Certifi cate Level

Assurance
C h a p t e r - 15 : I ntegrity, objectivity and independenc
Topics Today

• Definition of Integrity, objectivity and independence

• Why do independence and objectivity matter so much?
• Threats and safeguards
• Accepting New Clients
• Resolving Ethical Conflicts
• Conflict of Interest for the Accountant
• Sample Questions and Answer

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Integrity, objectivity and
independence- Definitions
Integrity: This means that an accountant must be straightforward and honest.
It implies fair dealing and truthfulness.

Objectivity: This is a state of mind that excludes bias, prejudice

and compromise.
Independence
Independence ensures that auditors don't have any financial interest in the
clients in which they are auditing. It is related to and underpins objectivity – it is
freedom from situations and relationships that make it probable that a
reasonable and informed third party would conclude that objectivity either is
impaired or could be impaired.

In the other words, objectivity relates to the accountant’s mind, and

independence relates to the circumstances surrounding the situation.

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Why do independence and objectivity matter so
much?
Independence and objectivity matter because of:
 The expectations of those directly affected, particularly the members of the company. The
audit should be able to provide objective assurance that the directors can never provide on
the financial statements.
 The public interest.

What can the auditor do to preserve objectivity?

The simple answer is to withdraw from any engagement where there is the slightest threat to
objectivity.
However, there are disadvantages in this strict approach.
 Clients may lose an auditor who knows their business.
 It denies clients the freedom to be advised by the accountant of their choice.

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Threats and safeguards

Self-interest threat:

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Financial
Interests
1. Financial interest exists where an assurance firm has a financial interest in a client's affairs;
for example, an assurance firm owns shares in the client, or is a trustee of a trust that holds
shares in the client.

 Direct financial interest:

• One which is owned directly by and under the control of an individual or entity or
• Beneficially owned through a collective investment
over which the individual/entity has control.

 Indirect financial interest: One beneficially owned through intermediaries, over which
the individual/entity has no control.

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Financial
Interests
Who are not allowed to have financial interest?
The parties listed below are not allowed to own a direct financial interest or an indirect material
financial interest in a client:
• The assurance firm
• Any partner in the assurance firm
• Any person in a position to influence the conduct and outcome of the engagement (e.g. a
member of the assurance team)
• An immediate family member of such a person.

Restriction imposed by Companies Act:

According to Companies Act 1994, Section 212, a person who is a Director, or the holder of shares
exceeding 5% in capital of the company should not be appointed as auditor.
Restriction imposed by BSEC:
As per BSEC Notification dated 03 June 2018 (gazette on 10 June 2018) “ No Partner or employer
of the External Audit firms shall posses any share of the company they audit at least during the
tenure of their audit assignment of that company”

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Financial
Interests
Safeguards:
• Disposing of the interest
• Removing the individual from the team, if required
• Keeping the client's audit committee informed of the situation
• Using an independent partner to review work carried out if necessary

QC Requirements for the Audit Firm:

Assurance firms should have Quality Control (QC) procedures requiring staff to disclose relevant
financial interests for themselves and immediate family members. They should also foster a
culture of voluntary disclosure on an ongoing basis so that any potential problems are identified
on a timely basis.

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Close business
relationships
02. Close business relationships a close business relationship will involve a commercial common
financial interest, which in addition to a self-interest threat, could cause an intimidation threat.
Examples :
• Operating a joint venture between the firm and the client, or between the firm and a
director
or other senior manager of the client.
• Arrangements to combine one or more services or products of the firm with one or more
services or products of the assurance client and to market the package with reference to both
parties
• Distribution or marketing arrangements under which the firm acts as distributor or marketer
of the assurance client's products or services or vice versa
• Other commercial transactions, such as the audit firm leasing its office space from the
assurance client.

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Close business
relationship
Suggested Actions/Safeguards:
 It is necessary for the partners to judge the materiality of the interest and therefore its
significance. However, unless the financial interest is clearly immaterial and the relationship to
the firm and its client clearly insignificant, an assurance provider should not participate in such a
venture with an assurance client.

