs in public or on
disclosing it proper authority, unless there social media.
improperly. is a legal or professional • Understanding when
 duty to do so. a duty to report (e.g.,
• Cannot use confiden al money laundering,
informa on for personal or NOCLAR) overrides
third-party advantage. confiden ality.
• Alert to inadvertent
disclosure (e.g., in social
se ngs).

Professional Complying with laws • Compliance with relevant • Adhering to audit

Behaviour and regula ons and laws and regula ons. regula ons and ethical
avoiding any ac on • Ac ng in the public interest. codes (e.g., IESBA, FRC
that discredits the • Avoiding conduct that might ES).
profession. discredit the profession. • Ensuring marke ng
and fees are not
misleading or
predatory.
• Dealing with
regulators and clients
courteously and
honestly.

Types of bias to be aware of: (Not Very important – Just read it)

1. Anchoring bias – using ini al informa on as anchor

2. Automa on bias – favoring automated output
3. Availability bias – placing more weight on readily available informa on
4. Confirma on bias – favoring informa on that confirms exis ng belief
5. Groupthink – consensus without cri cal reasoning
6. Overconfidence bias – overes ma ng own ability
7. Representa on bias – basing understanding on assumed pa ern
8. Selec ve percep on – expecta ons influencing view

THREATS TO FUNDAMENTAL PRINCIPLES

Categories of Threats

 Self-interest – Financial or other interests of member/family

 Self-review – Not appropriately evalua ng results of previous judgment/ac vity
 Advocacy – Promo ng client's posi on to point objec vity may be compromised
  Familiarity – Too sympathe c to client due to long/close rela onship
 In mida on – Deterred from ac ng objec vely by threats

Addressing Threats

Three ways:

 Eliminate circumstances crea ng threats

 Apply safeguards to reduce to acceptable level
 Decline or end professional ac vity (only op on if threats cannot be
eliminated/reduced)

Safeguards defini on: Ac ons that effec vely eliminate threats or reduce to acceptable level

Independence

Independence comprises:

 Independence of mind – permits the expression of a conclusion that is not affected by

influences that compromise professional judgement, thereby allowing an individual to
act with integrity and exercise objec vity and professional scep cism.

 Independence in appearance – avoids facts and circumstances that are so significant

that a reasonable and informed third party would be likely to conclude that a firm’s or an
audit team member’s integrity, objec vity or professional scep cism has been
compromised.

Ethical Conflict Resolu on

Steps if Unresolved

 Consult with other appropriate persons

 Consult legal advisors/ACCA (can be on "no names" basis)
 Ensure those consulted bound by similar ethical rules
 If s ll unresolved → refuse to remain associated with ma er

Final Ac ons if Necessary

 Withdraw from engagement team/specific assignment

 Resign from engagement/firm/employing organiza on
Pressure to breach the fundamental principles

They must not:

• Allow pressure from others to result in a breach of the fundamental principles.

• Place pressure on others which would result in a breach of the fundamental principles.
Examples of pressures:
• Being asked to misrepresent the financial statements
• Being asked to lie to the auditor
• Being asked to sign-off work as completed that you have not performed

Appropriate safeguards include:

• Discussing the ma er with the individual exer ng the pressure to try and resolve the
issue.
• Discussing the ma er with a manager, if the manager is not the individual exer ng the
pressure.
• Seeking advice from within the employer (e.g. Human Resources department).
• Using the organisa on's formal dispute resolu on process or whistleblowing policies.
• Seeking advice from the ACCA or other independent professional advisor.
• Seeking legal advice.

FEES AND INDEPENDENCE

Fees create self-interest threat (may create in mida on threat)

 Factors affec ng threat level:

1. Level of fees rela ve to resources required
2. Dependency between fee and service outcome
3. Opera ng structure/compensa on arrangements
4. Significance of client to firm/office/partner
5. Nature of client (e.g., PIE)
6. Involvement of TCWG
Con ngent Fees:

 Fees calculated on a predetermined basis rela ng to the outcome of a transac on or the

result of the services performed.
 Prohibited for audit engagements – Either directly or Indirectly.
 Also prohibited for non-assurance services if:
1. Fee material to firm, OR
2. Outcome depends on future/current judgment related to audit of material
amount

Total Fees - Propor on for Other Services:

 Threats – Self Interest and In mida on.

 Threat increased when large propor on from other services
 Factors: Ra o of other fees to audit fees, length of me which a high ra o existed,
nature/scope/purpose of services
 Safeguards: Appropriate reviewer, reducing other services

Overdue Fees:

 Self Interest threat

 Generally expected to obtain payment before audit report issued
 Factors that are relevant to evaluate the level of threat
 Signficance of the overdue fees to the firm
 Length of me the fees was overdue
 Ability and willingness of client to pay
 If significant overdue fees: Determine if equivalent to loan and if appropriate to
con nue
 Safeguards
 Obtain Par al Payment of Overdue fees
  Have appropriate reviewer

Fee Dependency

A self-interest or in mida on threat is similarly created when the fees generated by a firm from
an audit client represent a large propor on of the revenue of one partner or one office of the
firm.

