Chapter:4

Professional Ethics

Wasequl H Reagan, Partner, Mahfel Huq & Co.

*Generic guidance purpose only and not a replacement for study manual.

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Chapter 4: Professional Ethics

Key Areas covered:

§ The need for professional ethics

§ Code of ethics
§ ICAB Code
§ Companies Act 1994
§ Problems and Solution
Chapter 4: Professional Ethics

The need for professional ethics

§ The accountancy professional has a paradoxical image. On the one hand accountants are seen as pillars of
society, providing reliable financial information in their working lives and acting as treasurer for NGO’s in
their spare time;

§ The other side of the coin is the image of aggressive tax schemes, financial scandals and money laundering;

§ Yet accountants believe that the importance of reliable financial information has paramount importance to
governments, shareholders, investors and other stakeholders.

§ The reliability comes from publics trust which can be gained by following a certain code of conduct .

§ Therefore the profession needs a code of professional ethics.

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Chapter 4: Professional Ethics

IFAC Code of ethics

FUNDAMENTAL PRINCIPLES

Objective Professional
No bias, conflict of
Integrity interest or undue Competence
Straightforward and influence of others to Maintain professional
Honest override professional knowledge, skills and
judgments should act diligently

Confidentiality Professional
Should not disclose behavior
information acquired as a Comply with relevant
result of professional and laws and regulations and
business relationships avoid actions that
discredit profession
IOPCP

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IFAC Code of ethics: Threats

•All firms face this threat simply because client pays the fee
The self-interest threat •In practice appointment depends on management and the auditor may be tempted
to allow inappropriate accounting treatments

•Where the auditor carries out accounting work on behalf of the client, this may seem
The self-review threat innocent . Indeed their may be perceived ethical advantages because the accountant
should be able to prepare the accounts ‘properly’. This is a classic situation for self
review threat

The management •This threat arises when audit firms undertakes work that involves making judgements
threat (FRC, UK) and taking decisions which are responsibilities of management
IRMAFI

The advocacy threat •Occurs where professional adopts a stance arguing for or against the clients point of
view rather than taking an objective position.

• This occurs when the professional gets to know the client too well, objectivity
The familiarity threat maybe threatened because the auditor becomes too trusting of the client and
professional skepticism is impaired.

•This may range from the effective hi-jacking of the auditor’s professional qualification by
The intimidation threat the clients with criminal tendencies to the bullying behavior of a dominant personality
who insists on getting his own way. This could go as far as threatening the auditor with
removal if a qualified report is produced.

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Chapter 4: Professional Ethics

Sources of self-interest threat

Direct
financial
interest
Contingent
Fee Total fees
arrangement

Close
Loans and
business
guarantees
Self- relation
Interest
threat

Employment
Losing a client
negotiation

Gifts and
Lowballing
hospitality

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Chapter 4: Professional Ethics
Self-interest threat
Financial Interest:
• The assurance team and immediate family member of such person are not allowed to own a direct or indirect material financial
interest in a client
• As per Section 212 of CA1994 a person who is a director or holders of shares exceeding 5% in the nominal value of the
subscribed capital should not be appointed as auditor.
• For listed entities, no Partner or employees of the audit firm shall possess any share of the company they audit during the
tenure of the audit.
• Safeguards: Dispose interest, remove individual, keeping clients audit committee informed, using engagement quality control.
Close business relationship:
• Purchasing goods and services from an assurance client in the ordinary course of business on an arm’s length business does not
constitute threat to independence. However, substantial number of such transactions may be a threat to independence and
safeguards will be necessary.
Dual employment:
• Dual employment (same person being employed by the firm and a client) is not allowed.
Staff Transfer:
• When any former member has moved from the firm to client should not be entitled to any benefits or payments from the firm
unless these are made in accordance with pre determined arrangement.
• A firm should have quality control procedures setting out that an individual involved in serious employment negotiations with
an audit client should notify the firm and be removed from the engagement.
Family and personal relationships:
• When an immediate family member of a member of the assurance team is a director, an officer or an employee of the assurance
client in a position to exert significant influence over the subject matter information of the assurance engagement, the individual
should be removed from the assurance team.
Gifts and hospitality:
Unless the value o gifts and hospitality are such that a reasonable and informed third party weighing all the specific facts and
circumstances would consider them trivial and inconsequential , a firm or a member of an assurance team should not accept them.

