Part 1 – Ethics

Ethical standards and their application form a major part of the Advanced Audit and
Assurance syllabus and are examined regularly. Often the marks for this area will be
spread over more than one question and may be combined with planning,
professional issues or as a standalone.

The basic ethical standards at this level are the same as those examined previously
in Audit and Assurance; what sets apart the level of the questions is your ability to
apply those standards to more complex situations and show that you understand
both threats and safeguards. This is an area of the exam where candidates can use
good exam technique to increase the marks attained without having to rote learn
much additional information above that learnt for previous exams.

This article will demonstrate how to maximise marks on these areas using good
technique. It is, however, specific to the context of auditing and assurance and will
therefore have a different focus and application to the way ethics is examined in
other areas of the ACCA Qualification.

What you need to know

The starting point for preparing for any exam is to know the underlying knowledge
that is required for this part of the syllabus. At this level the content of the guidance is
what you should focus on. Marks are not awarded for memorising or quoting
standard numbers, it is the application of the content of those standards that is
important. For the Advanced Audit and Assurance exam the following standards are
examinable:

 ACCA’s Code of Ethics and Conduct (2016)

 IESBA’s Code of Ethics for Professional Accountants (Revised May 2015)
 IESBA–Changes to the Code Addressing Certain Non-Assurance Services
Provisions for Audit and Assurance Clients
Ethical Considerations Relating to Audit Fee Setting in the Context of Downward Fee
Pressure (January 2016)

In addition, for the UK exam candidates will be examined on the Financial Reporting
Council’s Revised Ethical Standard 2016, for the IRL exam candidates will be tested
on the IAASA’s Ethical Standard for Auditors (Ireland) 2016, and SGP candidates
should also refer to the ISCA Code of Professional Conduct and Ethics (Revised
November 2015).

You will be familiar with ACCA’s Code of Ethics from the Audit and Assurance exam.
This mirrors the IESBA’s Code of Ethics so you will be familiar with the five basic
 principles of Integrity, Objectivity, Professional Competence and Due Care,
Confidentiality, and Professional Behaviour. You will also be familiar with the general
areas of threat to the fundamental principles of Self Review, Self Interest, Advocacy,
Familiarity, and Intimidation.

The situations you will be appraising at this level will usually involve an assessment
of those same principles within scenarios given in the question. In addition, you may
be expected to identify situations where the auditor is at risk of assuming a
management responsibility with respect to providing additional services to audit
clients or appreciate the differences between listed (or other public interest entities)
and non-listed clients when it comes to applying these principles.

With regards to objectivity and independence, the general conceptual approach in

the codes is as follows:

(a) Identify threats to independence

(b) Evaluate the significance of the threats identified, and

(c) Apply safeguards, when necessary, to eliminate the threats or reduce them

to an acceptable level.

When the professional accountant determines that appropriate safeguards are

not available or cannot be applied to eliminate the threats or reduce them to an
acceptable level, the professional accountant shall eliminate the circumstance
or relationship creating the threats or decline or terminate the audit
engagement.

How to apply the knowledge

When addressing ethical situations in the exam, you will usually have to demonstrate
these skills:

1. that you can identify an ethical threat

2. that you understand how it arises and the implication of the threat, and
3. that you can relate the guidance to the specific scenario to determine the
safeguards or course of action required.

Each of these skills can be illustrated through the examples below (note that the
answers provided here are focusing on the ethical issues arising and do not cover
the professional or other issues you might also need to discuss arising from the
scenarios). These answers are not fully comprehensive and give an example of the
content which could be produced in an exam. There are further points in each case
that could be developed and additional outcomes available within the ethical codes;
however, they do represent a well-developed answer a candidate could use to attain
the full marks available. 

Example 1
The audit committee of, Mumbai Co, has asked the partner to consider whether it would be possible for
the audit team to perform a review of the company’s internal control system. A number of recent
incidents have raised concerns amongst the management team that controls have deteriorated and that
this has increased the risk of fraud, as well as inefficient commercial practices. The auditor’s report for
the audit of the financial statements of Mumbai Co for the year ended 31 March 2016 was signed a few
weeks ago. Mumbai Co is a listed company.
 
Required:
Comment on the ethical issues raised and the actions your firm should take in response to the client’s
request.
(6 marks)

In this example, we are asked to provide an additional service to an audit client – a

review of systems and controls. This is going to give rise to a self-review threat and
may possibly lead to assuming a management responsibility. This identification is the
first step to answering the question, but these points alone will not score credit in the
exam until you have developed them. In order to do this you can use the steps
described to build up marks as follows. The important phrases are in bold.

