Learning Objectives

To understand the requirements of MIA

By-Laws
To understand the applicability of MIA
By- Laws to the auditors

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MIA By-Laws
(on Professional Ethics, Conduct and Practice)
 In Malaysia, FOR ACCOUNTANTS, MIA issued the “MIA
By-Laws [on Professional Ethics, Conduct and Practice]”:
◦ Provide standard of conduct in daily professional life
◦ Important for gaining public confidence in auditors’
services
◦ Exhibit the highest standards of ethics, professionalism
and professional conduct that are expected of the profession

 The current By-Laws is amended as of 30 MAY 2020.

 A breach of these By-Laws will prima facie give rise to a

complaint of unprofessional conduct against the member
concerned. As such, members who fail to observe proper
standards of ethics and professional conduct as set out in these
by-laws may be required to answer a complaint before the
Investigation and the Disciplinary Committees of the MIA.
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MIA By-Laws
(on Professional Ethics, Conduct and Practice)

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Contents of MIA By-Laws
PART A: BY-LAWS ON PROFESSIONAL ETHICS
 PART 1 - COMPLYING WITH THE CODE, FUNDAMENTAL
PRINCIPLES AND CONCEPTUAL FRAMEWORK
 PART 2 – PROFESSIONAL ACCOUNTANTS IN BUSINESS
 PART 3 – PROFESSIONAL ACCOUNTANTS IN PUBLIC
PRACTICE
 PART 4A – INDEPENDENCE FOR AUDIT AND REVIEW
ENGAGEMENTS
 PART 4B – INDEPENDENCE FOR ASSURANCE ENGAGEMENTS
OTHER THAN AUDIT AND REVIEW ENGAGEMENTS (NOT
COVERED IN OUR SYLLABUS)

PART B: BY-LAWS ON PROFESSIONAL CONDUCT

AND PRACTICE
 PART 1 - ALL PROFESSIONAL ACCOUNTANTS
 PART 2- MEMBERS IN PUBLIC PRACTICE
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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

 SECTION 100 - COMPLYING WITH THE CODE

 SECTION 110 - THE FUNDAMENTAL PRINCIPLES
◦ SUBSECTION 111 – INTEGRITY
◦ SUBSECTION 112 – OBJECTIVITY
◦ SUBSECTION 113 – PROFESSIONAL COMPETENCE
AND DUE CARE
◦ SUBSECTION 114 – CONFIDENTIALITY
◦ SUBSECTION 115 – PROFESSIONAL BEHAVIOR SECTION
 SECTION
120 - THE CONCEPTUAL
FRAMEWORK

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 PYQ: June 2018; Question 1
A. A professional accountant in public practice may experience conflict of
interest when performing a professional service. A conflict of interest
creates a threat to objectivity and may create threats to the other
fundamental principles.
 
i) Define conflict of interest.
(2 marks)
 
ii) Explain any TWO (2) examples of conflict of interest.
(4 marks)
 
B. Explain money laundering and the Act that regulate this matter.
(4 marks)
(Total: 10 marks)

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PYQ: June 2018; Question 2(A)
Amar an audit senior at Azmi, Johan & Partners is assigned to audit a new
client in Sabah. The client operates a resort in Sandakan, Sabah and is listed
on the Main Board of Bursa Malaysia. Amar is not familiar to audit
hospitality business. He is not sure of specific risks involved for the
business. However, he is reluctant to seek advice from his manager because
he fears it may affect his performance appraisal.
 
During his audit with this client, he noticed that the managers of the resort
often have lunch in the restaurant at the resort. The managing director of the
client informed Amar that he can also have his lunch there for free as he
desired. Amar also discovered that one of the firm’s staff owns 10,000
shares (10 lots) in the client company. This staff is not in the team to audit
the company. In addition, Amar also noticed that, one of his team member
plans to disclose some of the clients’ information to his friend, a competitor
in the hospitality business in Sandakan. The client’s resort are showing
profitable trend for the past five years.

Required:
Discuss the ethical and other professional issues raised in the above case.
(8 marks)7
PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 110 – FUNDAMENTAL PRINCIPLES

 Professional accountants shall comply with the following fundamental
principles of ethics:

1. Integrity
2. Objectivity
3. Professional Competence and Due Care
4. Confidentiality
5. Professional Behaviour

 Auditor in performing professional services may face many threats to

compliance with the fundamental principles.

