Identification of Threats

Self Interest Self Review

Familiarity
• Own Shares • Accounts
• Fee Independency Preparation • Long Association
• Gifts and Hospitality • Internal Audit • Personal Relationships
• Loans • Tax • Movement of Staff
• Business and Personal Computations between the firm and
relationships • Valuation Clients
• Employment with client Services • Gifts and Hospitality
• Overdue fees • Client Staff Joins
• Contingency Fees the audit firms
• Litigation with Clients

Threats to Objectivity

Intimidations

• Fee dependency Advocacy

• Personal relationships • Representing the Client
• Audit Partners leaves to join • Promoting the client
clients • Negotiating on behalf of client
• Litigation with clients
Basic Principles Governing Audit
The fundamental principles establish the standard of behavior expected of a professional accountant

• Objectivity: A professional accountant must not allow bias, conflicts of interest or undue
influence of others to compromise professional or business judgments.
• Professional behavior: A professional accountant must comply with relevant laws and
regulations and avoid any conduct that might discredit the profession.
• Professional competence and due care: A professional accountant must attain and
maintain professional knowledge and skill at the level required to ensure that a client or
employer receives competent professional services based on current developments in practice,
legislation and techniques.
A professional accountant must act diligently and in accordance with applicable technical and
professional standards.
• Integrity: A professional accountant must be straightforward and honest in all professional and
business relationships.
• Confidentiality: A professional accountant must respect the confidentiality of information
acquired as a result of professional and business relationships. They should not disclose any
such information to third parties without proper and specific authority, unless there is a legal or
professional right or duty to disclose. Such confidential information should not be used for the
personal advantage of members or third parties.
External auditors are in a unique position of having a legal right of access to all information about their
clients. The client must be able to trust the auditor not to disclose anything about its business to third
parties as it could be detrimental to its operations.
Confidential information may be obtained from:

✓ The firm or employing organization

✓ Business relationships i.e. current clients and previous clients
✓ Prospective clients and employers.
Members of an assurance team should not disclose any information to anyone outside of the
engagement team, whether or not they work for the same firm.
Circumstances in which disclosure is permitted or required
Information should only be disclosed with proper and specific authority, or when there is a legal or
professional right or duty to disclose.
Disclosure of confidential information should only be made in the following circumstances:

a) Disclosure is required by law

✓ Production of documents or other provision of evidence in the course of legal
proceedings.
✓ Disclosure to the appropriate public authorities of infringements of the law that come
to light.
b) Disclosure is permitted by law and is authorized by the client or the employer.
c) There is a professional duty or right to disclose, when not prohibited by law
✓ To comply with the quality review of ICAN or another professional body.
 ✓ To respond to an inquiry or investigation by ICAN or a regulatory body
✓ To protect the professional interests of a professional accountant in legal proceedings
✓ To comply with technical standards and ethics requirements.
Factors to be considered before disclosing confidential information include:

✓ Whether harm could be caused by the disclosure

✓ Whether all relevant information is known and substantiated
✓ Whether the information is to be communicated to appropriate recipients.

Principles Based Vs Rules Based

Both IESBA and ICAN adopts principles based approach
Principles Based Rules Based
Requires compliance with the spirit of the May be easier to follow because rules are clearly
guidance. defined
Requires the accountant to use professional Needs frequent updating to ensure the guidance
judgment. applies to new situations.
Flexible, so can be applied to new, unusual or May encourage accountants to interpret
rapidly changing situations. requirements narrowly in order to get round the
spirit of the requirements.
Principles may be applied across national Virtually impossible to be able to deal with every
boundaries where laws may not. situation that may arise, particularly across
various national boundaries and in a dynamic
industry.
Can still incorporate specific rules for ethical
situations likely to affect many firms.
Threat Descriptions
Self Interest Threat
Meaning Where the auditor has a financial or other interest that will inappropriately
influence their judgment or behavior.
Fee Dependency ✓ Threats can be created if fees represent a large proportion of one partner or
one office of the firm
✓ Over-dependence could lead the auditor to ignore adjustments required in the
financial statements for fear of losing the client
✓ Factors relevant when evaluating the threat include
▪ Operating structure of the firm
▪ Whether the firm is well established or new
▪ The significance of the client to the firm.
For Non- Listed If fees from an audit client represent a large proportion of the firm's total fees, the
Client firm should implement safeguards such as:
✓ Increasing the client base to reduce dependency
✓ Having an appropriate reviewer who did not take part in the audit review
the work performed.
Listed Clients A firm's independence is threatened, and should be reviewed, if total fees from a
listed audit client exceed 15% of the firm's total fees for two consecutive years

