Chapter 1: Regulatory Environment

IFAC – in very simple words

IFAC = works for the public interest

 Helps develop high-quality international standards

 Supports strong accounting bodies and audit firms

 Promotes the importance of accountants worldwide

 Speaks on public interest issues where accountants’ skills matter

👉 Purpose: protect trust in the profession

IAASB – in very simple words

IAASB = makes audit standards

 Independent body under IFAC

 Overseen by PIOB (public interest watchdog)

 Issues International Standards on Auditing (ISAs)

 Standards are used globally

 Uses a formal due process (similar to IASB for IFRS)

👉 Remember: IAASB writes ISAs

ISA 200 – what it is

ISA 200 = foundation of all audits

 Applies to every audit

 Explains what an audit is

 Explains what the auditor must do

ISA 200 – what it covers

ISA 200:
  States the overall objectives of the auditor

 Defines key audit terms

 Explains the nature and scope of an audit

 Explains the authority and structure of ISAs

 Sets general responsibilities of the auditor

ISA 200 – requirements on the auditor

The auditor must:

 ✔ Follow ethical requirements

 ✔ Follow relevant ISAs

 ✔ Apply professional scepticism

 ✔ Use professional judgement

 ✔ Obtain sufficient and appropriate audit evidence

 ✔ Reduce audit risk to an acceptably low level

IESBA – in very simple words

IESBA = ethics rule-maker for accountants

 Part of IFAC

 Develops ethical standards and guidance

 Standards are used by professional accountants worldwide

 Encourages IFAC member bodies to:

o Follow high ethical standards

o Promote good ethical behaviour

 Promotes ethical practices globally

 Discusses and debates ethical issues faced by accountants

👉 In short: IESBA sets the ethics rules

OECD – in very simple words

OECD = promotes good governance

 Encourages good governance in:

o Public sector

o Corporate activities

 Helps governments by:

o Providing economic surveys and reviews

 Works on key global areas such as:

o Emerging economies

o Sustainable development

o Territorial / regional development

o International aid

 Public interest = the overall well-being of society that accountants serve

 Defined by IFAC as serving the collective good, not just individual clients

 A key feature of the accountancy profession is its responsibility to the public

 The public includes:

 Clients

 Governments

 Employers and employees

 Investors and lenders

 Business and financial community

 Anyone who relies on accountants for trust and order in commerce

 PIOB = oversees IFAC’s work on:

o Auditing and assurance

o Ethics

o Education

o Member body compliance

 Focuses on public interest

 Believes audit quality depends on:

o Audit process and

o Auditor’s skills, behaviour, and ethics

 Supports:

o High-quality, clear, usable standards

o Independent and public-interest-focused standard setters

o Global compliance with IFAC standards

o Open and transparent standard-setting (public input, exposure drafts)

 PCAOB (USA) = oversees auditors of public companies

 Created by Sarbanes-Oxley Act 2002

 Purpose:

o Protect investors

o Ensure fair and independent audit reports

 Works through:

o Registration of audit firms

o Setting US audit standards

o Inspection of audit firms

o Enforcement of rules and SOX

  FRC (UK) = UK’s independent audit regulator

 Promotes high-quality reporting and governance

 Responsibilities:

o Promotes UK Corporate Governance & Stewardship Codes

o Sets standards for reporting, auditing and actuarial work

o Represents UK in international standard-setting

o Oversees professional bodies

o Runs disciplinary actions for public interest cases

👉 Exam tip:
PIOB = global oversight, PCAOB = US audits, FRC = UK regulation.

Impact of Corporate Governance on Audit and Assurance

 Corporate governance = how a company is directed and controlled

 Board of directors responsible for governance

 Shareholders appoint directors and auditors and ensure good governance

 Focuses on how decision-makers act, are monitored, and held accountable

 Stakeholders rely on published audited financial statements and related info

 Key point: reliable financial statements + independent audit opinion = essential

 “Comply or explain” approach: principles set by regulator, compliance disclosed, non-

compliance explained

 Rules-based approach: governance rules set by law, more detailed

 Both approaches emphasize: balanced board structure, non-executive directors, proper

appointment and pay of directors, audit committees, monitoring internal controls
UK Corporate Governance Code – Main Principles

