BAC 3624

Advanced Auditing

Tutorial 3

Question 1
The MIA By-Laws (On Professional Ethics, Conduct and Practice) for Professional
Accountants states that a professional accountant is required to comply with five fundamental
principles, one of which is the principle of professional competence and due care.
Required:
Explain what is meant by the term professional competence and due care, and outline
how firms of Chartered Accountants can ensure that the principle is complied with.
ANSWER
Professional competence and due care is one of the fundamental ethical principles
explained as part of the Codes conceptual framework. It can be broken down into two parts.
Professional competence
This is the concept that a professional accountant must firstly achieve, and subsequently
maintain, professional knowledge and skill at the level required to ensure that clients and
employers receive competent professional service.
Attaining professional knowledge is achieved through a mixture of formal professional
qualifications, informal on the job training, and gaining experience of a range of professional
work.
Maintaining professional knowledge is achieved through continuing professional
development. Professional accountants must ensure that they are aware of changes in
technical fields such as tax, auditing and financial reporting regulations where relevant to the
services they offer to clients. Professional accountants should also be aware of general
business developments, such as the use of information technology and e-commerce.
Due care
This is about acting diligently in accordance with applicable technical and professional
standards when providing professional services. This means applying knowledge to a specific
situation with careful consideration, minimising the chance of mistakes being made. It may
also include wider issues such as making sure that there is enough time to complete work
with due care, and ensuring that staff fully understand the objectives of the work they are
being asked to perform.
Compliance with the principle
Attaining and maintaining professional knowledge:
Firms can offer training on specific technical matters, such as changes to tax rules or new
auditing guidelines, which could be provided by senior members of the firm or by external
consultants.
Due care
Adherence to quality control guidelines will help ensure that due care has been exercised.
Particularly the supervision and review of work by more senior members of the firm should
act as a preventative and detective control to pick up any errors made in the work.
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BAC 3624

Advanced Auditing

Tutorial 3

In addition, formal and informal staff appraisals will enable members of staff to raise issues
with more senior members of staff, e.g. if they felt under too much time pressure to properly
perform their work.
Reviews carried out as part of the normal audit cycle (i.e. hot and cold reviews) can also help
to identify where the firm may need to organise more training for staff.
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Hot file review or Hot review is conducted during the audit work is conducted but before the
auditors report is issued with a prime objective to ensure compliance with relevant auditing
standards and achieving engagements objectives
Cold file review or Cold review is conducted with a view to check for the weaknesses in the
firms quality control procedures and system, proficiency of audit team members and how
they can be improved to make later audit assignment more effective and efficient.

Question 2
Explain the meaning of independence of mind and independence in appearance as
provided in the IFAC Code of Ethics.
ANSWER
Independence in mind is the actual state of mind that allows the rendering of a conclusion
without being affected by factors that impair the exercise of professional judgement.
Independence in appearance refers to the public or other's perception of the practitioner's
independence. Accountants providing assurance services should avoid facts and
circumstances that are so significant that a reasonable and informed third party would
reasonably conclude the integrity, objectivity or professional scepticism had been
compromised.

BAC 3624

Advanced Auditing

Tutorial 3

Question 3
Your audit firm is the auditor for Nasha Sdn. Bhd., a manufacturer of medical equipment. You
are aware that the company has recently designed a new product, which market research
indicates is likely to be very successful.
The development of the product has caused Nasha Sdn. Bhd. to have depleted the
companys cash resources. The managing director of Nasha Sdn. Bhd. has written to the
audit partner to see if the audit firm would be interested in making an investment in the new
product. It has been suggested that the auditors could provide finance for the completion of
the development and the marketing of the product. The finance would be in the form of a
convertible debenture.
Required:
Identify and explain the ethical implications in respect of the business arrangement
with Nasha Sdn. Bhd..

ANSWER
The business opportunity in respect of Nasha Sdn. Bhd. could be lucrative if the market
research is to be believed.
However, MIA By Laws (On Professional Conduct and Ethics) states that a mutual business
arrangement is likely to give rise to self-interest and intimidation threats to independence and
objectivity. The audit firm must be and be seen to be independent of the audit client, which
clearly cannot be the case if the audit firm and the client are seen to be working together for a
mutual financial gain.
In the scenario, two options are available. Firstly, the auditor could provide the audit client
with finance to complete the development and take the product to market.
There is a general prohibition on audit firms providing finance to their audit clients. This would
create a clear financial self-interest threat as the audit firm would be receiving a return on
investment from their client. The MIA By Laws (On Professional Conduct and Ethics) states
that if a firm makes a loan (or guarantees a loan) to a client, the self-interest threat created
would be so significant that no safeguard could reduce the threat to an acceptable level.
The provision of finance using convertible debentures raises a further ethical problem,
because if the debentures are ultimately converted to equity, the audit firm would then hold
equity shares in their audit client. This is a severe financial self-interest, which safeguards are
unlikely to be able to reduce to an acceptable level.
The finance should not be advanced to Nasha Sdn. Bhd. while the company remains an audit
client of the firm.