The firm should disclose the issue to those charged with governance at the client
An engagement quality review should be performed by a person not a member of
the audit firm expressing the opinion, or by the professional regulatory body. This
can be performed as either a pre-issuance review, before the 2nd year audit
opinion is issued or a post-issuance review on the 2nd year audit before the 3rd
year audit opinion is issued

If fees significantly exceed 15%, a pre-issuance review should be

performed if a post-issuance review would not reduce the threat to an
acceptable level.
Gifts and
hospitality
✓ Acceptance of goods, services or hospitality from an audit client can create self-
interest, intimidation and familiarity threats as the auditor may feel indebted to the
client
✓ Gifts and hospitality may not be accepted unless the value is trivial and inconsequential
✓ Gifts and hospitality which are trivial and inconsequential but which are intended to
improperly influence the behavior of the recipient should not be accepted
Owning shares/
financial interests
The auditor will want to maximize return from the investment and overlook audit
adjustments which would affect the value of their investment.

When evaluating the threat, the factors which should be considered include who holds the
financial interest and whether the financial interest is direct or indirect.
 A direct, or material indirect, financial interest in the audit client must not be held by:
✓ the firm or a network firm
✓ an audit team member or the immediate family of a team member
✓ a partner working in the office connected with the audit engagement partner
✓ any partner providing non-audit services to the audit client

Safeguards
a) An immediate family member may hold a financial interest such as pension or
share options but must dispose of it as soon as practicable when the family
member has the right to do so, e.g., when there is a right to exercise the option
b) If a close family member of an audit team member holds a direct, or material
indirect financial interest in an audit client, the person must be removed from the
team until the financial interest is disposed and an appropriate review of the work
must be performed
Loans and
guarantees
The significance of the threat depends on whether the loan or guarantee is with a bank or
similar financial institution and whether the amount is material.
Loans and guarantees to audit clients are not permitted unless immaterial to the firm or
individual making the loan or guarantee, and the client
Loans and guarantees between an audit client which is a bank or similar financial institution
and the firm, the audit team member, or their immediate family, that are not made under
normal lending procedures, terms and conditions are not permitted
Safeguards If an immaterial loan from a bank or similar financial institution is obtained under normal
lending procedures, terms and conditions, an appropriate reviewer who is not an audit
team member should perform a review of the audit work performed.

A loan or guarantee from an audit client which is not a bank or financial institution is not
permitted unless immaterial
Overdue fees
Overdue fees may be seen to be a loan to a client. The firm may also treat the client
favorably to ensure the fees are paid.
Factors which should be considered when evaluating the threat include how long the debt
has been outstanding and the value of the debt
A self-interest threat may be created if a significant amount of fees is not paid before the
auditor’s report for the following year is issued
Safeguards To manage the threat the firm should:
✓ Obtain partial or full payment for the fees.
✓ Have an appropriate reviewer who did not take part in the audit review the work
performed.
When fees remain overdue for a significant amount of time, the firm should consider
whether the overdue fees constitute a loan, and whether it is appropriate to seek
reappointment or continue with the engagement
Business
relationships
If audit firms (or members) enter into business relationships with clients (e.g. joint
ventures, combining products or services of each party, distribution or marketing
 arrangements), this leads to self-interest because the auditor would have an interest in the
successful operation of the client
A firm, network firm or audit team member should not have a close business relationship
with an audit client unless any financial interest is immaterial and the business relationship
is insignificant to the client, the firm or the audit team member
Potential employment
with an audit client
If a member of the engagement team has reason to believe they may become an employee
of the client they will not wish to do anything to affect their potential future employment.
Safeguards The firm must establish policies and procedures which require individuals to notify the firm
of the possibility of employment with the client

