CODE

OF
ETHICS
 CODE OF E T H I C S
Cash
nt Flows
Chang
e m e e s in
Financial Statements are to be audited by an e stat Equit
o m y
INDEPENDENT auditor Inc et
S he No
tes
nce
B ala
Financial Statements
In order for auditor to be independent
He must comply with Ethical Principles as set
out in Code of Ethics
 Principles of Ethics Independent Auditor

Professional behavior
Confidentiality
Professional competence
& due care
Objectivity
Integrity
 Code Of Ethics

Legal Requirement Code Requirement

Partner
Applicable on Whole Firm Manager
Trainee

Examination Guidance

Examiner uses words like Examiner uses words like

- Statutory Auditor - Safeguards
- Legal Requirements; etc. - Threats; etc.
Answer should be based on Law Answer should be based on Code
Principles of Ethics

Be honest and straight forward

Not associate with info that is

A Chartered
Integrity accountant shall
Materially Provided
Misleading
false recklessly

If associated, shall take steps

to be dissociated with the info
Principles of Ethics

Not compromise professional

judgement due to

Bias Undue
Conflict of
A Chartered influence
Objectivity accountant shall
interest

Not undertake any professional

activity being unduly influenced
Principles of Ethics
Respect the confidentiality of information

Be alert of possibility of inadvertent

disclosure of information

A Chartered
Confidentiality accountant shall
Maintain confidentiality within firm

Not use confidential information

acquired as a result of a professional
relations hip for a personal advantage

Take reasonable steps to ensure that his

team understand the accountant’s duty
of confidentiality
 Confidentiality

Exceptions

Permitted by law & authorized by client Professional right/duty to disclose If required by law
Another Auditor is asking for info 1. Due to order by a court in legal proceedings
2. Disclosure to the appropriate public
before accepting the client. authorities of infringements of the law that come
to light
Regulatory bodies/Statutory bodies Respond to inquiry by regulator Expert / Lawyers

Auditor has a right / duty to disclose We can consult with ICAP if any ethical We share info. With them for their
data to ICAP for QCR problem arises professional opinion

Protection of Self Interest in Legal Matters Factors to Consider in Disclosing

Sharing of information to show that whether - Information is verified/substantiated

auditor has discharged its responsibilities as - Interest of 3rd party affected
per law/standard - Proposed form of disclosure
- Addressee / Appropriate recipient
Principles of Ethics

Attain and maintain professional

knowledge and skill

Act diligently
Professional A Chartered
Competence accountant shall
Take steps to adequately train and
supervise his team

Make client aware of inherent

limitations
Principles of Ethics

Comply with relevant laws and

regulations

Professional A Chartered Avoid any conduct that

Behavior accountant shall discredit the profession

Not engage in any business

that impairs

Integrity Objectivity Reputation

 Self Interest Threat

Advocacy Threat Familiarity Threat

Threats

Intimidation Threat Self Review Threat

 CODE OF
ETHICS
Section 330 – Fees & Other Types
of Remuneration
 Case 1: Fees & Remuneration
Level of Fee (Creates a self-interest threat)

Concept of Under Cutting

Chartered Not to quote fee lower than Predecessor

Accountant Auditor

Unless scope and quantum of work

materially differs
Factors for evaluating the level of such a threat include: Safeguards available are:
1. Whether the client is aware of the terms of the 1. Adjusting the level of fees or the scope of
engagement and the basis on which fees are charged the engagement
and which professional services the quoted fee covers. 2. Having an appropriate reviewer review
2. Whether the level of the fee is set by an independent the work performed
third party such as a regulatory body.
 Case # 2 Team member joining the client as an employee (outgoing member)

Threat Self interest threat + Familiarity threat + Intimidation threat

• Time duration spent in firm

Significance • Position at client
Factors • Position at firm

• No significant activity should be made between the firm and individual i.e.
• Do not call him in any event of the firm
• Clear his due before he leaves
Safeguards • Team member who is replacing the outgoing member should be more competent so
as to reduce the intimidation threat
• Modify the audit procedures and audit strategy
• Appoint reviewer
 Case # 3 Person from client joining the firm

Threat Self interest threat + Familiarity threat + Intimidation threat + Self review threat

• Position of individual who was working at client

Significance • Position assumed in the firm
• Threats would be created for decisions made or work performed by individual in the
Factors
period, while employed at client and should be evaluated in the current period as
part of the current audit engagement.
• Duration since he left

• Cannot be made part of audit team in the same year in which the individual left the
client because of self review and familiarity threat.
• Can be appointed next year, but appoint reviewer for his work
Safeguards • Restructure the responsibilities
• If same year threat created would be so significant that no safeguard could reduce
the threat to an acceptable level. Consequently, individual shall not be part of the
audit team.
 Case # 4 Contingent fees

Threat Self interest threat

• Fees as a % of the profit and tax saved

Significance • Fees based on number of misstatement identified
Factors • Fees based on bonus for early completion

• Such fee is not allowed for assurance as well as non-assurance engagements.