 Therefore, auditor should be able to identify threats, apply safeguards to

eliminate the threats or reduce to acceptable level to make sure the auditor
comply with fundamental principles.
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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 111 – INTEGRITY

 The principle of integrity imposes an obligation on all professional
accountants to be straightforward and honest in all professional and
business relationships.
 Integrity also implies fair dealing and truthfulness.
 A professional accountant shall not knowingly be associated with reports,
returns, communications or other information where the professional
accountant believes that the information:
(a) Contains a materially false or misleading statement;
(b) Contains statements or information furnished recklessly; or
(c) Omits or obscures information required to be included where such
omission or obscurity would be misleading.
 When a professional accountant becomes aware that the accountant has
been associated with such information, the accountant shall take steps to be
disassociated from that information.
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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 112 – OBJECTIVITY

 The principle of objectivity imposes an obligation on all professional
accountants not to compromise their professional or business judgment
because of bias, conflict of interest or the undue influence of others.
 A professional accountant may be exposed to situations that may impair
objectivity. It is impracticable to define and prescribe all such situations.
A professional accountant shall not perform a professional service if a
circumstance or relationship biases or unduly influences the accountant’s
professional judgment with respect to that service.

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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 113 – PROFESSIONAL COMPETENCE AND

DUE CARE
 A professional accountant shall comply with the principle of professional
competence and due care, which requires an accountant to:
(a) Attain and maintain professional knowledge and skill at the level
required to ensure that a client or employing organization receives
competent professional service, based on current technical and
professional standards and relevant legislation; and
(b) Act diligently and in accordance with applicable technical and
professional standards.
◦ Serving clients and employing organizations with professional
competence requires the exercise of sound judgment in applying
professional knowledge and skill when undertaking professional
activities.

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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 113 – PROFESSIONAL COMPETENCE AND

DUE CARE (Cont.)
• Maintaining professional competence requires a continuing awareness and an
understanding of relevant technical, professional and business developments.
Continuing professional development enables a professional accountant to
develop and maintain the capabilities to perform competently within the
professional environment.
• Diligence encompasses the responsibility to act in accordance with the
requirements of an assignment, carefully, thoroughly and on a timely basis.
• In complying with the principle of professional competence and due care, a
professional accountant shall take reasonable steps to ensure that those
working in a professional capacity under the accountant’s authority have
appropriate training and supervision.
• Where appropriate, a professional accountant shall make clients, the employing
organization, or other users of the accountant’s professional services or
activities, aware of the limitations inherent in the services or activities.
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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 114 – CONFIDENTIALITY

 The principle of confidentiality imposes an obligation on all professional
accountants to refrain from:
(a) Disclosing outside the firm or employing organization confidential
information acquired as a result of professional and business
relationships without proper and specific authority or unless there is a
legal or professional right or duty to disclose; and
(b) Using confidential information acquired as a result of professional
and business relationships to their personal advantage or the advantage
of third parties.
 A professional accountant shall maintain confidentiality even in a social
environment, being alert to the possibility of inadvertent disclosure,
particularly to a close or immediate family member.
 A professional accountant shall maintain confidentiality of information
disclosed by a prospective client or employer.
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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 114 – CONFIDENTIALITY (cont.)

 A professional accountant shall comply with the principle of
confidentiality, which requires an accountant to respect the confidentiality
of information acquired as a result of professional and business
relationships. An accountant shall:
(a) Be alert to the possibility of inadvertent disclosure, including in a
social environment, and particularly to a close business associate or an
immediate or a close family member;
(b) Maintain confidentiality of information within the firm or
employing organization;
(c) Maintain confidentiality of information disclosed by a
prospective client or employing organization;
(d) Not disclose confidential information acquired as a result of
professional and business relationships outside the firm or employing
organization without proper and specific authority, unless there is a
legal or professional duty or right to disclose;
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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 114 – CONFIDENTIALITY (cont.)

(e) Not use confidential information acquired as a result of
professional and business relationships for the personal
advantage of the accountant or for the advantage of a
third party;
(f) Not use or disclose any confidential information, either
acquired or received as a result of a professional or
business relationship, after that relationship has ended;
and
(g) Take reasonable steps to ensure that personnel under the
accountant’s control, and individuals from whom advice
and assistance are obtained, respect the accountant’s duty
of confidentiality.
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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 114 – CONFIDENTIALITY (cont.)

 Nevertheless, the following are circumstances where professional accountants are or might be
required to disclose confidential information or when such disclosure might be appropriate:
(a) Disclosure is required by law, for example:
(i) Production of documents or other provision of evidence in the course of legal
proceedings; or
(ii) Disclosure to the appropriate public authorities of infringements of the law that came
to light;
(b) Disclosure is permitted by law and is authorized by the client or the employing
organization; and
(c) There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with the quality review of a professional body;
(ii) To respond to an inquiry or investigation by a professional or regulatory body;
(iii) To protect the professional interests of a professional accountant in legal proceedings; or
(iv) To comply with technical and professional standards, including ethics requirements.