 Set by FRC; applies to listed companies but can guide any company

 Follows “comply or explain” approach

 Contains 18 principles covering: leadership, stakeholder relations, board effectiveness,

accountability, audit, risk, internal control, remuneration

 Boards must confirm ongoing risk identification, evaluation, and monitoring

 Boards must summarise review of effectiveness of internal controls

Board Leadership and Company Purpose

 Effective boards lead company to long-term success, creating value for shareholders and
society

 Boards ensure resources are available, measure performance, define purpose, values,
strategy

 Encourage engagement with shareholders, stakeholders, workforce

 Key point: Directors must act with integrity, lead by example, and promote desired
culture

Division of Responsibilities

 Chair leads board, ensures effectiveness, promotes openness and debate, provides
accurate info

 Chair must be independent (not employee, major shareholder, or significant business

ties recently)

 Board should have balance of executive directors and NEDs

 NEDs provide challenge, guidance, advice, hold management accountable

 Board supported by company secretary for effective functioning

Composition, Succession, and Evaluation

 Formal, transparent appointment and succession process led by nomination committee

 Majority of nomination committee should be independent NEDs

 Directors subject to annual re-election; chair max 9 years

 Appointments based on merit, diversity, inclusion

  Board should have a mix of skills, experience, knowledge; regular refresh of members

 Annual evaluation of board and individual directors to assess performance and

contribution

Audit, Risk, and Internal Control

 Establish policies to ensure independence and effectiveness of internal/external audit

 Ensure integrity of financial statements

 Present fair, balanced, understandable assessment of company position

 Maintain risk management and internal control framework

 Set principal risk appetite aligned with strategy

 Key point: meet principles via audit committee of independent NEDs

Remuneration

 Policies support strategy and long-term success

 Executive pay aligned to purpose, values, and strategy delivery

 Formal, transparent procedure for director and senior management remuneration via
remuneration committee

 Directors cannot decide their own pay

 Independent judgement and discretion exercised considering company performance and

wider circumstances

Audit Committee

 Ensures board has formal and transparent policies for audit, risk, and internal controls

 Best practice for listed and unlisted companies

 Members: at least 3, or 2 for smaller companies (below FTSE 350 in UK)

 All members must be independent NEDs

 Committee competence should match company sector

 At least one member must have recent and relevant financial experience

 Other members should have corporate financial experience

Audit Committee – Main Roles and Responsibilities

 Monitor integrity of financial statements and any formal financial announcements;

review significant financial reporting judgements

 Advise board on whether annual report and accounts are fair, balanced, understandable,
and give shareholders info to assess company position, performance, business model,
and strategy

 Follow Audit Committees and the External Audit: Minimum Standard

 Review risk management and internal control framework, unless covered by separate
risk committee or board

 Monitor and review internal audit function; if none exists, assess annually if needed and
recommend to board

 Report to board on how responsibilities have been discharged.

FRC Guidance on Audit Committees

 Supports UK Corporate Governance Code by providing examples of best practice

 Establishment and Effectiveness:

o Main roles set out in written terms of reference tailored to the company

o Induction for new members; ongoing training for all members

o Meet internal and external auditors annually without management

o Provided with sufficient resources to perform duties

 Roles and Responsibilities (five main areas):

o Relationship with Board: report on how responsibilities are discharged

o Annual & periodic reports: review and report significant financial reporting
issues and judgements

o Internal control & risk management: review internal financial controls and
systems for managing financial risks

o Internal audit process: review need for internal audit; if exists, approve role,
annual plan, and effectiveness

o External audit process: oversee relations with external auditor

  External Audit Process:

o Appointment: primary responsibility for auditor appointment, fees, scope,

tender process, reappointment/removal recommendations

o Terms and remuneration: approve engagement terms and auditor fees

o Independence: assess independence and objectivity annually, considering law,

ethics, regulations

o Annual audit cycle: ensure audit plans, materiality, resources, and audit team
competence are appropriate

