AUDITING THEORY  Responsible Citizenship

Obey just laws; if all law is unjust, openly protest it;

CHAPTER 5: CODE OF ETHICS FOR
exercise all democratic rights and privileges
PROFESSIONAL ACCOUNTANTS IN THE responsibly by participation.
PHILIPPINES  Pursuit Excellence
Pursue excellence in all matters; in meeting your
Ethics –is a branch of philosophy that deals with the personal and professional responsibilities, be
study of the rightness and wrongness of human actions. diligent, reliable, industrious, and committed;
Two primary reasons why people act unethically: perform all tasks to the best of your ability, develop
1. Person’s ethical standards differ from general and maintain a high degree of competence, be well
society. informed and well prepared.
2. The person chooses to act selfishly.  Accountability
Be accountable; accept responsibility for decisions,
Rationalizing Ethical Behavior for foreseeable consequences of actions and
1. Everybody does it. inactions, and for setting an example of others.
2. If it’s legal, it’s unethical.
3. Likelihood of discovery and consequences. CODE OF ETHICS

Values Associated with Ethical Behavior Definitions

 Integrity Acceptable Level –a level at which a reasonable and
Be principled, honorable, upright, and courageous informed third party would be likely to conclude,
and act on convictions; do not be two-faced, or weighing all the specific facts and circumstances
unscrupulous, or adopt an end-justifies-the-means available to the professional accountant at that time,
philosophy that ignores principle. that compliance with the fundamental principles is not
 Honesty compromised.
Be truthful, sincere, forthright, straightforward, Advertising –the communication to the public of
frank, and candid; do not cheat, steal, lie, deceive, information as to the services or skills provided by
or act deviously. professional accountants in public practice with a view
 Promise Keeping to procuring professional business.
Be worthy of trust, keep promises, full Audit Client –an entity in respect of which a firm
commitments, abide by the spirit as well as the conducts an audit engagement. When the client is a
letter of an agreement; do not interpret listed entity, audit client will always include its related
agreements in an unreasonably technical or entities. When the client is not a listed entity, audit
legalistic manner in order to rationalize client includes those related entities over which the
noncompliance or create excuses and justifications client has direct or indirect control.
for breaching commitments. Audit Engagement –a reasonable engagement in which
 Loyalty (Fidelity) a professional accountant in public practice expresses
Be faithful and loyal to family, friends, employers, an opinion whether the financial statements are
clients and country; do not use or disclose prepared, all material respects, in accordance with an
information learned in confidence. applicable financial reporting framework.
 Fairness Audit Team
Be fair and open-minded, be willing to admit error a. All members of the engagement team for the
and, where appropriate, change positions and audit engagement.
beliefs, demonstrate a commitment to justice, the b. All others within a firm who can directly
equal treatment of individuals and tolerance for and influence the outcome of the audit
acceptance of diversity; do not overreach or take engagement, including:
undue advantage of another’s mistakes or i. Those who recommend the
adversities. compensation of, or who provide direct
 Caring for Others supervisory, management or other
Be caring, kind, and compassionate; share, be oversight of the engagement partner in
giving, be of service to others; help those in need connection with the performance of the
and avoid harming others. audit engagement including those at all
 Respect for Others successively senior levels above the
Demonstrate respect for human dignity, privacy, engagement partner through the
and the right to self-determination of all people; be individual who is the firm’s Senior or
courteous, prompt, and decent; provide others with Managing Partner.
the information they need to make informed ii. Those who provided consultation
decisions about their own lives; do not patronize, regarding technical or industry-specific
embarrass or demean. issues, transactions or events for the
engagement; and
iii. Those who provided quality control for
the engagement, including those who
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 perform the engagement quality Public Interest Entity
control review for the engagement. a. A listed entity; and
Close Family –a parent, child, or sibling who is not an b. An entity:
immediate family member. i. Defined by regulation or legislation as a
Immediate Family –a spouse or dependent, also known public interest entity; or
as first-degree relatives. ii. For which the audit is required by
Direct Financial Interest regulation or legislation to be
A financial interest: conducted in compliance with the same
a. Owned directly by and under the control of an independence requirements that apply
individual or entity to the audit of listed entities.
b. Beneficially owned through a collective Related Entity
investment vehicle, estate, trust or other An entity that has any of the following relationships
intermediary over which the individual or entity with the client:
has control, or the ability to influence a. An entity that has direct or indirect control over
investment decisions. the client if the client is material to such entity;
Engagement Partner –the partner or other person in b. An entity with a direct financial interest in the
the firm who is responsible for the engagement and its client if that entity has significant influence over
performance, and for the report that is issued on behalf the client and the interest in the client is
of the firm, and who, where required, has the material to such entity;
appropriate authority from a professional, legal or c. An entity over which the client has direct or
regulatory body. indirect control;
Engagement Quality Control Review –a process d. An entity which is under common control with
designed to provide an objective evaluation, on or the client if the sister entity and the client are
before the report is issued, of the significant judgments both material to the entity that controls both
the engagement team made and the conclusions it the client and sister entity.
reached in formulating the report.