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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 115 – PROFESSIONAL BEHAVIOUR

 A professional accountant shall comply with the principle of
professional behaviour, which requires an accountant to comply
with relevant laws and regulations and avoid any conduct that
the accountant knows or should know might discredit the
profession.
 A professional accountant shall not knowingly engage in any
business, occupation or activity that impairs or might impair
the integrity, objectivity or good reputation of the profession,
and as a result would be incompatible with the fundamental
principles.
 Conduct that might discredit the profession includes conduct
that a reasonable and informed third party would be likely to
conclude adversely affects the good reputation of the profession.
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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 115 – PROFESSIONAL BEHAVIOUR (cont.)

 When undertaking marketing or promotional activities, a professional
accountant shall not bring the profession into disrepute. A professional
accountant shall be honest and truthful and shall not make:
◦ (a) Exaggerated claims for the services offered by, or the
qualifications or experience of, the accountant; or
◦ (b) Disparaging references or unsubstantiated comparisons to the
work of others.
 If a professional accountant is in doubt about whether a form of
advertising or marketing is appropriate, the accountant is encouraged to
consult with the relevant professional body.

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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 120 – THE CONCEPTUAL FRAMEWORK

 The conceptual framework specifies an approach for a professional
accountant to:
(a) Identify threats to compliance with the fundamental principles;
(b) Evaluate the threats identified; and
(c) Address the threats by eliminating or reducing them to an
acceptable level.

 Types of Threats:
a) Self-interest threat – the threat that a financial or other interest
will inappropriately influence a professional accountant’s judgment
or behavior;

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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND
CONCEPTUAL FRAMEWORK
SECTION 120 – THE CONCEPTUAL FRAMEWORK (
(b) Self-review threat – the threat that a professional accountant will no
appropriately evaluate the results of a previous judgment made; or an ac
performed by the accountant, or by another individual within the accoun
firm or employing organization, on which the accountant will rely when
forming a judgment as part of performing a current activity;
(c) Advocacy threat – the threat that a professional accountant will pro
client’s or employing organization’s position to the point that the accoun
objectivity is compromised;
(d) Familiarity threat – the threat that due to a long or close relationshi
a client, or employing organization, a professional accountant will be to
sympathetic to their interests or too accepting of their work; and
(e) Intimidation threat – the threat that a professional accountant will b
deterred from acting objectively because of actual or perceived pressure
including attempts to exercise undue influence over the accountant.
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PART A: PART 1
COMPLYING WITH THE CODE, FUNDAMENTAL PRINCIPLES AND CONCEPTUAL FRAMEWORK

SECTION 120 – THE CONCEPTUAL FRAMEWORK

(cont.)
 Professional accountants shall address the threats by eliminating them
or reducing them to an acceptable level by:
(a) Eliminating the circumstances, including interests or
relationships, that are creating the threats;
(b) Applying safeguards, where available and capable of being
applied, to reduce the threats to an acceptable level; or
(c) Declining or ending the specific professional activity.

 Safeguards are actions, individually or in combination, that the

professional accountant takes that effectively reduce threats to
compliance with the fundamental principles to an acceptable level.

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PART A: PART 3
PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE

 SECTION 300 - APPLYING THE CONCEPTUAL

FRAMEWORK – PROFESSIONAL
ACCOUNTANTS IN PUBLIC PRACTICE
 SECTION 310 - CONFLICTS OF INTEREST
 SECTION 320 - PROFESSIONAL APPOINTMENTS
 SECTION 321 - SECOND OPINIONS
 SECTION 330 - FEES AND OTHER TYPES OF
REMUNERATION
 SECTION 340 - INDUCEMENTS, INCLUDING GIFTS
AND HOSPITALITY

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SECTION 300 – Applying the Conceptual
Framework
 Identifying threats:
Types of Examples
threats
Self-interest • A professional accountant having a direct financial interest
in a client.
• A professional accountant quoting a low fee to obtain a new
engagement and the fee is so low that it might be difficult to
perform the professional service in accordance with
applicable technical and professional standards for that
price.
• A professional accountant having a close business
relationship with a client.
• A professional accountant having access to confidential
information that might be used for personal gain.
• A professional accountant discovering a significant error
when evaluating the results of a previous professional
service performed by a member of the accountant’s firm.

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SECTION 300 - Applying the Conceptual
Framework (cont.)
 Identifying threats:
Types of Examples
threats
Self-review • A professional accountant issuing an assurance report on
the effectiveness of the operation of financial systems
after implementing the systems.
• A professional accountant having prepared the original
data used to generate records that are the subject
matter of the assurance engagement.
Advocacy • A professional accountant promoting the interests of, or
shares in, a client.
• A professional accountant acting as an advocate on
behalf of a client in litigation or disputes with third
parties.
• A professional accountant lobbying in favor of
legislation on behalf of a client.

