Ch # 13.

Professional Ethics and Codes of Conduct Page 328

ANSWERS
Answer #1 Q.4 Spring 2011

(i) Self-interest threats - This may occur as a result of the financial or other interests of a chartered accountant or of
an immediate or close family member.
▪ A financial interest in a client or jointly holding a financial interest with a client.
▪ Undue dependence on total fees from a client.
▪ Having a close business relationship with a client.
▪ Concern about the possibility of losing a client.
▪ Potential employment with a client.
▪ Contingent fees relating to an assurance engagement.
▪ A loan to or from an assurance client or any of its directors or officers.

(ii) Self-review threat - This may occur when a previous judgment needs to be re-evaluated by the chartered
accountant responsible for that judgment.
▪ The discovery of a significant error during a re-evaluation of the work of the chartered accountant in practice.
▪ Reporting on the operation of financial systems after being involved in their design or implementation.
▪ Having prepared the original data used to generate records that are the subject matter of the engagement.
▪ A member of the assurance team being, or having recently been, a director or officer of that client.
▪ A member of the assurance team being, or having recently been, employed by the client in a position to exert
direct and significant influence over the subject matter of the engagement
▪ Performing a service for a client that directly affects the subject matter of the assurance engagement.

(iii) Advocacy threats - This may occur when a chartered accountant promotes a position or opinion to the point that
subsequent objectivity may be compromised.
▪ Promoting shares in a listed entity when that entity is a financial statement audit client.
▪ Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties.

(iv) Familiarity threats - This may occur when, because of a close relationship, a chartered accountant becomes too
sympathetic to the interests of others.
▪ A member of the engagement team having a close or immediate family relationship with a director or officer of
the client
▪ A member of the engagement team having a close or immediate family relationship with an employee of the client
who is in a position to exert direct and significant influence over the subject matter of the engagement.
▪ A former partner of the firm being a director or officer of the client or an employee in a position to exert direct
and significant influence over the subject matter of the engagement.
▪ Accepting gifts or preferential treatment from a client, unless the value is clearly insignificant.
▪ Long association of senior personnel with the assurance client.
(v) Intimidation threats - This may occur when a chartered accountant may be deterred from action objectively by
threats, actual or perceived.
▪ Being threatened with dismissal or replacement in relation to a client engagement.
▪ Being threatened with litigation.
▪ Being pressured to reduce inappropriately the extent of work performed in order to reduce fees.

Answer #2 Q.7 Autumn 2012

(a) Burewala Bank Limited:

Threats
(i) A threat to independence may be created if the loan is made under abnormal lending procedures, terms and
requirements and the loan is material to both the firm and the BBL.
(ii) A self interest threat may be created if the loan amount is material to the firm/ partner.

Safeguards:
As the Companies Act, 2017, restricts a person who is indebted to the company from being auditor of the said
company, therefore the course of action available to the partners of UCC is to withdraw from the engagement or
repayment of the loan by the partner concerned.
Ch # 13. Professional Ethics and Codes of Conduct Page 329

(b) Faisalabad Textile Mills Limited:

Threats:
It has created self interest, familiarity and intimidation threats.
The assurance team’s independence is threatened, on account of the fact that Kamal is in a position to exert direct and
significant influence over the assurance engagement as Kamal was a member of the assurance team during the
previous year audit.

Safeguards:
The safeguards might include:
(i) Consider the appropriateness or necessity of modifying the assurance plan for the assurance engagement;
(ii) Assigning an assurance team that is of sufficient experience in relation to the individual who has joined the
assurance client;
(iii) Involve an additional chartered accountant who was not a member of the assurance team to review the work or
advise as necessary; or
(iv) Quality control review of the assurance engagement.
(v) Ensuring that the individual concerned is not entitled to any benefits or payments from the firm unless these are
made in accordance with fixed pre-determined arrangements. In addition, any amount owed to the individual
should not be of such significance to threaten the firm’s independence.
(vi) Ensuring that the individual does not continue to participate or appear to participate in the firm’s business or
professional activities.

Answer #3 Q.9 Autumn 2013

(a) The purchase of goods and services from an assurance client by the firm would not generally create a threat to
independence unless the transaction is not in the normal course of business and not on an arm’s length basis.
The creation of self interest threat or otherwise shall depend upon the nature of the transaction and its magnitude.
If the threat created is other than clearly insignificant, safeguards should be considered and applied as necessary to
reduce the threat to an acceptable level.
Such safeguards might include:
▪ Discontinue the practice of staying in hotels managed by AHL or reducing its frequency so as to reduce the
magnitude of the billing.
▪ ensure that the charge out rates are in accordance with those applicable to normal customers.
▪ Ensure that the dealing is at arm’s length and no undue advantage is secured by the firm.
▪ Discussing (informing) the issue with TCWG.
(b)
▪ As a result of inheritance of shares, a self-interest threat has been created. The following safeguards should be
applied to eliminate the threat or reduce it to an acceptance level:
- The financial interest may be disposed of at the earliest practical date; or
- The concerned staff may be removed from the assurance engagement.
▪ During the period prior to disposal of the financial interest or the removal of the individual from the assurance
team, consideration should be given to whether additional safeguards are necessary to reduce the threat to an
acceptable level. Such safeguards might include:
- Discussing the matter with TCWG, such as the audit committee; or
- Involving an additional chartered accountant to review the work done, or otherwise advise as necessary

Answer #4 Q.5 Spring 2014

(a) Threats:
Self interest threat is created as the auditor would like to recover the previous year’s audit fee.

Safeguards:
Generally the payment of previous year audit fees should be received before the report is issued. However, if the fee
is not paid additional safeguards may be applied, which may include:
▪ Discussing the outstanding fees with the audit committee and TCWG.
▪ Involving an additional chartered accountant who did not take part in the assurance engagement, to provide
advice or review the work performed.
Ch # 13. Professional Ethics and Codes of Conduct Page 330

(b) Threats:
Self interest threat is created as the shares are held by a close relative of the engagement partner.
As the engagement partner has promptly notified the firm about the interest of his brother, hence it is likely that it
would not impair the independence of the engagement partner.