Engagement Team –all partners and staff performing PART A: GENERAL APPLICATION
the engagement, and any individuals engaged by the SECTION 100: INTRODUCTION AND FUNDAMENTAL
firm or a network firm who perform assurance PRINCIPLES
procedures on the engagement.  If a professional accountant is prohibited from
Existing Accountant –a professional accountant in complying with certain parts of this code by law
public practice currently holding an audit appointment or regulation, the professional accountant shall
or carrying out accounting, taxation, consulting or comply with all other parts of this code.
similar professional services for a client.  Fundamental Principles
External Expert –an individual or organization a. Integrity –straightforward and honest in all
possessing skills, knowledge and experience in a field professional and business relationships.
other than accounting or auditing, whose work in that b. Objectivity –not allow bias, conflict of interest
field is used to assist the professional accountant in or undue influence of others to override
obtaining sufficient appropriate evidence. professional or business judgment.
Firm c. Professional Competence and Due Care –
A firm may be: maintain professional knowledge and skill at the
a. A sole proprietorship or partnership of level required to ensure that a client or
professional accountant; employer receives competent professional
b. An entity that controls such parties, through services based on current developments in
ownership, management or other means; practice, legislations and techniques and act
c. An entity controlled by such parties, through diligently and in accordance with applicable
ownership, management or other means. technical and professional standards.
Indirect Financial Interest –a financial interest d. Confidentiality –respect the confidentiality of
beneficially owned through a collective vehicle estate, information acquired as a result of professional
trust or other intermediary over which the individual or and business relationships and, therefore, not
entity has no control or ability to influence investment discloses any such information to third parties
decisions. without proper and specific authority, unless
Key Audit Partner –the engagement partner, the there is a legal or professional right or duty to
individual responsible for the engagement quality disclose, nor use the information for personal
review, and the engagement partners responsible for advantage of the professional accountant or
significant subsidiaries or divisions. third parties.
Listed Entity –an entity whose shares, stock or debt are e. Professional Behavior –comply with relevant
quoted or listed on a recognized stock exchange, or are laws and regulations and avoid any action that
marketed under the regulations of a recognized stock discredits the profession.
exchange or other equivalent body.
Network Firm –a firm or entity that belongs to a
network.
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  Conceptual Framework Approach professional accountant will be too sympathetic
a. When a professional accountant identifies to their interests or too accepting of their work.
threats to compliance with the fundamental e. Intimidation Threat –a professional accountant
principles and determines that they are not an will be deterred from acting objectively because
acceptable level, the professional accountant of actual or perceived pressures, including
shall determine whether appropriate attempts to exercise undue influence over the
safeguards are available and can be applied to professional accountant.
eliminate the threats or reduce them to an  Safeguards are actions or other measures that
acceptable level. may eliminate threats or reduce them to an
b. A professional accountant shall evaluate any acceptable level.
threats to compliance with the fundamental a. Safeguards created by the profession,
principles when the professional accountant legislation, or regulation:
knows, or could reasonably expect to know, of 1. Educational, training and experience
circumstances or relationships that may requirements for entry into the profession.
compromise compliance with the fundamental 2. Continuing professional development
principles. requirement.
c. A professional accountant may encounter 3. Corporate governance regulation.
situations in which threats cannot be eliminated 4. Professional standards.
or reduced to an acceptable level, either 5. Professional or regulatory monitoring and
because the threat is too significant or because disciplinary procedures.
appropriate safeguards are not available or 6. External review by legally empowered third
cannot be applied. The professional accountant party of the reports, returns,
shall decline or discontinue the specific communications or information produced
professional service involved or, when by a professional accountant.
necessary, resign from the engagement. 7. Effective, well-publicized complaint system
d. A professional accountant may inadvertently operated by the employing organization,
violate a provision of this code. Once the the profession, or a regulator, which enable
violation is discovered, the violation is corrected colleagues, employers, and members of the
promptly and any necessary safeguards are public to draw attention to unethical
applied. behavior.
e. When a professional accountant encounters 8. An explicitly stated duty to report breaches
unusual circumstances in which the application of ethical requirement.
of a specific requirement of the code would b. Safeguards in the work environment (provided
result in a disproportionate outcome or an in Parts B and C)
outcome that may not be in the public interest,  Ethical Conflict Resolution
it is recommended that the professional a. Where a matter involves a conflict with, or
accountant consult with a member body or the within, an organization, a professional
relevant regulator. accountant shall determine whether to
 Threats consult with those charged with governance
When a relationship or circumstances creates a of the organization, such as board of
threat, such a threat could compromise, or directors or the audit committee.
could be perceived to compromise, a b. If a significant conflict cannot be resolved, a
professional accountant’s compliance with the professional accountant may consider
fundamental principles. obtaining professional advice from the
a. Self-interest Threat –a financial or other relevant professional body.
interest will inappropriately influence the c. If after exhausting all relevant possibilities,
professional accountant’s judgment or the ethical conflict remains unresolved, a
behavior. professional accountant shall, where
b. Self-review Threat –a professional accountant applicable, refuse to remain associated with
will not appropriately evaluate the results of a the matter creating the conflict.
previous judgment made or service performed
by the professional accountant, or by another SECTION 110: INTEGRITY
individual within the professional accountant’s  When a professional accountant becomes
firm or employing organization, on which the aware that the accountant has been associated
accountant will rely when forming a judgment with information such as materially false or
as part of providing a current service. misleading, furnished recklessly, or omitted, the
c. Advocacy Threat –a professional accountant accountant shall take steps to be disassociated
will promote a client’s or employer’s position to from that information.