 If an individual member of an assurance team had such an interest, he should be removed from
the assurance team.

 Purchasing goods and services from an assurance client in the ordinary course of business on an
arm's length basis does not constitute a threat to independence. However, if there are a
substantial number of such transactions, there may be a threat to independence and safeguards
may be necessary.

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Employment with
assurance
3. Employment with client
assurance client
Dual employment (the same person being employed by both an assurance firm and a client) is not
permitted. It is also possible that staff might transfer between an assurance firm and a client, or that
negotiations or interviews to facilitate such movement might take place. Both situations are a threat
to independence:
• An assurance team member might be motivated by a desire to impress a future possible
employer (objectivity is therefore affected)
• A former partner turned Finance Director has too much knowledge of the firm's systems and
Procedures.
These sorts of situations can present self-review, intimidation and familiarity threats.
Various safeguards might be considered:
• Modifying the assurance strategy
• Ensuring the assurance engagement is assigned to someone of sufficient experience as
compared with the individual who has left
• Involving an additional professional accountant not involved with the engagement to review the
work done
• Carrying out a quality control review of the engagement
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Partner on client board & Family and personal
relations
4. Partner on client board
A partner or employee of an assurance firm should not serve on the board of an assurance client.
This can also cause a self-review and/or a management threat.
It may be acceptable for a partner or an employee of an assurance firm to perform the role of
company secretary for an assurance client, if the role is essentially administrative.

5. Family and personal relationships

Family or close personal relationships between assurance firm and client staff could seriously
threaten independence. Each situation has to be evaluated individually. Factors to consider are:
• The individual's responsibilities on the assurance engagement
• The closeness of the relationship
• The role of the other party at the assurance client.
When an immediate family member of a member of the assurance team is a director, an officer
or an employee of the assurance client in a position to exert direct and significant influence over
the subject matter information of the assurance engagement, the individual should be removed
from the assurance team.

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Gifts and hospitality & Loans and
guarantees
06. Gifts and hospitality
Unless the value of a gift is clearly insignificant, or hospitality, is reasonable in terms of its
frequency, nature and cost, a firm or a member of an assurance team should not accept them.

07. Loans and guarantees

The advice on loans and guarantees falls into two categories:
• The client is a bank or other similar institution
• Other situations

If a loan or guarantee of a loan is made by an audit client which is a bank or NBFI, then this is not
acceptable if the loan is not made under normal lending procedure. However, safeguard is to
taken by the auditor.

An assurance firm or member of the assurance team should not enter into any loan or
guarantee arrangement with a client that is not a bank or similar institution.

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Overdue Fees & Percentage or
Contingent Fees

08. Overdue fees

Firms should guard against fees building up and being significant by discussing the issues with
those charged with governance (more specifically, the audit committee), and, if necessary, the
possibility of resigning if overdue fees are not paid.

09. Percentage or contingent fees

Contingent fees: Fees calculated on a predetermined basis relating to the outcome or
result of a transaction or the result of the work performed.
A firm should not enter into any fee arrangement for an assurance engagement under
which the amount of the fee is contingent on the result of the assurance work or on
items that are the subject matter of the assurance engagement.

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High
Percentage of
Fees
10. High percentage of fees
A firm should be alert to the situation arising where the total fees generated by an assurance
client represent a large proportion of a firm's total fees.
Safeguards in these situations might include:
 Discussing the issues with the audit committee
 Taking steps to reduce the dependency on the client
 Obtaining external/internal quality control reviews
 Consulting a third party such as ICAB.
If the client is PIE and for two consecutive years, the fee is more than 15% of total fees
received by a firm, then
• Disclose the fact to TCWG
• Carry out an engagement quality control review of the second year engagement , either
a “Pre Issuance Review” or “Post Issuance Review”.
If the audit fee is significantly exceed 15% only “Pre Issuance Review” is sufficient

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Lowba
lling
11. Lowballing
When a firm quotes a significantly lower fee level for an assurance service than would have
been charged by the predecessor firm, there is a significant self-interest threat. If the firm's
tender is successful, the firm must apply safeguards such as:
• Maintaining records such that the firm is able to demonstrate that appropriate staff and
time are spent on the engagement;

• Complying with all applicable assurance standards, guidelines and quality control
procedures.