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SECTION 300 - Applying the Conceptual
Framework (cont.)
 Identifying threats:
Types of Examples
threats
Familiarity • A professional accountant having a close or immediate
family member who is a director or officer of the client.
• A director or officer of the client, or an employee in a
position to exert significant influence over the subject
matter of the engagement, having recently served as
the engagement partner.
• An audit team member having a long association with
the audit client.
Intimidation • A professional accountant being threatened with
dismissal from a client engagement or the firm because
of a disagreement about a professional matter.
• A professional accountant feeling pressured to agree
with the judgment of a client because the client has more
expertise on the matter in question.
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SECTION 300 - Applying the Conceptual
Framework (cont.)
 Examples of Safeguards:
◦ Assigning additional time and qualified personnel to required tasks when
an engagement has been accepted might address a self-interest threat.
◦ Having an appropriate reviewer who was not a member of the team
review the work performed or advise as necessary might address a self-
review threat.
◦ Using different partners and engagement teams with separate reporting
lines for the provision of non-assurance services to an assurance client
might address self-review, advocacy or familiarity threats.
◦ Involving another firm to perform or re-perform part of the engagement
might address self-interest, self-review, advocacy, familiarity or
intimidation threats.
◦ Disclosing to clients any referral fees or commission arrangements
received for recommending services or products might address a self-
interest threat.
◦ Separating teams when dealing with matters of a confidential nature
might address a self-interest threat.
26
SECTION 310 – Conflict of Interest
 Examples of circumstances that might create a conflict of
interest:
◦ Providing a transaction advisory service to a client seeking to acquire an
audit client, where the firm has obtained confidential information during the
course of the audit that might be relevant to the transaction.
◦ Providing advice to two clients at the same time where the clients are
competing to acquire the same company and the advice might be relevant to
the parties’ competitive positions.
◦ Providing services to a seller and a buyer in relation to the same transaction.
◦ Preparing valuations of assets for two parties who are in an adversarial
position with respect to the assets.
◦ Representing two clients in the same matter who are in a legal dispute with
each other, such as during divorce proceedings, or the dissolution of a
partnership.
◦ In relation to a license agreement, providing an assurance report for a
licensor on the royalties due while advising the licensee on the amounts
payable.

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SECTION 320 – Professional appointments
• Client acceptance
◦ The auditor should investigate the background and business
activities of the audit client and he should consider:
 Whether the acceptance of the nomination would create any threats
to compliance with the fundamental principles; for example any
blood relationship between auditor and audit client; or

 Whether there are any client issues that would threaten

compliance of fundamental principles; for example the audit client
involves in illegal business activities such as money laundering
etc.

To accept the appointment, the auditor need to eliminate or reduce

the threats to an acceptable level with proper safeguards. Otherwise
the auditor should decline the appointment.

28
SECTION 320 – Professional appointments (cont.)

• Engagement acceptance
o The auditor should only accept audit engagements that he is
competent to perform. He should consider whether acceptance
would create any threats to compliance with the fundamental
principles. After identified the threats, the auditor need to eliminate
or reduce threats to an acceptable level, by applying the following
safeguards:-
 Acquiring understanding of the nature and complexity of the
client’s business
 Acquiring knowledge of relevant industries
 Obtaining experience with regulatory & reporting requirements
 Assigning sufficient staff with the necessary competencies
 Using expert where necessary
 Agreeing on the realistic time frame for performance of the
engagement
 Comply with quality control policies and procedures

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SECTION 321 – Second Opinions
• Providing a second opinion to an entity that is not an
existing client might create a self-interest or other threat
to compliance with one or more of the fundamental
principles.
• Examples of actions that might be safeguards to address
such a self-interest threat include:
o With the client’s permission, obtaining information from
the existing or predecessor accountant.
o Describing the limitations surrounding any opinion in
communications with the client.
o Providing the existing or predecessor accountant with a
copy of the opinion.

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SECTION 330 – Fees and Other Types of
Remuneration
 Fees charged for all engagements should be a fair reflection of the
value of the work involved and should take into account, among others:
(a) the skill and knowledge required for the type of work involved;
(b) the level of training and experience of the persons necessarily
engaged on the work;
(c) the time necessarily occupied by each person engaged on the
work; and
(d) the degree of responsibility and urgency that the work entails.

 Quoting a fee lower than another accountant is not in itself unethical.

However, the level of fees quoted creates a self-interest threat to
compliance with the principle of professional competence and due care
if the fee quoted is so low.

31
SECTION 330 – Fees and Other Types of
Remuneration
 The factors that may create self-interest threats:
 A large portion of the audit firm’s total earning from one client
the audit firm’s financial heavily dependence on that client may
create self-interest threat. E.g. All cases involving listed entities, if
the total fee generated exceed 15% of the firm total fees in each year
over two consecutive years, a self-interest threat to independence is
created. The only way is to withdraw from the engagement.

 Overdue fee of an audit client

Long overdue for significant amount of audit fee may also give rise
to self-interest threat. Generally the payment of such fees should be
required before the report is issued or before starts the new
engagement.