 Assessing Audit Effectiveness:

o Check if audit plan was followed and reasons for changes understood

o Assess auditor robustness, judgement, and handling of deficiencies

o Obtain feedback from finance director, head of internal audit

o Investigate if auditor resigns and decide actions

 Key Points for Exams:

o Audit committee supports board in risk management and internal control

o Involvement at all audit stages ensures quality audit

o Weak execution of responsibilities, especially internal audit, = audit risk

Audit Committees and the External Audit: Minimum Standard (FTSE 350)

 Applies to largest UK listed companies; smaller companies can use as good practice

Responsibilities of Audit Committee:

 Manage non-audit relationships to ensure fair choice of external auditors

 Conduct tender process and recommend appointment, reappointment, or removal of

auditor

 Approve remuneration and terms of engagement for external auditor

 Engage with shareholders on audit scope, if appropriate

 Ensure auditor has full access to staff and records

  Invite and consider challenges by the auditor, adjust financial statements if needed

 Review and monitor auditor independence and objectivity

 Review effectiveness of external audit considering regulations and professional

standards

 Develop policy on non-audit services provided by auditor

 Report to board and members on discharge of responsibilities

Assessment of External Audit Quality:

 Ask auditor to explain risks to audit quality and responses

 Review if auditor met audit plan and reasons for any changes

 Obtain feedback from finance director, head of internal audit, others

 Review auditor’s management letter to:

o Ensure understanding of company business

o Check recommendations have been acted upon

Evidence of Effectiveness of External Audit (Activity 1):

 Obtain evidence from those impacted by the audit (e.g., finance staff, management,
stakeholders)

 Approaches may include:

o Surveys or feedback forms

o Interviews with key personnel

o Review of management letter and corrective actions

Reporting to Shareholders in Annual Report:

 Significant issues considered in financial statements and how addressed

 Explanation of application of accounting policies

 How independence and effectiveness of audit was assessed

 Findings of any regulatory inspection and auditor remedial actions

 Explanation if board rejects audit committee recommendation on auditor

 How auditor independence/objectivity is safeguarded if non-audit services provided

  Guidance on tender process

Benefits and Potential Drawbacks of Audit Committees

Benefits:

 Provide effective oversight, ensuring market, public, and stakeholder confidence in

financial reporting

 Can investigate issues independently, not just as directed by CEO

 Clear on what information they need and determined to receive it

 Act as deterrent to fraud

 Allow board to delegate detailed audit review, enhancing external confidence

 NEDs contribute independent judgement on critical business matters (e.g., investment

decisions, risk analysis)

 Provide a formal link between auditors and NEDs, plus informal communications

Potential Drawbacks:

 May be seen as an unnecessary legal or regulatory burden

 High demands on NEDs make suitable candidates harder to find

 Responsibility and risk may make reward seem insufficient

 Costs involved; must ensure appropriate cost-benefit

 Effectiveness reduced if board does not respect or understand audit committee role or
restricts access to information

Chapter 2: Money Laundering

Money Laundering
  Definition: Process by which criminals hide the true origin/ownership of proceeds from
crime to make it look legitimate

 Includes possessing, dealing with, or concealing criminal property

 Also includes:

o Attempt, conspiracy, or incitement to commit money laundering

o Aiding, abetting, counselling, or procuring such offences

o Any act that constitutes these offences

 Criminal property = money, securities, tangible and intangible property from crimes
such as:

o Tax evasion

o Bribery and corruption

o Income/benefits from criminal cartels

o Savings or benefits from failing regulatory compliance

 Key Point: Bribe-related benefits include both receiving the bribe and income from
contracts obtained through bribery

Money Laundering

 Definition: Process criminals use to hide origin/ownership of proceeds from crime and
make it appear legitimate

 Includes possessing, dealing with, or concealing criminal property

 Also includes:

o Attempt, conspiracy, or incitement to commit money laundering

o Aiding, abetting, counselling, or procuring such offences

 Criminal property = money, securities, tangible/intangible property from crimes such as:

o Tax evasion

o Bribery and corruption

o Income/benefits from criminal cartels

 o Savings/benefits from failing regulatory compliance

 Key Point: Bribe-related benefits include receiving the bribe and income from contracts
obtained through bribery

FATF

The Financial Action Task Force on Money Laundering (also known by the French name "Groupe
d'action financière sur le blanchiment de capitaux") is an inter-governmental body which sets
standards, and develops and promotes policies to combat money laundering and terrorist
financing.