When such a situation occurs, the following safeguards should be implemented

✓ Remove the individual from the assurance engagement.
✓ Have an appropriate reviewer review any significant judgments made by that
individual
Contingent Fees
The auditor would have incentive to ensure a particular outcome is achieved in order to
maximize the audit fee. E.g., overlook audit adjustments that would reduce profit if the fee
is calculated based on profit
Fees based on a particular outcome, e.g. level of profits of the company, are not permitted
for audit engagements
Contingent fees are not permitted for non-assurance services provided to an audit client if:
✓ The fee is material to the firm.
✓ The outcome of the non-assurance service is dependent on a future judgment
related to the audit of a material amount in the financial statements
Compensation and
evaluation policies
A self-interest threat is created when a member of the audit team is evaluated on, or
compensated for, selling non-assurance services to that audit client.
The significance of the threat will depend on:
• The proportion of the individual’s compensation or performance evaluation that is
based on the sale of such services.
• The role of the individual on the audit team
• Whether promotion decisions are influenced by the sale of such services.
Safeguards Audit team members
The firm shall:
• Revise the compensation plan or evaluation process for that individual.
• Remove that individual from the audit team.
• Have an appropriate reviewer review the work of the member of the audit team.

Key audit partner

A key audit partner shall not be evaluated on or compensated based on their success in
selling non-assurance services to their audit client.
Actual or threatened
litigation
Litigation could represent a breakdown of trust in the relationship between auditor and
client. This may affect the impartiality of the auditor, and lead to a reluctance of
management to disclose relevant information to the auditor.
 The significance of the threat depends on the materiality of the litigation and whether the
litigation relates to a prior assurance engagement
It may be possible to continue other assurance engagements, depending on the significance
of the threat by:
• Discussing the matter with the client.
• If the litigation involves an individual, removing that individual from the engagement
team
• Having an appropriate reviewer review the work performed.
If adequate safeguards cannot be implemented the firm must withdraw from, or decline,
the engagement

Familiarity Threats
When the auditor becomes too sympathetic or too trusting of a client and loses
professional skepticism, or where the relationship between the auditor and client goes
beyond professional boundaries.
Long association of
senior personnel
Using the same senior personnel in an engagement team over a long period may cause the
auditor to become too trusting/less skeptical of the client resulting in material
misstatements going undetected
A self-interest threat may also be created as a result of the individual’s concern about
losing a longstanding client
In relation to the individual the firm should consider:
✓ The length and closeness of the individual’s relationship with the client.
✓ The length of time on the audit team.
✓ The extent of direction, supervision and review of work of the individual.
✓ The extent to which the individual has had the ability to influence the outcome of
the audit.
In relation to the audit client, the firm should consider:
✓ Whether the complexity of the subject matter has changed
✓ Whether the client's management team has changed.
✓ Structural changes in the client’s organization.
Safeguards ✓ Rotate individuals off the audit team.
✓ Change the role of the individual or the nature of the tasks they perform.
✓ Have an appropriate reviewer who was not a member of the audit team review
the work performed.
✓ Perform regular independent internal or external quality reviews of the
engagement.
Listed clients ✓ The engagement partner, EQR or any other key audit partner must not act for a
period of more than seven cumulative years (‘time-on’ period).
✓ After the time-on period, the individual must serve a cooling-off period

The cooling-off periods are as follows:

✓ 5 years for an engagement partner
✓ 3 years for an EQR.
✓ 2 years for a key audit partner.
During the cooling-off period, the individual shall not:
✓ Be an engagement team member
 ✓ Consult with the engagement team or client.
✓ Be responsible for, or provide, other professional services to the audit client.
✓ Undertake any role which would require significant interaction with senior
management or directly influence the outcome of the audit.
▪ In exceptional circumstances, a key audit partner may be permitted to serve a one-
year extension if continuity is important to maintain audit quality
▪ If an audit client becomes a public interest entity, the length of time served as a key
audit partner before the client became a public interest entity is taken into account.
▪ If a key audit partner was a key audit partner on that engagement at a different firm,
the length of time served at the prior firm should be taken into account.
▪ An independent regulatory body may provide an audit firm with an exemption from
partner rotation if the firm does not have sufficient people with the necessary
knowledge and experience to enable partner rotation