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Self Review
Threat

The key area in which there is likely to be a self-review threat is where an assurance firm
provides services other than assurance services to an assurance client (providing multiple
services).
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Self Review
Threat
1. Service with an assurance client
Individuals who have been a director or officer of the client, or an employee in a position to exert
direct and significant influence over the subject matter information of the assurance engagement in
the period under review or in recent years should not be assigned to the assurance team.
Here the key threat is self-review where a member of the engagement team has to report on work
they prepared originally, or elements of the financial statement they had responsibility for at the
client, but there is also a risk of self-interest and familiarity threats.

If an individual had been closely involved with the client prior to the time limits set out above, the
assurance firm should consider the threat to independence arising and apply appropriate
safeguards, such as:
• Obtaining a quality control review of the individual's work on the assignment
• Discussing the issue with the audit committee

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Self Review
02. Preparing accounting records and financial statements
Threat
There is clearly a significant risk of a self-review threat if a firm prepares accounting records and
financial statements and then audits or reviews them.
On the other hand auditors routinely assist management with the preparation of financial
statements and give advice about accounting treatments and journal entries.

Safeguards include:
• Using staff members other than assurance team members to carry out work
• Implementing policies and procedures to prohibit the individual providing such services from
making any managerial decisions on behalf of the assurance client
• Requiring the source data for the accounting entries to be originated by the assurance client
• Requiring the underlying assumptions to be originated and approved by the assurance client

The rules are more stringent when the client is listed. In the BSEC Notification Dated 03 June
2018 (gazette date is 10 June 2018) states that firms should not be involved in other services.

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Self Review
Threat
03. Valuation Services
If an audit firm performs a valuation that will be included in financial statements audited by the
firm, a self review threat arises and also a management threat might arise.
If the valuation is for an immaterial matter, the audit firm should apply safeguards to ensure that
the risk is reduced to an acceptable level. Matters to consider when applying safeguards are the
extent of the audit client's knowledge of the relevant matters in making the valuation and the
degree of judgement involved, how much use is made of established methodologies and the
degree of uncertainty in the valuation.
Safeguards include:
• Second partner review
• Confirming that the client understands the valuation and the assumptions used
• Ensuring the client acknowledges responsibility for the valuation
• Using separate personnel for the valuation and the audit

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Self Review
04. Taxation services
Threat
The meaning of the term 'taxation services' is wide. It can be broken down into three general
categories:
The audit firm
• Provides advice to the audit client in one or more specific matters at the request of the client.
• Undertakes a substantial proportion of the tax planning for the audit client.
• Promotes tax structures or products to the audit client, the effectiveness of which is likely to
be influenced by the manner in which they are accounted for in the financial statements.
Tax services can cause self-review, self-interest, management and advocacy threats. Safeguards to
mitigate these threats include:
• Tax services being provided by partners and staff with no involvement in the audit of financial
statements
• Tax services being reviewed by an independent tax partner or senior tax employee
• Obtaining external independent advice on tax work
• Tax computations prepared by audit staff members being reviewed by a partner/staff member
of appropriate experience who is not a member of the audit team
• An audit partner not involved in the audit engagement reviews whether the tax work has been
properly and effectively addressed in the context of an audit of the financial statements
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Self Review
Threat
5. Internal audit services
A firm may provide internal audit services to an audit client in certain situations. It should ensure that
the client acknowledges its responsibility for establishing, maintaining and monitoring the system of
internal controls. It may be appropriate to use safeguards such as ensuring that an employee of the
client is designated responsible for internal audit activities and that the client approves all the work
that internal audit does. However, the key threat in providing internal audit services is self-review.