For Public Interest En es (PIEs):

 If >15% for 2 consecu ve years: Must determine if pre-issuance review needed

 If con nues 5 years: Must cease as auditor a er 5th year opinion
 Excep on: Regulatory body agrees compelling reason + pre-issuance review

For Non-PIEs:

 If >30% for 5 consecu ve years: Must determine if external review needed

 Safeguards

o prior to issuing the audit opinion for the fi h year, a professional accountant
who is not a member of the firm, reviews that year’s audit work; or

o a er the fi h year’s audit opinion has been issued (and before the sixth year’s),
- Review

Safeguards
 An appropriate reviewer who is not a member of the firm reviews the audit work;
 Reducing the extent of services other than audit provided to the audit client;
 Increasing the client base of the firm to reduce dependence on the client;
 Increasing the extent of services provided to other clients.

INDUCEMENTS, GIFTS AND HOSPITALITY

Self-interest, familiarity, in mida on threats

 Forms: Gi s, hospitality, entertainment, dona ons, appeals to friendship, employment

opportuni es
 Must comply with laws/regula ons (e.g., bribery/corrup on)
 Gi s and hospitality may not be accepted unless the value is trivial and inconsequen al

Intent to Improperly Influence

 Must not offer/accept inducements with intent to improperly influence

 Factors to consider:
o Nature, frequency, value, cumula ve effect
o Timing rela ve to ac on/decision
o Custom/cultural prac ce
o Whether ancillary to professional service
o Availability to broader group
o Roles/posi ons of individuals
o Transparency of offer
o Whether required/requested
o Previous behavior/reputa on of offeror

Safeguard include:

 Informing senior management of the firm or TCWG of the client regarding the offer;
 Amending or termina ng the business rela onship with the client.

No Intent to Improperly Influence

 If trivial/inconsequen al: Threats at acceptable level

 Threats may s ll arise even without intent
 Safeguards: Transparency, registra on in log, independent review, dona ng to charity,
reimbursing cost, returning inducement
ACTUAL OR THREATENED LITIGATION

Threat of a case against the firm for negligence or failure to conduct ac vi es in a professional
manner resul ng in a breakdown of trust.

The significance of the threat will depend on:

 the materiality of the li ga on;

 whether the li ga on relates to a prior audit engagement.

Safeguards that may be applied include:

 if the li ga on involves a member of the audit team, removing that individual from
the audit team; and
 independent review of the work that was carried out and is subject to the li ga on.

FINANCIAL INTERESTS, LOANS AND BUSINESS RELATIONSHIPS

Financial Interests

Cannot be held by:

 Audit team member

 Any partner in office of engagement partner
 Their immediate family

If held: Must dispose, firm disengage, or individual resign

Excep on - Immediate family may hold if:

 Received as employment right

 Firm addresses threat (e.g., removing team member)
 When right to dispose obtained → disposed as soon as possible

Close family member holding interest:

 Consider rela onship and materiality

 Safeguards: Independent review of work
Loans and Guarantees

Prohibited unless immaterial to both firm/individual AND client

 From non-bank client: Prohibited

 From bank client: Can accept if normal lending procedures/terms/condi ons

 If material: Safeguards required (e.g., independent review)

Business Rela onships

Close business rela onships create self-interest/in mida on threats

 Examples: Joint ventures, marke ng arrangements

 Unless immaterial/insignificant: No safeguards can reduce to acceptable level → must
terminate/decline/decline assignment
 An alterna ve would be to reduce the arrangements such that they become immaterial

FAMILY AND PERSONAL RELATIONSHIPS

Create self-interest, familiarity, in mida on threats

 Significance depends on: Nature of rela onship, posi ons held, roles involved

Prohibited Situa ons

Cannot be audit team member if immediate family:

 Director/officer of audit client

 Employee in posi on to exert significant influence over financial statements
 Was in such posi on during period covered

Safeguards for Other Situa ons

 Restructuring responsibili es so team member doesn't deal with family member's areas
 Example: Junior's friend is credit controller → junior shouldn't audit revenue/receivables

SERVING AS A DIRECTOR

Serving as a director or officer of an audit client creates self-review and self-interest threats.
Serving as Company Secretary for an audit client is similarly prohibited, unless:

 Specifically permi ed under local law, professional rules or prac ce;

 Management makes all relevant decisions; and
 Du es and ac vi es performed are limited to those of a rou ne and administra ve
nature (e.g. preparing minutes and maintaining statutory returns).