Safeguards:
Significance of threat should be evaluated and if the threat is other than clearly insignificant, safeguards should be
considered and applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:
▪ If possible the engagement partner may convince his brother to dispose of the shares;
▪ If disposal does not occur at the earliest practical date, the engagement partner may be changed.
▪ An additional chartered accountant who did not take part in the assurance engagement may review the work
done or otherwise advise as necessary.

Answer #5 Q.10 Autumn 2014

(a) Integrity:
Members should be straightforward and honest in all professional and business relationships. Integrity implies not
just honesty but also fair dealing and truthfulness.
A chartered accountant should not be associated with reports, returns, communications or other information which
according to him is materially false or misleading.
(b) Advocacy threat:
Advocacy threat occur when members promote a position or opinion on behalf of a client to the point that subsequent
objectivity may be compromised.
Example: Acting as an advocate for an assurance client in litigation or dispute with third parties.
(c) Actual Independence:
Actual independence means that the auditor should not be influenced by anything which results in compromising his
professional judgement while expressing an opinion.

Perceived independence: The auditor must be seen to be independent, i.e. the auditor should avoid facts and
circumstances due to which a third party may conclude that his integrity, objectivity or professional skepticism had
been compromised.

(d) The following are circumstances where chartered accountants are or may be required to disclose confidential
information:
▪ Disclosure is permitted by law and is authorized by the client.
▪ Disclosure is required by law.
▪ There is a professional duty or right to disclose, when not prohibited by law:

Examiner Comments:
This question consisted of 10 short questions of 1, 2 and 3 marks each. The question was generally well
answered. However, some candidates did not read the requirements of each part carefully and produced
lengthy explanations where the requirement was to state the points only. The performance in each part
is discussed below:

(a) Generally done well.

(b) Advocacy threat was described correctly but examples were often incorrect. Many students gave
examples of purchase of shares which was not relevant in this case.
(c) The concept of actual independence and perceived independence was appropriately distinguished
by majority of the candidates. However, a significant number of students were totally confused as
regards perceived independence and stated that actual independence represented “true
independence” whereas perceived independence meant that the auditor was not independent and
only appeared to be independent.
(d) In outlining the situation where confidential information may be disclosed, many candidates did not
seem to distinguish between ‘required by the law’ and ‘permitted by the law’. Some candidates also
gave examples of such situations which was not required.
Ch # 13. Professional Ethics and Codes of Conduct Page 331

Answer #6 Q.7 Spring 2015

(a) The previous provision of accounting and taxation services to MPL and long association of Ahmed with MPL will
create self-review and familiarity threat.
Significance of threats needs to be evaluated and if threats are other then clearly insignificant, safeguards need to be
applied to reduce the threats to an acceptable level.
In case Ahmed is included in the Audit engagement the related safeguards may include:
▪ involving an additional chartered accountant to review the work done by Ahmed or otherwise advise as
necessary.
▪ independent internal quality reviews.
If the threats are significant, Ahmed should not be part of the assurance engagement team.
(b) In the given situation involvement of such trainees in the audit of CL may result in a self-interest threat.
The materiality and significance of the financial interest, needs to be evaluated. If the financial interest is immaterial
then the audit trainee may be allowed to work on that client, otherwise only safeguard available is to withdraw the
trainee from this assignment.

(c) A self interest threat is created when a member of the assurance team participates in the assurance engagement
while knowing, or having reason to believe, that he may join the assurance client in future.
The threat created can be reduced to an acceptable level by the application of the following safeguards:
▪ Ask the individual to notify the firm when entering serious employment negotiations with the assurance client;
▪ Remove of the individual from the assurance engagement;
▪ Perform an independent review of any significant judgments made by that individual while on engagement.

Examiner Comments:
In this question, three situations were given and the candidates were required to advise the firm about
the possible course of action in each situation. The performance in each case is discussed below:
(a) Self-review and familiarity threats were correctly identified by majority of the students as the
concerned employee of the firm was providing accounting and taxation services as a consultant prior
to appointment in the audit firm. The safeguards were also mentioned correctly. However, the need
to identify the significance of such threats and to decide whether the concerned person should be a
part of the respective assurance engagement, was not discussed.
(b) The threat was correctly identified in most cases as a self-interest threat when a father of a trainee
has a financial interest in the client but the issues of materiality and significance of the threat were
not discussed by many students. Further, many candidates produced a long list of safeguards and
did not appreciate that if the financial interest was material, the only safeguard available was to
remove the concerned trainee from that audit.
(c) There is a self-interest threat when a member of the team participates in an assurance engagement
while knowing that he may join the assurance client in future. The overall performance was good.
However, some candidates incorrectly identified other threats such as advocacy threat and
intimidation threat instead of or in addition to self-interest threat.

Answer #7 Q.9 Autumn 2015

(a) Accepting of discount vouchers may create self interest and intimidation threats.
However, if the value of discount vouchers is not clearly insignificant, the threat to independence cannot be reduced
to an acceptable level by the application of any safeguard.
If the value is other than clearly insignificant, the members of the audit team should be instructed not to accept the
discount vouchers.

(b) The lending of staff by a firm to an audit client will create a self-review threat. However, the threat may be reduced
to an acceptable level if the firm's personnel:
▪ are not involved in exercising discretionary authority; or
▪ do not assume management responsibilities.
▪ are not given audit responsibility for any function or activity that they performed or supervised.
The audit client should acknowledge its responsibility for directing and supervising the activities of assigned
personnel.
Ch # 13. Professional Ethics and Codes of Conduct Page 332

(c) Familiarity and self-interest threats are created by using the same senior personnel on an audit engagement over
a long period of time. This applies to the audit manager also.
The significance of the threats shall be evaluated and following safeguards should be applied if necessary to eliminate
the threats or reduce them to an acceptable level:
▪ Rotating the audit manager as well;
▪ Having a professional accountant who was not a member of the audit team review the work of the audit manager;
▪ Regular independent internal or external quality reviews of the engagement.

