- 12 Marks
Question
The International Federation of Accountants (IFAC) Code of Ethics discusses the need for professional accountants to be aware of and avoid conflict of interest situations as well as maintain independence in carrying out their professional duties. The professional accountant is exposed to several threats to independence, which are likely to lead to conflict of interest. A threat may arise where an assurance firm provides services other than assurance services to an assurance client.
Required:
i) Identify the specific threat a professional accountant or assurance firm faces by providing the following services:
- Preparing accounting records and financial statements
- Valuation services (8 marks)
ii) Suggest TWO measures each a professional accountant can take to minimize the threats identified in (i). (4 marks)
Answer
i) Specific Threats:
- Preparing accounting records and financial statements:
There is a significant risk of a self-review threat if a firm prepares accounting records and financial statements and then audits them. On the other hand, auditors routinely assist management with the preparation of financial statements and give advice about accounting treatments and journal entries. Therefore, assurance firms must analyze the risks arising and put safeguards in place to ensure that the risk is at an acceptable level.
(4 marks) - Valuation services:
A valuation comprises making assumptions regarding future developments, applying certain methodologies and techniques, and combining both to compute a certain value, or range of values, for an asset, liability, or business as a whole. Audit firms should not carry out valuations on matters that will be material to the financial statements. If the valuation is for an immaterial matter, the audit firm should apply safeguards to ensure that the risk is reduced to an acceptable level.
(4 marks)
ii) Suggested Measures:
- For Preparing accounting records and financial statements:
- Using staff members other than assurance team members to carry out work.
- Obtaining client approval for work undertaken. (2 marks)
- For Valuation services:
- Second partner review.
- Confirming that the client understands the valuation and the assumptions used.
- Ensuring the client acknowledges responsibility for the valuation.
- Using separate personnel for the valuation and the audit. (2 marks)
- Tags: Conflict of Interest, Independence, Professional Ethics, Safeguards
- Level: Level 2
- Topic: Business ethics
- Series: NOV 2017
- Uploader: Theophilus