Professional and ethical framework
The objectives of the Paper 3.1, Audit and Assurance Service syllabus state that
‘On completion of this paper candidates should be able to demonstrate their
ability to work within a professional and ethical framework…’. Question
5 of the three exams to date (and the pilot paper) has barely scratched the surface
of ‘ethics’, dealing principally with issues of independence and confidentiality
which should be recognisable from Paper 2.6 studies. The majority of candidates
fail to demonstrate an understanding of ethical principles in the real world.
For the well-prepared candidate the ‘ethics question’ should provide
good marks (10+ out of 15).
Question 5 December 2002
This article examines the question Isthmus as illustrative of the style and
standard of an ethics question at the higher level. Read the requirement as
illustrated in Figure 1.
Figure 1: Question 5 December 2002
| Read |
Think |
| ‘Comment on the ethical and other professional
issues... |
Remark / make observations on:
- ethical issues = integrity, independence, competence, etc.
- other professional issues – referring to the syllabus
this encompasses ‘professional responsibility and liability’
and ‘practice management’.
|
| ‘...raised by the above matters... |
Answer must be made specific to the scenarios. |
| ‘...and their implications, if any, for staffing... |
Answer is to address the assignment of staff (a practice management
issue). |
| ‘...the final audit... |
Relevance of ‘final audit’ is not immediately apparent
– so if it is important, there must be further information in
the scenario. |
| ‘...of Isthmus... |
Another clear indication that the answer must address the specifics
of the question – and not simply regurgitate rote-learned knowledge. |
| ‘...for the year to 31 December 2002.’ |
The exam is being sat on 3 December 2002 – therefore the final
audit is a short period of time in the future. |
|
Having registered the above – either by highlighting and / or annotating
the question paper or by jotting down ‘prompts’ into an answer plan
– you are now ready to read the scenario (which is given for a reason).
You should expect it to clarify and / or reinforce the requirement and provide
the specifics which you are expected to address. Refer to Figure 2.
Figure 2: Question 5 December 2002
| Read |
Think |
| ‘You are an audit manager of Kloser, a firm of
Chartered Certified Accountants... |
As a relatively senior person in the audit firm you should expect
to have responsibilities and be able to make decisions / come to reasoned
conclusions.
The firm and staff are subject to ACCA’s ‘Rules of Professional
Conduct’ – you should be prepared to draw on a sound knowledge
of these rules!
|
| ‘You are assigning staff to the final audit of
Isthmus... |
This reinforces the requirement – that you are expected to
find implications for staffing. |
| ‘...a company listed on a stock exchange... |
Stop! Do not go into autopilot and write out everything you know
which is specific to listed companies (e.g. 10% fee rule, must not
prepare financial statements except in an emergency situation). You
must not presume the relevance of listing but understand it in context. |
| ‘...for the year to 31 December 2002. |
Reinforcing the requirement... in the near future. |
| ‘You are aware of the following matters: |
At last, this is where you get into the specifics! Does that mean
that the reading so far has been a waste of time? Not at all! You
should by now have thought yourself into the scenario – you are
an audit manager, and you have a task to carry out – namely to
assign staff to a client audit in the light of ethical / professional
issues which are about to unfold... |
|
(1) Profits warning
But is that the real issue? Appreciate that the requirement points to staffing...
(detailed in Figure 3). Now take a moment to reflect on the situation posed.
Trainees are expected to gain experience in a range of professional disciplines
– this can be achieved through secondment to different departments. The
question is... can, or should, the audit trainees be assigned to the (final)
audit of Isthmus? Many candidates correctly realised that this was the issue
but dealt with it using sweeping comments, usually at the extreme view that
they could not have any involvement. Candidates must ask themselves ‘how
can jumping to and stating this as a conclusion, with no supporting analysis
be worth more than a mark?’ With 15 marks for three issues, you should
be looking for five marks worth of answer for each.
Now here’s a ‘tip’ for an approach to any higher level paper
(not just Paper 3.1). There are generally two ways in which to draw conclusions,
either:
- go through a process of arguments and draw a conclusion by way of summary
or
- state a ‘gut reaction’ first (i.e. bottom line on top ‘BLOT’)
but then analyse the situation to justify this conclusion.
Figure 3: (1) Profits Warning
| Read |
Think |
| ‘(1) Isthmus has recently issued a profits warning. |
OK, so what? This is a listed company ‘thing’. It happens.
It’s a fact of life... move on...
Well that seems like a good enough reason for the profit warning
but the relevance to ‘ethical and other professional issues’
is not yet clear...
|
| ‘The company has announced... synergies expected from the acquisition
of Vanaka, ...have not materialised. Moreover, ...certain of Vanaka’s
assets are significantly impaired. |
Alarm bells should be ringing… ‘other services’ –
triggering thoughts of ‘self-interest’ and ‘self-review’
threats (in particular). |
| ‘Your firm’s corporate finance department, assisted by
two audit trainees, carried out due diligence work...
|
And here are the staff… audit trainees… let’s underline
so we don’t lose focus! |
|
‘...before the purchase of Vanaka was completed in December
2001.’
|
Many candidates did not read this with sufficient care and stated
that the audit trainees should not have been entrusted with due diligence
work, that they were incompetent, their work not properly supervised
and reviewed and therefore jumped to a conclusion of negligence! To
merely state this and move onto issue (2) was premature!