The FATF Recommendations set out a comprehensive and consistent framework of measures
that countries should implement to combat money laundering and terrorist financing. Countries
have diverse legal, administrative and operational frameworks and different financial systems,
and so cannot all take identical measures to counter these threats.

The FATF Recommendations set an international anti-money laundering (AML) standard, which
countries should implement through measures adapted to their particular circumstances.

AML regulators that regulate national AML systems include the Monetary Authority of
Singapore, the Financial Intelligence Centre (South Africa), the Swiss Financial Market
Supervisory Authority (FINMA), the European Banking Authority (EBA) and the UK’s Financial
Conduct Authority (FCA).

The Recommendations include:

 the scope of the criminal offence of money laundering;

 measures to be taken by financial institutions and non-financial businesses and

professions to prevent money laundering and terrorist financing, including:

o customer due diligence (CDD) and record-keeping; and

o reporting suspicious transactions to an external financial intelligence unit (FIU);

 transparency and beneficial ownership of legal persons and arrangements;

 international co-operation including mutual legal assistance and extradition.

Anti-Money Laundering Guidance (Accountancy Sector, UK)

 Prepared by CCAB, issued by ACCA (Technical Factsheet 145)

  Applies to those providing audit, accountancy, tax, insolvency, trust & company services

 Why ethical guidance is needed:

o Scope of money laundering offences is wide

o Non-compliance can lead to legal, regulatory, or professional disciplinary

consequences

o No clear definition of suspicion → requires professional judgement to report

o Disclosure requirements may conflict with client confidentiality.

Principal Offences (Money Laundering)

 Laundering – concealing or dealing with criminal property

 Failure to report suspicion – not reporting suspicious activity as required

 Tipping off – alerting someone that they are being investigated or reported

 Other offences – failure to take preventative measures

Laundering

Stages of Money Laundering:

 Placement: introducing “dirty money” into the financial system

o Deposit cash in banks, buy money orders, pay off debts, convert to casino chips

o Risky stage as large cash amounts attract suspicion

 Layering: obscure the money trail through multiple transactions

o Bank-to-bank transfers (domestic/international), buy/resell high-value assets

o More layers = harder to trace origin

 Integration: illegal money appears legitimate in mainstream economy

o Hard to distinguish legal vs illegal wealth

Common Types:

 Asset laundering: buy high-value items (art, etc.) → resell later for cash/bank transfer
  Casino laundering: buy chips → return for cash/bank transfer

 Trade laundering: falsify invoices in legitimate business to move illegal money

Fiscal Offences:

 Tax evasion = crime; proceeds can be laundered like drug or theft money

 Can involve direct tax (income/corporation tax) or indirect tax (sales tax)

 Examples: under-declaring income, over-claiming expenses

Reporting Suspicion (Money Laundering)

 FATF recommendation: Financial institutions must report suspected criminal or terrorist

financing funds to the Financial Intelligence Unit (FIU)

 Suspicious Transaction Report (STR): Alerts law enforcement to possible money

laundering or terrorist financing

 Suspicious Activity Report (SAR): Info sent to law enforcement when a client’s activity is
suspicious

 Suspicion: More than speculation but less than proof or knowledge; not clearly defined

 No de minimis limit in some countries (e.g., UK); all suspicions must be reported,
though some countries use thresholds

Indicators of Money Laundering (example: Sparkle Co):

 Large cash-based transactions (e.g., $35,000 sale to business associate)

 Use of offshore bank accounts controlled by one person (CEO sole signatory)

 Unusual sales schemes or commission structures encouraging cash sales

 Transactions not aligned with normal business practices

Suspicion report may include:

 Reporting business full name

 Identification of each subject (name, address, DOB, nationality, occupation, employer)

 Role of each subject (suspect, victim, unknown)

 IDs or references (bank accounts, transaction details)

  Transaction/activity details (amounts, dates, currency, source, estimates)

 Location of laundered property

 No need to quantify certainty of suspicion

Tipping Off (Money Laundering)