*Immediate family=spouse (or equivalent) or a dependent

*Close family= A parent, child or sibling who is not an immediate family member
*Assurance Team=All members of the assurance team for the assurance engagement and all others who can influence
the outcome of the engagement. WHR
Chapter 4: Professional Ethics
Self-interest threat (contd.)

Loans and Guarantees:

• If a loan made by bank/NBFI (a client too) under normal circumstances following normal lending procedures is acceptable provided.
Otherwise this is not acceptable.
• If a material guarantee is provided by a client (bank or other) to either the firm or to a member or the immediate family member of
the audit team no safeguards could reduce the threat.

Overdue fees:
• It is effectively like making a loan to the client and the firm should guard against fee building up and discuss this with those charged
with governance.

Contingent fees:
• A firm shall not enter into an any fee arrangement for an assurance work under which the amount of the fee is contingent on the
result of the assurance work or on items that are the subject matter of the assurance engagement.
High percentage of fees:
• As per the code, if an audit client is a public interest entity and for two consecutive years the total fees from the client and its related
entities represent more than 15% of the total fees received by the firm the firm shall disclose the fact to those charged with
governance of the client and carry out an engagement quality control review.
Lowballing
• When a firm quotes a significantly lower fee level for an assurance service than would have been charged by the predecessor firm,
there is a significant self interest threat and the firm must apply safeguards such as documenting that appropriate staff and time are
spent on the engagement and comply with all applicable assurance standards, guidelines and quality control procedures.

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Sources of self-review threat

Operation of
financial
system

Prepared
Other services
accounting
e.g., litigation
records and
support, IT
financial
services
systems

Self-
review
threat

Corporate
Valuation
finance/Tax
services
etc.

Internal audit

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Chapter 4: Professional Ethics
Self-review threat
Services with assurance client
• If a member of the engagement team has to report on work they prepared originally or elements of the FS they had responsibility
for at the client, but there is a self review threat. Safeguards such as performing a quality control review and discussing with the
client audit committee should be applied.

Preparing accounting records and financial statements

• In this instance appropriate safeguards such as deployment of separate staff member other than assurance tam member,
requiring that source data and underlying assumptions be originated and approved by the client, implementing policies and
procedures prohibiting individual making managerial decisions on behalf of the client for must be applied.
• Not allowed for listed companies.

Valuation services
• If immaterial matter then safeguards such as second partner review, confirming with the clients that they understand the
valuation and the assumptions used, ensuring that client takes responsibility for the valuation, using separate personnel for
valuation and assurance service must be applied.
• Not allowed for listed companies.

Taxation service
• Tax return preparation is not harmful as long as client takes responsibility.
• Tax calculation or the purpose of preparing the FS is permissible for non public interest entities and may not be prepared for
public interest entities except in emergency situation.
• Tax planning may be acceptable in circumstances where advice is clearly supported by a tax authority.
• Assistance in the resolution of tax disputes may be provide depending on whether the firm itself provided the service which is the
subject of dispute.
• Safeguards to mitigate these threats that could be applied include: employing different partner and staff, tax services being
reviewed by a different tax partner of senior tax employees, obtaining independent advice on tax work, review of the tax
computations by an independent partner not a member of the assurance team

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Self-review threat
Internal audit services
• If the audit firm’s personnel assume management responsibility (such as setting policy, directing and taking responsibility for the
actions of the entity’s internal audit employees, deciding which recommendations to be implemented, reporting the results to
those charged with governance, performing procedures that form part of the internal control, taking responsibility for designing,
implementing and maintaining internal control system) then there is no safeguard.

