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1. What is Independence? managed on a discretionary basis by others);

A. As per Paragraph 120.12 A1 of Volume-I of the or
Code of Ethics, Professional Accountants in public b) Beneficially owned through a collective
practice are required by Independence Standards to investment vehicle, estate, trust, or other
be independent when performing audits, reviews, or intermediary over which the individual or entity
other assurance engagements. has control, or the ability to influence investment
Independence comprises: decisions.
Independence of Mind - The state of mind that 4. What is the meaning of Indirect Financial Interest?
permits the expression of a conclusion without being A. Indirect Financial Interest means a financial interest
affected by influences that compromise professional beneficially owned through a collective investment
judgment, thereby allowing an individual to act with vehicle, estate, trust, or another intermediary over
integrity, and exercise objectivity and professional which the individual or entity has no control or ability
skepticism. to influence investment decisions.
Independence in appearance - The avoidance of 5. What course of action shall be taken by a Firm
facts and circumstances that are so significant that a
when it identifies a Breach in Audit and Review
reasonable and informed third party would be likely
Engagements?
to conclude that a firm’s or an audit or assurance
team member’s, integrity, objectivity, or professional A. As per requirement under paragraph R400.80 of
skepticism has been compromised. Volume-I of the Code of Ethics, subject to the
eligibility requirements of the auditor mentioned
2. What is Engagement Period (Audit and Review)?
under Section 141 of the Companies Act, 2013, if a
A. The engagement period starts when the audit firm concludes that a breach of a requirement in this
team begins to perform the audit. The engagement Part has occurred, the firm shall:
period ends when the audit report is issued. When
the engagement is of a recurring nature, it ends at a) End, suspend, or eliminate the interest or
the later of the notification by either party that the relationship that created the breach and
professional relationship has ended or the issuance address the consequences of the breach.
of the final audit report. Where the audit client is a b) Consider whether any legal or regulatory
statutory audit client under the Companies Act, requirements apply to the breach and, if so:
2013, the engagement period shall be determined
in accordance with the provisions contained in the I. Comply with those requirements.
Companies Act, 2013. c) Promptly communicate the breach in
3. What is the meaning of Direct Financial Interest? accordance with its policies and procedures to:
A. Direct Financial Interest means a financial interest: I. The engagement partners.
a) Owned directly by and under the control II. Those with responsibility for the policies
of an individual or entity (including those and procedures relating to independence.

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THE CHARTERED ACCOUNTANT

KNOW YOUR ETHICS
III. Other relevant personnel in the firm and, b) The client.
where appropriate, the network; and The above is subject to the Council guidelines on
IV. Those subject to the independence indebtedness, issued from time to time, and the
requirements in Part 4A who need to take additional restrictions under the Companies Act,
appropriate action. 2013, where applicable.
d) Evaluate the significance of the breach and its In accordance with Section 141 of the Companies
impact on the firm’s objectivity and ability to Act, 2013 read with Rule 10 of Companies (Audit and
issue an audit report; and Auditors) Rules, 2014 a firm, an individual practitioner,
e) Depending on the significance of the breach, sole proprietor or partner (as the case may be), or
determine relatives shall not be indebted in excess of Rs 5 lakhs
(or such other limit as may be prescribed from time
I. Whether to end the audit engagement; or to time) to the Company, its subsidiary, or its holding
II. Whether it is possible to take action that or associate company or subsidiary of such holding
satisfactorily addresses the consequences company or provide guarantee or any security in
of the breach and whether such action connection with the indebtedness of any third person
can be taken and is appropriate in the in excess of Rupees one lakh (or such other limit as
circumstances. may be prescribed from time to time), to the company
its subsidiary, or its holding or associate company or
In making this determination, the firm shall subsidiary of such holding company.
exercise professional judgment and take into
account whether a reasonable and informed 9. What are the examples of Close Business
third party would be likely to conclude that the Relationships arising from a commercial
firm’s objectivity would be compromised, and relationship or common financial interest?
therefore, the firm would be unable to issue an A. As per paragraph 520.3 A2 of Volume-I of the Code
audit report. of Ethics, examples of Close Business Relationships
6. What is the definition of an Audit Client? arising from a commercial relationship or common
financial interest are: -
A. An audit client refers to an entity in respect of which a
firm conducts an audit engagement. When the client a) Having a financial interest in a Joint venture with
is a listed entity, the audit client will always include its either the client or a controlling owner, director,
related entities. When the Audit client is not a listed officer, or another individual who performs
entity, the Audit client includes those related entities senior managerial activities for that client.
over which the client has direct or indirect control. b) Arrangements to combine one or more services
In Part, 4A of Volume-I of the Code of Ethics, the or products of the firm or a network firm with
term “audit client” applies equally to “review client.” one or more services or products of the client
and to market the package with reference to
7. What are the factors relevant in evaluating the level both parties.
of threat created by holding a financial interest in
an Audit Client? 10. What actions might be safeguards to address
threats created when an individual is involved in
A. As per Paragraph 510.3 A3 of Volume-I of the Code
an audit engagement over a long period of time?
of Ethics, factors that are relevant in evaluating the
level of a self-interest threat created by holding a A. When an individual is involved in an audit engagement
financial interest in an audit client include: over a long period of time, familiarity and self-interest
threats might be created.
• The role of the individual holding the financial
interest. As per Paragraph 540.3 A6 of Volume-I of the
Code of Ethics, examples of actions that might be
• Whether the financial interest is direct or indirect. safeguards to address such familiarity or self-interest
• The materiality of the financial interest. threats include: -
8. Whether a loan, or a guarantee of a loan made  Changing the role of the individual on the audit
by a firm, an Audit team member, or any of that team or the nature and extent of the tasks the
individual’s immediate family to an Audit client individual performs.
creates any threats to Independence?  Having an appropriate reviewer who was not
A. As per Paragraph R511.4 of Volume-I of the Code of an audit team member review the work of the
Ethics, a firm, a network firm, an audit team member, individual.
or any of that individual’s immediate family shall not
 Performing regular independent internal or
make or guarantee a loan to an audit client unless
external quality reviews of the engagement.
the loan or guarantee is immaterial to:
As per Paragraph R540.5 of the Code, in
a) The firm, the network firm, or the individual
respect of an audit of a public interest entity, an
making the loan or guarantee, as applicable; and