Timeframe... this was a year ago. So the audit for December 2001 was
carried out after the purchase. Therefore to assert, for example,
that the 2002 audit cannot be undertaken because other services were
provided is nonsense – showing a lack of appreciation of the
real world – that audit firms can, and do, provide additional
services – in this case through a separate department. |
|
Remember that there may be no ‘right’ answer – what is then
important, is the quality of your argument.
When writing out your answer use the ‘speak’ of the profession and
the examinable documents. An answer which refers, appropriately, to ‘self-review
threat’, ‘self-interest’ etc is more likely to attract the markers’
pen than one which does not. Having said that, you must also take care not to
‘throw in’ the speak ‘for good measure’ (see examples in
the narrative which follows).
If you did not sit the examination in December 2002, you may at this point
like to review the answer to point (1), only – to appreciate how it is
derived from a thought process – not a random list of points. You could
then go on to attempting Parts (2) and (3) before continuing with this article.
(2) Assistant Manager
Good – a member of staff... Please refer to Figure 4.
Figure 4: (2) Assistant Manager
| Read |
Think |
‘(2) Mercedes, the assistant manager assigned to the interim
audit...
|
This is a matter of fact... now reflect that you are planning staff
for the final audit – surely Mercedes should normally be your
first choice of assistant manager for the final audit. |
| ‘has since inherited 5,000 $1 shares... |
So she did not hold them when participating in the interim audit...
She acquired them through the death of a relative, an event which
presumably she had no control over...not by an act on her part to
acquire shares (e.g. purchase). Could she have known about her (impending)
inheritance? If so, a re-review of her audit work would be appropriate.
|
| ‘Mercedes has told you that she has no intention of selling
the shares until the share price recovers... |
To have voiced this view, Mercedes must have been appraised of the
situation – that she would sell the shares. How should you now
respond to what is essentially her refusal to sell? How can you ‘persuade’
her to sell? What are your alternatives if she does not? |
| ‘... from the fall to $1.95 which followed the profit warning... |
As you might expect, share price has fallen – although what
from has not yet been stated, this might be an additional item of
information to be on the look out for. |
|
Some candidates wrote, for example, ‘Kloser should have had controls in
place to prevent this happening’… Think how naïve that sounds
in the real world! How can inheritance be prevented?
Many candidates wrote that Mercedes should be ‘disciplined’ for not
adhering to ethical rules … but put yourself in Mercedes’ place for
a moment! Being ‘seen to be’ independent is all very well – but
she has an asset which is, even now, worth just under $10,000, and you are demanding
that she should dispose of it right now, this second, when this is not in her
interests.
Many candidates also made ‘throw-away’ comments about ‘conflicts
of interest’. The ACCA statement which concerns ‘conflicts of interest’
does not deal with the ‘self-review’ threat of individuals but rather
the conflicts which are between firm & client and client & client. There
is nothing ‘improper’ in the latter providing it is properly managed
– it is the former which is a ‘no, no’.
(3) Anthony
Yes, he’s ‘staff’ too. Refer to Figure 5.
Figure 5: (3) Anthony
| Read |
Think |
| ‘(3) Anthony, an audit senior, has been assigned to the audits
of Isthmus since joining the firm nearly three years ago... |
Audit senior … so not as ‘risky’ as assistant manager
– appreciating this distinction is worthy of credit. Three years…
quite a long time… should ring bells of ‘familiarity’.
But is any ‘threat’ likely to be of significance at such
a junior level? Possibly not! (Candidates who wrote that all Anthony’s
work for the last three years must be reviewed have little understanding
of the impracticality of such a suggestion. Also, they do not take
into account the relative unimportance of the work of a junior nor
indeed the nature and purpose of the annual audit and the fact that
it would be of no consequence to revisit prior year audits.) |
|
‘He has confided to you that his father owned 1,001 shares
…
|
First thing to note is that Anthony has disclosed the facts... secondly
it is his father and that there is ownership... so completely different
to (2)! |
| ‘...but sold them... |
They have gone! Therefore candidates who demand that they should
now be sold have not read the question. |
| ‘...only days before the profits warning... |
Now why do you suppose he did that? Lucky coincidence? Perhaps!
Many candidates correctly identified the possibility of ‘insider
dealing’ as an issue. |
| ‘...at a share price of $7.95. |
Now isn’t that a useful piece of information you were waiting
for? Mercede’s shares are currently worth only $1.95 – you
can now quantify this as 5,000 x (7.95 – 1.95) = $30,000 which
she is ‘losing’ by being made to sell immediately. |
| ‘You are assured that Anthony did not previously know that
his father had the shares.’ |
The question is telling you that you have no doubts about this –
therefore not insider dealing but perhaps there could have been some
indiscretion (e.g. a careless, rather than deliberate, breach of duty
of confidentiality by Anthony). |
|
The marking team concurred that, again, answers from most candidates were disappointing,
as the technical content was not difficult.
The underlying knowledge required was that of Paper 2.6. At this level you
should not expect to see matters as ‘black and white’ – but expect
‘grey areas’ into which you are expected to delve (hence the requirement
to comment / discuss). For example, in (1):
- a candidate who said the trainees should not be engaged in the audit got
½ a mark
- if they said this was because of a threat to independence – another
½ mark
- if this was expanded into consideration of a self-review threat –
another mark
- if however they recognised that, as junior staff, they could stay engaged
on the audit if properly supervised… there’s another mark and a
half!
Conclusion
It was clear from marking the December 2002 exam that candidates who had read
the article Divided opinion in the Nov / Dec 2002 issue of student accountant
performed noticeably better than those who had not. Read this article and heed
its message and you will be rewarded.
Kim Smith is Examiner for Paper 3.1
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