• Otherwise safeguards include ensuring that the client designates an appropriate and competent resource to be responsible at all
times for internal audit activities and client management reviews, approves, assesses the scope, risk and frequency of the internal
audit services and client determines which recommendations to implement.

Corporate finance services

• Assurance firms are not allowed to promote, deal in or underwrite an assurance clients shares, commit an assurance client to the
terms of a transaction or consummate a transaction on clients behalf.

Information technology services

• For public interest entities the firm shall not design or implement IT services that form a significant part of the internal control
over financial reporting and generate information that is significant to the FS on which the firm will express an opinion.
• For non public interest entities the above could be provided as long as safeguards such as client acknowledges its responsibility
for establishing and monitoring a system of internal control, a senior management personnel makes the management decisions,
the client evaluates the adequacy and effectiveness and results of such system.
Litigation support service
• Litigation support services for non-listed entities that do not involve subjective estimations are not prohibited.

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Sources of familiarity threat

Close family
member

Employment Long
with Familiarity association
assurance threat with the
client client

Recruitment

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Sources of intimidation threat

Close business
relationship

Family and
Intimidation
personal Litigation
threat
relationships

Assurance staff
members move
to employment A few of these are also examples of sources
with client of self interest threat largely because
intimidation may only arise significantly
when the assurance firm has something to
lose.

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Intimidation threat
When such threat arises the factors that need to be considered by the firm include:
• Materiality of the litigation
• The nature of the assurance engagement
• Whether the litigation relates to a prior assurance engagement

Safeguards:
• Disclosing to Audit committee
• Removing specific affected individual from the engagement team
• Involving additional professional accountant on the team to review the work

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Sources of advocacy threat

Legal
services

Advocacy
threat

Corporate Contingent
finance fees

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Advocacy threat
• Ethical standards forbids the provision of providing legal services to an audit client where it would involve acting as the solicitor
formally nominated to represent the audited entity in resolution of a dispute or litigation which is material to the financial
statements.
• In rare circumstances when it is allowed safeguards such as different personnel, making disclosures to the audit committee must
be applied.
• Remember the ultimate option is to withdraw from the engagement.

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Chapter 4: Professional Ethics

BSEC Corporate Governance Code 03 June,2018

7. External or Statutory Auditors.

(1) The issuer company shall not engage its external or statutory auditors to perform the
following services of the company, namely:-
(i) appraisal or valuation services or fairness opinions;
(ii) financial information systems design and implementation;
(iii) book-keeping or other services related to the accounting records or financial
statements;
(iv) broker-dealer services;
(v) actuarial services;
(vi) internal audit services or special audit services;
(vii) any service that the Audit Committee determines;
(viii) audit or certification services on compliance of corporate governance as required
under condition No. 9(1); and
(ix) any other service that creates conflict of interest.
(2) No partner or employees of the external audit firms shall possess any share of the company
they audit at least during the tenure of their audit assignment of that company; his or her family
members also shall not hold any shares in the said company.

[Family : spouse, son, daughter, father, mother, brother, sister, son-in-law and daughter-in-law shall be
considered as family members.]
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Chapter 4: Professional Ethics

General safeguards against threats

Safeguard: by the profession, regulation, work environment. Its include regulator, external review.
Safeguards that may eliminate or reduce to an acceptable level the threats faced by professional accountants in business
fall into two broad categories: (a) Safeguards created by the profession, legislation or regulation; and
(b) Safeguards in the work environment.
Safeguards created by the profession, legislation or regulation include:
-Educational, training and experience requirements for entry into the profession.
-Continuing professional development requirements.
-Corporate governance regulations.
-Professional standards.
-Professional or regulatory monitoring and disciplinary procedures.