EMPLOYMENT RELATIONSHIPS

Former Partner/Audit Team Member

When joins audit client as director/in posi on of influence:

 Ensure no significant connec on remains

 Factors: Posi on taken, involvement with audit team, me since leaving, former posi on
 Safeguards: Modify audit plan, assign experienced team, engagement quality review

Audit Team Member Entering Employment

 Must have policies requiring no fica on of employment nego a ons

 Threat eliminated by: Removing individual from audit team
 Safeguard: Review significant judgements made while on team
 For PIE - Key audit partner joining client compromises independence unless:

 Not concerned with audit for ≥12 months

Key audit partner defini on: Statutory auditor primarily responsible for audit OR signs auditor's
report

Temporary personnel assignments

The loan of personnel may create a self-review, advocacy and familiarity threat

Staff may be loaned to the client provided:

 The loan period is short.

 The person does not assume management responsibili es.
 The client is responsible for direc ng and supervising the person.

Where personnel are loaned to the client, the following safeguards should be implemented:
 • Addi onal review of the work performed by the loaned personnel.
• Not including the loaned personnel on the audit team.
• Not giving the loaned personnel audit responsibility for any func on that they
performed during the loaned assignment.

LONG ASSOCIATION OF SENIOR PERSONNEL

Threats Created

 Familiarity threat: From long involvement

 Self-interest threat: Concern about losing client/maintaining rela onship

PIE Requirements

Cannot act for >7 cumula ve years in:

 Engagement partner
 Engagement quality reviewer
 Other key audit partner roles

Cooling-off periods:

 5 years – engagement partner

 3 years – engagement quality reviewer
 2 years – other key audit partner

If client becomes PIE with partner me-on ≥5 years: Maximum 2 addi onal years

Non-PIE Factors to Consider

 Length of me on audit team

 Extent of work direc on/supervision/review
 Closeness to management/TCWG
 Whether management changed
 Whether accoun ng/repor ng issues changed

Safeguards: Rotate personnel, independent review, quality reviews

NON-ASSUREANCE SERVICES (NAS)

General Principles

 No objec on in principle to providing NAS

 BUT must evaluate threats before accep ng
 Audit commi ees must approve NAS (under corporate governance codes)
 Cannot assume management responsibili es

Prohibited Services - Assuming management responsibili es (controlling/direc ng en ty,

making decisions)

Ac vi es considered management responsibility:

• Se ng policies and strategic direc on.

• Hiring or dismissing employees.
• Direc ng and taking responsibility for employee's ac ons.
• Authorising transac ons.
• Deciding which recommenda ons to implement.
• Repor ng to those charged with governance on behalf of management.
• Taking responsibility for the prepara on and fair presenta on of the financial
statements.
• Taking responsibility for designing, implemen ng and maintaining internal controls.

For PIE clients prohibited:

 Accoun ng/bookkeeping services

 Valua on services crea ng self-review threat
 Tax calcula ons for accoun ng entries (if material)
 Internal audit related to financial repor ng
 IT systems services crea ng self-review threat
 Legal services crea ng self-review threat
Specific Services

Accoun ng/Bookkeeping Services:

 Example – Preparing FS – Recording transac ons and payroll services

 PIE: Prohibited
 Non-PIE: Can provide if rou ne/mechanical + safeguards
 Using professionals who are not audit team members to perform the service.
 Independent review of the audit work or service performed.

Valua on Services:

 Making assump ons about future development – Asset – Liability – Investment

 PIE: Cannot provide if creates self-review threat
 Non-PIE: Cannot provide if involves significant subjec vity + material effect
 Independent review
 Excluding members of the valua on team from the audit.

Internal Audit Services:

 Self Review threat

 Few IA Services may not be directly related to the financial systems and hence it can
be opted if it does not compromise the independence
 PIE prohibited if relates to financial repor ng, accoun ng systems, or financial
statements or disclosures of F.S
 Not PIE Client – Use professional who are not member of the audit team.

IT Systems Services:

 Self Review threat

 Services it includes –

o Designing or developing hardware or so ware IT systems;

o Implemen ng IT systems (including installing, configuring, interfacing
customising);
o Opera ng, maintaining, monitoring, upda ng or upgrading IT systems;
o Collec ng or storing data or managing (directly or indirectly) the hos ng of data.
  PIE prohibited if affects accoun ng records/internal control

Li ga on Support Services – Self-review or Advocacy Threat

Li ga on support services may include ac vi es such as:

 ac ng as an expert witness;
 calcula ng es mated damages that might become receivable or payable as a result of
the dispute; and
 assistance with document management and retrieval in rela on to a dispute or
li ga on.
 forensic or inves ga ve services.

Where the service may affect the financial statements (e.g. es ma ng damages)- Same rules as
those for valua on services.

Legal Services – Self-review or Advocacy Threat

 (e.g. contract support, legal advice, legal due diligence and restructuring) - self-review
threats (e.g. es ma ng poten al loss arising from a lawsuit).
 Such services might also create an advocacy threat.
 Threat - materiality of the ma er in rela on to the financial statements and the
complexity and degree of judgement required to provide the service.
 PIE – Prohibited

Recrui ng Services (prohibited for all audit clients for director/officer/senior management):

 Threat – Self Interest, Familiarity and In mida on threat.