Examiner Comments:
This question contained three situations and the candidates were required to discuss the categories of
threats involved and the related safeguards. Performance in each part is discussed below:
(a) The overall performance was below average. Self-interest threat was correctly identified by majority
of the students but very few could identify the intimidation threat. Further, mostly the candidates
just mentioned that discount vouchers should not be accepted. Significance or insignificance of the
amount involved was not discussed. Many students specified safeguards such as involving additional
chartered accountant, quality control and review of the work, which were not relevant.
(b) The overall performance was average. Though the threat was generally identified correctly as a self-
review threat, however, in most of the cases the safeguard that management responsibilities should
not be assumed was not mentioned.
(c) In this part also, candidates correctly mentioned relevant threats, but most of them mentioned only
one safeguard i.e. rotation of the audit personnel. The safeguards relating to independent quality
control review by an independent reviewer were rarely mentioned by the students. Many students
said that the partner should be rotated which was already mentioned in the question.

Marking Scheme:
(a)
▪ Identification of threats 2.0
▪ Discussion on related safeguards 2.0
(b)
▪ Identification of threat 1.0
▪ Discussion on related safeguards 4.0
(c)
▪ Identification of threats 1.5
▪ Discussion on related safeguards 2.5

Answer #8 Q.5 Spring 2016

a) Familiarity or intimidation threats may be created if a member of audit team joins the audit client.
Following are the safeguards:
(i) Modifying the audit plan;
(ii) Assigning individuals to the audit team who have sufficient experience as compared to the individual who has
joined the client;
(b) A loan from an audit client to an audit team member will not create a threat to independence, if the loan is made
under normal lending procedures, terms and conditions.
If the loan is not made under normal lending procedures, terms and conditions, a self- interest threat would be created
that would be so significant that no safeguard could reduce the threat to an acceptable level. However, as the loan has
already been disbursed, the only safeguard available is to remove the manager from the audit team or ask him to settle
the lease obligation.

Examiner Comments:
This question also consisted of two parts. Each part contained a situation and the candidates were
required to identify the threats involved and suggest appropriate safeguards. Part-wise comments are
provided below:
(a) Performance in this part was above average. Majority of the candidates rightly identified the threats
and related safeguards. However, a number of candidates identified self-interest threat which was
not correct. Many candidates mentioned irrelevant safeguards also.
Ch # 13. Professional Ethics and Codes of Conduct Page 333

(b) The performance was average. Most of the students were able to identify the self- interest threat.
However, very few candidates discussed the main issue i.e. whether the lease was under normal
conditions or otherwise.

Answer #9 Q.8 Autumn 2016

(a) Self-interest, self-review and familiarity threats will be created, as Kamran has served as an employee in ABC.
Safeguards:
▪ Conducting a review of the work performed by Kamran as a member of the audit team,
▪ Not including the member in the audit team.
(b) As the father of Nasir is a close family member, having a direct financial interest in DL, a self-interest threat is
created.
Safeguards:
▪ Disposing as soon as practicable, of all the shares by Nasir’s father (a close family member)
▪ Having a professional accountant review the work of Nasir;
▪ Replacement of Nasir from the Audit team.

Examiner Comments:
This was the best attempted question as more than 85% students secured passing marks and a
substantial number scored high marks. Almost all the students identified the threats correctly. Few
marks were lost because some of the related safeguards were missed.

Marking Scheme:
(a)
▪ 01 mark for identification of each threat 3.0
▪ 01 mark for identification of each applicable safeguard 2.0
(b)
▪ Identification of threat 1.0
▪ 01 mark for identification of each applicable safeguard 3.0

Answer #10 Q.4 Spring 2017

Assisting financial statement audit client in matters such as preparing accounting records or F/S may create a self-
review threat when the F/S are subsequently audited by the firm.
The related safeguards are as follows:
▪ Arrange for such services to be performed by an individual who is not a member of audit team.
▪ If such services are performed by a member of the audit team, use a partner or senior staff member with
appropriate expertise who is not a member of the audit team, to review the work performed by such person,
during the audit.
(i) As Asif is associated with the client since last three years it will create a familiarity threat, an appropriate
safeguard would be to exclude Asif from the engagement team.
(ii) Independence of Rashid can be threatened as Rashid is a close family member of marketing director. Although
marketing director is not directly related to the preparation of F/S, however, he could be tempted by
management for not identifying errors due to influence of his father. In order to provide safeguard against the
threat the firm should not include Rashid in the audit team.
(iii) Independence of audit firm can be compromised if extra ordinary benefits is obtained for conducting internal
functions at restaurants of TTL. As a precaution, the firm should avoid using the restaurants of TTL.

Examiner Comments:
This question contained four simple situations [one in part (a) and three in part (b)] and the candidates
were required to discuss the threats and the related safeguards in each case. It was well attempted as
more than 70% of the candidates secured passing marks. Comments on each situation are given below:
(a) Most of the candidates performed well in this part of the question. Some candidates identified self-
interest threat which was incorrect. Some candidates did not mention the correct safeguards and
stated that while preparing the financial statements, the auditor should not take any management
decision which was not appropriate in the given context.
Ch # 13. Professional Ethics and Codes of Conduct Page 334

(b)
(i) The overall performance was good. However, many candidates incorrectly identified self- review
threat instead of familiarity threat.
(ii) Good performance was witnessed in this part also. However, many candidates also mentioned
familiarity threat which was not correct. Some of them even mentioned intimidation threat which
was totally incorrect. As regards the safeguards, some of the candidates mentioned that the work
carried out by Rashid should be reviewed by a chartered accountant which was not appropriate as
the work performed by all team members is reviewed at various stages as a matter of routine rather
than in that particular situation.
(iii) An average performance was witnessed in this sub-part. Most of the students failed to understand
that the threat would only be significant if some extra-ordinary benefit is obtained. Some of them
even mentioned that the firm should not continue as the auditor which was quite inappropriate. In
fact, the threat if any, was easily manageable by reducing the use rather than refusing the audit
altogether.