• Only agreeable fee terms are
Safeguards • Lumpsum fees; or
• Hourly basis
 Case # 5 Gifts / Hospitality treatment

Threat Self interest threat + Familiarity threat

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

Significance • Monetary value of gifts

Factors • Nature of gifts

• If significant – NOT ALLOWED

Safeguards • If not significant - ALLOWED
 Case # 6 Buying goods and services

Threat Self interest threat

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. But if it is significant it will create a threat.

• Magnitude of transaction
Significance • Nature of transaction (whether in ordinary course of business or not I.e. on arm’s
Factors length basis or not?

• Reduce the magnitude of transaction

• Convert the transaction into normal course of business if it is not.
• If not possible, remove the member from engagement team
Safeguards • Appoint reviewer to review work
• Ensure that the contract is awarded after a proper tendering process
• Ensure that no undue favors have been obtained
 Case # 7 Prospective employment at client

Threat Self interest threat + Familiarity threat + Intimidation threat

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

• Position in firm
Significance • Position at client
Factors • Department in which he might be employed

• Individual must communicate to firm about his/her willingness

• Remove from audit team
Safeguards • Appoint reviewer on his work done
 Question – Spring 2021 – 12 Marks
You are the Ethics and Quality Control Manager in an audit firm namely HMB Chartered Accountants. The audit manager responsible for
the audit of Fantom Limited (FL), has started the audit planning for FL and come across the following matters for which he needs your
guidance:
• Fizza was planned to be the engagement supervisor for the audit of FL. She has received an employment offer from FL. However, she is
considering not to accept FL’s employment offer.
• FL is the main sponsor of the ongoing cricketing event. Being the main sponsor, FL has received some entry passes of VIP enclosure of
the final match. It has offered three such passes to the audit team members.
• Your firm is under renovation process and about to procure two central air conditioning systems through tendering process. Your firm
has received quotations from various vendors including FL. The total expenditures for purchase and installation of two central air
conditioning units are expected to be Rs. 50 million.
• FL has offered your firm that the fee for taxation services of this year may be based on a percentage of tax saved.
Required
Identify the threat(s) which may arise and evaluate their significance. Also recommend the course of action or the mitigating actions which
may be taken by your firm.

Solution
(i)
(ii)
(iv)
(Iii)
A self-interest
Accepting
Agreeing
The purchase
to threat
gifts or
accept
of goodswill beservices
hospitality
taxation
and created
fromon
work when
an
fromtheana audit
audit member
percentage ofofthe
clientclient
may by audit
create
thethetax
firmteam
doesmay
self-interest,
saved isnot join
andthe
essentially
generallyaudit-client
familiarity
accepting aincontingent
createthreats. near
a threat tofuture,
The audit as her decision
team’s
independence
fee. This making
ifobjectivity
would may
the transaction
create and
be
a self-
is
objectivity
compromised
interest
in the normal may
threat and bethere
course
as impaired
theyof would due
business
will be to
toothe
bepressure
and at potential
accepting
arm’s
to gain theemployment
length.
theaudit
Sinceclients
highest with
thetax work
expectedtheif client.
savings they It client
are
transaction
for the needs
treated tosignificant
is ofand be
with ensured
thisgifts
could that
of temptarefusal
considerable
value, have
value.
self-interest
the audit been
firm to formally
Intimidation
threat suggest
may be
communicated
threat would also
inappropriate
created. to the
tax ariseaudit
advice. manager
as the client may before planning
threaten the her
firminofthe audit such
making [Link]
When it has been assured that she won’t be accepting the offer
public.
then
Even
The no
Firmthreatthreat
though
should would
the
created
ensure bewould
tickets
that
would created
no be
undue
so and
not havesheany
significant
favors could
are thatbeno
direct made
acceptedcost topart
the
safeguard
and of
that the
audit audit
client
contract
could isteam.
reducebut theythreat
awarded
the are still
after a of
to ansignificant
properacceptable value
tendering to therefore
level, the audit team.
process. the feeTherefore,
must be
If it audit
the
based can’t
on be
team
timeensured
should
and that
notFizza
accept
experience willthe
for not accept
tickets
job, notforthe
thetheemployment
VIP enclosure
contingent offer,
fee. then
of the shematch.
final should not be made part of the audit team.
A self-review might also be created and therefore the firm should have separate teams for the taxation service and the audit services.
Self Review While reviewing his /firm’s own work, team member will not appropriately
Threat evaluate the results as his objectivity is impaired