 The significance of any threat will depend on:
o the role of the person to be recruited;
o the nature of the assistance requested; and
o any conflicts of interest or rela onships that might exist between the candidates
and the firm providing the advice or service.

The following recrui ng services are prohibited for any audit client for the posi ons of director,
officer or senior management in a posi on to exert significant influence over the accoun ng
records or financial statements

 Searching for candidates

 Reference checks
 Recommending appointments
 Advising on terms/remunera on
Corporate Finance Services (prohibited for all audit clients):

 Promo ng/dealing/underwri ng client's shares

 Services whose effec veness depends on par cular accoun ng treatment in doubt

 Safeguards that may be applied include:

o Using professionals who are not members of the audit team to perform the
service;

o Independent review of the audit work or service.

Tax Services – Self-review or Advocacy Threat

Tax return prepara on services do not usually create a threat because:

o they are based on historical informa on presented under exis ng tax law; and

o tax returns are subject to review or approval by the tax authority.

Preparing tax calcula ons (current and deferred) for the accoun ng entries that will be
subsequently audited creates a self-review threat.

o This is prohibited for a PIE audit client, if material;

o Appropriate safeguards should be applied to a not-PIE audit client.

Tax advisory and tax planning services comprise a broad range of services which might create a
self-review or advocacy threat.

o Such services that might create a self-review threat for a PIE are prohibited;

o Where permi ed, as well as the usual safeguards, the firm may obtain “pre-
clearance” from the tax authori es.

Tax services involving valua ons might arise in merger and acquisi on transac ons, transfer
pricing, share-based compensa on arrangements, etc. Where the accoun ng records are
affected (e.g. assets are revalued), the provisions of the Code for valua on services apply
Providing assistance in the resolu on of tax disputes to an audit client might create a self-
review or advocacy threat

ADVICE ON ITS INTERNATIONAL EXPANSION

• Providing advice on the selec on of target companies and on the financing of

investments is the provision of non-audit services, specifically corporate finance
services, to an audited en ty.
• The degree of subjec vity involved in determining the appropriate treatment for the
outcome or consequences of the corporate finance advice in the financial statements.
• In providing advice on the selec on of target companies and on financing arrangements,
the main risk is that the audit firm could be seen to be taking on the responsibility of
management
• A self-review threat arises in that when audi ng the Group, the audit firm would be
evalua ng risk and performing audit procedures pertaining to the advice which they had
given and would be less likely to highlight issues or challenge assump ons. This impacts
on the quality of the audit performed.
• Self Interest – Fees offered – Dependency
• Advocacy - promo ng the interests of the audit client
• Self Review – In future, If it directly impact the F.S
• Safeguard:
o A wri en acknowledgement from management that they are responsible for
decision-making regarding the planned interna onal expansion and associated
o The use of separate teams of staff
o Quality Review

ASSURANCE ON KEY PERFORMANCE INDICATORS (KPIS)

 Providing assurance on financial and non-financial KPIs included in the annual report.
 Ethical Threats:
o Self-Review Threat: The audit team may over-rely on KPIs they have assured,
reducing objec vity.
 Safeguards: Use an independent partner to review the assurance work.
 Prohibi ons: - If the KPIs are material to the financial statements, the service should not
be provided.
PAYROLL SERVICES

 Providing payroll services to an audit client.

  Ethical Threats:
o Self-Review Threat: The audit team may over-rely on payroll figures they have
prepared.
o Management Responsibility Threat: The firm may be seen as ac ng on behalf of
management.
 Safeguards:
o Use separate teams for payroll services and audit work.
o Ensure management acknowledges responsibility for payroll decisions.
 Prohibi ons:
o If the payroll figure is material to the financial statements, the service should not
be provided.
INTEGRATED REPORTING

 Assis ng with the prepara on of an integrated report containing financial and non-
financial KPIs.
 Ethical Threats:
o Self-Review Threat: The firm may over-rely on financial informa on they have
audited.
o Management Responsibility Threat: The firm may be seen as assuming
management responsibili es for content decisions.
 Safeguards: Use an independent partner to review the work.
 Prohibi ons: If the service involves significant management responsibility, it should not
be provided.