Safeguards in the work environment:

-The employing organization’s systems of corporate oversight or other oversight structures.
-The employing organization’s ethics and conduct programs.
-Recruitment procedures in the employing organization emphasizing the importance of employing high caliber competent
staff.
-Strong internal controls.
-Appropriate disciplinary processes.
-Leadership that stresses the importance of ethical behavior and the expectation that employees will act in an ethical
manner.
-Policies and procedures to implement and monitor the quality of employee performance.
-Timely communication of the employing organization’s policies and procedures, including any changes to them, to all
employees and appropriate training and education on such policies and procedures.
-Policies and procedures to empower and encourage employees to communicate to senior levels within the employing
organization any ethical issues that concern them without fear of retribution.
-Consultation with another appropriate professional accountant.
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General safeguards against threats

Quality control systems in place at engagement, firm and

professional levels
e.g., planning, supervision, hot and cold file reviews, regulatory inspections

Control environment at the firm Training

Segregation of Monitoring
Evaluating the Staff training,
duties and
Partner and integrity of development,
between audit evidencing the
staff rotation the potential performance
and non-audit firms own
new clients appraisal
staff system

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Confidentiality

*Public Interest

Improper use of confidential information -Whether or not it is in the public interest is

difficult to prove and the auditor must proceed
-Professional accountants are allowed to use with caution if thinking of disclosing information
experience gained in their previous experience but for this reason. Such examples could include fraud,
not confidential information gained there. environmental pollution, or simply companies
-A professional accountant should not engage acting against the public good.
himself in insider dealing
-Where a professional accountant has confidential -Legal advice should be sought beforehand to avoid
information from Client 1 which affects the the risk of being sued. Matters to consider before
assurance report on Client 2 he cannot provide an disclosing information in the public interest are
opinion on Client 2 which he already knows from whether that matter is likely to be repeated and
whatever source to be untrue. This conflict must how serious the effects of the client’s actions are.
be resolved by following normal audit procedure
so that the same information is obtained from
another source. Under no circumstances should
there be any disclosure of confidential information
outside the firm.
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Conflicts of Interest

Any advice given should be in the best interests of the client. However, where clients'
interests conflict (for example, clients in the same line of business), the firm's work should
be arranged to avoid the interests of one being adversely affected by those of another.

The steps to be taken by the auditor are:

-Once a conflict is noted, auditor should advise both clients of the situation
reassure the client that adequate safeguards will be implemented, e.g. separate
engagement leaders for each, separate teams, to prevent the transfer of client
information between teams and a second partner review
suggest they seek additional independent advice

-If adequate safeguards can't be implemented, the auditor should resign.

Confidentiality – Separate team, separate team member, separate file – Chinese wall
/barrier

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Question
You are a Senior Manager in Ahmed & Co., Chartered Accountants. You are responsible for evaluating proposed engagements and
for recommending to the partners whether or not an engagement should be accepted by your firm. General Express Ltd., a listed
company, is an existing audit client and is an international mail services operator, with a global network including 220 countries.
The company offers mail and freight services to individual and corporate customers, as well as storage and logistical services.
General Express Ltd. follows its corporate social responsibility meticulously and publishes sustainability key performance
indicators (KPIs) in a Sustainability Report, which is published with the financial statements in the annual report. Partly in response
to requests from shareholders and pressure groups, General Express Ltd.'s management has decided that in the forthcoming annual
report, the KPIs should be accompanied by an independent assurance report. An approach has been made to your firm to provide
this report in addition to the audit. Your firm has recently established a specialist social, environmental and sustainability assurance
department, and if the engagement to report on the Sustainability Report is accepted, it would be performed by the partner and
members of that team, who would not be involved with the audit. You have also had a meeting with Ali Monsur, the manager
responsible for the audit of General Express Ltd., and notes of the meeting are given below:

Ahmed & Co. has audited General Express Ltd. for three years, and it is a major audit client of our firm, due to its global presence and
recent listing on two major stock exchanges. The audit is managed from our Dhaka office, which is also the location of the Country Head
Office of General Express Ltd. We have not done any work on the KPIs, other than reviewing them for consistency, as we would
with any 'other information' issued with the financial statements. The KPIs are produced by General Express Ltd.'s Sustainability
Department. We have performed audit procedures on the charitable donations, as this is disclosed in a note to the financial
statements, and our evidence indicates that there have been donations of Tk.9 million this year, which is the amount disclosed in the
note. However, the draft KPI is a different figure of Tk.10.5 million, and this is the figure highlighted in the draft Chair's Statement
as well as the draft Sustainability Report. Tk.9 million is material to the financial statements. The audit work is nearly complete,
and the annual report is to be published in about four weeks, in time for the company meeting, scheduled for April 2023.
Chapter 4: Professional Ethics

Question
Requirements

Evaluate the matters which should be considered before your firm accepts the invitation
to perform an assurance engagement on the Sustainability Report of General Express
Ltd.
Chapter 4: Professional Ethics
Solution
Matters that should be considered in by Ahmed & Co. making acceptance decision Objectivity
The proposed assurance engagement represents a non-audit service. IESBA's International Code of Ethics for Professional
Accountants does not prohibit the provision of additional assurance services to an audit client. However, the audit firm must
carefully consider whether the provision of the additional service creates a threat to objectivity and independence of the firm or
members of the audit team.
For example, when the total fees generated by a client represent a large proportion of a firm's total fees, the perceived dependence
on the client for fee income creates a self-interest threat. Due to the nature of the proposed engagement, self-review and advocacy
threats may also be created, as the Sustainability Report is published with the audited financial statements, and the audit firm could
be perceived to be promoting the interests of its client by providing an assurance report on the key performance indicators (KPIs).
Ahmed & Co should only accept the invitation to provide the assurance engagement after careful consideration of objectivity, and a
review as to whether safeguards can reduce any threat to objectivity to an acceptable level. As General Express Ltd. is a 'major
client', the fee level from providing both the audit and the assurance services could breach the permitted level of recurring fees
allowed from one client. The fact that General Express is listed means that the assessment of objectivity is particularly important
and a second partner review of the objectivity of the situation may be considered necessary.
General Express Ltd.'s requirements
Assurance engagements can vary in terms of the level of work that is expected, and the level of assurance that is required. This will
clearly impact on the scale of the assignment. For example, General Express Ltd. may require specific procedures to be performed
on certain KPIs to provide a high level of assurance, whereas a lower level of assurance may be acceptable for other KPIs.
Newman & Co should also clarify the expected content and expected wording of the assurance report itself, and whether any
specific third party will be using the Sustainability Report for a particular purpose, as this may create risk exposure for the firm.
Competence
The audit firm's specialist social and environmental assurance department has only been recently established, and the firm may not
have sufficient experienced staff to perform the assurance engagement. The fundamental principle of professional competence and
due care requires that members of an engagement team should possess sufficient skill and knowledge to be able to perform the
assignment, and be able to apply their skill and knowledge appropriately in the circumstances of the engagement.
Some of General Express Ltd.'s KPIs appear quite specialised - verification of CO2 emissions for example, may require specialist
knowledge and expertise. Ahmed & Co could bring in experts to perform this work, if necessary, but this would have cost
implications and would reduce the recoverability of the assignment.
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Scale of the engagement