the point that the professional accountant’s
objectivity is compromised.
d. Familiarity Threat –due to a long or close
relationship with a client or employer, a
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SECTION 120: OBJECTIVITY b. Make disparaging reference or
 A professional accountant shall not perform a unsubstantiated comparisons to the work
professional service if a circumstance or of others.
relationship biases or unduly influences the
accountant’s professional judgment with PART B PROFESSIONAL ACCOUNTANTS IN PUBLIC
respect to that service. PRACTICE
SECTION 200: INTRODUCTION
SECTION 130: PROFESSIONAL COMPETENCE AND DUE  Examples of circumstances that create self-
CARE interest threats for a professional accountant in
 A professional accountant shall take reasonable public practice:
steps to ensure that those working under the a. A member of the assurance team having a
professional accountant’s authority in a direct financial interest in the assurance
professional capacity have appropriate training client.
and supervision. b. A firm having undue dependence on total
 Where appropriate, a professional accountant fees from a client.
shall make clients, employers, or other users of c. A member of the assurance team having a
the accountant’s professional services aware of significant close business relationship with
the limitations inherent in the services. an assurance client.
d. A firm being concerned about the
SECTION 140: CONFIDENTIALITY possibility of losing a significant client.
 A professional accountant shall maintain e. A member of the audit team entering into
confidentiality, including in a social employment negotiations with the audit
environment, being alert to the possibility of an client.
inadvertent disclosure, particularly to a close f. A firm entering into a contingent fee
business associate or a close or immediate arrangement relating to an assurance
family member. engagement.
 A professional accountant shall maintain g. A professional accountant discovering a
confidentiality of information disclosed by a significant error when evaluating the
prospective client or employer. results of a previous professional service
 A professional accountant shall maintain performed by a member of the
confidentiality of the information within the professional accountant’s firm.
firm or employing organization.  Examples of circumstances that create self-
 A professional accountant shall maintain review threats for a professional accountant in
confidentiality to ensure that the staff under public practice:
the professional accountant’s control and a. A firm issuing an assurance report on the
persons from whom advice and assistance is effectiveness of the operation of financial
obtained respect the professional accountant’s systems after designing or implementing
duty of confidentiality. the systems.
 The need to comply with the principle of b. A firm having prepared the original data
confidentiality continues even after the end of used to generate records that are the
relationships between a professional subject matter of the assurance
accountant and a client or employer. engagement.
 Disclosure may be appropriate when: c. A member of the assurance team being, or
a. Disclosure is permitted by law and is having recently been, a director or officer
authorized by a client or the employer of the client.
b. Disclosure is required by law d. A member of the assurance team being, or
c. There is a professional duty or right to having recently been, employed by the
disclose when not prohibited by law. client in a position to exert significant
influence over the subject matter of the
SECTION 150: PROFESSIONAL BEHAVIOR engagement.
 Avoid any action that the professional e. The firm performing a service for an
accountant knows or should know may discredit assurance client that directly affects the
the profession. subject matter information of the
 Professional accountant shall be honest and assurance engagement.
truthful and not: f. Examples of circumstances that create self-
a. Make exaggerated claims for the services interest threats for a professional
they are able to offer, the qualifications accountant in public practice:
they possess, or experience they have  Examples of circumstances that create
gained; or advocacy threats for a professional accountant
in public practice:
a. The firm promoting shares in an audit
client.
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 b. A professional accountant acting as an d. Document, evaluate the significance of the
advocate on behalf of an audit client in threats, and apply safeguards to eliminate
litigation or disputes with third parties. or reduce the threats to an acceptable level
 Examples of circumstances that create or, when appropriate safeguards are not
familiarity threats for a professional accountant available or cannot be applied, terminate or
in public practice: decline the relevant engagement.
a. A member of the engagement team having e. Documented internal policies and
a close or immediate family member who procedures requiring compliance with
is a director or officer of the client. fundamental principles.
b. A member of the engagement team having f. Enable the identification of interests or
a close or immediate family member who relationships between the firm or members
is in a position to exert significant influence of engagement teams and clients.
over the subject matter of the g. Monitor and, if necessary, manage the
engagement. reliance on revenue received from a single
c. A director or officer of the client or an client.
employee in a position to exert significant h. Using different partners and engagement
influence over the subject matter of the teams with separate reporting lines for the
engagement having recently served as the provision of non-assurance services to an
engagement partner. assurance client.
d. A professional accountant accepting gifts i. Prohibit individuals who are not members
or professional treatment from a client, of an assurance engagement team from
unless the value is trivial or inappropriately influencing the outcome of
inconsequential. the engagement.
e. Senior personnel having a long association j. Timely communication of a firm’s policies
with the assurance client. and procedures and appropriate training
 Examples of circumstances that create and education on such policies and
intimidation threats for a professional procedures.
accountant in public practice: k. Designating a member of senior
a. A firm being threatened with dismissal management to be responsible for
from a client engagement. overseeing the adequate functioning of the
b. An audit client indicating that will not firm’s quality control system.