Objectivity

Preparation of FS Temporary Staff Secondment

• Preparation of complete set of FS Temporary posting of audit team member at

• Calculation of some values involving client as their employee
significant estimates (e.g. NRV,
Depreciation etc.) Significance of Threat
• Valuation of quoted and unquoted stocks • Position at client
for FS • Position at firm
Significance of Threat • Duration of service
• Nature of service (department in which he
• Nature of service is working)
• Extent of work
 Self Interest Any monetary connection with client will create a self interest threat. Team
Threat member will be influenced by the financial interest

Financial Interest
Shareholding Loan Fee
Shares of the company held partner, • Loan by Firm, partner, manager or There would be no issue in regular
manager or trainee trainee taken from client – if taken in situation
ordinary course of business from client
Significance of Threat that is bank. If loan taken by “Firm” this Significance of Threat
is always create a threat if it is material
• Position of holder at firm to client or firm. • Overdue fees
• Number of shares held • Loan taken by client from auditor – not • Contingent fees
allowed if immaterial to both then • Major portion of firm’s revenue
allowed
Business Relationship Significance of Threat
• Undercutting

Company and partner, manager or • Position of lender/borrower in Buying Goods and Services
trainee have a business relation audit team
• Amount of loan Even a single small transaction will
Significance of Threat
• Whether the transaction is in create threat
• Position of individual working at client ordinary course of business Significance of Threat
• Position of individual working at audit team
• Amount of financial interest • Position of individual in the firm
• Magnitude/Nature of the transaction
 Familiarity A team member will be too sympathetic to client because of long or close
Threat relationship

Relationship
Family/personal Relation Employment Long association
Spouse or children of auditor • Firm’s employee is now working Auditing for a long time period
working at client at client (more than 3 years)
Significance of Threat • Prospective employment at Significance of Threat
client
• Nature of relationship • Time spent of audit team at
• Position at client and firm Significance of Threat client
• Department in which the person • Position in firm • Personal relations developed
works • Position (offered) at client due to long association
• Time duration spent in firm
Gifts • Cooling off period

Accepting gifts from client

Significance of Threat
• Monetary value of gift
• Position in firm
• Position at client
 Self Interest Threat

Advocacy Threat Familiarity Threat

Threats

Intimidation Threat Self Review Threat

 Self Interest Threat

Advocacy Threat Familiarity Threat

Threats

Intimidation Threat Self Review Threat

Intimidation Team member will be deterred from acting objectively because of undue
Threat influence, pressure

Undue Influence/Pressure

Threat of Dismissal Threat of litigation

• Threat by shareholder o remove auditor On account of previously unidentified

• Threat to remove relative by client misstatement due to inherent limitation of
• Threat to remove auditor from other non- audit
assurance services
Significance of Threat
Significance of Threat • Will always be significant
• Will always be significant
 Self Interest Threat

Advocacy Threat Familiarity Threat

Threats

Intimidation Threat Self Review Threat

Advocacy
Team member promoting client’s position to 3rd party
Threat

Advocacy

Promoting Client’s Share Acting as Advocate

Auditor acting as an agent on behalf of client Acting as a lawyer for client in a law suite
selling/promoting its shares
Significance of Threat
Significance of Threat
• Will always be significant
• Will always be significant
 Case # 1 Engagement team member / relative holds shares in client

Threat Self interest threat

• Position of engagement team member

Significance • If relative of a member has purchased the shares his relation ship nature will be
Factors considered
• Magnitude of transaction (number & value of shares)

• Member must notify the firm.

