Professional Ethics and Independence
Fundamental principles
Know the fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Understand the conceptual framework: identify threats, evaluate them, and address them by eliminating circumstances, applying safeguards, or declining the engagement.
Threats and safeguards
Know the five threat categories: self-interest, self-review, advocacy, familiarity, and intimidation. Be able to match scenarios to threats. Independence has two dimensions: independence of mind (state of mind) and independence in appearance (public perception). Safeguards may be created by legislation, profession, or the firm.
Traps in questions
Distractors confuse the threat categories, or suggest that disclosure alone resolves an independence breach. Others imply that a safeguard can always reduce a threat to an acceptable level; some threats cannot be safeguarded and require declining the engagement. Watch for questions on fees, long association, and provision of non-assurance services.
Rule of thumb
First identify the threat, then assess its significance, then apply safeguards or eliminate the threat. If no safeguard can reduce the threat to an acceptable level, decline or withdraw.
Worked example
A firm prepares the financial statements and also audits them. This creates a self-review threat because the firm would review its own work. Providing the preparation service to an audit client that is not a public interest entity may be permissible if safeguards apply, but for a listed audit client it is generally prohibited.