award a planned non-assurance contract l. Advising partners and professional staff of
to the firm if the firm continues to disagree assurance clients and related entities from
with the client’s accounting treatment for which independence is required.
a particular transaction. m. A disciplinary mechanism to promote
c. A firm being threatened with litigation by compliance with policies and procedures.
the client. n. Encourage and empower staff to
d. A firm being pressure to reduce communicate to senior levels within the
inappropriately the extent of work firm any issue relating to compliance with
performed in order to reduce fees. the fundamental principles.
e. A professional accountant feeling pressured  Examples of engagement-specific safeguards in
to agree with the judgment of a client the work environment include:
employee because the employee has more a. Having a professional accountant who was
expertise on the matter in question. not involved with the non-assurance service
f. A professional accountant being informed review the non-assurance work performed
by a partner of the firm that a planned or otherwise advise as necessary.
promotion will not occur unless the b. Having a professional accountant who was
accountant agrees with an audit client’s not a member of the assurance team
inappropriate accounting treatment. review the assurance work performed or
 Work environment safeguards comprise firm- otherwise advise as necessary.
wide safeguards and engagement-specific c. Consulting an independent third party.
safeguards. d. Discussing ethical issues with those charged
 Examples of firm-wide safeguards in the work with governance of the client.
environment include: e. Disclosing to those charged with
a. The firm stresses the importance of governance of the client the nature of
compliance with the fundamental services provided and extent of fees
principles. charged.
b. The firm establishes the expectation that f. Involving another firm to perform or re-
members of an assurance team will act in perform part of the engagement.
the public interest. g. Rotating senior assurance team personnel.
c. Policies and procedures to implement and
monitor quality control of engagements.
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  Examples of safeguards within the client’s 3. Possessing or obtaining experience with
systems and procedures include: relevant regulatory or reporting
a. The client requires persons other than requirements.
management to ratify or approve the 4. Assigning sufficient staff with the
appointment of a firm to perform an necessary competencies.
engagement. 5. Using experts where necessary.
b. The client has competent employees with 6. Agreeing on a realistic time frame for
experience and seniority to make the performance of the engagement.
managerial decisions. 7. Complying with quality control policies
c. The client has implemented internal and procedures designed to provide
procedures that ensure objective choices in reasonable assurance that specific
commissioning non-assurance engagements are accepted only when
engagements. they can be performed competently.
d. The client has a corporate governance b. When a professional accountant in public
structure that provides appropriate practice intends to rely on the advice or
oversight and communications regarding work of an expert, the professional
the firm’s services. accountant in public practice shall
determine whether such reliance is
SECTION 210: PROFESSIONAL APPOINTMENT warranted.
 Client Acceptance  Changes in a Professional Appointment
a. Before accepting a new client relationship, a. A professional accountant in public practice
a professional accountant in public practice who is asked to replace another
shall determine whether acceptance would professional accountant, or who is
create any threats to compliance with considering tendering for an engagement
fundamental principles. currently held by another professional
b. A professional accountant in public practice accountant in public practice, shall
shall evaluate the significance of any threats determine whether there are any reasons
and apply safeguards when necessary to for not accepting the engagement.
eliminate them or reduce them to an b. The apparent reasons for the change in
acceptable level. appointment may not fully reflect the facts
Examples of safeguards: and may indicate disagreements with the
1. Obtaining knowledge and existing accountant that may influence the
understanding of the client. decision to accept the appointment.
2. Securing the client’s commitment to Examples of safeguards:
improve corporate governance 1. When replying to requests to submit
practices or internal controls. tenders, stating in the tender that,
c. Where it is not possible to reduce the before accepting the engagement,
threats to an acceptable level, the contact with the existing accountant
professional accountant in public practice will be requested so that inquiries may
shall decline to enter into the client be made as to whether there are any
relationship. professional or other reasons why the
d. It is recommended that a professional appointment should not be accepted.
accountant in public practice periodically 2. Asking the existing accountant to
review acceptance decisions for recurring provide known information on any facts
client engagements. or circumstances that, in the existing
 Engagement Acceptance accountant’s opinion, the proposed
a. A self-interest threat to professional accountant needs to be aware of before
competence and due care is created if the deciding whether to accept the
engagement team does not possess, or engagement.
cannot acquire, the competencies 3. Obtaining necessary information from
necessary to properly carry out the other sources. When the threats cannot
engagement. be eliminated or reduced to an
Examples of safeguards: acceptable level through the application
1. Acquiring an appropriate understanding of safeguards, decline the engagement.
of the nature of the client’s business, c. A professional accountant in public practice
the complexity of its operations, the may be asked to undertake work that is
specific requirements of the complementary or additional to the work of
engagement and the purpose, nature existing accountant. It creates threats to
and scope of the work to be performed. professional competence and due care
2. Acquiring knowledge of relevant resulting from a lack of or incomplete
industries or subject matters. information.