 Contingent fee
Fee should not be charged on a contingent basis for audit
engagements but can be used for certain types of non-audit
engagements. Hence the auditor must have clear understanding with
the client on the scope and fee of the audit engagement.

32
SECTION 340 – Inducements, including Gifts and
Hospitality
 An inducement can take many different forms, for example:
◦ Gifts.
◦ Hospitality.
◦ Entertainment.
◦ Political or charitable donations.
◦ Appeals to friendship and loyalty.
◦ Employment or other commercial opportunities.
◦ Preferential treatment, rights or privileges.

 Accepting gifts from audit clients may create self-interest, familiarity

and intimidation threats, but generally is permissible if the value is
clearly insignificant.

 However, if the gifts are significant and cannot be reduced to an

acceptable level by application any safeguard, the auditor should not
accept such gifts.
33
 SECTION 340 – Inducements, including Gifts and
Hospitality
 Examples of safeguards:
◦ Be transparent with senior management of the firm or of the client
about offering or accepting an inducement.
◦ Registering the inducement in a log monitored by senior management
of the firm or another individual responsible for the firm’s ethics
compliance or maintained by the client.
◦ Having an appropriate reviewer, who is not otherwise involved in
providing the professional service, review any work performed or
decisions made by the professional accountant with respect to the client
from which the accountant accepted the inducement.
◦ Donating the inducement to charity after receipt and appropriately
disclosing the donation, for example, to a member of senior management
of the firm or the individual who offered the inducement.
◦ Reimbursing the cost of the inducement, such as hospitality, received.
◦ As soon as possible, returning the inducement, such as a gift, after it was
initially accepted.
34
PART A: PART 4A
INDEPENDENCE FOR AUDIT AND
REVIEW ENGAGEMENTS

 SECTION 400 - APPLYING THE CONCEPTUAL FRAMEWORK TO

INDEPENDENCE FOR AUDIT AND REVIEW ENGAGEMENTS
 SECTION 410 - FEES
 SECTION 420 - GIFTS AND HOSPITALITY
 SECTION 430 - ACTUAL OR THREATENED LITIGATION
 SECTION 510 - FINANCIAL INTERESTS
 SECTION 511 - LOANS AND GUARANTEES
 SECTION 520 - BUSINESS RELATIONSHIPS
 SECTION 521 - FAMILY AND PERSONAL RELATIONSHIPS
 SECTION 522 - RECENT SERVICE WITH AN AUDIT CLIENT
 SECTION 523 - SERVING AS A DIRECTOR OR OFFICER OF AN
AUDIT CLIENT
 SECTION 524 - EMPLOYMENT WITH AN AUDIT CLIENT
 SECTION 540 - LONG ASSOCIATION OF PERSONNEL (INCLUDING
PARTNER ROTATION) WITH AN AUDIT CLIENT
 SECTION 600 - PROVISION OF NON-ASSURANCE SERVICES TO AN
AUDIT CLIENT 35
PART A: PART 4A
INDEPENDENCE FOR AUDIT AND
REVIEW ENGAGEMENTS (cont’d)

 SECTION 600 PROVISION OF NON-ASSURANCE

SERVICES TO AN AUDIT CLIENT
 SUBSECTION 601 ACCOUNTING AND BOOKKEEPING
SERVICES
 SUBSECTION 604 TAX SERVICES
 SUBSECTION 605 INTERNAL AUDIT SERVICES
 SUBSECTION 606 INFORMATION TECHNOLOGY SYSTEMS
SERVICES

36
TEST: April 2019; Question 1
Salhadi & Co is the auditor for Baller Cafe Sdn Bhd. On 1 January 2019,
Baller Cafe had ceased the company’s accounting department and
outsourced the accounting function to Salhadi & Co.
 
The partner-in-charge, En. Salhadi Zambri, always looking forward for a
business in food and beverages. Therefore, on 28 Februari 2019, he
signed a franchise agreement with Baller Café for a right to operate the
cafe in Balakong.
 
a) Explain the importance of auditors’ independence.
(3 marks)
 
b) Explain the following threats:
i) Self-interest
ii) Advocacy threat.
(4 marks)
 
c) Discuss the ethical threats which may affect the independence of
Salhadi & Co. and provide the safeguards for each threat identified.
(9 marks)37
 PYQ: June 2019; Question 1

A. List two (2) ethical threats to

independence and give example for each
threat.
(4 marks)
B. Explain three (3) factors that need to be
considered in determining the fees to be
charged to audit clients.
(3 marks)

38
PYQ: June 2019; Question 2

39
SECTION 400 - Applying the Conceptual Framework to
Independence for Audit and Review Engagements
 Independence is linked to the principles of objectivity and integrity.
It comprises:
(a) Independence of mind – the state of mind that permits the
expression of a conclusion without being affected by influences
that compromise professional judgment, thereby allowing an
individual to act with integrity, and exercise objectivity and
professional skepticism.

