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Probably not a big deal, but I failed my exam in June and lots of the MCQ were on the resolution of conflict of interests ( engagement team going to management and vice versa)
It seems like there are lots of conditions that are not “allowed”, but the specific safeguards auditor firm should use are on a spectrum from removal from engagement team to review of work by independent partner. I understand these are guidelines, not rule based, but isn’t there something that is stricly forbidden ? Just read the ACCA code and doesn’t seem like there is definitive.
The most definitive rule is – What would reasonable and informed third party would do?If I used to be CFO of a company for 10 years, how can I be objective auditor for the same company now ? If the whole idea is to provide independent assurance, how come nothing is strictly prohibited? How can you safeguard your audit if your wife is a CEO or you own shares in the company. If it isn’t allowed why not state it simply.Why the legalese hoop jumping?It’s the opposite of a “Code”.
I am sure I am missing something. Sorry, I don’t mean to rant, I thought it would be easier to find “infraction = safeguard” type rules.
“Conflicts of interest” is a term that is usually used when considering for example acting for two clients. I think you are referring more generally to ethical threats to independence. The conceptual framework approach means – identify the threat(s) – evaluate its significance – apply safeguards – if the threat cannot be reduced to an acceptable level (as you say, as a “reasonable and informed third party would be likely to conclude”) – eliminate the threat by resigning/declining the engagement.
The principles-based approach requires judgement – so the “answer” may depend on whether we are talking about an engagement partner or another audit partner in the firm, or a manager or a trainee. What may be acceptable involvement for a trainee (because his work can be reviewed (a safeguard)/he can’t take management decisions/influence the auditor opinion) may not be acceptable for an audit partner.
There are examples of “no nos”
– a member of the audit team, a member of that individual’s immediate family and the audit firm cannot have any direct financial interest (or material indirect financial interest) in an audit client
– neither a member of the audit team, a member of that individual’s immediate family, nor a firm shall accept such a loan or guarantee
– a firm shall not assume a management responsibility for an audit client
– a firm shall not enter into any contingent fee arrangement
– a firm or a member of the audit team shall not accept gifts or hospitality (unless trivial and inconsequential)
etc, etc.Thank you, threats to independence is what I meant.
It’s quite relative, but I appreciate the complexity.While you are here, what is an appropriate response to engagement partner becoming a senior manager in previously audited company ? For both sides- for the audit company as well as the former auditor ?
For the audit company, I guess independent review? Any consequences for the previous auditor ? Unless misstatement , I guess not.I understand your example was for simultaneous auditing/management.
Thanks for your reply. Sorry again for the exasperation 🙂
You only have to consider ethics from the audit firms’ perspective.
As you say, independent review of the former partner’s work would be required – especially significant judgments they have made.
Thank you. It’s nice to have somebody to ask about these things.
Seems like most of this exam is just brute memorisation – assertions, controls, procedures….Oh well 🙂
Thanks again !
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