6. Corporate finance services

Certain aspects of corporate finance services will create self-review threats that cannot be reduced to an
acceptable level by safeguards. Therefore, assurance firms are not allowed to promote, deal in or underwrite
an assurance client's shares. They are also not allowed to commit an assurance client to the terms of a
transaction or consummate a transaction on the client's behalf.
Other corporate finance services, such as assisting a client in defining corporate strategies, assisting in
identifying possible sources of capital and providing structuring advice may be acceptable, provided that
safeguards, such as using different teams of staff, and ensuring no management decisions are taken on behalf
of the client are in place.
Note that corporate finance services can also constitute an advocacy threat if the audit firm is representing
the interests of the client.
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Self Review
Threat
7. Information technology services
The key threats in providing IT services, such as designing and implementing a new IT system, is self-
review.

8. Litigation support services

An example of a litigation support service is acting as an expert witness. Such services can
cause self-review threats if they involve a subjective estimation of the likely outcome of a
pending legal matter material to the financial statements. In addition, advocacy threats may
arise.
Litigation support services that do not involve such subjective estimations are not prohibited,
provided that appropriate safeguards have been established.

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Self Review
Threat
09. BSEC Notification
As per BSEC Notification dated 03 Jan 2018 (Gazette date is 10 Jan 2018), the issuer company
shall not engage its external or statutory auditors to perform the following services of the
company, namely:-

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Advocacy
Threat

An advocacy threat arises in certain situations where the assurance firm is in a position of taking
the client's part in a dispute or somehow acting as their advocate. The most obvious instances of
this would be when a firm offered legal services to a client and, say, defended them in a legal case.
An advocacy threat might also arise if the firm carried out corporate finance work for the client; for
example, if the audit firm were involved in advice on debt restructuring and negotiated with the
bank on the client's behalf.

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Familiarity
Threat
A familiarity threat is where independence is jeopardized by the audit firm and its staff becoming
over familiar with the client and its staff. There is a substantial risk of loss of professional
skepticism in such circumstances.
We have already discussed some examples of when this risk arises, because very often a
familiarity threat arises in conjunction with a self-interest threat.

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Intimidation
Threat

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Intimidation
Actual and threatened litigation
Threat
The most obvious example of an intimidation threat is when the client threatens to sue, or indeed
sues, the assurance firm for work that has been done previously. The firm is then faced with the risk
of losing the client, bad publicity and the possibility that they will be found to have been negligent,
which will lead to further problems. This could lead to the firm being under pressure to produce an
unqualified audit report when they have been qualified in the past, for example.
Factors to consider are, if the situation arises:
• The materiality of the litigation
• The nature of the assurance engagement
• Whether the litigation relates to a prior assurance engagement
The following safeguards could be considered:
• Disclosing to the audit committee the nature and extent of the litigation
• Removing specific affected individuals from the engagement team
• Involving an additional professional accountant on the team to review work
However, if the litigation is at all serious, it may be necessary to resign from the engagement, as the
threat to independence is so great. However it is not required to resign immediately in circumstances
where a reasonable and informed third party would not regard it in the interests of the shareholders
for it to do so.
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Accepting
New Client
We outlined the issues relating to accepting new clients in Chapter 2. We stated that auditors must
consider any ethical issues that might be a bar to acceptance. Any of the ethical issues outlined
above could constitute a barrier to acceptance. In addition, the assurance firm must consider
whether there appear to be any factors at the client that could be a threat to the firm's integrity or
professional behavior. These are likely to arise from:

• Illegal activities of the client

• Apparent dishonesty of the client
• Questionable accounting practices of the client

It may not be possible to reduce these risks, in which case, the assurance service should be
declined. However, some safeguards, such as obtaining a commitment from those charged
with governance to improving corporate governance, might be sufficient to make acceptance
possible.