(b) Independence in appearance – the avoidance of facts and

circumstances that are so significant that a reasonable
and informed third party would be likely to conclude that a
firm’s, or an audit team member’s, integrity, objectivity or
professional skepticism has been compromised.

40
SECTION 410 – Fees
 When the total fees generated from an audit client by the firm
expressing the audit opinion represent a large proportion of the total
fees of that firm, the dependence on that client and concern about
losing the client create a self-interest or intimidation threat.
 A self-interest threat might be created if a significant part of fees is
not paid before the audit report for the following year is issued. It is
generally expected that the firm will require payment of such fees
before such audit report is issued.
 When a significant part of fees due from an audit client remains
unpaid for a long time, the firm shall determine:
(a) Whether the overdue fees might be equivalent to a loan to the
client; and
(b) Whether it is appropriate for the firm to be re-appointed or
continue the audit engagement.

41
SECTION 410 – Compensation and Evaluation Policies
 When an audit team member for a particular audit client is evaluated
on or compensated for selling non-assurance services to that audit
client, the level of the self-interest threat will depend on:
(a) What proportion of the compensation or evaluation is based
on the sale of such services;
(b) The role of the individual on the audit team; and
(c) Whether the sale of such non-assurance services influences
promotion decisions.

 A firm shall not evaluate or compensate a key audit partner based on

that partner’s success in selling non-assurance services to the
partner’s audit client. This requirement does not preclude normal
profit-sharing arrangements between partners of a firm.

42
SECTION 420 – Gifts and Hospitality
 A firm, network firm or an audit team member shall not accept gifts
and hospitality from an audit client, unless the value is trivial and
inconsequential.
 Refer Section 340

43
SECTION 430 – Actual or Threatened Litigation
 Factors that are relevant in evaluating the level of such threats
include:
◦ The materiality of the litigation.
◦ Whether the litigation relates to a prior audit engagement.

 If the litigation involves an audit team member, an example of an

action that might eliminate such self-interest and intimidation
threats is removing that individual from the audit team.

44
SECTION 510 – Financial Interest
 Direct and indirect financial interests by:
(a) The firm or a network firm;
(b) An audit team member, or any of that individual’s immediate
family;
(c) Any other partner in the office in which an engagement
partner practices in connection with the audit engagement, or
any of that other partner’s immediate family; or
(d) Any other partner or managerial employee who provides
non-audit services to the audit client, except for any whose
involvement is minimal, or any of that individual’s immediate
family.
 Factors that are relevant in evaluating the level of a self-interest
threat created by holding a financial interest in an audit client
include:
◦ The role of the individual holding the financial interest.
◦ Whether the financial interest is direct or indirect.
◦ The materiality of the financial interest.
45
SECTION 511 – Loans and Guarantees
 A firm, a network firm, an audit team member, or any of that
individual’s immediate family shall not make or guarantee a loan to
an audit client unless the loan or guarantee is immaterial to:
(a) The firm, the network firm or the individual making the loan
or guarantee, as applicable; and
(b) The client.
 Unless the loan or guarantee is made under normal lending
procedures, terms and conditions (including for mortgages, bank
overdrafts, car loans, and credit card balances).

46
SECTION 520 – Business Relationships
 In determining whether such a relationship is material to an
individual, the combined net worth of the individual and the
individual’s immediate family members may be taken into account.
 Examples of a close business relationship arising from a commercial
relationship or common financial interest include:
◦ Having a financial interest in a joint venture with either the client
or a controlling owner, director or officer or other individual who
performs senior managerial activities for that client.
◦ Arrangements to combine one or more services or products of the
firm or a network firm with one or more services or products of
the client and to market the package with reference to both
parties.
◦ Distribution or marketing arrangements under which the firm or a
network firm distributes or markets the client’s products or
services, or the client distributes or markets the firm or a network
firm's products or services.

47
SECTION 521 – Family and Personal Relationship
 A self-interest, familiarity or intimidation threat is created when an
immediate family member of an audit team member is an employee
in a position to exert significant influence over the client’s financial
position, financial performance or cash flows.
 Factors that are relevant in evaluating the level of such threats
include:
◦ The individual’s responsibilities on the audit team.
◦ The role of the family member or other individual within the
client, and the closeness of the relationship.
 An individual shall not participate as an audit team member when
any of that individual’s immediate family:
(a) Is a director or officer of the audit client;
(b) Is 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;
(c)Was in such position during any period covered by the
engagement or the financial statements.
48
SECTION 522 – Recent Service with an Audit Client
 The audit team shall not include an individual who, during the
period covered by the audit report:
(a) Had served as a director or officer of the audit client; or
(b) Was 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.
 For example, a threat would be created if a decision made or work
performed by the individual in the prior period, while employed by
the client, is to be evaluated in the current period as part of the
current audit engagement.
 Factors that are relevant in evaluating the level of such threats
include:
◦ The position the individual held with the client.
◦ The length of time since the individual left the client.
◦ The role of the audit team member.