CONFIDENTIALITY

 Defini on: Any informa on not publicly available

 Must: Maintain confiden ality within firm, protect informa on throughout lifecycle

Even if informa on becomes publicly available: Duty s ll applies

Excep ons (When May Disclose)

Legal or professional duty/right:

 Produc on in legal proceedings

 Disclosure of law infringements to authori es
 Compliance with quality review
  Response to professional body inquiry
 Protec ng professional interests in legal proceedings
 Compliance with standards

Authorized by client/person with authority (if not prohibited by law)

CONFLICTS OF INTEREST

Types of Conflicts

 Professional Accountant vs Client (e.g., commission arrangements)

 Client vs Client (ac ng for compe ng clients)

General Principles

 Place clients' interests before own

 Cannot accept/con nue if significant conflict exists
 Any financial gain (beyond proper fees) = significant conflict

Commission/Referral Fees

 Creates self-interest threat

 Unless client agrees commission may be kept: It's client's money → must pay to client
 Safeguards: Wri en disclosure to client of commission receipt, amount, terms; advance
agreement

Managing Client vs Client Conflicts

Steps to take:

 Ascertain if conflict exists/likely

 Consider exis ng client rela onships before new appointment
 Disclose material conflicts so clients can make informed decision
 No fy all relevant par es, obtain consent
 Inform poten al client firm doesn't act exclusively

Safeguards:

1. Separate engagement teams (with different engagement partners and team

members) who are provided with clear guidance on maintaining confiden ality
2. Review of the key judgements and conclusions by an independent person of
appropriate seniority.
3. Procedures to limit access to client files
4. Physical separa on of confiden al informa on including separate prac ce areas
 5. Signed confiden ality agreements by the engagement team members
6. Specific training and communica on.

If necessary to disengage: Do speedily compa ble with clients' interests

SECOND OPINIONS/OPINION SHOPPING – STUDY HUB CONCEPT (NO QUESTIONS AS OF NOW)

Threats Created

 Self-interest threat to competence/due care if not based on same facts

 May create undue pressure on appointed auditor
 Public percep on of encouraging auditor change

Safeguards

Approached auditor should:

 Seek en ty's permission to contact exis ng auditor

 Request all relevant informa on from exis ng auditor
 Provide opinion to exis ng auditor (with client permission)

Exis ng auditor should:

 Seek client's permission to reply

 Provide all relevant informa on/facts/assump ons

If permission not given: Approached auditor must consider whether second opinion may be
provided

TECHNICAL ARTICLE - Ethics in the AAA exam

Stepping Up from AA to AAA

 Applica on over Rote Learning: It’s not enough to just know the principles. You
must apply them to complex scenarios.

 Depth of Analysis: Demonstrate a deeper understanding by:

o Explaining how a threat arises from the specific scenario.

o Discussing the implica ons of the threat.
o Evalua ng and sugges ng specific safeguards.
o Reaching a jus fied conclusion (e.g., decline engagement, implement safeguard).

Answering Ethics Ques ons – A Structured Method

Step 1: Iden fy the Ethical Threat(s)

  Read the scenario carefully.
 Pinpoint the exact threat (e.g., "This creates a self-review threat...").

Step 2: Evaluate the Threat

 Explain HOW it arises: Link the scenario detail directly to the threat.

o Example: "Providing a review of internal controls creates a self-review

threat because the same firm will later audit the financial statements that rely on
those controls."

 State the IMPLICATION: What is the risk or consequence?

o Example: "The audit firm may be reluctant to cri cise the controls it reviewed,
impairing objec vity."

Step 3: Apply Knowledge & Recommend Ac on

 Reference the Code: Use your knowledge of the specific code's requirements.
o Example: "The Code states that assuming management responsibility for an
audit client is so significant that no safeguards could reduce it to an acceptable
level."
 Consider Safeguards: Are there appropriate safeguards that could eliminate or reduce
the threat?
o Discuss safeguards relevant to the scenario (e.g., separate teams, independent
review, modifying the engagement terms).
 Reach a Conclusion:
o If safeguards are effec ve and applicable → propose them.
o If the threat is too significant (e.g., prohibited service for a listed client)
→ decline or withdraw.

o Always link your conclusion back to the fundamental principles.

Worked Example Analysis (Mumbai Co.)

Request: Audit firm asked to review internal controls post-audit. Client is listed.

Step Applica on in Answer Marks Awarded (Guide)

Iden fy "This gives rise to a self-review threat and a Minimal credit alone
poten al management threat."
 Evaluate "Self-review threat arises because... (explain link 2 marks (1 for each
to future audits). Management threat explained threat)
arises because reviewing/designing controls is a
management responsibility."

Apply & "For listed clients, the Code prohibits internal 4 marks (1 for lis ng rule,
Conclude audit services rela ng to financial repor ng 1 for management threat
controls. No safeguards overcome emphasis, 1 for
this. Management threat is also fundamental. conclusion, 1 for depth on
Therefore, we must decline the engagement." listed client)

The marks are in the explana on and applica on, not the iden fica on.

Key Exam Tips

 DO NOT just list threats and safeguards.

 DO explain them in the context of the story.
 Use scenario details: Quote or reference specific facts (e.g., "As Mumbai Co. is a listed
company...").
 Priori se: Address the most significant issues first. For listed en es, prohibi ons are
o en the decisive factor.
 Prac ce: Develop skill in applying knowledge through past ques on prac ce.

Bo om Line: In AAA, ethics ques ons test your professional judgment in applying ethical codes
to complex, realis c situa ons. Demonstrate that judgment clearly.

Factors affec ng the significance of the threat include:

• Value – e.g. when considering gi s and hospitality.

