Audit and Assurance

(ii) Design Limited has contacted Shamsuddin and informed him that they are willing to appoint him
as their external auditor in the next AGM at a fee of Rs. 200,000 if he completes the audit in a
month. However, in case of delay in the audit work the audit fee will be reduced to Rs. 150,000.
Required:
Shamsuddin is inclined to accept the above offers. Discuss the options available with him in each of the
above situations.

4 Core concepts
(a) Briefly highlight the managemHQW¶V responsibilities relating to the financial statements?
(b) During the audit team planning meeting, a member of the audit team passed a comment that based
on past experience with the client, he was confident that the management of the client was honest
and there was no issue as regards management integrity or risk of fraud in the Company. The
audit manager responded that the auditor should always maintain an attitude of professional
scepticism throughout the audit.
Required:
Briefly describe µ$XGLWScepticism¶DQG elaborate on the response of the audit manager.

5 Threats
(a) $FKDUWHUHGDFFRXQWDQWLVUHTXLUHGWRFRPSO\ZLWKILYHIXQGDPHQWDOSULQFLSOHVVSHFLILHGE\,&$3¶V
Code of Ethics. However, compliance with the fundamental principles may potentially be
threatened by a broad range of circumstances.
Required:
Briefly describe the categories of threats that may potentially affect compliance with the
fundamental principles. Give two examples for each category.
(b) Discuss the threats and the related safeguards in each of the following situations:
(i) 6DOHHPLVWKHDXGLWVHQLRUDW0DQJR,QGXVWULHV/LPLWHG 0,/ 0,/¶VILQDQFHPDQDJHUKDV
requested him to provide the residential addresses of the engagement manager and the
engagement partner. The finance manager wants WRVHQGWKHPRQHRI0,/¶VODWHVWSURGXFW
(ii) Akram is the audit senior engaged on the audit of Dragon Limited (DL). He has informed the
audit manager that he has been offered a job by DL and that he would be joining DL from 1
April 2018. The audit is expected to be completed on 15 March 2018.
(c) Amjad is the audit senior at Orange Limited (OL), a software house. OL has adopted IFRS 15
µ5HYHQXHIURP&RQWUDFWVZLWK&XVWRPHUV¶IRUSUHSDUDWLRQRILWV financial statements for the year
ending 31 March 2018. However, the manager finance of OL is indecisive as regards revenue
recognition on certain contracts.
He has asked Amjad to suggest accounting treatment of such contracts in accordance with IFRS
15. Amjad does not have in-depth knowledge of this IFRS and therefore, he has consulted his
friend who has recently attended a workshop on IFRS 15.
Required:
i. Discuss the threats in the above situation.
ii. What actions the firm should take to ensure that such situation is avoided in

6 Burewala and Kamal

Discuss the categories of threats that may be involved in each of the following independent
situations and advise the partners of the concerned firm with regard to the possible course of action that
may be followed, in each case.
(a) Burewala Bank Limited (BBL) is a listed audit client of Umer and Company, Chartered Accountants
(UCC). BBL has granted a house loan of Rs. 5 million to a partner in UCC.
(b) Kamal was the audit manager during the last year¶V annual audit of Faisalabad Textile Mills Limited
(FTML). He has joined FTML as their Manager Finance prior to the commencement of the current
year¶V audit.

© Emile Woolf International 14 The Institute of Chartered Accountants of Pakistan

Audit and Assurance

5 Threats
(a) Following are the categories of threats that may potentially affect the fundamental principles:
(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

© Emile Woolf International 78 The Institute of Chartered Accountants of Pakistan

 Answer bank: Objective test and long-form answers

‰ 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.
(b) (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:
i. ‰ Removing the individual from the audit team; or
‰ A review of any significant judgments made by that individual while on the team.

(c) Following are the threats in the mentioned situation:

‰ Suggesting the client about accounting treatment would create a self-review threat,
because that accounting treatment will also be the subject matter of the assurance
engagement.
‰ (YHQ WKRXJK $PMDG¶V IULHQG KDV DWWHQGHG WKH ZRUNVKRS RQ ,)56-15, it does not
ii. 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.
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.

© Emile Woolf International 79 The Institute of Chartered Accountants of Pakistan

STEPS TO TACKLE THE ETHICAL / PROFESSIONAL ISSUES

Identify Threat

Evaluate / Is
No
Threat OK!
Significant?

Y
e s

Eliminate the Interest / Decline

Is Safeguard No
/ Not Accept / Discontinue the
Available?
Engagement

Y
e
s

Identify + Apply Safeguards to

Eliminate / Mitigate the Threat
 SAFEGUARDS AGAINST THREATS TO INDEPENDENCE (INTEGRITY

AND OBJECTIVITY)

1. Disposing the Interest (Financial)

2. Withdraw/Replace Specified Staff from the Engagement Team

3. Withdraw/Replace Specified Partner from the Engagement Team

4. Different Staff/Separate Departments for Assurance & Non-Assurance

Engagements

5. Discuss/Keep Audit Committee/Those Charged With Corporate

Governance Informed

6. Use Independent Partner to Review Work

7. Internal/External Quality Control Review

8. Quality Control Procedures for Disclosures/Notifications/Highlighting

9. Maintain Record for Proper Work Done

10. Rotation of Senior Staff

11. Consult Third Parties

12. Client Acknowledges its Responsibility

13. Engagement Letter

14. Modification of Audit Plan

15. More Experienced Personnel

16. Chinese Wall (Different Audit Groups/Practically Firms within a Firm)

17. Withdraw from the Engagement