ACCA P7 (INT) Advanced Audit & Assurance - Study Text

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Chapter 2: The regulatory environment

incorporation, the registered address and a list of shareholders and directors, all

of which can be obtained from the Registrar of Companies.

 Establishing procedures within the firm for reporting any suspicion of money

laundering by client companies.

 Training and educating staff in procedures for detecting and reporting

suspicions of money laundering activities.

These obligations are wide-ranging and auditors and other professionals need to be

fully aware of the extent of their obligations.

Example

A case in the UK involved a solicitor who was imprisoned for six months for failing

to report his suspicion in relation to money paid to his firm by a client who was

later convicted of drug trafficking. The solicitor misunderstood his obligation to

report the suspicion, thus unintentionally committing an offence.

Guidance from professional bodies

To ensure that practitioners are aware of their responsibilities, the ACCA’s

Monitoring Unit – as part of its monitoring process – checks to see if practitioners

have understood their obligations by asking a series of questions during their visits.

In addition to any disciplinary action that may be taken by the ACCA for breaches

of the regulations, penalties for non-compliance with money laundering obligations

can:

 make a firm liable (under criminal law) to unlimited fines, and

 make its principals (usually its partners) liable to possible imprisonment.

In response to the increased expectations of legislators and regulators in many

countries with respect to the accounting profession’s role in detecting money

laundering, IFAC has published a second paper on this topic.

This paper highlights:

 the causes and possible means of preventing money laundering

 the signs of money laundering activity

 the vulnerability of banks, non-bank financial institutions and other entities to

money laundering

 governance-related issues (the relative responsibilities of directors and auditors

for monitoring and reporting suspicions of money laundering).

4.4 Duty of confidentiality and money laundering

The accountant’s normal professional duty of confidentiality to clients is not an

adequate defence where money laundering is concerned.

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In the case of reporting suspicions of money laundering, practitioners in the UK are

afforded statutory protection against claims for breach of confidence where reports

are made in good faith and to the appropriate authority. This will be so even in

cases where the suspicions later prove to be unfounded and wrong.

An accountant may in fact find it hard to not to commit the offence of ‘tipping off’

bearing in mind all the reporting requirements that an auditor has to fulfil. For

example, bear in mind that if an auditor had a strong suspicion or knowledge of

money laundering, he might want to resign his position. However, doing so would

mean that he was required to report to the shareholders on his reasons (in a

statement of circumstances) and also report any professional matters arising to his

successor in a professional clearance letter. In such a circumstance, the auditor

might be better placed not resigning at that time and should certainly take legal

advice before doing so (remember that taking advice from a solicitor would not

constitute tipping off because it is protected by legal privilege).

Accountants may find themselves in a position where they are prevented from

making a report of a suspicion of money laundering because they have received

information under a legal privilege. This will be rare. It will be considered further

when you look at forensic auditing in Chapter 12.

4.5 Global dimension

The rules above, although based on FATF recommendations are the legal situation

in the UK. Several countries have very similar legislation.

The US Patriot Act 2001 requires all financial institutions to establish anti-money

laundering programmes to include development of internal policies, the

appointment of a compliance officer, an ongoing employee training programme and

an independent audit function.

Chapter 2: The regulatory environment

Compliance with laws and regulations in an audit of financial

statements: ISA 250

 The legal environment and non-compliance by a client company

 Action by the auditor in the event of non-compliance or suspected non-

compliance by a client company

5 Compliance with laws and regulations in an audit of

financial statements: ISA 250

5.1 The legal environment and non-compliance by a client company

ISA 250 Consideration of laws and regulations in an audit of financial statements requires

the auditor to:

 obtain a general understanding of the applicable legal and regulatory

framework and how the entity is complying with that framework. This is part of

obtaining an understanding of the entity and its environment – here, the legal

environment – as required by ISA 315

 obtain sufficient appropriate audit evidence in respect of compliance with

those laws and regulations which might be expected to have a direct effect on

material amounts and disclosures in the financial statements

 perform the following audit procedures to help identify such instances of non-

compliance:

- make enquiries of management as to whether the entity is complying with

the relevant laws and regulations

- inspect any correspondence with the relevant authorities

 during the audit, remain alert to the possibility that other audit procedures

might bring instances of non-compliance to the auditor’s attention

 obtain written representations from management that all known instances of

non-compliance or suspected non-compliance have been disclosed to the auditor

 document all identified or suspected instances of non-compliance and the results

of discussions with management and/or other parties.