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individual shall not act in any of the following  Pressure related to financial interests.
roles, or a combination of such roles, for a  Pressure related to financial Interests,
period of more than seven cumulative years (the Compensation, and Incentives Linked to
“time-on” period): Financial Reporting and Decision Making.
a) The engagement partners.  Inducements, Including Gifts and Hospitality
b) The individual appointed as responsible for the  Responding to Non-compliance with Laws and
engagement quality control review; or Regulations etc.
c) Any other key audit partner role. As per paragraph 270.3 A4 of Volume-I of the Code
After the time-on period, the individual shall of Ethics, discussing the circumstances creating
serve a “cooling-off” period in accordance the pressure and consulting with others about
with the provisions in paragraphs R540.11 to those circumstances might assist the professional
R540.19. accountant to evaluate the level of the threat.
Such discussion and consultation, which requires
11. Whether a person who is a director or officer of being alert to the principle of confidentiality, might
an entity shall be qualified for appointment as include:
auditor of that entity?
 Discussing the matter with the individual who is
A. As per paragraph R523.3 of Volume-I of the Code of exerting the pressure to seek to resolve it.
Ethics, a partner or employee of the firm or a network
firm shall not serve as a director or officer of an audit  Discussing the matter with the accountant’s
superior, if the superior is not the individual
client of the firm. Further, as per Section 141(3) (b) of
exerting the pressure.
the Companies Act, 2013, an officer or employee of
the company or a person who is a partner, or who is  Escalating the matter within the employing
in the employment, of an officer or employee of the organization, including when appropriate,
company, shall not be eligible for appointment as an explaining any consequential risks to the
auditor of a company. organization, for example with:
12. What are the pressures that may create a † Higher levels of management.
threat to compliance with one or more of † Internal or external auditors.
the fundamental principles by a professional
† Those charged with governance.
accountant in service? How should he deal with
the said situation?  Disclosing the matter in line with the employing
A. As per paragraph 270.3 A2 of Volume-I of the Code organization’s policies, including ethics and
of Ethics, examples of pressures that might result whistleblowing policies, using any established
in threats to compliance with the fundamental mechanism, such as a confidential ethics
principles by a professional accountant in service hotline.
include:  Consulting with:
 Pressure related to conflicts of interest. † A colleague, superior, human resources
personnel, or another professional
 Pressure to influence the preparation or
accountant.
presentation of information.
† Institute or industry associations; or
 Pressure to act without sufficient expertise or
due care. † Legal counsel.

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