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 Safeguard: Notify the existing accountant of 7. The use of confidentiality agreements
the proposed work, which would give the signed by employees and partners of the
existing accountant the opportunity to firm.
provide any relevant information needed 8. Regular review of the application of
for the proper conduct of the work. safeguards by a senior individual not
d. Whether the professional accountant is involved with the relevant client
permitted or required to discuss the affairs agreements.
of the client with a proposed accountant  Where a conflict of interest cannot be
will depend on the nature of the eliminated or reduced to an acceptable level,
engagement and on: the professional accountant in public practice
1. Whether the client’s permission to do shall not accept a specific engagement or shall
so has been obtained; or resign form one or more conflicting
2. The legal or ethical requirements engagements.
relating to such communications and  Where a professional accountant in public
disclosure, which may vary by practice has requested consent form a client to
jurisdiction. act for another party in respect of a matter
e. A professional accountant in public practice where the respective interests are in conflict
will generally need to obtain the client’s and that consent has been refused by the client,
permission, preferably in writing, to initiate the professional accountant in public practice
discussion with an existing accountant. The shall not continue to act for one of the parties
existing accountant shall comply with in the matter giving rise to the conflict of
relevant legal and other regulations interest.
governing such requests. It shall be
provided honestly and unambiguously. If SECTION 230: SECOND OPINION
the proposed accountant is unable to  There may be a threat to professional
communicate with the existing accountant, competence and due care in circumstances
the proposed accountant shall take where the same set of facts that were made
reasonable steps to obtain information available to the existing accountant or is based
about any possible threats. on inadequate evidence.
Safeguards:
SECTION 220: CONFLICT OF INTEREST 1. Seeking client permission to contact the
 A threat to objectivity may be created when a existing accountant.
professional accountant in public practice 2. Describing the limitations surrounding any
competes directly with a client or has a joint opinion in communications with the client.
venture or similar arrangement with a major 3. Providing the existing accountant with a
competitor of a client. copy of the opinion.
 A threat to objectivity or confidentiality may  If the entity seeking the opinion will not permit
also be created when a professional accountant communication with the existing accountant, a
in public practice performs services for clients professional accountant in public practice shall
whose interests are in conflict. determine whether it is appropriate to provide
Safeguards: the opinion sought.
1. Notifying the client of the firm’s business
interest or activities that may represent a SECTION 240: FEES AND OTHER TYPES OF
conflict of interest and obtaining their REMUNERATION
consent to act in such circumstances.  When entering into negotiations regarding
2. Notifying all known relevant parties that the professional services, a professional accountant
professional accountant in public practice is in public practice may quote whatever fee is
acting for two or more parties in respect of deemed appropriate.
a matter where their respective interests  A self-interest threat to professional
are in conflict and obtaining their consent competence and due care is created if the fee
to so act. quoted is so low that it may be difficult to
3. Notifying the client that the professional perform the engagement in accordance with
accountant in public practice does not act applicable technical and professional standards
exclusively for any one of the client in the for that price.
provision of proposed services and Safeguards:
obtaining their consent to so act. 1. Making the client aware of the terms of the
4. The use of separate engagement teams. engagement and the basis on which fees
5. Procedures to prevent access to are charged and which services are covered
information. by the quoted fee.
6. Clear guidelines for members of the 2. Assigning appropriate time and qualified
engagement team on issues of security and staff to the task.
confidentiality.
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  Contingent fees may create a self-interest SECTION 260: GIFTS AND HOSPITALITY
threat to objectivity.  A professional accountant in public practice,
Safeguards: or an immediate or close family member,
1. An advance written agreement with the may be offered gifts and hospitality from a
client as to the basis of remuneration. client. A self-interest or familiarity threat to
2. Disclosure to intended users of the work objectivity may be created if a gift from a
performed by the professional accountant client is accepted. An intimidation threat to
in public practice and the basis of objectivity may result from the possibility of
remuneration. such offers being made public.
3. Quality control policies and procedures.  Where gifts or hospitality are offered that
4. Review by an independent third party of are reasonable and informed third party,
the work performed by the professional would consider trivial or inconsequential, a
accountant in public practice. professional accountant in public practice
 A professional accountant in public practice may conclude that the offer is made in the
may receive a referral fee or commission normal course of business without the
relating to a client. Where a professional specific intent to influence decision making
accountant in public practice does not provide or to obtain information. In such cases, the
the specific service required, a fee may be professional accountant in public practice
received for referring a continuing client to may generally conclude that any threat to
another professional accountant in public compliance with the fundamental principles
practice or other expert. It may create a self- is at an acceptable level.
interest threat to objectivity and professional  When the threats cannot be eliminated or
competence and due care. reduced to an acceptable level through the
 A professional accountant in public practice application of safeguards, a professional
may also pay a referral fee to obtain a client. accountant in public practice shall not
Where the client continues as a client of accept such an offer.
another professional accountant in public
practice but requires specialist services not SECTION 270: CUSTODY OF CLIENT ASSETS
offered by the existing accountant.  A professional accountant in public practice
Safeguards: shall not assume custody of client monies or
1. Disclosing to the client any arrangements to other assets unless permitted to do so by law
pay a referral fee to another professional and in compliance with any additional legal
accountant for the work referred. duties imposed on a professional accountant in
2. Disclosing to the client any arrangements to public practice holding such assets.
receive a referral fee for referring the client  There is a self-interest threat to professional
to another professional accountant in public behavior and may be a self-interest threat to
practice. objectivity arising from holding client assets.