Family and personal ✓ A familiarity threat (and self-interest or intimidation threat) may occur when a
relationships member of the engagement team has a family or personal relationship with
someone at the client who is able to exert significant influence over the financial
statements (or subject matter of another assurance engagement)
✓ Factors which should be considered when evaluating the threat include the
individual’s responsibilities on the audit team and the role of the family member or
other individual within the client, and the closeness of the relationship.
Safeguards Audit team members
▪ Where an immediate family member is a director or employee in a position to
influence the accounting records or financial statements, the individual must be
removed from the engagement team
▪ Where an immediate family member is in a position to exert influence over the
client’s financial position, performance or cash flows, or where a close family
member is a director or employee in a position to influence the accounting
records or financial statements, the following safeguards can be applied:
✓ Remove the individual from the audit team.
✓ Structure the engagement team so that the individual does not deal with
matters that are the responsibility of the family member
Other employees and partners of the firm
A firm should have policies and procedures in place to provide guidance when a partner
(or employee) of the firm has a family or personal relationship with someone at the client
who is able to exert significant influence over the subject matter, even when the individual
is not a member of the engagement team

The firm should structure the individual’s responsibilities to reduce any potential influence
over the audit engagement and have an appropriate reviewer review the audit work
performed
Recruitment services Familiarity, self-interest or intimidation threats may arise if the firm is involved in recruiting
senior personnel for the client.

The firm may also be considered to be assuming management responsibilities.

Employment with an A self-interest, familiarity or intimidation threat may arise where an employee or partner
audit client of the firm becomes a director or employee of an audit client (in a position to exert
significant influence over the financial statements or other subject matter).
 The firm should ensure no significant connection remains between the individual and the
firm, such as entitlement to benefits or payments from the firm, or participation in the
firm's business and professional activities
Safeguards The firm should consider:
✓ The position taken at the client.
✓ The involvement the person will have with the audit team.
✓ The length of time since the individual was a member of the audit team.
✓ The former position of the individual within the audit team.

Self-review threats
Where non-audit work is provided to an audit client and is then subject to audit, the
auditor will be unlikely to admit to errors in their own work, or may not identify the
errors in their own work
Accounting and
bookkeeping services
Providing accounting and bookkeeping services for an audit client might create a self-
review threat
Accounting and bookkeeping services include:
✓ Preparing accounting records and financial statements including:
▪ determining accounting policies
▪ originating journal entries
▪ determining account classifications of transactions
✓ Recording transactions
✓ Payroll services
Discussing accounting treatments and proposing adjusting journal entries are a normal part
of the audit process and do not create threats as long as the client is responsible for
making decisions in the preparation of the financial statements
Safeguards Non- Listed Clients
A firm shall only provide a non-listed audit client with accounting and bookkeeping services
which are routine or mechanical in nature

Professionals who are not audit team members must be used to perform the service and
an appropriate reviewer who was not involved in providing the service should review the
audit work or service performed

Services which are routine and mechanical in nature and therefore require little or no
professional judgment include
✓ Preparing payroll calculations based on client-originated data
✓ Recording recurring transactions which are easily determinable.
✓ Calculating depreciation when the client determines the accounting policy, useful
life and residual value.
✓ Posting transactions coded by the client to the ledger
✓ Posting client approved entries to the trial balance
✓ Preparing financial statements based on information in the client-approved trial
balance.

Listed clients
 A firm cannot provide a listed audit client with accounting and bookkeeping services which
form the basis of financial statements on which the firm will express an opinion.