Demonstrating you understand the threats, how they arise and the implication

Providing a review of the company’s system and controls gives rise to a self-review threat as these
controls will then be reviewed by the firm when determining our audit strategy. The firm may
be reluctant to highlight errors or adopt a substantive approach during the audit as this may highlight
deficiencies in the firm’s work on the additional service. (1 mark)

The design of systems and controls is a management responsibility so a review of such may give
rise to a situation where the auditor is assuming a management responsibility by taking on the role of
management. (1 mark)

Apply the guidance to the scenario – evaluate the significance and suggest
safeguards

The code states that the threat to independence of undertaking management responsibilities for an audit
client is so significant that there are no safeguards which could reduce the threat to an acceptable
level. (1 mark)

However, this answer could score three marks, it is likely that more marks are
available. From an exam technique point of view, you should be looking for
additional points to make. At this stage, don’t start speculating about relative fee
size; try to focus on the information the examiner has given you. Here, the company
is flagged as listed, so there must be further development available on this area.
Think about how you’ve seen management responsibility issues overcome during
your studies and past question practice. It is these points that you can use to attract
further marks.

Management responsibility can be avoided if the client takes responsibility for monitoring the reports
made and taking the decisions on recommendations.
(1 mark)
 
However, as this client is listed, we are prohibited from undertaking internal audit services which
relate to a significant part of the controls over financial reporting. (1 mark)

Conclude

As such we must decline the additional work. (1 mark)

In other circumstances, the safeguard of using separate teams to overcome self-

review threats or considering the competence of the firm to provide this service
would attain credit; however, in this case, the client is listed so these points are
irrelevant here.

Note that, in the exam, no marks are awarded for simply listing self-review or
management responsibility as they will need to be described before marks are
awarded. As such, ensure that you take the time to explain the threats rather than
simply writing terms.

Example 2
Your firm’s advisory department has been carrying out a due diligence assignment on a potential
acquisition target of an audit client, Blue Co. The management team of Blue Co has also approached
White & Co to ask whether representatives of the firm would be available to attend a meeting with the
company’s bankers, who they are hoping will finance the acquisition of Red Co, to support the
management team in conveying the suitability of the acquisition of Red Co. For the meeting the bank
requires the most up-to-date interim accounts of Red Co with the accompanying auditor’s independent
interim review report. Your firm is due to complete the interim review shortly and the management
team of Red Co has requested that the interim review is completed quickly so that it does not hold up
negotiations with the bank, stating that if it does, it may affect the outcome of the next audit tender,
which is due to take place after the completion of this year’s audit.
 
Required:
Comment on the ethical issues raised and recommend any actions your firm should take in response to
the client’s requests.
(8 marks)

In this example we have additional services and pressure relating to existing

services to an audit client. The issues we face are advocacy, self-review,
management responsibility and intimidation.
 

Demonstrating you understand the threats, how they arise and the implication

Attending a meeting with the bank would give rise to an advocacy threat as we would be perceived
as promoting the interests of our client and confirming the client’s assertions in negotiations. (1
mark)
 
In addition, this may give rise to legal proximity exposing the firm to potential litigation. (1 mark)
 
Attending the meeting may result in the firm being perceived to support the acquisition of Red Co. As
these are decisions which should be taken by management we could be perceived as taking on
a management role.
(1 mark)
 
Self-review threats may also arise when we later audit the finance and acquisition in the financial
statements of the group as we may be reluctant to highlight errors or are less sceptical about the
values in the subsidiary as we have provided the due diligence work. (1 mark)
 
Further, an intimidation threat exists as the client has threatened that if the interim report is delayed it
would affect the outcome of the tender for audit in the future and there is a risk that quality is
reduced in order to meet the client’s demands. (1 mark)

Apply the guidance to the scenario – evaluate the significance and suggest
safeguards and conclude
Here, there are different directions that the answer could take – for example,
discussing in depth the exact nature of the assignment and meeting attendance;
however, it is possible to attract marks without such detail in your answer as follows:

Assuming a management responsibility can be avoided if the directors confirm in writing that they

are responsible for any decision regarding the acquisition. (1 mark)
 
The firm should decline to attend the meeting with the bank. (1 mark)

The self-review threat can be reduced by having an independent partner review the audit work prior
to signing the auditor’s report. (1 mark)

The intimidation threat should be reported to those charged with governance. (1 mark)

Note that, in this instance, a separate team for the due diligence and audit
assignments was not suggested as the scenario already told us that a different
department had been carrying out the due diligence work.

Conclusion

The above two examples aim to cover a range of issues and illustrate how
candidates can attract strong marks when answering ethics questions. As with most
areas of the Advanced Audit and Assurance exam, it is the application of knowledge
to a scenario rather than the knowledge itself that will attract marks. This means that
when preparing for this exam, a good grasp of the knowledge underpinning the
syllabus is important but practising questions and developing the skills of applying
that knowledge is key to passing. 

Written by a member of the P7 examining team