3. Obtaining advance agreement from the  A professional accountant in public practice
client for commission arrangements in entrusted with money or other assets belonging
connection with the sale by a third party of to others shall therefore:(safeguards)
goods or services to the client. 1. Keep such assets separately from personal
 A professional accountant in public practice or firm assets.
may purchase all or part of another firm on the 2. Use such assets only for the purpose for
basis that payments will be made to individuals which they are intended.
formerly owning the firm or their heirs or 3. At all times, be ready to account for those
estates. assets and any income, dividends, or gains
generated, to any persons entitled to such
SECTION 250: MARKETING PROFESSIONAL SERVICES accounting.
 When a professional accountant in public 4. Comply with all relevant laws and
practice solicits new work through advertising regulations relevant to the holding of and
or other forms of marketing, it may create a accounting for such assets.
self-interest threat to professional behavior if  A professional accountant in public practice
services, achievements, or products are shall make appropriate inquiries about sources
marketed in a way that it is inconsistent with of such assets and consider legal and regulatory
that principle. obligations.
 If the professional accountant in public practice  If the assets were derived from illegal sources, a
is in doubt about whether a proposed form of threat would be created. He/she may consider
advertising or marketing is appropriate, he/she seeking legal advice.
considers consulting with the relevant
professional body.

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SECTION 280: OBJECTIVITY-ALL SERVICES Network and Network Firm
 A professional accountant in public practice  If a firm is deemed to be a network firm, the
shall determine when providing any firm shall be independent of the audit clients of
professional service whether there are any the other firms within the network.
threats to objectivity resulting from having  To enhance their ability to provide professional
interests in, or relationships with, a client or its services, firms frequently form larger structures
directors, officers or employees. A familiarity with other firms and entities.
threat to objectivity may be created from a  Where the larger structure is aimed at
family or close personal or business cooperation and it is clearly aimed at profit or
relationship. cost sharing among the entities within the
Safeguards: structure, it is deemed to be a network.
1. Withdrawing from the engagement team.  The following does not create a network:
2. Supervisory procedures. a. Sharing of immaterial costs.
3. Terminating the financial or business b. Sharing of costs is limited only to those
relationship giving rise to the threat. costs related to the development of audit
4. Discussing the issue with higher levels of methodologies, manuals, or training
management within the firm. courses.
5. Discussing the issue with those charged c. An association between a firm and an
with governance of the client. otherwise unrelated entity to jointly
 If safeguards cannot eliminate or reduce the provide a service or develop a product.
threat to an acceptable level, the professional  The following create a network:
accountant in public practice shall decline the a. Share common ownership, control or
relevant engagement. management.
b. Share common quality control policies and
SECTION 290: INDEPENDENCE-AUDIT AND REVIEW procedures.
ENGAGEMENTS c. Share a common business strategy.
Structure of Section d. Share the use of a common brand name.
 This section addresses the independence e. It makes reference in its stationery or
requirements for audit engagements and promotional materials to being a member
review engagements, which are assurance of an association of firms.
engagements in which a professional f. Share a significant part of professional
accountant in public practice expresses a resources.
conclusion on financial statements. Related Entities
 In this section, the terms:  In the case of an audit client that is a listed
a. Audit, audit team, audit engagement, audit entity, references to an audit client include
client and audit report includes review, related entities of the client.
review team, review engagement, review  When the audit team knows or has a reason to
client and review report. believe that a relationship or circumstance
b. Firm includes network firm, except where involving another related entity of the client is
otherwise stated. relevant to the evaluation of the firm’s
A Conceptual Framework Approach independence from the client, the audit team
 Independence comprises: shall include that related entity when
a. Independence of Mind identifying and evaluating threats to
Independence of mind is the state of mind independence and applying appropriate
that permits the expression of a conclusion safeguards.
without being affected by influences that Those Charged with Governance
comprise professional judgment, thereby  Regular communication is encouraged between
allowing an individual to act with integrity the firm and those charged with governance of
and exercise objectivity and professional the audit client regarding relationships and
skepticism. other matters that might reasonably bear
b. Independence of Appearance independence.
Independence of appearance is the Documentation
avoidance of facts and circumstances that  The professional accountant shall document
are so significant that a reasonable and conclusions regarding compliance with
informed third party would be likely to independence requirements and the substance
conclude, weighing all the specific facts and of any relevant discussions that support those
circumstances, that a firm’s, or a member conclusions.
of the audit team’s integrity, objectivity or Engagement Period
professional skepticism has been  Independence from the audit client is required
compromised. both during the engagement period and the
period covered by the financial statements.

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  The engagement period starts when the audit  If those charged with governance request the
team begins to perform audit services and ends firm to continue as auditor, the firm shall do so
when the audit report is issued. only if:
 When the engagement is of a recurring nature, a. The interest or relationship will be
it ends at the later date of notification by either terminated as soon as reasonably possible
party that the professional relationship has and in all cases within six months of the
terminated or the issuance of the final audit effective date of merger or acquisition.
report. b. Any individual, who has such an interest or
 When an entity becomes an audit client during relationship, including one that has arisen
or after the period covered by the financial through performing a non-assurance
statements on which the firm will express an service that would not be permitted under
opinion, the firm shall determine whether any this section, will not be a member of the
threats to independence are created by: engagement team for the audit or the
a. Financial or business relationships with the individual responsible for the engagement
audit client during or after the period quality control review.
covered by the financial statements but c. Appropriate transitional measures will be
before accepting the audit engagement: or applied and discussed with those charged
b. Previous services provide to the audit client with governance.