A firm can provide accounting services for divisions or related entities of a listed client if
separate teams are used and divisions or related entities are collectively immaterial to the
financial statements subject to audit.
Internal audit services In addition to the self-review threat, the audit firm must be satisfied that management
takes full responsibility for the internal audit activities and internal controls to avoid
assuming management responsibilities
The firm should consider
✓ The materiality of the related financial statement amounts
✓ The risk of misstatement of the assertions related to the financial statement
amounts
✓ The degree of reliance that the audit team will place on the internal audit service.
Non- Listed Clients
Professionals who are not audit team members must be used to perform the internal audit
service

Listed Clients
A firm cannot provide internal audit services for a listed audit client, where the service
relates to internal controls over financial reporting, financial accounting systems, or in
relation to amounts or disclosures that are material to the financial statements

Tax services Providing tax services to an audit client might create a self-review and advocacy threat

Tax services include

✓ Tax return preparation
✓ Tax calculations for preparing accounting entries
✓ Tax planning and advisory services
✓ Tax services involving valuations
✓ Assistance in the resolution of tax disputes.
Safeguards The firm should consider
✓ The characteristics of the engagement.
✓ The level of tax expertise of the client’s employees.
✓ The complexity of the tax regime
Tax return Completion of tax returns does not usually create a threat as the returns are based on
preparation historical information and subject to approval by the tax authority
Tax calculations Non-listed clients
The firm should use professionals who are not audit team members to perform the
service, and an appropriate reviewer who was not involved in providing the service should
review the audit work or service performed.

Listed clients
The firm must not prepare tax calculations of current or deferred tax where the figures
are material to the financial statements. Where the figures are immaterial, the safeguards
for non-listed clients should be applied.
Tax planning and the firm should consider
advisory services ✓ The degree of subjectivity involved
✓ Whether the tax treatment is an established practice, supported by a private ruling
and cleared by the tax authority
 ✓ Whether the advice will have a material effect on the financial statements
✓ Whether the effectiveness of the advice depends on the accounting treatment and
presentation in the financial statements and there is doubt over that treatment.
Safeguards A firm shall not provide tax planning and advisory services to an audit client when the
effectiveness of the tax advice depends on a particular accounting treatment

When providing such services, the firm should:

✓ Use professionals who are not audit team members to perform the service
✓ Have an appropriate reviewer who was not involved in providing the service to
review the audit work or service performed.
✓ Obtain pre-clearance from the tax authorities.
Tax services involving If the valuation performed for tax purposes is not subject to external review and the effect
valuations is material to the financial statements, the firm should also consider,
✓ The extent to which the valuation methodology is supported by tax law.
✓ The degree of subjectivity
✓ The reliability of the underlying data
Safeguards When providing such services, the firm should:
✓ Use professionals who are not audit team members to perform the service.
✓ Have an appropriate reviewer who was not involved in providing the service to
review the audit work or service performed
✓ Obtain pre-clearance from the tax authorities.
Assistance in the the firm should consider:
resolution of tax ✓ The extent to which the outcome of the dispute will have a material effect on the
disputes financial statements
✓ Whether the advice provided is the subject of the tax dispute.
✓ The extent to which the matter is supported by tax law, regulation or established
practice.
✓ Whether the proceedings are conducted in public.
Safeguards When providing such services, the firm should
✓ Use professionals who are not audit team members to perform the service
✓ Have an appropriate reviewer who was not involved in providing the service to
review the audit work or service performed.
A firm shall not act as an advocate for the audit client before a public tribunal or court in
the resolution of a tax matter if the amounts are material to the financial statements

The firm is allowed to have a continuing advisory role e.g.

✓ Responding to specific requests for information
✓ Providing factual accounts or testimony about the work performed.
✓ Assisting the client in analyzing the tax issues
IT services IT services may create a self-review threat and also be considered to be assuming
management responsibilities.