 Definition: Disclosing a suspicious activity report (SAR/STR) or investigation to a third

party, or prejudicing an investigation

 Non-disclosure/non-action can sometimes count as tipping off (e.g., refusing to follow

client instructions that are part of money laundering)

 Professional accountants should:

o Report suspicion promptly

o Seek authority to continue acting safely

 Discussion with clients: Can talk non-specifically about money laundering matters;
withholding information or guidance may itself be tipping off

General Defences (Money Laundering)

 Report made to authorities or MLRO

 Intended to report but had a reasonable excuse for delay

 Client action in good faith and for adequate consideration

 Only extreme circumstances accepted (e.g., threats to safety)

Professional Duty of Confidence (Money Laundering)

 Reporting in good faith: Accountants do not breach confidentiality if they report money
laundering knowledge or suspicions to authorities

 Statutory protection: Safeguards accountants from criminal action when reporting

  Client confidentiality can be overridden when:

o There is knowledge or reasonable suspicion of a money laundering offence

o A prohibited act will be or has been committed

 Caution: Reporting without reasonable grounds may lead to breach of confidentiality

claims

Legal Privilege (Money Laundering)

 Definition: Right to consult a lawyer in private about legal matters

 Provides defence for legal advisers (lawyers, solicitors, barristers) against failing to
report money laundering suspicions

 Applies only if:

o Information is received in privileged circumstances

o Not communicated to further a criminal purpose

 Does NOT apply to accountants: Professional accountants must report all suspicions

Money Laundering – Requirements for Professional Accountants

 Establish a top-down AML culture throughout the organisation

 Implement risk management, internal controls, and policies for compliance

 Appoint a Money Laundering Reporting Officer (MLRO) at senior level

 Appoint a key partner responsible for risk and internal controls

 Implement record-keeping systems for all transactions

 Maintain systems for client verification and ongoing monitoring

 Establish internal suspicion reporting procedures

 Educate and train staff on main AML legislation requirements

 Non-compliance may lead to severe penalties (e.g., in the UK)

 Non-compliance may lead to severe

AML – Risk Management, Internal Controls and Policies

 Risk-based approach: Identify relevant money laundering and terrorist financing risks

 Design and implement controls to manage/mitigate risks and record their operation

Examples of risks:

 Being used by clients to launder assets

 Offering products/services that could aid money laundering

 Types of clients and industry sectors

 Client jurisdictions

 Client funding and investment activities

 Client business activities, reputation, contacts, public profile

Internal controls and policies should:

 Reflect perceived risks

 Cover client due diligence (CDD)

 Ensure anyone suspecting money laundering knows how to report to MLRO

 Provide MLRO with means to judge suspicions and assess what to report

Client acceptance procedures:

 Identification procedures

 Gather “Know Your Client” (KYC) information

Controls over client money and transactions:

 Verify client identity

 Check commercial purpose of transactions

 Check source and destination of funds

Money Laundering Reporting Officer (MLRO)

 Offence: Failing to appoint an MLRO is illegal (e.g., UK)

  Requirements: Senior and experienced person (e.g., principal of firm)

Responsibilities:

 Review internal reports of suspected money laundering

 Decide if there are sufficient grounds for suspicion

 Prepare Suspicious Activity Reports (SARs)

 Liaise with authorities on consent and disclosure issues

Additional responsibilities (optional):

 Train employees in AML and SAR procedures

 Advise on avoiding tipping off or prejudicing investigations

 Design and implement internal AML systems and procedures

Note: Sole practitioners without staff do not need an MLRO

AML – Record Keeping

 Maintain all client ID records, business relationships, transactions, and monitoring

details (full audit trail)

 Transaction records must be readily retrievable for at least 5 years after last transaction
or end of relationship

 Controls must prevent destruction of records before the 5-year period is satisfied for all
users

 Client verification records: Keep during relationship + 5 years after termination

 MLRO records (internal/external reports, actions taken) must be kept 5 years from date
dealt with

 Follow ACCA Rules of Professional Conduct on retention of books, files, and working
papers

Customer Due Diligence (CDD) / Know Your Customer (KYC)