• Firm will request him / relative to dispose the shares
• If shares are disposed, then no threat
Safeguards • If not disposed, remove the member from team
• Review his work done by another chartered accountant to ensure that no benefit is
given to client
 Case # 2 Fees overdue

Threat Self interest threat

• Last year audit was conducted by another firm and its fee is overdue
Significance OR
Factors • Last year audit was conducted by our firm and fee is overdue

• If last year audit was done by another firm then DO NOT ACCEPT THE CLIENT
• If last year audit was conducted by our firm, client can be accepted
• Do not sign the report until all or substantial amount is recovered
Safeguards • Speak to TCWG that the management is not clearing our fee
• Appoint a reviewer to check work done by firm on the client to verify that no favor is
given
 Case # 4 Significant fees from a single client (15% or more of total revenue)

Threat Self interest threat + Intimidation threat

• Total Number of clients

Significance • Number of services being provided to client
Factors • Fees charged from other clients

• Reduce the number of services being provided to client

Safeguards • Increase number of clients to reduce dependency
• Appoint a reviewer
 Case # 5 Business relation ship with client

Threat Self interest threat + Intimidation threat

Significance • Position of both parties

Factors • Magnitude of business

• In case of individual
• Remove the individual from engagement team
• Review his work by another chartered accountant
Safeguards • In cash of firm
• Withdraw (because no amount of safeguards can reduce this threat to an
acceptable level)
 Case # 7 Family / personal relationship

Threat Self interest threat + Familiarity threat + Intimidation threat

• Position of individual working at client

Significance • Position of individual working at firm
Factors • Nature of relationship

• Restructure the responsibilities so the auditor is not given the responsibilities of

areas in which his relative is working
Safeguards • Appoint an independent reviewer to review the work done by audit team member
• If restructuring is not possible, remove the person from team
 Case # 8 Long association

Threat Self interest threat + Familiarity threat

• Depends on the duration since he has been auditing the client

Significance • Position at client
Factors • Position at firm

• Remove the member from audit team

Safeguards • Appoint an independent reviewer to review the work done by the member
• Perform regular independent internal or external QCR of the engagement
 Question – Autumn 2019 – 7 Marks
Shayan has recently been hired as the audit manager in a firm of chartered accountants which is the auditor of Python Limited (PL). Shayan
previously served as manager finance in PL for three years.
The firm is considering to depute Shayan as the engagement manager for the audit of PL for the year ended 31 August 2019.
Required:
Identify the possible threats which may arise and discuss their significance. Also, discuss the safeguards required to mitigate the threats
under each of the following assumptions:
a) Shayan resigned from PL with effect from 30 June 2019
b) Shayan resigned from PL with effect from 30 June 2018

Solution
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.
 Case # 12 Temporary staff services

Threat Self review threat + Familiarity threat + Advocacy threat

Significance • Position in firm

Factors • Position at client

• 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
Safeguards 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.
 Question – Autumn 2021 – 7 Marks
Hussain Tarar is the audit partner responsible for the audit of Petra Travels (Private) Limited (PTL). The chief executive officer (CEO) of the
company has informed Hussain that due to liquidity issues amid COVID-19, several employees including some staff members of finance
department left the company. CEO has therefore requested Hussain to provide two staff of the audit firm for some time to run the finance
department.
Required
In the light of Code of Ethics for Chartered Accountants, discuss the threats in the above scenario and suggest appropriate safeguards.

Solution
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.
 Case # 14 Preparation of accounting records

Threat Self review threat

Significance • Nature of services

Factors • Whether it involves estimates, judgements or uncertainties

• In case of a listed company – NO SAFEGUARD AVAILABLE

Safeguards • In case of unlisted company – remove from audit team
• If removal is not possible, appoint a reviewer
 Case # 15 Threat of dismissal

Threat Intimidation threat

Significance • Will always be significant

Factors

• Communicate to TCWG
Safeguards • If not listening, withdraw from the engagement
 Case # 16 Threat of litigation on firm’s individual

Threat Intimidation threat

Significance • Position of individual

Factors • Magnitude of transaction tenure of case

• Remove from engagement team

Safeguards • If removal is not possible, restructure responsibilities
• Appoint a reviewer
 Question – Autumn 2020 – 12 Marks
Haris Awan has recently been appointed as a partner in HBC Chartered Accountants. Haris has been assigned the audit of Hemlock Limited
(HL). HL has been the firm’s client for the past 15 years. Haris has asked Babar Raza, manager responsible for the audit of HL for the last
seven years, to assist him in the planning phase. Babar has informed him that:
• attitude of HL’s Chief Financial Officer (CFO) has been very aggressive towards audit team members, particularly at times when
questioned on any of his judgements in relation to accounting matters.
• CFO normally gives us a short deadline for completion of the audit.
• one of the previous audit team members has recently joined HL as Manager Finance and has ensured us his full cooperation towards the
timely completion of the audit.
Required
Discuss the possible threat(s) which may arise in the above situation, their significance and the safeguards required to mitigate those
threats.