 If a non-assurance service was provided to the Examples of transitional measures:
client during or after the period covered by the 1. Having a professional accountant
financial statements but before the audit team review the audit or non-assurance work
begins to perform audit services and the service as appropriate.
would not be permitted during the period of 2. Having a professional accountant
the audit engagement, the firm shall evaluate perform a review that is equivalent to
any threat to independence created by the an engagement quality control review.
service. 3. Engaging another firm to evaluate the
Safeguards: results of the non-assurance services or
1. Not including personnel who provided the having another firm re-perform the
non-assurance service as members of the non-assurance service to the extent
audit team. necessary to enable it to take
2. Having a professional accountant review responsibility for the service.
the audit and non-assurance work as  The firm may have completed a significant
appropriate. amount of work on the audit prior to the
3. Engaging another firm to evaluate the effective date of the merger or acquisition and
results of the non-assurance service or may be able to complete the remaining audit
having another firm re-perform the non- procedures within a short period of time. In
assurance service to the extent necessary to such circumstance, if those charged with
enable it to take responsibility for the governance request the firm to complete the
service. audit while continuing with an interest or
Mergers and Acquisitions relationship identified, the firm shall do so only
 When an entity becomes a related entity of an if it:
audit client, the firm shall identify and evaluate a. Has evaluated the significance of the threat
previous and current interests and relationships created by such interest or relationship and
with the related entity that could affect its discussed the evaluation with those
independence and therefore its ability to charged with governance.
continue the audit engagement after the b. Ceases to be the auditor no later than the
effective date of the merger and acquisition. issuance of the audit report.
 If a current interest or relationship cannot be Financial Interest
reasonably terminated by the effective date of  Holding a financial interest in an audit client
merger or acquisition, the firm shall evaluate may create a self-interest threat. The existence
the threat that is created by such interest or and significance of any threat created depends
relationship. on:
 The more significant the threat, the more likely a. The role of the person holding the financial
the firm’s objectivity will be compromised and it interest.
will be unable to continue as auditor. b. Whether the financial interest is direct or
 The firm shall discuss with those charged with indirect.
governance the reasons why the interest or c. The materiality of the financial interest.
relationship cannot reasonably be terminated  Financial interest may be held through an
by the effective date of the merger and intermediary. When control over the
acquisition and the evaluation of the investment decisions exist, the financial interest
significance of the threat. is a direct financial interest and vice versa.

10
  If a member of the audit team, a member of  A self-interest threat may be created if the firm
that individual’s immediate family or a firm has or a member of the audit team, or a member of
a direct financial interest or a material indirect that individual’s immediate family has a
financial interest in the audit client, the self- financial interest in an entity and an audit client
interest threat created would be so significant also has a financial interest in that entity.
that no safeguards could reduce the threat to However, independence is deemed not
an acceptable level. Therefore, none of the compromised if these interests are immaterial
following shall have a direct financial interest or and the audit client cannot exercise significant
a material indirect financial interest in the influence over the entity. If such interest in
client: a member of the audit team, a member material to any party and the audit client can
of that individual’s immediate family, or the exercise significant influence over the other
firm. entity, no safeguards could reduce the threat to
 When a member of the audit team has a close an acceptable level. Accordingly, the firm shall
family member who the audit team member not have such interest and any individual with
knows has a direct financial interest or a such interest shall, before becoming a member
material indirect financial interest in the audit of the audit team, either:
client, a self-interest threat is created. a. Dispose of the interest
Safeguards: b. Dispose of a sufficient amount of the
1. The close family member disposing of all of interest so that the remaining interest is no
the financial interest or disposing of a longer material.
sufficient portion of an indirect financial  A self-interest, familiarity, or intimidation threat
interest so that the remaining interest is no may be created if a member of the audit team,
longer material. or a member of that individual’s immediate
2. Having a professional accountant review family or the firm, has a financial interest in an
the work of the member of the audit team. entity when a director, officer or controlling
 If a member of the audit team, a member of owner of the audit is also known to have a
that individual’s immediate family or a firm has financial interest in that entity.
a direct or material indirect financial interest in Safeguards:
an entity that has a controlling interest in the 1. Removing the member of the audit team
audit client, and the client is material to the with the financial interest from the audit
entity, self-interest created would be so team.
significant that no safeguards could reduce the 2. Having a professional accountant review
threat to an acceptable level. Therefore, none the work of the member of the audit team.
of the following shall have such a financial Loans and Guarantees
interest: a member of the audit team, a  If the loan or guarantee is not made under
member of that individual’s immediate family, normal lending procedures, terms and
and the firm. conditions, a self-interest threat created that
 The holding by a firm’s retirement benefit plan would be so significant that no safeguards could
of a direct or material indirect financial interest reduce the threat to an acceptable level.
in an audit client creates a self-interest threat. Accordingly, neither a member of the audit
 If other partners in the office in which the team, a member of that individual’s immediate
engagement partner practices in connection family, nor a firm shall accept such a loan or
with the audit engagement, or their immediate guarantee.