• Seniority of staff – e.g. when considering rota on of staff.
 • Impact to the audit firm – e.g. when considering fee dependency.
• Materiality to the financial statements – e.g. when considering whether a non-audit
service can be provided.
• Whether or not the client is a public interest en ty (PIE).

PART – 2 – OF SECTION B – PRACTICE MANAGEMENT

Topics to be covered

7. Changing the auditor

8. Engagement acceptance
9. Egagement Le er
10. Professional Enquiry
11. Pre condi ons
12. Tendering
13. Low Balling

Reasons for Change in Auditor

An en ty may change its auditor due to:

 Commercial Reasons: Seeking be er value,

wider services.
 Structural Changes: Change of ownership
(e.g., takeover).
 Audit Firm Changes: Merger of audit firms.
 Rela onship Factors: Client partner leaves,
client follows.
 Prac cal Circumstances: Death/incapacity of a sole prac oner.

Engagement Risk & Acceptance Procedures

Risks in Accep ng a Client:

1. Reputa on/Credit Risk: Associa on with a poorly regarded client.

2. Recurring Appointment Changes: Difficulty recovering set-up costs.
3. Lack of Exper se: Threat to professional competence and due care.
4. Fraudulent Ac vi es: Threat to integrity and professional behaviour.

Screening (Acceptance) Procedures (Key Step in Acceptance):

 Purpose: Minimise business risk from clients who threaten compliance with
fundamental principles.
  Threats Iden fied:
o Integrity/Professional Behaviour: From client's management (lack of integrity,
illegal ac vi es, financial repor ng malprac ce).
o Objec vity: If auditor is not independent.

Ma ers to Consider During Screening:

 Source of Work: Recommenda on vs. tender.

 Prac cal Factors: Timing, staff availability, loca ons, industry knowledge, independence.
 Red Flags (Indicators of High Risk):
o History of modified audit opinions.
o Last-minute approach near year-end.
o Reason for auditor change (cri cal).
o Poor management integrity, weak controls, poor records.
o Frequent li ga on, going concern issues.
o Disagreements with predecessor auditor.

Procedures to Perform:

1. Establish reason for seeking new auditors.

2. Review financial statements and prior reports.
3. Evaluate firm's independence (using checklists to iden fy prohibited ma ers vs.
those requiring safeguards).
4. Obtain broad understanding of en ty, environment, controls.
5. Seek references from bankers, lawyers, suppliers.
6. Communicate with predecessor auditor (professional clearance - see 6.3).
7. Designate a person/group to make final decision.
8. Perform AML KYC/CDD procedures (integral part).

Professional Clearance & Predecessor Communica on

Professional Enquiry (Required by IESBA/ACCA Code):

 Prospec ve auditor must request client permission to contact exis ng accountant.

 If Permission Refused: Must decline appointment.
 If Conflic ng Views: Discuss with client to ensure their view is reasonable and they
accept you may express contrary opinions.
 Non-Response by Predecessor: Follow up (phone, email), send final recorded delivery
le er. Can report lack of response to their professional body.

Relevant Ma ers to Discuss:

 Client refusal to supply necessary informa on.

 Unlawful acts (e.g., tax fraud, money laundering).
 Ques onable financial repor ng prac ces.
 Note: Unpaid fees alone are not a reason to decline (but a commercial factor).

For Non-Audit Work: No fy exis ng accountant as professional courtesy.

Response by Exis ng (Predecessor) Auditor:

 Must respond promptly with: a) No ma ers to be aware of, or b) Specific factors to

consider.

 Cannot just say "unspecified factors exist" (though details can be given orally).

Access to Previous Auditor's Working Papers:

 To obtain evidence on opening balances, compara ves, en ty understanding.

 Professional courtesy or legal requirement (varies by jurisdic on).
 "Reasonable Access" Does NOT Include: All documenta on, proprietary systems,
budgets, fee calcula ons, staff records.
 Incoming auditor's primary responsibility is to obtain sufficient appropriate evidence;
reliance on predecessor's work is not a subs tute.

Engagement Acceptance (Competence Assessment)

Auditors must only agree to services they are competent to perform. Assess:

 Understanding of client's business and work scope.

 Industry/sector knowledge and regulatory experience.
 Firm's policies (SoQM) to ensure compliance with standards.
 Specific engagement requirements (laws, use of automated tools, reliance on others).
 Logis cs (loca ons, staff, meframe).
Combine screening and professional enquiry findings to decide on acceptance/con nuance.

Agreeing Terms – Precondi ons & Engagement Le er

ISA 210 – Precondi ons for an Audit:

 Auditor Must:

a. Assess appropriateness of financial repor ng framework.

b. Obtain wri en acknowledgement of management's responsibili es for:
i. Prepara on of financial statements.
ii. Internal control.
iii. Providing unrestricted access to informa on and persons.