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Resolving
Ethical Conflict
The ICAB Code sets out a framework that professional accountants can follow when seeking to
resolve ethical problems. It states that the professional accountant should consider:
• The relevant facts
• The relevant parties
• The ethical issues involved
• The fundamental principles related to the matter in question
• Established internal procedures
• Alternative courses of action
The accountant should then consider which is the course of action that most aligns with the
fundamental principles.
If the accountant cannot determine the best course of action himself, he should refer it to the
relevant department within his firm for more advice.
It is generally better for firms to come to conclusions 'in-house', but if needs be, further advice
can be sought from ICAB.
This is a useful structure for you to use when considering ethical problems in the assessment.
Think about the facts, parties, issues and fundamental principles involved and try and see the
best course of action. Remember that as a trainee, referral to a more senior member of staff may
be your most appropriate course of action.
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Conflict ofTheInterest for the
Code of Ethics gives advice to accountants in such conflicting situations.
Accountant It is important to remember that accountants in a non-practice environment are subject to the
same fundamental principles as accountants in practice are. However, an accountant in business (as
opposed to practice) may find that he is faced with implicit or explicit pressure to:
• Act contrary to law or regulation
• Act contrary to technical or professional standards
• Facilitate unethical or illegal earnings management strategies
• Lie to or mislead auditors or regulators
• Issue or be associated with published reports (for example, financial statements, tax
statements) that materially misrepresent the facts

The accountant in question should evaluate the threats that such situations bring (for example, the
accountant may face severe intimidation and self-interest threats if he could lose his job by not
complying), and safeguards should be applied. These include:
• First, resolve internally using a formal dispute resolution process or audit committee
• Second, obtaining advice from ICAB
• Third, seeking legal advice
• As a last resort, resign
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Sample Questions
and Answers
01. Threat Types:
In each of the following cases, indicate the principal threat that the assurance firm is facing.

(a) Mr. Abdul Halim recently resigned as Finance Director of Orpo Limited. Halim joined the
assurance firm that provides the audit to Orpo after his notice period of six months.

(b) NUA Limited has suggested to the engagement partner that a qualified audit report would be
unacceptable in the current year because the company is considering a flotation.

(c) Wafee Limited has requested that the audit team should not be changed from the previous
year as they got on well with client staff.

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Sample Questions and Answers
02. Engagement Acceptance:
Scenario A: Notorious Limited is a small company that has had a number of NBR investigations in
recent years. The company has had to pay a number of back taxes where incorrect figures had been
declared. Recently a director was banned from being a director for five years for wrongful trading. This
person has left Notorious and a new managing director has been appointed, who has intimated to the
firm that improved corporate governance is at the top of his agenda.
 Do not accept.
 Accept with safeguards.
 Accept with no safeguards.

Scenario B: Shahil Ltd is a listed company that has good references from all parties whom the firm
made enquiries of. It has requested that Touhid & Co. both prepare and audit the financial
statements. It does not feel that these services are divisible.
 Do not accept.
 Accept with safeguards.
 Accept with no safeguards.

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Sample Questions
03. Audit Trainee Issues
and
You are aAnswers
trainee in the audit department of Harris & Co. You have recently started your training,
have not attended any courses and have attended one audit, where you carried out some simple
audit tests under supervision from the audit senior.
An audit manager has asked you to attend the inventory count of Teximco, which has a large amount
of inventory, which is subject to an annual inventory count. There are very few other controls over
the inventory at Teximco. Inventory is highly material to Teximco‘s financial statements. No other
audit staff will be attending the inventory count.

Which of the following is the most appropriate course of action for you to take:
 Perform the work
 Refer to training partner
 Contact ICAB

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Sample Questions
and Answers
04. Conflict of Interest:
Sharmin is a qualified accountant. She has recently moved out of practice and taken up the position of
financial controller of a small, non-listed company, DexicoLimited. The company has a short term cash
flow problem.
Sharmin was recently called into the board meeting and asked if she could defer some income from the
previous financial year so as to influence when the tax (both VAT and corporation tax) would be due on
those sales. The directors were insistent that such deferral was necessary and that she should consider
this request more in the nature of an order.
Which two of the following possible courses of action are likely initially to be the most appropriate in
this situation?
 Report her concerns to the audit committee of the board of directors
 Seek advice from ICAB
 Take steps in line with the company's formal dispute resolution process
 Take advice from her legal advisors
 Resign her job

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Sample Questions and
Answers
05. Others:

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Sample Questions and
Answers

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Thank
you