family members, hold a direct or a material  If a loan to affirm from an audit client that is a
indirect financial interest in that audit client, bank or similar institution is made under normal
the self-interest threat would be so significant lending procedures, terms and conditions and it
that no safeguards could reduce the threat to is material to the audit client or firm receiving
an acceptable level. . Therefore, none of the the loan, it may be possible to apply safeguards
following shall have such a financial interest: a such as having the work reviewed by a
member of the audit team, a member of that professional accountant from a network firm
individual’s immediate family, and the firm. that is neither involved with the audit nor
 If other partners and managerial employees, received the loan to reduce the self-interest
who provide non-audit services to the audit threat to an acceptable level.
client or their immediate family members, hold  Credit card balances which are normally
a direct or material indirect financial interest in available to other credit card holders and fully
the audit client, the self-interest threat would secured car loans and housing loans which are
be so significant that no safeguards could not past due does not create a threat to
reduce the threat to an acceptable level. independence.
Accordingly, neither such personnel nor their  If the firm or a member of the audit team, or a
immediate family members shall hold any such member of that individual’s immediate family,
financial interest in such an audit client. accepts a loan from, or has a borrowing
guaranteed by, an audit client that is not a bank
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 or similar institution, the self-interest threat immediate family, does not generally create a
created would be so significant that no threat to independence if the transaction is in
safeguards could reduce the threat to an the normal course of business and at arm’s
acceptable level, unless the loan or guarantee is length. However, such transactions may be of
immaterial to both the firm or the member of such a nature or magnitude that they create a
the audit team and the immediate family self-interest threat.
member, and the client. (Vice versa) Safeguards:
 If a firm or a member of the audit team, or a 1. Eliminating or reducing the magnitude of
member of that individual’s immediate family, the transaction.
has deposits or a brokerage account with an 2. Removing the individual from the audit
audit client that is a bank, broker or similar team.
institution, a threat to independence is not Family and Personal Relationships
created if the deposit or account is held under  Family and personal relationships between a
normal commercial terms. member of the audit team and a director or
Business Relationship officer and certain employees of the audit client
 Relationships that may create a self-interest or may create self-interest, familiarity or
intimidation threats: intimidation threats.
a. Having a financial interest in a joint venture  When an immediate family member of a
with either the client or a controlling member of the audit team is:
owner, director, officer or other individual a. A director or officer of the audit client; or
who performs senior managerial activities b. An employee in a position to exert
for that client. significant influence over the preparation of
b. Arrangements to combine one or more the client’s accounting records or the
services or products of the firm with one or financial statements on which the firm will
more services or products of the client and express an opinion; the threats to
to market the package with reference to independence can only be reduced to an
both parties. acceptable level by removing the individual
c. Distribution or marketing arrangements from the audit team.
under which the firm distributes or markets Safeguards:
the client’s products or services, or the 1. Removing the individual from the audit
client distributes or markets the firm’s team.
products or services. 2. Structuring the responsibilities of the audit
 Unless the financial interest is immaterial and team so that the professional does not deal
the business relationship is insignificant, the with matters that are within the
business relationship shall not enter into, or it responsibility of the immediate family
shall be reduced to an insignificant level or member.
terminated.  Threats to independence is created when a
 In the case of a member of the audit team, close family member of a member of the audit
unless any such financial interest is immaterial team is:
and the relationship is insignificant to that a. A director or officer of the audit client; or
member, the individual shall be removed from b. An employee in a position to exert
the audit team. significant influence over the preparation of
 A business relationship involving the holding of the client’s accounting records or the
an interest by the firm, or a member of the financial statements on which the firm will
audit team, or a member of that individual’s express an opinion.
immediate family, in a closely-held entity when Safeguards:
the audit client or a director or officer of the 1. Removing the individual from the audit
client, or any group thereof, also holds an team.
interest in that entity does not create threats to 2. Structuring the responsibilities of the audit
independence if: team so that the professional does not deal
a. The business relationship is insignificant to with matters that are within the
the firm, the member of the audit team and responsibility of the immediate family
the member of the immediate family member.
member, and the client.  Threats to independence are created when a
b. The financial interest is immaterial to the member of the audit team has a close
investor or group of investors. relationship with a person who is not an
c. The financial interest does not give the immediate or close family member, but who is a
investor the ability to control the closely- director or officer or an employee in a position
held entity. to exert significant influence over the
 The purchase of goods and services from an preparation of the client’s accounting records
audit client by the firm, or a member of an audit or the financial statements on which the firm
team, or a member of the individual’s will express an opinion.
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 Safeguards:
1. Removing the individual from the audit
team.
2. Structuring the responsibilities of the audit
team so that the professional does not deal
with matters that are within the
responsibility of the immediate family
member.
Employment with an Audit Client
 Familiarity or intimidation threats may be
created if a director or officer of audit client, or
an employee in a position to exert significant
influence over the preparation of the client’s
accounting records or the financial statements
on which the firm will express an opinion, has
been a member of the audit team or partner of
the firm.
 Independence would be deemed to be
compromised if a former member of the audit
team or partner joins the audit client as a
director or officer of audit client, or an
employee in a position to exert significant
influence over the preparation of the client’s
accounting records or the financial statements
on which the firm will express an opinion,
unless:
a. The individual

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