Marking Scheme:
(a)
▪ Identification of threat 1.0
▪ 01 mark for discussing each applicable safeguard 2.0
(b)
▪ Identification of threats 3.0
▪ Up to 1.5 marks for discussing each applicable safeguard 4.0

Answer #11 Q.3 Autumn 2017

(a) The association of Anwar with Curtains Limited will create self-review and familiarity threat. If the threats are
significant, Anwar should not be part of the assurance engagement team.
In case Anwar is included in the Audit engagement the related safeguards may include:
▪ Involving an additional chartered accountant to review the work done by Anwar or otherwise advise as
necessary.
▪ Independent internal quality reviews.

(b) In the given situation, the acceptance of audit engagement will result in a business relationship with an audit client
which may pose a familiarity threat to objectivity.
However, the significance of the threat in such situation depends upon the following:
▪ Whether it is in the ordinary course of business;
▪ Whether the tenancy agreement is on an arm’s length basis; and
▪ The materiality of the contract for either of the party.

From the situation given, it can be determined that this business relationship is in the ordinary course of business on
an arm’s length basis and not material to either of the parties, hence, the engagement can be accepted.

(c) Income tax return contains information which is directly related to a significant figure in the financial statements.
Therefore, the acceptance of review of income tax return would create a self review threat.
In case the engagement is accepted the related safeguards may include the following:
▪ The review may be performed by professionals who are not members of the audit team;
▪ If the service is performed by a member of the audit team, a partner or senior staff member with appropriate
expertise and is not a member of the audit team, review the tax calculations; or
▪ The firm does not get involved in management decision making and clarifies this fact in the communication with
the client.

Examiner Comments:
This question required identification of threats and related safeguards to be applied in three different
situations each covered in a separate part of the question. The overall passing percentage was 23%.
Comments on each part are given below:
Ch # 13. Professional Ethics and Codes of Conduct Page 335

Part (a)
Majority of the answers suggested only one safeguard i.e. not to allow Anwar to be the engagement
manager. Hence, safeguards in case the threat is not considered significant and Anwar is appointed as
the engagement manager were not covered.

Part (b)
The performance remained below average. Most of the students took the easy way out of suggesting that
the firm should refuse to accept the audit, without giving any reason or simply mentioning conflict of
interest. Only few candidates were able to suggest correctly that the significance of the threat should be
evaluated and the basis thereof.

Part (c)
Majority of the students performed well in this question, however some students identified familiarity
threat instead of self-review threat.

Marking Scheme:
(a)
▪ Identification of threats 1.0
▪ 01 mark for discussing each safeguard 3.0
(b)
▪ Identification of threat 1.0
▪ Discussion on the significance of threat 3.0
▪ Discussion on the safeguard / decision 1.0
(c)
▪ Identification of threat 1.0
▪ Up to 01 mark for discussing each safeguard 2.0

Answer #12 Q.5 Spring 2018

(a) (i) Accepting of gift may create self-interest and familiarity threats.
If the value of the gift is not clearly insignificant, the threat to independence cannot be reduced to an acceptable level
by the application of any safeguard.
Consequentially in such situation, the members of the audit team should be instructed not to accept the gift.

(ii) A self-interest threat is created when a member of the audit team participates in the audit engagement while
knowing that he / she may join the client sometime in the future.
On receiving such notification, the significance of threat shall be evaluated and following safeguards could be applied:
▪ Removing the individual from the audit team; or
▪ A review of any significant judgments made by that individual while on the team.
(b)
(i) Following are the threats in the mentioned situation:
▪ Suggesting the client about accounting treatment would create a selfreview threat, because that accounting
treatment will also be the subject matter of the assurance engagement.
▪ Even though Amjad’s friend has attended the workshop on IFRS-15, it does not necessarily mean that he is
competent enough to advise the client regarding the accounting treatment under IFRS-15, as it could involve
significant judgment. It would create a threat to professional competence and due care.
▪ Sharing of information with his friend may create threat to confidentiality.

(ii) Following actions could be taken by the firm to avoid such a situation in future:
▪ Regularly conduct professional development of its staff for any recent changes or updates in professional
pronouncement.
▪ Circulate documented internal policies and procedures requiring compliance with the fundamental principles.
▪ Implement an effective disciplinary mechanism to promote compliance with policies and procedure.
Ch # 13. Professional Ethics and Codes of Conduct Page 336

Examiner Comments:
The overall performance in this question was average as 35% of the candidates secured passing marks.
The question consisted of two parts. Part (a) was further sub-divided into two sub-parts. Each sub-part
contained a scenario and the candidates were required to discuss the threats and related safeguards in
the given situations. In sub-part (i) the performance remained below average as majority of the
candidates simply stated whether gifts should be accepted or not without considering the significance of
the gift. Most of those who were of the view that the gifts should not be accepted, did not give any
appropriate reason thereof. Some of them identified intimidation and advocacy threats which were
totally irrelevant. Performance in sub-part (ii) was quite good as the candidates seemed to understand
the situation well.
Performance in part (b) was quite poor. In sub-part (i) mostly, they raised the issue of lack of knowledge
on the part of Amjad. The critical issues i.e. emergence of self review threat and the threat to
confidentiality were rarely discussed. In sub-part (ii) where the requirement was to list down the actions
the firm should take to ensure that such situation is avoided in future, mostly the candidates focused on
CPD activities related to IFRSs only and overlooked the need for guidance regarding appropriate
behaviour at the client, disciplinary procedures and compliance with fundamental principles.