Other factors – FIRM PR

Engagement Le er – Purpose & Contents:

To help avoid misunderstandings between client and auditor, to document and confirm:

 management's and auditor's acceptance of their respec ve responsibili es;

 auditor's acceptance of the appointment;
 iden fica on of the applicable repor ng framework;
 objec ve and scope of the work (audit);
 form and content of any reports, circumstances in which the form and content may
differ (e.g. modifica ons), limita on of such reports and to whom reports will be
delivered.

Principal Contents:

o Objec ve, scope, reference to ISAs/legisla on.

o Management's vs. Auditor's responsibili es.
o Financial repor ng framework.
o Form of reports (e.g., KAMs for listed en es).
o Inherent limita ons of audit.
o Expecta on of wri en representa ons.
o Fee basis ( me spent; con ngency/percentage of profit fees are unacceptable).
o Arrangements re: other auditors, experts, internal audit, liability, repor ng to
third par es.

Recurring Audits & Revisions:

 Review le er annually for appropriateness.

 Revise if: Change in management, business nature/size, legal requirements, repor ng
framework, iden fied misunderstanding.
 If client refuses acceptable revision/insists on unacceptable changes: Consider threats
to fundamental principles and poten ally resign.

Tendering & Fee Issues

Tendering is the process of quo ng a fee for work before the work is carried out.

Ma ers to consider before tendering

When invited to tender, a firm must decide whether it wishes to take part in the tendering
process.

Specific risks of being involved with the tender include:

• Wasted me if the audit tender is not accepted. The firm will not be paid for the me spent
pu ng the tender proposal together.

• Se ng an uncommercial fee in order to win the contract (lowballing covered later in this
chapter).

• Making unrealis c claims or promises in order to win the contract.

Decision to Bid – Considera ons:

 Technical Proficiency: Industry specialty, IT environment.

 Geographic/Interna onal Reach.
 Staffing & Exis ng Commitments.
 Ethical Issues: Conflicts of interest, fee limita ons.
 Strategic Fit & Reputa on Risks.
 Presenta on Prepara on: Familiarisa on visit, internal report, fee es mate, bid
document (include service quality statements, other non-prohibited services), rehearsal.

Tendering: Poten al Benefits vs. Risks – just read.

Stakeholder Poten al Benefits Poten al Risks

To the En ty 1. Cost Efficiency: Obtain audit/other 1. Intangible Value

services at a lower cost, be er service Overlooked: May undervalue
for the same cost, or same service for intangible benefits (e.g., personal
lower cost. service, partner access) in a rival
firm's submission.
2. Cost Recovery by Auditor: The
2. Insight & Innova on: Gain insight
successful firm may seek to recover
into current audit methodologies and
its tendering costs through higher
alterna ve service delivery models.
fees in future years or for other
services.
 To the 1. New Client & Fees: Secures new 1. Sunk Cost Pressure: Must
Successful Audit business and revenue. recover the direct (presenta on)
Firm 2. Enhanced Efficiency: Deep and indirect costs of tendering
understanding of client needs gained without compromising audit
during the tender aids efficient quality.
engagement planning. 2. Threat to Fundamental
3. Knowledge Transfer: Insights from Principles: A very ght budget may
the tender process can be applied to lead to failures in professional
benefit exis ng clients. competence and due
care and objec vity.
3. Self-Interest Threat: A fee too
low to perform the engagement
properly creates a significant self-
interest threat to professional
competence.

To Others (e.g., 1. Self-Improvement: Unsuccessful firm 1. Unrecovered Costs: Unsuccessful

Unsuccessful may re-appraise its audit approach or firms bear the cost of the tender
Firms, Market) fee structure, leading to posi ve submission with no new business
change. to offset it.
2. Cost Pass-Through: These
overhead costs may be passed on
to exis ng clients via increased
hourly charge-out rates.

Lowballing & Fee Pressure – No ques ons as – Just read

Quo ng abnormally low audit fees for ini al engagements (predatory pricing) or as a loss-
leader to secure lucra ve non-audit work.

Arguments FOR Allowing:

 Free Market: Compe ve behaviour in a commercial environment.

 Cost Structure: Audit costs are largely fixed; any fee contribu on to overheads is
beneficial.
 Drives Efficiency: Promotes development of more efficient, risk-based methodologies.
 Reduces Threat?: Lower audit fees could arguably reduce the self-interest threat from
fee dependency.
Arguments AGAINST Disallowing (Public Interest Perspec ve):

 Statutory Service, Not Commodity: Audit quality serving the public interest cannot be
compromised.
 Threat to Independence: Suggests a "favour" is being provided, impairing objec vity.
 Threat to Quality: Sub-standard service likely if fees are below cost.
 Cross-Subsidisa on Risk: Making up losses via other (poten ally prohibited) services.
 Public Percep on: Seen as discreditable, sacrificing the interests of
shareholders/investors.