Solution
(i)
(iii)
(ii)
Familiarity
CFO aggressiveand self-interest
or intimidation threatthe
threats
attitude towards maycreated
are arise team
audit because
as the ofsetting
using Baber
manager
and short on
finance thebeen
has auditfor
deadlines a of HL overofathe
member
completion long periodindicates
ofprevious
audit of time.
audit team.
presence of intimidation
The
Beingthreat
[Link] theisposition
significant but it alsofinance,
of manager needs tothebeindividual
further evaluated by considering
is responsible whether HL’s
for the preparation management
of financial teamand
statements has will
changed
be in or whether
continuous
the nature
threat or
communication
The complexity
with the as
is significant ofaudit
HL’s
audit accounting
team.
firmDue
may tobeand
these reporting issues
factors the
pressurized hasseems
threat
into changed.
accepting Furthermore,
significant.
CFO’s judgements evendue to the these
when long association
may not beofappropriate
Babar withand
HL,
he may
Following
due besafeguards
to very too sympathetic
strict may be
deadlines tofirm
theirmay
applied:interest
not beor too
ableaccepting
to obtainofsufficient
their work. appropriate audit evidence. This may result in the issuance of an
Following
• Assign safeguards
individuals
inappropriate may
to thebeaudit
audit opinion. applied:
team who have sufficient experience in relation to the individual who has joined the client; or
• Replace Baber withmay
Have asafeguards
Following professional any other
accountant
be manager
applied: having
review the workappropriate experience.
of the former member of the audit team.
Ask a professional
Modify
• Independentthe audit
review accountant
plan. who is not
of areas requiring a member of the audit team, to review the work.
judgements.
Regularhighly
• Assign independent internal
skilled and or external
competent auditquality reviews of the engagement.
team members.
• Discussing with those charged with governance the attitude of CFO towards the audit team.
 Question – Autumn 2018 – 10 Marks
You have recently been promoted as a partner in the assurance department of a firm of chartered accountants. Your
portfolio of clients includes Shah Motors (Pvt.) Limited (SML), a leading car dealer. Qaiser, a senior manager assurance in
your firm, has been auditing SML for the past 7 years. While updating you about SML, Qaiser informed about the following:
1. On the request of an audit team member, CFO of SML has helped the team member’s brother in securing early delivery
of a vehicle ordered by him on preferential basis.
2. SML has hired a new Head of Marketing. His son Amjad is expected to be included as a junior team member in SML’s
audit team.
Required
Discuss the possible threats which may arise, their significance and the safeguards required to mitigate those threats.

Solution
(ii)
(i)
(iii)
Requesting
Familiarity
Family CFO
andand for expediting
self-interest
personal relationshipthe may
threat delivery
arisemay
between createofself-interest,
abecause
member long
of the auditfamiliarity,
associationteam and intimidation
of Qaiser onHead
the ofthreat
the audit to theofindependence
of SML.
Marketing of theself-interest,
SML may create audit team
member.
The threat and
familiarity is significant but it also
/ or intimidation needs to be further evaluated by considering whether SML’s management team has changed or whether
threats.
The threats
the nature seem
threat or
would to
bebesignificant
complexity significant becauseofthe
of SML’sbecause
accounting preferential
and
the reporting
close treatment
issues has
relationship. Thewas not in the normal
changed.
significance course
would also of theon
depend business.
Amjad’s responsibilities on the
The audit
Following
audit [Link] member
safeguards may who
be has obtained preferential treatment should not be made part of the audit team and in case he is made part of
applied:
the team, his
• Replace
Following work with
Qaiser
safeguards should
mayanybe reviewed
beother seniorbymanager
applied: an independent chartered accountant.
having appropriate experience.
•It should
Askingalso
Removing be ensured
a professional
Amjad that no such
fromaccountant
the audit breach
who
team was ofnotethics occursofinthe
a member future
audit and theto
team firm should
review thecommunicate
work. and strictly implement its policies
•in this regard.
Regular Firm may internal
independent
Structuring also consider
the responsibilities orof taking
external
the disciplinary
quality
audit team reviewsaction
so that theagainst
of Amjad thenot
engagement.
does individual
deal withwho had obtained
matters that arethe preferential
within treatmentof
the responsibility from
his
[Link].
• Review of work carried out by Amjad,