Marking Scheme:
(a) (i)
▪ 0.5 mark for identification of each threat 1.0
▪ Discussion on the significance of threat 1.0
▪ Discussion on the related safeguard 1.0
(ii)
▪ Identification of threat 1.0
▪ 01 mark for each safeguard 2.0
(b)
(i) 01 mark for identification of each threat 3.0
(ii) 01 mark for each action that the firm should take for avoiding the situation in future 3.0

Answer #13 Q.5 Autumn 2018

(a)
(i) Familiarity and self-interest threat may arise because of long association of Qaiser on the audit of SML.
The threat is significant but it also needs to be further evaluated by considering whether SML’s management team
has changed or whether the nature or complexity of SML’s accounting and reporting issues has changed.
Following safeguards may be applied:
▪ Replace Qaiser with any other senior manager having appropriate experience.
▪ Asking a professional accountant who was not a member of the audit team to review the work.
▪ Regular independent internal or external quality reviews of the engagement.
(ii) Requesting CFO for expediting the delivery may create self-interest, familiarity, intimidation threat to the
independence of the audit team member.
The threats seem to be significant because the preferential treatment was not in the normal course of the business.
The audit team member who has obtained preferential treatment should not be made part of the audit team and
in case he is made part of the team, his work should be reviewed by an independent chartered accountant.
It should also be ensured that no such breach of ethics occurs in future and the firm should communicate and
strictly implement its policies in this regard. Firm may also consider taking disciplinary action against the
individual who had obtained the preferential treatment from SML.
(iii) Family and personal relationship between a member of the audit team and the Head of Marketing of SML may
create self-interest, familiarity and / or intimidation threats.
The threat would be significant because of the close relationship. The significance would also depend on Amjad’s
responsibilities on the audit team.
Following safeguards may be applied:
▪ Removing Amjad from the audit team
▪ Structuring the responsibilities of the audit team so that Amjad does not deal with matters that are within the
responsibility of his father.
▪ Review of work carried out by Amjad,
Ch # 13. Professional Ethics and Codes of Conduct Page 337

(b) A chartered accountant should refrain from disclosing confidential information acquired as a result of
professional and business relationships. However, under the following circumstances, a chartered accountant
may be required to disclose confidential information:
▪ Disclosure is required by law.
▪ There is a professional duty or right to disclose, when not prohibited by law.
▪ Disclosure is permitted by law and is authorized by the client.

Examiner Comments:
This question consisted of two parts. This was quite an easy question. However, the overall performance
was just average as 54% candidates secured passing marks. Part wise performance is discussed below:
(a) In this part the candidates were required to identify the possible threats and discuss their significance
and the relevant safeguards. Generally the performance was good. Some of the common mistakes
are discussed below:
▪ Many candidates mentioned relevant as well as irrelevant threats and loss marks. Some of them
even mentioned five to six threats. It must be noted that there only a limited number of threats
and hence if the students mention irrelevant threats along with the relevant ones, they would lose
marks.
▪ Significance of the threat were not discussed.

(b) It was a simple and easy question which was well answered by most of the candidates. However,
many candidates missed this part of the question altogether.

Marking Scheme:
(a)
▪ 0.5 mark for identification of each threat 3.5
▪ Evaluation of the situation and significance of the threat 3.0
▪ 0.5 mark for discussing each safeguard 3.5

(b) 01 mark for each circumstance where a chartered accountant may be required to disclose the
information obtained during the audit 3.0

Answer #14 Q.10(a) Spring 2019

(a) Offering business advice to the audit client in such an informal manner is a breach of professional behavior by the
audit junior. He also appears to be in breach of the fundamental principal of professional competence and due
care, unless he has the required competency to offer such an advice.
Moreover, business relationship between the member of the audit team and the audit client will create self-
interest threat and intimidation threat.
Due to above, the following safeguards may be implemented:
▪ Any work performed by the audit junior to date should be critically reviewed.
▪ We need to take steps to ensure that the client does not act on any advice that the junior provided.
▪ We should also assess any gaps in our internal training process; the junior should have received training prior
to his audit assignments so that he understood his role as an auditor.

Examiner Comments:
Threat due to the audit team member offering business advice to the CFO and its related safeguard was
not discussed.

Marking Scheme:
Marking Plan:
▪ Evaluation of the situation 1.0
▪ 0.5 mark for identification of each threat 1.0
▪ 01 mark for each safeguard 3.0
Ch # 13. Professional Ethics and Codes of Conduct Page 338

Answer #15 Q.8(a,c) Autumn 2019

(a) Self-interest threat, self–review threat or familiarity threat may be created. Shayan previously being the manager
finance was in a position to exert significant influence over the preparation of the PL’s accounting records which
would now be subject to his own review in the capacity of audit manager. Furthermore, since Shayan has worked
for three years in PL, he may be influenced by his ex-subordinates. Considering these facts, the threat appears to
be significant.

If Shayan had previously worked in PL until 30 June 2019

Since he resigned during the period covering by the audit, the threat created would be so significant that no
safeguard could reduce the threat to an acceptable level. Consequently, Shayan shall not be part of the audit team.
If Shayan had previously worked in PL until 30 June 2018
▪ Threats would only be created for decisions made or work performed by Shayan in the prior period, while
employed at PL and should be evaluated in the current period as part of the current audit engagement.
▪ If Shayan is appointed as the engagement manager then the work performed by him as a member of the audit
team should be independently reviewed.

(c) The lending of staff by a firm to an audit client will create a self-review threat, However, the threat may be reduced
to an acceptable level if:
▪ they are not involved in exercising discretionary authority; or
▪ they do not assume management responsibilities and the audit client should acknowledge its responsibility for
directing and supervising the activities of assigned personnel.
▪ an additional review of the work performed by the seconded staff may be carried out.
▪ they are not given audit responsibility in future for any function or activity that they performed or supervised.
▪ are not included in the audit team.

Examiner Comments:
(a) Many examinees correctly identified the threats but they failed to discuss their significance.
(c) Good performance was observed in this part of the question.