 Purpose: Identify clients and check they are who they say they are

 Ensures accountants:
 o Know who their clients are

o Avoid accepting clients beyond firm’s risk tolerance or unclear business

 When to conduct CDD:

o Establishing a business relationship

o Occasional transactions

o Suspicion of money laundering or terrorist financing

o Doubts about accuracy/reliability of previous ID information

Before starting a business relationship:

 Identify & verify client’s identity using reliable, independent sources

 Identify any beneficial owners who are not the client

 Obtain info on purpose and intended nature of the relationship

Client Identification (“Knowing Your Client”)

 Higher-risk clients → deeper, stronger, more detailed KYC

 Normal risk individual:

o Photo ID (passport, driving licence) + recent utility bill

 Normal risk entity:

o Certificate of incorporation

o Registered address

o List of shareholders and directors from Registrar of Companies

Suspicion & Reporting (AML)

 Suspicion: Cannot be precisely defined; usually inconsistent with client’s known

legitimate business or personal activity
  Examples of suspicious transactions:

o Unusually large cash deposits

o Frequent currency exchanges

o Transactions with unknown counter-parties

o Activities inconsistent with normal business

o Offshore arrangements with no clear business purpose

Reporting Suspicion:

 Legal obligation for professional accountants to report knowledge or suspicions to the

appropriate authority (MLRO, police, customs)

 Criminal offence not to report

 No “de minimis” limit – report all suspicious activity regardless of amount or

seriousness

 Standard disclosure forms available (e.g., National Crime Agency website)

 Client requests action that is potentially money laundering:

o Written request for consent to authorities

o Do not act for 7 working days unless consent is given

o Legal advice must be sought quickly

o If no response in 7 days, consent is deemed given → accountant can proceed

Education and Training (AML)

 Staff must be trained on:

o Reporting to the MLRO

o Identifying clients

o Recognising and handling possible money laundering situations

o Main money laundering offences

o Business procedures: identification, record keeping, reporting

 Training objectives:
 o Establish a culture of compliance

o Document training to show compliance

 Effective training methods:

o Conferences, seminars, external courses

o Computer-based training, webinars

Resignation (AML / Professional Duty)

 A business can resign from a client if:

o Continuing is not in the business’s commercial interest

o Acting for the client would conflict with professional or ethical requirements

 Must take care not to “tip off” the client about any money laundering suspicion

 Seek legal advice if unsure

AML Principle: Avoiding Tipping Off

 You cannot get consent to “tip off” a client or third party about a suspicion or SAR.

 When sending reports to regulators or authorities (not meant for clients), still be careful
not to reveal the suspicion to the client.

 If there’s conflict between reporting duties and avoiding tipping off:

o Seek legal advice.

o Follow court directions if necessary.

Key point: Always protect the investigation and don’t alert the person under suspicion.

Basic Elements of an AML Program

 Appoint dedicated resources (e.g., MLRO)

 Have written policies and procedures

  Ensure comprehensive coverage, especially CDD/KYC

 Enable timely escalation and resolution of issues

 Show management support (“tone at the top”)

 Provide sufficient training and education

 Conduct regular review/audit to ensure effectiveness

Written Policies and Procedures

 Written procedures should identify risk factors indicating possible money laundering.

Common Risk Factors:

 Client wants secrecy in a transaction (e.g., using another person’s name)

 Transactions routed through jurisdictions or banks with weak ID checks

 Funds moved through multiple jurisdictions or banks without a clear purpose

 Frequent or excessive wire transfers in/out of accounts

 Wire transfers lacking information on beneficial owners or originators

 Large cash or bearer instrument transactions (e.g., cash, gold coins)

 Deposits or withdrawals just below reporting thresholds, especially repeatedly or on

the same day

 High-value transactions that don’t match the client’s documented wealth or business

Chapter 3: Code of Ethics for Professional Accountants

  IFAC lets member bodies (e.g. ACCA) set, enforce and apply detailed ethical rules
because countries differ.

 IESBA (part of IFAC) issues the International Code of Ethics as a global model for these
bodies.

 The Code sets minimum ethical standards and fundamental principles.