49
SECTION 523 – Serving as a Director of Officer as an
Audit Client
 A partner or employee of the firm or a network firm shall not serve
as a director or officer of an audit client of the firm.
 A partner or employee of the firm or a network firm shall not serve
as Company Secretary for an audit client of the firm, unless:
(a) This practice is specifically permitted under local law,
professional rules or practice;
(b) Management makes all relevant decisions; and
(c) The duties and activities performed are limited to those of a
routine and administrative nature, such as preparing minutes
and maintaining statutory returns.

50
SECTION 524 – Employment with an Audit Client
 The firm shall ensure that no significant connection remains
between the firm or a network firm and:
(a) A former partner who has joined an audit client of the firm; or
(b) A former audit team member who has joined the audit client,
if either has joined the audit client as:
(i) A director or officer; or
(ii) 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.
 Factors that are relevant in evaluating the level of familiarity and
intimidation threats include:
◦ The position the individual has taken at the client.
◦ Any involvement the individual will have with the audit team.
◦ The length of time since the individual was an audit team
member or partner of the firm or network firm.
◦ The former position of the individual within the audit team, firm 51
SECTION 540 – Long Association of Personnel (Including
Partner Rotation) with an Audit Client
 Although an understanding of an audit client and its environment is
fundamental to audit quality, a familiarity threat might be created as
a result of an individual’s long association as an audit team member
with:
(a) The audit client and its operations;
(b) The audit client’s senior management; or
(c) The financial statements on which the firm will express an
opinion or the financial information which forms the basis of the
financial statements.
 Examples of actions that might be safeguards to address such
familiarity or self-interest threats include:
◦ Changing the role of the individual on the audit team or the
nature and extent of the tasks the individual performs.
◦ Having an appropriate reviewer who was not an audit team
member review the work of the individual.
◦ Performing regular independent internal or external quality
reviews of the engagement.
52
SECTION 600 – Provision of Non-Assurance Services to
an Audit Client
 Factors that are relevant in evaluating the level of threats created by
providing a non-assurance service to an audit client include:
◦ The nature, scope and purpose of the service.
◦ The degree of reliance that will be placed on the outcome of the
service as part of the audit.
◦ The legal and regulatory environment in which the service is
provided.
◦ Whether the outcome of the service will affect matters reflected
in the financial statements on which the firm will express an
opinion, and, if so:
 The extent to which the outcome of the service will have a
material effect on the financial statements.
 The degree of subjectivity involved in determining the
appropriate amounts or treatment for those matters reflected in
the financial statements.

53
SECTION 600 – Provision of Non-Assurance Services to
an Audit Client (cont.)
◦ The level of expertise of the client’s management and employees
with respect to the type of service provided.
◦ The extent of the client’s involvement in determining significant
matters of judgment.
◦ The nature and extent of the impact of the service, if any, on the
systems that generate information that forms a significant part of
the client’s:
 Accounting records or financial statements on which the firm
will express an opinion.
 Internal controls over financial reporting.
◦ Whether the client is a public interest entity. For example,
providing a non-assurance service to an audit client that is a
public interest entity might be perceived to result in a higher level
of a threat.

54
SUBSECTION 601 – ACCOUNTING AND
BOOKKEEPING SERVICES
◦ This subsection includes requirements that prohibit firms and
network firms from providing certain accounting and bookkeeping
services to audit clients in some circumstances because the threats
created cannot be addressed by applying safeguards
 The audit process necessitates dialogue between the firm and the
management of the audit client, which might involve:
◦ Applying accounting standards or policies and financial
statement disclosure requirements.
◦ Assessing the appropriateness of financial and accounting control
and the methods used in determining the stated amounts of assets
and liabilities.
◦ Proposing adjusting journal entries.
 These activities are considered to be a normal part of the audit
process and do not usually create threats as long as the client is
responsible for making decisions in the preparation of accounting
records and financial statements.
55
SUBSECTION 601 – ACCOUNTING AND
BOOKKEEPING SERVICES
◦ Client might request technical assistance on matters such as resolving
account reconciliation problems or analyzing and accumulating
information for regulatory reporting. In addition, the client might
request technical advice on accounting issues such as the conversion
of existing financial statements from one financial reporting
framework to another
◦ Examples include:
 Complying with group accounting policies.
 Transitioning to a different financial reporting framework such as International
Financial Reporting Standards.
◦ No threat if neither the firm nor network firm assumes a management
responsibility for the client
◦ Accounting and bookkeeping services that are routine or mechanical
in nature require little or no professional judgment

56
SUBSECTION 604: TAX SERVICES

◦ Might create a self-review or advocacy threat.