The Sustainability Report contains 75 KPIs, and presumably a lot of written content in addition. All of these KPIs will need to be
verified, and the written content of the report reviewed for accuracy and consistency, meaning that this is a relatively large
engagement.
Ahmed & Co should consider whether the newly established sustainability reporting assurance team has enough resources to
perform the engagement within the required time scale, bearing in mind the time pressure which is further discussed below.
Time pressure
Given that the financial statements are scheduled to be published in four weeks, it is doubtful whether the assurance assignment
could be completed, and a report issued, in time for it to be included in the annual report, particularly given the global nature of the
assignment.
Ahmed & Co may wish to clarify with General Express Ltd.'s management whether they intend to publish the assurance report
within the annual report, as they have done previously, or whether a separate report will be issued at a later point in time, which
would allow more time for the assurance engagement to be conducted.
Fee level and profitability
Such a potentially large-scale assignment should attract a large fee. Costs will have to be carefully managed to ensure the
profitability of the engagement, especially considering that overseas travel will be involved, as presumably much of the field work
will be performed at General Express Ltd.'s Sustainability Department in Fartown.
The fee level would need to be negotiated bearing in mind the specialist nature of the work, and the urgency of the assignment, both
of which mean that a high fee could be commanded.
Global engagement
The firm's sustainability reporting team is situated in a different country to General Express Ltd.'s Sustainability Department.
Although this does not on its own mean that the assignment should not be taken on, it makes the assignment logistically difficult.
Members of the assurance department must be willing to travel overseas to conduct at least some of their work, as it would be
difficult to perform the engagement without visiting the department responsible for providing the KPIs. Other locations may also
need to be visited. There are also cost implications of the travel, which will need to be built into the proposed fee for the
engagement. Language may also present a barrier to accepting the engagement, depending on the language used in Fartown's
location.
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Risk
General Express Ltd. is a large company with a global presence. It is listed on several stock exchanges, and so it appears to have a
high public profile. In addition, pressure groups are keen to see the added credibility of an assurance report issued in relation to the
KPIs disclosed. For all of these reasons, there will be scrutiny of the Sustainability Report and the assurance report.
Ahmed & Co should bear in mind that this creates a risk exposure for the firm. If the assignment were taken, the firm would have to
carefully manage this risk exposure through thorough planning of the engagement and applying strong quality measures.
The firm would also need to ensure that the fee is commensurate with the level of risk exposure. Given the inconsistency that has
come to light regarding one of the draft KPIs, which appears to overstate charitable donations made by the company, we may need
to consider that management are trying to show the company's KPIs in a favourable way, which adds to the risk of the engagement.
Commercial consideration
If Ahmed & Co does not accept the assurance engagement, the firm risks losing the audit client in future years to another firm that
would be willing to provide both services. As General Express Ltd. is a prestigious client, this commercial consideration will be
important, but should not override any ethical considerations.
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Question
Strong Beverage Ltd. a listed company has been engaged in soft drink production and distribution business over decades. As usually the
company is compelled to prepare their financial statement (FS) in accordance to conceptual framework as guided by the International
Financial Reporting Standard (IFRS). In the respective AGM of the company Honest Man and Co. Chartered Accountants (HMCO) has been
appointed auditor for the year ending 31 December 2022.

Notable that although the company is a listed one, a family being major investor has been passively engaged to influence the major decisions
of the company. The one who represents the family is a highly influential personality being closely connected to national level politics.

HMCO having been influenced by the brand image of the company accepted the engagement without doing much of pre acceptance review.
Having been engaged, the firm deputed the engagement manager to have a quick review of the draft FS as part of the risk assessment process.
The engagement team revealed that the company has been reporting their annual maintenance costs (not overhauling) as part of the Property
Plant and Equipment which naturally does qualify to be capital expenditure. Given the nature of the company this expenditure is substantially
a large amount. The engagement team primarily doubted that the management had been overstating profit every year by capitalizing such big
amount of annual maintenance cost.

The engagement team argued that this was wrong reporting leading to a gross misstatement and would require rectification in the financial
statement under audit. This could never be accepted as capital expenditure which results in understatement of the operating expense and
correspondingly overstatement of the capital expenditure. The management, without much deliberation, outrightly refused to put required
rectification and they referred to their logic applied to their previous auditors. The company seemed to be worried about the implication,
should they accept such rectification proposition. Such rectification proposition might require restatement and necessary adjustments in the
previously published FS as well as in the draft handed over to the auditor. On the contrary, if not necessary adjustment accepted, carrying such
substantial misstatement, the respective audit report would be a modified one. But the management too indicated that their board geared by
the influential corner might not accept any modified opinion.