The firm should consider:

✓ 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 the audit team will place on the IT systems
The firm can provide IT services which involve:
✓ Design or implementation of IT systems unrelated to internal controls or financial
reporting.
 ✓ Implementation of off-the-shelf accounting software that was not developed by the
audit firm and does not require significant customization.
✓ Evaluating and making recommendations on a system designed or operated by
another service provider or by the entity
Safeguards Listed clients
A firm shall not provide IT systems services to a listed client that form a significant part of
the internal controls over financial reporting or generate information that is significant to
the financial statements

All clients
When providing such services, the firm should use professionals who are not audit team
members to perform the service

The audit firm must be satisfied that management takes full responsibility for the IT
controls and systems
Valuation services Providing valuation services to an audit client might create a self-review and advocacy
threat
The firm should consider
✓ The use and purpose of the valuation report, including whether the report will be
made public
✓ The extent of the client’s involvement in determining matters of judgment.
✓ The degree of subjectivity
✓ Whether the valuation will have a material effect on the financial statements.
✓ The degree of dependence on future events that might create significant volatility
in the amounts involved
Safeguards Non-listed clients
Valuation services shall not be provided to audit clients if the valuation involves a significant
degree of subjectivity and the valuation will have a material effect on the financial
statements
Listed clients
Valuation services that are material to the financial statements (regardless of subjectivity)
should not be provided to listed audit clients.
All clients
Where services can be provided
✓ Use professionals who are not audit team members to perform the service
✓ Have an appropriate reviewer who was not involved in providing the service
review the audit work or service performed
Material to the financial Not material to the
statements financial statements
Valuation does not involve Non-listed, with safeguards Listed and non-listed, with
significant subjectivity safeguards
Valuation involves Neither Non-listed, with safeguards
significant subjectivity
Corporate finance Self-review and advocacy threats may be created if a firm
services ✓ Assists an audit client in developing corporate strategies.
✓ Identifies possible targets for the audit client to acquire.
✓ Advises on disposal transactions.
✓ Assists in raising finance.
✓ Provides structuring advice.
Factors affecting the existence and significance of any threat include:
 ✓ The degree of subjectivity involved
✓ Whether the outcome will have a material impact on the financial statements
✓ Whether the effectiveness of the corporate finance advice depends on a particular
accounting treatment.
Safeguards Where services can be provided:
✓ Use professionals who are not audit team members to perform the service.
✓ Have an appropriate reviewer who was not involved in providing the service
review the audit work or service performed
Prohibited services
✓ Corporate finance services that involve promoting, dealing in, or underwriting the
audit client’s shares
✓ Corporate finance services where:
▪ the effectiveness of the advice depends on a particular accounting
treatment or presentation in the financial statements
▪ the audit team has reasonable doubt as to the appropriateness of the
accounting treatment, and
▪ the outcome will have a material effect on the financial statements
Legal services ✓ Providing legal services to an audit client might create a self-review and advocacy
threat
✓ Legal services can only be provided by legally trained, or authorized, personnel.

The firm should consider:

✓ The materiality of the matter in relation to the financial statements
✓ The complexity of the legal matter and the degree of judgment necessary.
Safeguards Where services are provided, the firm should
✓ Use professionals who are not audit team members to perform the service.
✓ Have an appropriate reviewer who was not involved in providing the service
review the audit work or service performed.
▪ A partner or employee of the firm must not act as general counsel for an audit client
▪ A firm shall not act in an advocacy role for an audit client when the amounts involved
are material to the financial statements
Advocacy threats Promoting the position of a client or representing them in some way would mean the audit
firm is seen to be 'taking sides' with the client
▪ Representing the client in court or in any dispute where the matter is material to
the financial statements.
▪ Negotiating on the client's behalf for finance
▪ Loan of personnel from an audit firm to an audit client
▪ Providing valuation services to an audit client
▪ Providing tax services to an audit client.
Intimidation threats Actual or perceived pressures from the client, or attempts to exercise undue influence
over the assurance provider, create an intimidation threat.
▪ Fee dependency
▪ Gifts and hospitality
▪ Family and personal relationships
▪ Recruitment services
▪ Employment with an audit client
▪ Litigation between the audit firm and client.
Part 3- Professional Accountants in Public Practices

Conflict of Interest
A conflict of interest arises when the same audit firm is appointed for two companies that interact with
each other, for example:

✓ Companies which compete in the same market

✓ Companies which trade with each other
A conflict of interest may create a threat to the fundamental principles of objectivity and confidentiality.