5.2 Action by the auditor in the event of non-compliance or suspected non-

compliance by a client company

If the auditor identifies or suspects material areas of non-compliance by the

company, the following procedures are required:

 Obtain an understanding of the nature of the act and the circumstances under

which it has occurred.

 Evaluate the possible effect of the non-compliance on the financial statements.

 For suspected non-compliance, discuss the matter with management. If

compliance is not proved, take legal advice.

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 If there is insufficient evidence re a suspected non-compliance, consider the

impact on the audit report (this would constitute a “limitation on scope” which

is considered in a later chapter).

 Consider whether the non-compliance impacts on other areas of the audit (for

example, on the overall risk assessment).

 Consider how to report the non-compliance – to those charged with governance

and/or to shareholders and/or to the authorities.

Paper P7 (INT)

Advanced audit and assurance

CHAPTER

Rules of professional conduct

Contents

1 The fundamental principles

2 Integrity, objectivity and independence

3 Professional duty of confidentiality

4 Corporate financial advice and conflicts of

interest

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The fundamental principles

 Introduction: rules of conduct for professional accountant

 The fundamental principles

1 The fundamental principles

1.1 Introduction: rules of conduct for professional accountants

The professional bodies that regulate the auditing profession set high standards of

behaviour for their members (including student members). Their codes of practice

apply to all members, whether in public practice or not. The detailed rules of

conduct vary between the professional bodies, but all the major bodies have codes

that are broadly similar.

In setting a code of practice, each professional body is complying with one of its

regulatory functions, which is to ensure that statutory audits are performed only by

‘fit and proper’ persons who act with professional integrity.

For your examination, you need to be aware of:

 the ‘ACCA Code of Ethics and Conduct’, and

 the ‘IFAC Code of Ethics for Professional Accountants’.

As the ACCA has adopted the IFAC Code, the content of these two sets of

regulations is largely the same. IFAC has recently issued an exposure draft of its

independence provisions, splitting them between ‘audit and review engagements’

and ‘other assurance engagements’ and proposing some amendments to the

requirements. These will be referred to as relevant in this section.

1.2 The fundamental principles in the IFAC Code

The five fundamental principles of the IFAC and ACCA Codes are set out below.

Principle Explanation

Integrity

A professional accountant should be straightforward and

honest in all professional and business relationships.

Objectivity

A professional accountant should not allow bias, conflict of

interest or undue influence of others to override professional

or business judgements.

Chapter 3: Rules of professional conduct

Principle Explanation

Professional

competence and

due care

A professional accountant has a continuing duty to maintain

professional knowledge and skill at the level required to

ensure that a client or employer receives competent

professional service based on current developments in

practice, legislation and techniques. A professional accountant

should act diligently and in accordance with applicable

technical and professional standards when providing

professional services.

Confidentiality

A professional accountant should respect the confidentiality of

information acquired as a result of professional or business

relationships and should not disclose any such information to

third parties without proper and specific authority unless there

is a legal or professional right or duty to disclose. Confidential

information should not be used for the personal advantage of

the professional accountant or third parties.

Technical

standards

A professional accountant should comply with relevant laws

and regulations and should avoid any action which discredits

the profession.

You need to know these five fundamental principles and what each of them means.

An exam question may ask you to discuss the relevance of the five fundamental

principles to a particular situation in a case study.

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Integrity, objectivity and independence

 The requirement for independence

 Threats to independence

 Specialist valuations and threats to independence

 Safeguarding independence

 The provision by auditors of non-audit services

 Commercial transactions between an audit client and a member of the audit

team

 Making referrals

2 Integrity, objectivity and independence

2.1 The requirement for independence

For an audit report to be of value, the auditor:

 must be independent, and also

 must be seen to be independent.

The opinion of an auditor must be an independent opinion given by a professional

person with appropriate skills in audit work, and the opinion must not be

influenced by anyone else, and in particular must not be influenced by the opinions

and views of the management of the company whose financial statements have been

audited.

In order that a member’s audit report is of value auditors must have ‘independence

of mind’ and to be ‘independent in appearance’. These principles of both being

and being seen to be independent are at the centre of the role played by

independence in auditing.

Independence of the auditor is a matter of public confidence in the audit process.

 Auditors need to be fully aware of situations that may damage their

independence and objectivity. Such situations are referred to as threats to

auditor independence.