Under the given circumstance and having felt the influential stature of the board, the audit firm wished to discontinue the engagement and
withdraw their team without further progress in the audit work.
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Question
Requirements
a) As engagement manager what are the steps would you suggest that your firm should take to discontinue the
engagement?

b) Being a new engagement, what actions as guided by the ethical codes should your firm have taken prior to
formally accept such engagement?
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Solution
(a) In an ideal situation, once an engagement is accepted, the audit firm should carry on doing whatever is necessary towards
successful completion of the engagement. However, if it is sensed that successful completion is unlikely and if at all done forming a
credible opinion might not be possible due to potential intimidating environment, the auditor may prefer withdrawing from the
engagement. In that case following steps may be necessary:
• Holding clear discussion amongst partners of the firm bringing on table all necessary points underlying such hard decision
• If suitable, putting a note with the ICAB.
• Communicating the logic behind the decision of withdrawal with those charged with the governance. While communicating,
necessary reference of technical standards, ethical codes and other regulatory directives may be offered for their clear understanding.
• If felt appropriate, taking a legal advice on the matter.
• Returning all evidence collected so far to the client, if left in original copy with the firm
• Last, but not the least, withdrawing regulatory notice (Form-23B) given to the Registrar of Joint Stock Companies and Firms
(b) IESBA Codes of Ethics offer appropriate ethical guidance to its members across the globe. Similarly, there has been list of guidance
applicable to a firm/professional accountant contemplating to accept a new engagement. The guidance items are:
• Determine whether acceptance would create any threat to compliance with the fundamental principles.
• Determine potential threats to integrity and professional behavior due to the predominant influential attitude of the owners, management etc.
• Review if the client has/had involvement in illegal activities.
• Evaluate the magnitude of the threats and apply suitable safeguard. If the threats are unlikely to be eliminated or reduced to an acceptable level, it
is better declining to enter the relationship.
• Periodically review acceptance decisions of recurring client engagements
• Accept only those engagements which professional accountant in practice is competent to perform.
• Evaluate the significance of the threats and apply suitable safeguard to eliminate them or reduce to an acceptable level. Safeguards may include:
- Acquiring sufficient knowledge of the industries and related activities.
- Deploying adequate staff with due competencies
- Using expert services wherever necessary
• In case of replacing or tendering for an engagement currently held by a professional accountant in public practice:
- Determine if there is any reason for not accepting this offer.
- Communicate directly to the existing accountant.

- While communicating existing accountant the professional accountant in practice needs client’s permission to do so.
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Question
Shamim & Co is the external auditor of Dhaka and its BD-based subsidiaries. Dhaka has recently acquired 100%
of the share capital of Merry Ltd (Merry), a company incorporated and operating in China. The directors of
Dhaka have requested that Shamim & Co accepts appointment as external auditor of Merry and undertakes a
one-off engagement to review and report on the adequacy of internal controls at Merry. Shamim’s annual audit
fee is expected to rise to BDT 998,400 if it accepts appointment as auditor of Merry. The fee to review and
report on internal controls at Merry is expected to be BDT 155,000.

Your firm's total annual fee income is expected to be BDT 7.2 million. None of the entities within the group is
listed.

Requirements
a. Identify and explain the professional and ethical issues arising of the situation above. State any actions that
firm’s partners or its other employees should take to address these issues.
b. List the specific matters, arising from the acquisition of Merry that Shamim & Co should consider when
planning the audit of Dhaka.
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Solution
Professional and ethical issues

There is a threat to the firm’s objectivity and independence due to:

-Self-interest threat
- The regular fee income will be 13.9% of firm’s annual fee income.
- This is above the 10% threshold, but below the 15% threshold, set out in the Ethical
Standard.
- There is a risk of over-reliance on income from Dhaka.
- The auditor may be reluctant to take actions adverse to the interests of the firm,
such as modifying the audit report.