Marking Scheme:
(a)
▪ 0.5 mark for identification of each threat 1.5
▪ Discussion on significance of threat 4.0
▪ Mentioning safeguard to reduce the threat 1.5
(c)
▪ Identification of threat 0.5
▪ Up to 01 mark for each safeguard 3.5

Answer #16 Q.9 Spring 2020

(a)
▪ Whether the interests of all parties, including third/related parties whose interests may be affected, could be
harmed if the client consents to the disclosure of information.
▪ Whether all the relevant information related to the related parties is known and substantiated, to the extent it is
practicable.
▪ Since the requirement of the committee involves reporting on the arm’s length price of the transaction which
generally involves unsubstantiated facts or unsubstantiated conclusions, professional judgment shall be used in
determining the type of disclosure to be made, if any.
(b)
Threat
Close friendship of the audit manager with the managing director would cause a familiarity threat, because the audit
manager would be biased towards the managing director and would sympathetic to his interest or too accepting of
his work.
Ch # 13. Professional Ethics and Codes of Conduct Page 339

Safeguard
▪ Structure the audit manager’s responsibilities to reduce any potential influence over the assurance engagement;
or
▪ Review the assurance work from a chartered accountant; or
▪ Remove the audit manager from the engagement.
Threat s
▪ Offering of membership at reduced rate could cause a self-interest threat to the audit, because the recipients may
not want to lose their benefit, and therefore be biased in their audit work or not seek adjustments where there are
material issues in the financial statements.
▪ An intimidation threat may also arise because the audit client may threaten to make such offers public to degrade
the firm’s reputation.

Safeguards
Auditors are not allowed to accept such benefits unless their value is trivial and inconsequential. In this case, the value
of a reduced membership of a high end gym is unlikely to be trivial and inconsequential to audit staff members and
therefore the firm should reject this discounted offer of MD.

Examiner Comments:
(a) Examinees did not mention whether all the relevant information is known and substantiated, to the
extent it is practicable and the professional judgment required for determining the type of disclosure
to be made.
(b)
▪ Examinees identified the threat but did not evaluate it.
▪ Examinees did not mention about structuring the audit manager’s responsibilities to reduce any
potential influence over the assurance engagement.

Marking Scheme:
(a) 01 mark for discussing each factor that the firm should consider while disclosing client information
to the investigation committee 3.0

(b)
▪ 0.5 mark for identification of each threat 1.5
▪ Up to 01 mark for the evaluation of each identified threat 2.5
▪ 01 mark for discussing each safeguard required to mitigate the threats 4.0

Answer #17 Q.8 Autumn 2020

Familiarity and self-interest threat may arise because of using Baber on the audit of HL over a long period of time.

The threat is significant but it also needs to be further evaluated by considering whether HL’s management team has
changed or whether the nature or complexity of HL’s accounting and reporting issues has changed. Furthermore, due
to the long association of Babar with HL, he may be too sympathetic to their interest or too accepting of their work.
Following safeguards may be applied:

Replace Baber with any other manager having appropriate experience.

▪ Ask a professional accountant who is not a member of the audit team, to review the work.
▪ Regular independent internal or external quality reviews of the engagement.

CFO aggressive attitude towards the audit team and setting short deadlines for completion of audit indicates presence
of intimidation threat.

The threat is significant as audit firm may be pressurized into accepting CFO’s judgements even when these may not
be appropriate and due to very strict deadlines firm may not be able to obtain sufficient appropriate audit evidence.
This may result in the issuance of an inappropriate audit opinion.
Following safeguards may be applied:
Ch # 13. Professional Ethics and Codes of Conduct Page 340

▪ Independent review of areas requiring judgements.

▪ Assign highly skilled and competent audit team members.
▪ Discussing with those charged with governance the attitude of CFO towards the audit team.

Familiarity or intimidation threats are created as the manager finance has been a member of the previous audit team.
Being in the position of manager finance, the individual is responsible for the preparation of financial statements and
will be in continuous communication with the audit team. Due to these factors the threat seems significant.

Following safeguards may be applied:

▪ Assign individuals to the audit team who have sufficient experience in relation to the individual who has joined
the client; or
▪ Have a professional accountant review the work of the former member of the audit team.
▪ Modify the audit plan.

Examiner Comments:
▪ Examinees did not discuss the significance of the threat.
▪ In the case of threat related to aggressive attitude of the CFO, examinees were only able to mention
one safeguard i.e. discussing with those charged with governance the attitude of CFO towards the
audit team.
▪ Regarding the fact that one of the previous audit team members has recently joined HL as Manager
Finance, examinees perceived as Manager Finance joined the audit team and consequently
produced irrelevant answer.

Marking Scheme:
▪ 0.5 mark for identification of each threat 2.0
▪ 01 mark for discussing each safeguard required to mitigate each threat 6.0
▪ 01 mark for discussing the significance of each threat 4.0

Answer #18 Q.9(a) Autumn 2020

▪ Disclosure is permitted by law and is authorized by the client or the employer

▪ Disclosure is required by law
▪ There is a professional duty or right to disclose

Examiner Comments:
Examinees performed well in this question.

Marking Scheme:
01 mark for stating each situation 3.0

Answer #19 Q.9 Spring 2021

(i) A self-interest threat will be created when a member of the audit team may join the audit-client in near future, as
her decision making and objectivity may be impaired due to the potential employment with the client. It needs to
be ensured that refusal have been formally communicated to the audit manager before planning her in the audit
team. When it has been assured that she won’t be accepting the offer then no threat would be created and she
could be made part of the audit team.

If it can’t be ensured that Fizza will not accept the employment offer, then she should not be made part of the audit
team.
Ch # 13. Professional Ethics and Codes of Conduct Page 341

(ii) Accepting gifts or hospitality from an audit client may create self-interest, and familiarity threats. The audit team’s
objectivity may be compromised and they would be too accepting the audit clients work if they are treated with
gifts of considerable value. Intimidation threat would also arise as the client may threaten the firm of making such
offers public.

Even though the tickets would not have any direct cost to the audit client but they are still of significant value to
the audit team. Therefore, the audit team should not accept the tickets for the VIP enclosure of the final match.

(iii) The purchase of goods and services from an audit client by the firm does not generally create a threat to
independence if the transaction is in the normal course of business and at arm’s length. Since the expected
transaction is of significant value, a self-interest threat may be created.

Firm should ensure that no undue favors are accepted and that contract is awarded after a proper tendering
process.

(iv) Agreeing to accept taxation work on the percentage of the tax saved is essentially accepting a contingent fee. This
would create a self-interest threatas there will be pressure to gain the highest tax savings for the client and this
could tempt the audit firm to suggest inappropriate tax advice.
The threat created would be so significant that no safeguard could reduce the threat to an acceptable level,
therefore the fee must be based on time and experience for the job, not the contingent fee.