• A professional accountant provides a professional service related to a particular matter for two
or more clients whose interests with respect to that matter are in conflict; or
• The interests of a professional accountant with respect to a particular matter and the interests
of the client for whom the accountant provides a professional service related to that matter are
in conflict.
Example

• 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.
• Advising a client on acquiring a business which the firm is also interested in acquiring.

It may be perceived that the auditor cannot provide objective services and advice to a company where it
also audits a competitor.
Professional accountants should always act in the best interests of the client. However, where conflicts
of interest exist, the firm’s work should be arranged to avoid the interests of one being adversely
affected by those of another and to prevent a breach of confidentiality.
In order to ensure this, the firm must disclose the nature of the conflict to the relevant parties and
obtain consent to act.
The following additional safeguards should be implemented

✓ Separate engagement teams (with different engagement partners and team members) who are
provided with clear guidance on maintaining confidentiality.
✓ Review of the key judgments and conclusions by an independent person of appropriate seniority.
Measures which should be taken to reduce the threat of disclosure include:
 ✓ The existence of separate practice areas for specialty functions within firms.
✓ Procedures to limit access to client files
✓ Physical separation of confidential information including separate practice areas
✓ Signed confidentiality agreements by the engagement team members
✓ Specific training and communication
If adequate safeguards cannot be implemented (i.e. where the acceptance/ continuance of an engagement
would, despite safeguards, materially prejudice the interests of any clients), or if consent is refused, the
firm must end or decline to perform professional services that would result in the conflict of interest.

Professional Appointments- Professional Clearance

If offered an audit role, the prospective audit firm must:

✓ Ask the client for permission to contact the existing auditor (and refuse the engagement if the
client refuses).
✓ Contact the outgoing auditor, asking for all information relevant to the decision whether or not
to accept appointment (e.g. overdue fees, disagreements with management, breaches of laws &
regulations).
✓ If a reply is not received, the prospective auditor should try and contact the outgoing auditor by
other means e.g. by telephone.
✓ If a reply is still not received, the prospective auditor may still choose to accept but must
proceed with care.
✓ If a reply is received, consider the outgoing firm's response and assess if there are any ethical or
professional reasons why they should not accept appointment.
✓ The existing auditor must ask the client for permission to respond to the prospective auditor.
✓ If the client refuses permission, the existing auditor should notify the prospective auditor of this
fact.
Independence and objectivity

If the assurance provider is aware, prior to accepting an engagement, that the threats to objectivity
cannot be managed to an acceptable level, the engagement should not be accepted.
A lack of integrity may indicate risks such as

✓ Aggressive interpretation of accounting standards including window dressing of financial

statements, management bias and inappropriate judgments.
✓ Weak control environment and possible override of controls.
✓ Intimidation of auditors.
✓ Criminal activities such as money laundering, fraud and breach of laws and regulations.
✓ Aggressive tax avoidance/evasion
✓ Unreliable management representations.
Money laundering (client due diligence)
The firm must comply with money laundering regulations which require client due diligence to be
carried out. If there is any suspicion of money laundering, or actual money laundering committed by
the prospective client, the firm cannot accept the engagement.
 Resources
The firm should consider whether there are adequate resources available at the time the
engagement is likely to take place to perform the work properly. If there is insufficient time to
conduct the work with the resources available the quality of the work could be affected.
Risks
Any risks identified with the prospective client (e.g. poor performance, poor controls, unusual
transactions) should be considered. These risks can increase the level of engagement risk, i.e. the
risk of issuing an inappropriate report.

Fees
The firm should consider the acceptability of the fee. The fee should be commensurate with the
level of risk.
In addition, the creditworthiness of the prospective client should be considered as non -payment of
fees can create a self-interest threat.
Professional competence
An engagement should only be accepted if the audit firm has the necessary skill and experience to
perform the work competently.
Reputation of the client
The audit firm should consider the reputation of the client and whether its own reputation could be
damaged by association.
If there are any reasons why the firm believes it may not be able to issue an appropriate report, the
engagement should not be accepted.