Objectives of the profession:

 High professionalism

 High performance

 Serve the public interest

To achieve this, accountants must provide:

 Credibility – reliable information

 Professionalism – clearly recognised professionals

 Quality – high-standard services

 Confidence – ethics-based trust

IESBA Code structure:

1. Fundamental principles & conceptual framework

2. Accountants in business

3. Accountants in public practice

4. Independence standards

 Integrity
Be honest and fair. Do the right thing even under pressure or when it personally hurts.
 Objectivity
Make unbiased decisions. Don’t let conflicts, pressure, or over-reliance on others/technology
affect judgement.

 Professional competence & due care

Keep knowledge up to date. Work carefully and follow standards and laws.

 Confidentiality
Don’t share client/employer information unless legally or professionally required. Never use it
for personal gain.

 Professional behaviour
Follow laws, act in the public interest, and avoid anything that damages the profession’s
reputation.

Conceptual Framework – super simple (AAA/ACCA exam-ready):

What is it?

 A thinking framework, not a rulebook.

 Used to identify, evaluate, and respond to threats to the fundamental principles.

How to apply it

You must:

1. Have an inquiring mind – question the information.

2. Use professional judgment – apply knowledge and experience.

3. Apply the reasonable & informed third-party test – ask: Would an objective outsider
agree this is ethical?

Key rule

 If a threat is not at an acceptable level, you must apply safeguards to remove or reduce
it.

 If you can’t → don’t proceed.

 Not illegal ≠ allowed.

Acceptable level
  A level where a reasonable and informed third party would say the accountant still
complies with ethical principles.

Inquiring mind (think like an auditor)

 Is the information reliable, complete, unbiased, and consistent?

 Has anything changed?

 Is something missing?

 Do the facts support the conclusion?

 Should I investigate further?

Professional judgment

 Use training, experience, and standards.

 Be aware of bias (very examinable):

Common biases:

 Anchoring

 Automation

 Availability

 Confirmation

 Groupthink

 Overconfidence

 Representation

 Selective perception

Reduce bias by:

 Consulting others

 Getting expert advice

 Ethics & bias training

Reasonable & informed third party test

 Would an objective outsider with relevant knowledge agree with your decision?

 Used a lot in:

o Gifts & hospitality

o Non-assurance services

o Conflicts of interest

 Self-interest
Personal or family benefit affects judgement (money, job, bonuses).

 Self-review
Checking your own previous work → hard to be objective.

 Advocacy
Promoting a client/employer too strongly → objectivity lost.

 Familiarity
Relationship too close or too long → scepticism drops.

 Intimidation
Pressure, threats, or fear influence decisions.

Addressing threats – super simple (exam-perfect):

There are only 3 options:

1. Eliminate the cause

Remove the interest or relationship creating the threat.

2. Apply safeguards
Take effective actions to reduce the threat to an acceptable level.

3. Decline or stop the work

If the threat cannot be eliminated or reduced → walk away.

Safeguards (key exam points)

  A safeguard must be a real action, not just thinking about it.

 Getting advice alone is NOT a safeguard.

 Acting on that advice can be a safeguard.

 If the action doesn’t work, it’s not a safeguard.

Bottom line:
If threats remain high → don’t proceed.

How to score ethics marks – super simple (Section A / AAA):

Examiners want application, not theory. Do this every time:

1. Identify the threat

Name it clearly (self-interest, self-review, etc.).

2. Explain how it arises

Link it directly to the scenario and state why it’s a problem.

3. Respond properly

o Apply specific safeguards; or

o If safeguards don’t work → decline or withdraw from the engagement.

Exam reality check:

 Listing principles alone = low marks.

 Scenario-based explanations + clear action = high marks.

Conceptual Framework – Professional Scepticism (super simple):

 Independence of mind: Make decisions honestly, free from outside influence.

 Independence in appearance: Avoid situations that make others think your judgement is
compromised.

 Professional scepticism: Question everything, be alert to errors or fraud, critically assess

evidence.

How fundamental principles support skepticism:

 Integrity: Be honest, raise concerns, investigate inconsistencies, assess evidence

critically.
  Objectivity: Recognize threats like familiarity, consider their impact on judgements, stay
unbiased.

 Professional competence & due care: Use relevant knowledge, identify risks, design
proper audit procedures, assess evidence carefully.

In short: Ethics + skepticism = smart, unbiased audit decisions.