A self-review might also be created and therefore the firm should have separate teams for the taxation service and
the audit services.

Examiner Comments:
▪ Examinees did not evaluate the significance of the threats.
▪ Examinees did not identify the need to ensure formal communication of refusal to the audit
manager and that there would be no threat if the above was ensured.
▪ Examinees concluded that the audit firm cannot enter into any business relationship with the audit
client. In fact, it can enter into such relationship subject to compliance with certain safeguards.
▪ Examinees did not discuss about negotiating a different basis of deciding the fee related to taxation
services.

Marking Scheme:
▪ 0.5 mark for identification of each threat 3.0
▪ 0.5 mark for evaluation of each threat 5.0
▪ 01 mark for mentioning each safeguard 4.0

Answer #20 Q.2b,c Autumn 2021

(b) As per the “Code of Ethics” for Chartered Accountants, the practicing chartered accountants are not allowed to
publicize their services in a manner done by other normal businesses.

However, appropriate newspapers or magazines may be used to inform the public of the establishment of a new
practice, of changes in the composition of a partnership, or of any alteration in the address and telephone number
of a practice. The following should be considered before placing the announcement:
▪ Such announcements should be limited to a bare statement of facts in an objective manner.
▪ Consideration should be given to the appropriateness of the area of distribution of the newspaper or
magazine and number of insertions.
▪ The basic principles of legality, decency, clarity, honesty and truthfulness should be followed; and
▪ Do not project an image, which is inconsistent with that of a professional person bound to high ethical and
technical standards.

The purchase of services from an audit client by a firm does not usually create a threat to independence if the
transaction is in the normal course of business and at arm’s length. However, the magnitude of the transaction
needs to be evaluated to substantiate that whether a self-interest threat may be created. The firm should evaluate
Ch # 13. Professional Ethics and Codes of Conduct Page 342

that the whether the amount of discount is material to the firm and would it impair the audit team’s objectivity. It
also needs to be evaluated that whether such discounts are also offered to other clients.

The firm may accept the discounted offer only if other clients are also given similar sort of offers and the
advertisement is in the compliance with the above mentioned principles.

(c) A self-review threat may be created as the firm would be auditing the same financial information which the team
had worked on.
An advocacy threat would also be created as the firm’s employees might promote the in-correct position adopted
by them to the point that their objectivity is impaired.

A familiarity threat would also be created as the seconded employees will become too familiar with the
management of the audit client.

The following safeguards may be adopted to address the above threats:

▪ Conducting an additional review of the work performed by the loaned personnel.
▪ Not including the loaned personnel as an audit team member.
▪ Not giving the loaned personnel audit responsibility for any function or activity that the personnel had
performed.
▪ Providing such assistance only for a short period of time.
▪ Not assuming management responsibilities and the audit client is responsible for directing and supervising
the activities of the personnel.

Examiner Comments:
(b)
▪ Examinees only discussed one aspect of the question i.e. the threats related to publicity of the
services or the audit client offering significant discounts.
▪ While discussing the threat related to advertisement, examinees did not mention that
appropriate newspapers or magazines may be used to inform the public of the establishment of
a new practice and what needs to be complied with when placing such an advertisement.

(c)
Examinees did not mention the following safeguards:
▪ Not giving the loaned personnel audit responsibility for any function or activity that the personnel
had performed.
▪ Providing the assistance only for a short period of time.
▪ Not assuming management responsibilities and ensuring that the audit client is responsible for
directing and supervising the activities of the personnel.

Marking Scheme:
(b)
▪ Discussion on whether advertisement can be made 1.0
▪ Matters to be considered before placing the announcement in newspaper 3.0
▪ Discussion on discount offered by the audit client 3.0
(c)
▪ Identifying and discussing the threats 4.0
▪ 01 mark for each safeguard 3.0

Answer # 21 Q.4 Spring 2022

Self-interest threat to compliance with the principles of integrity or professional behavior might be created. As there
may be questionable issues associated with the client owners because of their registration abroad in tax heaven
countries, it might create threat(s) of client’s involvement in illegal activities, dishonesty, questionable financial
reporting practices or other unethical behavior.
Ch # 13. Professional Ethics and Codes of Conduct Page 343

To further evaluate this threat, we will have to obtain:

▪ knowledge and understanding of:
▪ the client;
▪ who are the eventual owners, management and those charged with governance; and
▪ business activities.
▪ the client’s commitment to address the questionable issues raised by the firm.

A self-interest threat to compliance with the principle of professional competence and due care is created if the
engagement team does not possess, or cannot acquire the competencies to perform the professional services.

Factors that are relevant in evaluating the level of such a threat include the following:
▪ Understanding of the nature of the DTL’s business; what type of IT services does it provide.
▪ The complexity of DTL’s operations.
▪ The requirements of the engagement.
▪ The purpose, nature and scope of the work to be performed.
▪ Knowledge of relevant industries or subject matter.
▪ Experience with relevant regulatory or reporting requirements.
▪ The existence of quality control policies and procedures designed to provide reasonable assurance that
engagements are accepted only when they can be performed competently.

The threats to professional competence and due care can be reduced by the following safeguards:
▪ Assigning sufficient engagement personnel with the necessary competencies.
▪ Agreeing on a realistic time frame for the performance of the engagement.
▪ Using experts where necessary.

Examiner Comments:
▪ Examinees did not evaluate the threat related to client acceptance.
▪ While evaluating the threat related to engagement acceptance, examinees did not discuss the
following factors:
- Understanding of the nature of the client's business.
- Complexity of the client's operations.
- Knowledge of relevant industry and subject matter.
- Existence of quality control policies and procedures.

Marking Scheme:
▪ 0.5 mark for identification of threats 1.0
▪ 0.5 mark for identification of fundamental principles 1.0
▪ 01 mark for discussion on each threat 2.0
▪ 01 mark for each factor for evaluating the threat 7.0
▪ 01 mark for each safeguard 2.0

Answer # 22 Q.1(c) Autumn 2022

There is a self-review threat because Ahmed may not appropriately evaluate the work performed by him in the role
of accounting and tax consultant.