◦ Factors that are relevant in evaluating the level of threats created by
providing any tax service to an audit client include:
 The particular characteristics of the engagement.
 The level of tax expertise of the client’s employees.
 The system by which the tax authorities assess and administer the tax in question
and the role of the firm or network firm in that process.
 The complexity of the relevant tax regime and the degree of judgment necessary in
applying it.
◦ Providing tax return preparation services does not usually create a
threat.
◦ Preparing calculations of current and deferred tax liabilities (or
assets) for an audit client for the purpose of preparing accounting
entries that will be subsequently audited by the firm creates a self-
review threat.

57
SUBSECTION 604: TAX SERVICES (Cont’d)

 Examples of actions that might be safeguards to address such a self-

review threat when the audit client is not a public interest entity
include:
◦ Using professionals who are not audit team members to perform the service.
◦ Having an appropriate reviewer who was not involved in providing the service
review the audit work or service performed.
 A firm or a network firm shall not prepare tax calculations of
current and deferred tax liabilities (or assets) for an audit client that
is a public interest entity for the purpose of preparing accounting
entries that are material to the financial statements on which the
firm will express an opinion.
 The examples of actions that might be safeguards to address self-
review threats are also applicable when preparing tax calculations of
current and deferred tax liabilities (or assets) to an audit client that
is a public interest entity that are immaterial to the financial
statements on which the firm will express an opinion.

58
SUBSECTION 605: INTERNAL AUDIT SERVICES
 Might create self review threat unless the auditor does not assume
management responsibility.
 Examples:
◦ Setting internal audit policies or the strategic direction of internal audit activities.
◦ Directing and taking responsibility for the actions of the entity’s internal audit
employees.
◦ Deciding which recommendations resulting from internal audit activities to
implement.
◦ Reporting the results of the internal audit activities to those charged with governance
on behalf of management.
◦ Performing procedures that form part of the internal control, such as reviewing and
approving changes to employee data access privileges.
 Factors that are relevant in evaluating the level of such a self-review
threat include:
◦ The materiality of the related financial statement amounts.
◦ The risk of misstatement of the assertions related to those financial statement
amounts.
◦ The degree of reliance that the audit team will place on the work of the internal audit
service, including in the course of an external audit.
59
SUBSECTION 605: INTERNAL AUDIT SERVICES
(cont’d)

Auditor shall not provide internal audit services to

an audit client that is a public interest entity, if the
services relate to:
a) A significant part of the internal controls over financial reporting;
b) Financial accounting systems that generate information that is,
individually or in the aggregate, material to the client’s accounting
records or financial statements on which the firm will express an
opinion; or
c) Amounts or disclosures that are, individually or in the aggregate,
material to the financial statements on which the firm will express
an opinion.

60
SUBSECTION 606: INFORMATION TECHNOLOGY
SERVICES
 Might create self review threat unless the auditor does not assume
management responsibility.
 Examples:
a) Designing or implementing IT systems that are unrelated to internal control over financial
reporting;
b) Designing or implementing IT systems that do not generate information forming a
significant part of the accounting records or financial statements;
c) Implementing “off-the-shelf” accounting or financial information reporting software that
was not developed by the firm or network firm, if the customization required to meet the
client’s needs is not significant; and
d) Evaluating and making recommendations with respect to an IT system designed,
implemented or operated by another service provider or the client.
 Factors to consider in evaluating the level of a self-review threat include:
◦ The nature of the service.
◦ The nature of IT systems and the extent to which they impact or interact with the client’s
accounting records or financial statements.
◦ The degree of reliance that will be placed on the particular IT systems as part of the audit.
 Use professionals who are not audit team members to safeguard against self-
review threat 61
SUBSECTION 606: INFORMATION TECHNOLOGY
SERVICES (cont’d)

A firm or a network firm shall not provide IT

systems services to an audit client that is a
public interest entity if the services involve
designing or implementing IT systems that:
a) Form a significant part of the internal control over
financial reporting; or
b) Generate information that is significant to the
client’s accounting records or financial statements
on which the firm will express an opinion.

62
PART B: PART 2
MEMBERS IN PUBLIC PRACTICE
 SECTION B200 METHOD OF PRACTICE
◦ Subsection B200.1 – B200.06: Method of Practice
◦ Subsection B200.7 – B200.12: Establishment and Registration of Member
Firm
◦ Subsection B200.13: Breaches

 SECTIONB210 PROFESSIONAL INDEMNITY

INSURANCE
◦ Subsection B210.1 – B210.5: Professional Indemnity Insurance

 SECTION B220 DEATH OR INCAPACITY OF A SOLE

PRACTITIONER
◦ Subsection B220.1 – B220.5: Death or Incapacity of a Sole Practitioners

 SECTION B240 REFERRALS 63

END OF TOPIC 1