Custody of Client Assets 2023

The Professional Accountants while assuming custody of the clients’ monies or
assets shall:
✓ Comply with the Fundamental Principles and Conceptual Framework to
identify, evaluate and address threats;
✓ Holding clients’ monies or assets creates self- interest threats or other threats to compliance of
fundamental principles such as professional behavior and objectivity;
✓ Always remain alert and keep clients’ assets or monies separately from firm’s or personal assets;
✓ Use clients’ assets or monies for the purpose intended and with the written approval of the
clients;
✓ Always be ready to account for clients’ assets or monies and any incomes if generated such as
interest, dividend, etc.; and
✓ Comply with the laws and regulations of the local jurisdiction relevant to assuming and
accounting for such assets.

Requirements
The Professional Accountants shall assume custody of clients’ assets or monies in accordance with
provisions of laws and regulations of the local jurisdiction and also in conformity with the conditions
mentioned in the engagement assignment.
While assuming custody of clients’ assets or monies, the Professional Accountants shall:

✓ make enquiries about the sources of such assets; and

✓ verify whether all legal and regulatory requirements are appropriately complied with.

After taking custody of clients’ asset or monies: Professional Accountant shall ensure that:

✓ all provisions of laws and regulations are appropriately complied with;

✓ clients’ assets are kept separately and not mixed with personal or firm’s assets;
✓ such assets of the clients will be used as intended by the client or in accordance with the terms
and conditions of the engagement assignments; and
✓ books of accounts are appropriately maintained at all times for the safe custody of client’s assets
along with any incomes or gains, dividends etc. accrued or received thereof.
Investment in short- or long-term securities and bank deposits:
The professional Accountant shall first verify and evaluate the risks associated as follows:

✓ Whether local laws and regulations permit to assume clients’ such investments by Professional
accountants?
✓ Whether local regulatory authorities such as banks and financial institutions, Security Board of
Nepal or Stock exchange etc. permit to assume the custody by Professional Accountant and also
to receive the incomes or return on such investment by the Professional Accountant?
✓ If permitted to assume the custody of such investments, then proceed to fully comply with
regulatory the requirements;
✓ Collect the returns like interest income, dividend, bonus etc.;
✓ Shall not mix up these assets or their incomes with Professional accountant or firm’ own
incomes or assets; and
✓ maintain up –to- date appropriate accounts and records to be made available with all up to-date
information to clients on regular basis.
Cash and bank balances:

✓ The professional Accountant shall first verify and evaluate the risks associated as follows:
✓ whether local laws and regulations permit to assume cash and bank balances of the clients’ in the
name of Professional accountant?
✓ Verify the legality of earning of cash and bank balances of the clients and if found legal and also
permitted by local laws and regulations, regulatory authorities and bank and financial institution
then proceed to assume the custody; if not decline the engagements.
✓ If permitted to assume the custody of cash and bank balances, then proceed to provide safe
custody of such assets but shall not mix up with the Professional accountant or firm’s assets;
✓ make legal declaration that these assets are owned by the clients and the professional
accountant has only professional services by assuming the safe custody of clients’ such assets;
✓ open and operate bank account in the name of client as permitted and directed by the local
regulatory authorities;
✓ collect client’s monies or income earned on bank deposits such as interest, dividend on
securities and other recoverable and deposit them in time into the clients’ bank accounts;
✓ in case of foreign currency if any received then verify the source of income and if found legal
then open a separate foreign currency bank account in the name the clients and deposit it in
time;
✓ Professional accounts shall obtain monthly bank statement and reconcile them within seven days
of the succeeding moth on regular basis;
✓ In case of occurrence of any error the professional accountant shall ensure its prompt remedy;
✓ Before making any disbursement out of these cash or bank balances the Professional accounts
shall ensure that such disbursements are having prior approval of the clients;
✓ In case of disbursement of Professional accountant’s fees and expenses if any, the professional
accountant shall ensure that these disbursements are having prior approval of the client and
disbursed time;
✓ maintain up –to- date appropriate accounts and records to be made available with all up to-date
information to clients on regular basis;
✓ accounts and records maintained shall be preserved for the period as required by the local laws
and regulations and the engagement assignments and also be made available for inspection if any
at their requirement in time.