There is also a familiarity threat due to Ahmed’s long association with MPL, and he might be too sympathetic to their
interests or too accepting of their work.
Ahmed’s objectivity may be compromised because of his bias, conflict of interest or undue influence of the audit client.

Evaluation of significance of threat:

Self-review threat
The consultancy service related to preparation of annual budget and management accounts may not pose a significant
threat as the preparation of annual budget is based on expected amount which is not subject to audit. Therefore, there
may not be a self- review threat.
Ch # 13. Professional Ethics and Codes of Conduct Page 344

It needs to be ascertained whether the preparation of management accounts is based on the historical amounts and
whether any adjustments are made to the accounting records on the basis of the management accounts prepared by
Ahmed.

However, the calculation of tax provision would be subject to audit which would result in a significant self-review
threat.

Familiarity threat
The closeness of Ahmed’s relationship with the senior management and frequency of interaction with the
management needs to be determined. In any case this is a significant threat.
It also needs to be determined that since how long Ahmed has been providing these services to the audit client.

Examiner Comments:
▪ The examinees did not explain and evaluate the identified threats.
▪ Examinees mentioned safeguards that were not required.

Marking Scheme:
▪ 0.5 mark for identification of each threat and the relevant fundamental principle 1.5
▪ Up to 01 mark for explaining the threat to the fundamental principle 2.0
▪ Up to 01 mark for evaluating the significance of the threat 3.5

Answer # 23 Q.2 Spring 2023

(a) There is an intimidation threat to professional competence and professional behavior. Since the audit team is
facing pressure because of tight deadlines, this may lead the audit team to compromise on the audit quality. The
audit team may reduce the sample size, increase the materiality level or adopt other ways to meet the deadline.
Preparation of the fixed asset schedule is the responsibility of the management. A self- review threat to objectivity
will be created if the audit team member prepares the fixed asset schedule himself. The audit team member will
have to review his own schedule which will be part of the financial statements and his professional judgment
would be biased due to this fact.

(b) The insurance industry is markedly different from other businesses and requires a specific knowledge base that
the audit team must possess. In addition, the financial statements of an insurance company are distinct from those
of other companies, making it necessary for the audit team to possess specialized knowledge in this area.
Furthermore, insurance transactions and their accounting are inherently complex in nature, necessitating a
thorough understanding on the part of the audit team.
Since only two personnel have experience auditing insurance clients, there is a self- interest threat to compliance
with the principles of professional competence and due care. Despite this, the firm may accept the client due to
financial and reputational interests, and may subsequently be unable to deliver competent services based on
professional standards, potentially discrediting the profession.
Given the current situation, it is necessary to assess:
▪ whether the knowledge possessed by the two experienced personnel can be effectively transferred to other
team members to ensure a successful audit.
▪ that only one partner has relevant experience and consequently, it is unclear who will conduct the mandatory
quality control review. It should be noted that the engagement cannot proceed without an effective quality
control review.
Given the high level of threat posed by these factors, the firm should not accept this engagement. However, if the
firm decides to accept the engagement, the following safeguards should be implemented:
▪ Providing adequate training to the staff to ensure that only personnel with the necessary competencies are
assigned to the engagement.
▪ Hiring staff members who possess experience and knowledge of the insurance industry.
▪ Agreeing upon a realistic time frame for the completion of the engagement.
▪ Using experts where necessary.
Ch # 13. Professional Ethics and Codes of Conduct Page 345

Examiner Comments:
(a)
▪ Examinees failed to identify and evaluate the threat posed by the strict deadline for the completion
of the audit.
▪ Examinees discussed safeguards that were not required.
(b)
▪ The question required the evaluation of threats in the context of accepting the engagement. However,
the examinees primarily focused on client acceptance procedures.
▪ Examinees failed to discuss that specialize knowledge was required for auditing an insurance client.
▪ Examinees also failed to mention that only one partner possessed relevant experience, raising the
question of who would conduct the mandatory quality control review.
▪ The following safeguards were generally not mentioned:
- Providing adequate training to staff members to ensure that only personnel with the necessary
competencies are assigned to the engagement.
- Hiring staff members who possess experience and knowledge of the insurance industry.

Marking Scheme:
(a)
▪ 0.5 mark for identification of threat and the fundamental principle 2.5
▪ Explanation of threat to the fundamental principle 3.5
(b)
▪ 0.5 mark for identification of threat and the fundamental principle 1.0
▪ Evaluation of threat to the fundamental principle 5.0
▪ 01 mark for each safeguard 4.0

Answer # 24 Q.1(a) Autumn 2023

Alia has been offered a job by the audit client; therefore, there are self-interest, familiarity and intimidation threats to
the fundamental principles of objectivity. In order to secure the employment, offer, Alia may overlook audit issues.
Furthermore, as a result, she would also gain familiarity with the individuals, responsible for her hiring and the audit
team assigned to the audit client may also be familiar with Alia in case she accepts the offer. The audit client may also
intimidate her to overlook issues if she is employed by the audit client. Therefore, Alia might compromise her
professional judgment due to bias towards the audit client.

The client's expectation that she would share the data of the competitors poses a self- interest threat to the
fundamental principles of integrity, confidentiality, and professional behavior. The ICAP code of ethics prohibits
disclosing confidential information acquired as a result of professional relationships outside the firm without proper
and specific authorization. Any disclosure of confidential information would discredit the profession and the audit
firm. If Alia accepts the client’s employment offer she would not be straightforward and honest in her negotiation as
she did not inform the client that she could not disclose the information obtained during the audit.

Examiner Comments:
▪ Examinees did not identify and explain the fundamental principles and threats related to professional
behavior, familiarity, and intimidation.
▪ Majority of the examinees only identified the threats and the fundamental principles but did not
explain them in the context of the given scenario.
▪ Examinees mentioned safeguards that were not required.

Marking Scheme:
▪ 0.5 mark for identifying the threat and the fundamental principle 3.0
▪ Up to 01 mark for explanation of each threat to the fundamental principle 5.0