Managing Downward Fee Pressure:

• Fundamental Principle Compliance is Non-Nego able: Must maintain professional

competence and due care and objec vity.
• Adequate me and sufficiently experienced staff must be assigned, regardless of fee.
• Economic Difficul es May Increase Work: Greater judgement/scep cism needed for
going concern, impairments.
• In mida on Threat: If management pressures cost cuts that threaten audit
quality, discuss with TCWG/Audit Commi ee. Emphasise that audit is essen al, not just
a cost.
• Audit Commi ee Role: Should recognise and support the need for a high-quality audit.

Adver sing

The ACCA Rulebook (sec on B13) states that it is acceptable in principle for ACCA members to
adver se their services, but there is a requirement that the adver sing must not reflect
adversely on:

• the member
• the ACCA, or
• •the accountancy profession as a whole.

The aim of adverts should be ‘to inform, rather than impress’.

The rules state that adver sements should not:

• bring the ACCA into disrepute or bring discredit to the member, firm or the accountancy
profession.
• discredit the services offered by others whether by claiming superiority for the
member’s own services or otherwise.
• be misleading, either directly or by implica on.
 • fall short of the requirements of any relevant na onal Adver sing Standards Authority’s
Code of Adver sing Prac ce, notably as to legality, decency, clarity, honesty, and
truthfulness.

EXAMINER REPORT – MARCH JUNE 2025 – ETHICS

1. ANSWER STRUCTURE: "Iden fy → Explain → Apply → Conclude"

For each issue, your answer must follow this structure to score well:

• Step 1 - Iden fy: Name the threat/issue (e.g., "This creates a self-review threat").
• Step 2 - Explain & Evaluate: Explain HOW it arises from the scenario and state the
implica on. This is where most marks are.
o Weak Answer: "This is a self-interest threat." (Minimal marks)
o Strong Answer: "The offer of a 50% discount creates a self-interest
threat because it may cause the audit team to be reluctant to challenge
management or raise issues for fear of losing the engagement and the personal
benefit." (Full marks)
• Step 3 - Apply Knowledge: Reference the relevant sec on of the Code and
discuss safeguards/ac ons.
• Step 4 - Conclude: State the recommended ac on (e.g., decline, implement safeguard).

2. SPECIFIC ETHICAL ISSUES & HOW TO HANDLE THEM

Issue A: Audit Firm Partner/Secondment as a Non-Execu ve Director (NED)

 Threat: Self-review threat (most significant) and management threat.

 Applica on:

o A partner/employee serving as a director/officer of an audit client creates a

fundamental conflict.
o The partner would be part of the governance body (TCWG) that the audit firm
reports to, severely impairing objec vity.
o The partner could be seen as assuming a management responsibility.

 Code Reference & Conclusion (INT/SGP/UK/IRL):

o INT/SGP (IESBA Code): The threat is so significant no safeguards could reduce it

to an acceptable level. Must decline even for a limited period.

Issue B: Assis ng in Recrui ng More NEDs

 Threat: Management threat (assuming a management responsibility).

  Applica on: Shortlis ng or selec ng candidates is a management responsibility.
 Code Reference & Conclusion:
o INT/SGP: Could provide limited assistance (e.g., advising on required
competencies, reviewing qualifica ons of candidates). Must ensure client makes
all final decisions.

Issue C: 50% Discount Offer to Audit Team

 Threats: Self-interest threat (personal gain) & Familiarity threat (long associa on may
be exacerbated by gi ).
 Applica on: The value is not trivial or inconsequen al. It could compromise objec vity
by crea ng a sense of obliga on.
 Code Reference: Gi s/hospitality are only acceptable if clearly insignificant.
 Conclusion: The offer must be declined by the audit team. The firm should have policies
prohibi ng acceptance of such discounts.

Issue D: Seven-Year Tenure of Audit Team & Poten al Lis ng

 Threat: Familiarity threat (long associa on may reduce professional scep cism).
 Applica on: Crucial Dis nc on:
o The company is currently unlisted, so mandatory rota on rules do not yet apply.
o However, the inten on to list makes this a forward-looking issue. The familiarity
threat is heightened.
 Safeguard/Ac on: Recommend implemen ng partner/team rota on as a proac ve
safeguard, especially in prepara on for lis ng. This is good prac ce and prepares for
future compliance

3. CRITICAL SKILLS & COMMON PITFALLS

Do Don't

Explain implica ons in the context of Just list threat names without explana on.
the scenario.

Reference the correct Apply generic rules without considering exam variant
Code (IESBA/FRC/IAASA/ISCA) for your differences.
exam variant.

Dis nguish between listed/unlisted/PIE Assume all rota on/prohibi on rules apply
status and its impact on rules. immediately.
Know the specific FRC/IAASA rules (e.g., Assume all non-audit services for listed clients are
70% cap for interim reviews). prohibited.

Provide a clear, jus fied Leave the answer hanging without a

conclusion (decline, accept with recommenda on.
safeguards).

Prac ce applying the structured Rely only on rote learning of Code paragraphs.
approach to past papers.