 Any threats to independence may be reduced by safeguards that are taken by an

audit practice (audit firm).

It is matter of public confidence in the audit process.

Both the ACCA Rules and the IFAC Code take the form of guidance on

independence, rather than specific rules. It is left to the individual member to apply

judgement about how the guidance should be applied in practice.

Chapter 3: Rules of professional conduct

The guidance sets out a number of general categories of threat to independence, and

then goes on to list specific threats and associated guidance.

2.2 Threats to independence

General categories of threat

Threats to the fundamental principles are matters that could result in the accountant

or audit firm acting without integrity, without sufficient competence, without

ensuring confidentiality or in a way that discredits the profession. However threats

to the fundamental principles are largely threats to the independence and objectivity

of the accountant or the audit firm.

The Code recognises the following general sources of threat to the fundamental

principles:

 Self-interest threat. This arises when the accountant or the audit firm has a

financial interest or other interest in a matter. Typically this means that the

accountant’s decisions may be influenced by self-interest and the accountant will

therefore not act with objectivity and independence.

 Self-review threat. This occurs when an accountant is required to review or re-

evaluate (for a different purpose) a previous judgement he has made or action

that he has taken. Self-review threats can also apply to audit firms. For example

if an audit firm prepared the financial statements for a client company and then

acted as auditor, it would be reviewing its own work and would be reluctant to

criticise or question it. This would be a threat to objectivity and independence.

 Advocacy threat. This occurs when the accountant is in a position where he is

expected to defend or justify the position of the client, and act as an ‘advocate’

for the client’s position or point of view. This would be a threat to objectivity

and independence.

 Intimidation threat. This occurs when the accountant is deterred from acting

with objectivity due to threats against him or his firm. The nature of the threat

may be a threat by the client that it will take work away from the audit firm

unless it agrees with the point of view of the client management.

 Familiarity threat. This occurs when the accountant becomes too sympathetic

with the client’s position due to close relationships, for example due to a long

association over many years in carrying out the annual audit..

The Code goes on to give guidance about a number of specific threats which an

accountant might be faced with.

Financial interests

A financial interest in a client would constitute a self-interest threat, although the

nature of the interest and the degree of control the accountant has over it will affect

the level of the risk.

Paper P7: Advanced audit and assurance (International)

The guidance recommends that a member of the assurance team or an immediate

family member of that team should not hold a direct financial interest or an indirect

material interest in a client. The interest should either be disposed of, or the team

member removed from the engagement.

Example: Financial interest

Drin Company is developing a new product which is expected to be very profitable,

but it needs additional finance to complete the product development work and for

the market launch. It has invited its audit firm, Pull & Push, to make an investment

in the product. The financing arrangement would take the form of either convertible

debentures in Drin Company or a separate joint venture company. If a joint venture

company is established, Drin Company and Pull & Push would share control of the

business. The joint venture company would develop, manufacture and market the

new product.

What are the ethical issues to consider in this situation?

Answer

If Pull & Push retain Drin Company as an audit client, the ethical situation is as

follows.

Convertible debentures

The audit firm must not provide a loan to a client. Buying debentures in the

company would be a form of loan. It would create a major self-interest threat for

which there could be no suitable safeguards.

A further problem is that convertible debentures could eventually be converted into

equity shares in Drin Company, which would also create a major self-interest threat

for Pull & Push.

Joint venture company

A joint venture arrangement would also be unacceptable on ethical grounds,

because of the significant mutual financial interests that Drin Company and Pull &

Push would share.

A financial interest by an audit firm in an audit client is permissible only if the

interest is not material, the relationship with the client is insignificant and the audit

firm does not exercise significant influence. These conditions do not apply here.

If the audit firm resigns from the audit

If Pull & Push resigned from the audit of Drin Company, a different situation would

arise. The audit firm would be allowed to invest in its former audit client, since the

ethical threats would no longer exist. However, it is questionable whether an audit

firm would want to diversify its business interests in to the manufacture and

marketing of a new product – an area of business in which the firm’s partners

would have no direct experience or expertise.

ACCA P7 (INT) Advanced Audit &amp; Assurance - Study Text - 2010 (Emile Woolf Publishing)

Подождите немного. Документ загружается.

ACCA P7 (INT) Advanced Audit & Assurance - Study Text - 2010 (Emile Woolf Publishing)