- Management threat
- The engagement to review the internal controls at Merry may require the firm to
make management decisions such as designing internal controls and implementing
changes thereto.
- The firm’s views may become too closely aligned with management.

- Self-review threat
- The results of the review of the internal controls at Merry may need to be reevaluated as part of external audit.
- The audit team may place too much reliance on the controls work and they may be
reluctant to highlight any shortcomings identified in the controls work.

There is a risk to professional competence and due care as the firm may not:
- Have the resources or experience to complete the audit of Merry.
- Have representation in China.
- Have sufficient knowledge of Chinese regulations.

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Answer to requirement (a) (contd.):

-The firm should undertake an external independent quality control review.
- The expectation that fees from Dhaka Group will exceed 10% should be disclosed to the
firm’s ethics partner and to those charged with governance at Dhaka.
- The proportion of the firm’s income earned from Dhaka should continue to be monitored.
- The firm should not make management decisions as part of the engagement to review
internal controls at Merry and must ensure there is informed management.
- Separate teams should be used for the audit and review of internal controls.
- The firm must consider the appropriateness of its resources and experience before accepting
either of the engagements at Merry.

Answer to requirement (b)

§ The group engagement team needs to obtain an understanding of Merry to ascertain
§ whether Merry is a significant component and assess the risks of material misstatement.
§ Materiality for the group financial statements as a whole and component materiality should
§ be determined.
§ If Merry is not significant then only analytical procedures at group level need to be planned.

• If reliance is to be placed on a local auditor, the firm must consider whether:

They will comply with ethical requirements relevant to group audit.
They are competent
§ The group audit team will be involved in their work to the extent necessary to obtain sufficient appropriate audit evidence.
§ They operate in a regulatory environment that actively oversees auditors.
§ Communication will be required with Merry’s auditor on timely basis and will need to cover
§ The work to be performed
§ The use to be made of the work
§ The form and content of Merry auditor’s communication with the group audit team.

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Chapter 4: Professional Ethics
ICAB Code of conduct- Part of ICAB Bye-Laws
§ Enters into a partnership with an unqualified person or persons in a position to obtain business of the nature in
which chartered accountants engage by means which are not open to Chartered Accountants.
§ allows any person to practice in his name as a chartered accountant unless such person is also a Chartered
accountant and is in partnership with or employed by him,
§ pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in fees or profits
of his professional business, to any other person than a member of the Institute or a partner he a retired partner or
the legal representative or widow of a deceased partner;
§ accepts or agrees to accept any part of the profits of the professional work of a lawyer, income-t practitioner,
auctioneer, broker or other agent or any other person who is not a member of the Institute;
§ accepts a position as auditor previously held by another chartered accountant without first communicating with him
in writing;
§ accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of
section 144(6) of the Companies Act, 1913 (VII of 1913), in respect of such appointment, have been duly complied
with;
§ accepts a position as auditor previously held by some other chartered accountant in such conditions as to constitute
under cutting;
§ publishes or sanctions the publication of expressions of thanks or appreciation by clients or promotes in any way
laudatory notices with regard to professional matters;
§ solicits clients or professional work either directly or indirectly by circular, advertisement, personal communication
or interview or by any other means;
§ advertises his professional attainments or services or uses any designation or expressions other than chartered
accountants on professional documents, visiting cards, letter-heads or sign boards unless it be a degree of a
University established by law in Bangladesh or recognized by the Government of Bangladesh or a title indicating
membership of the Institute of Chartered Accountants or any other Institution that has been recognized by the
Council;

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Chapter 4: Professional Ethics
ICAB Code of conduct- Part of ICAB Bye-Laws (contd.)

§ allows his name to be inserted in any directory, either in the main section or in classified list whether printed or not
so as to appear in a leaded type or in any manner, which could be regarded as of an advertising character;
§ certifies any documents, exhibits, statements, schedules or other forms of accountancy work which have not been
verified entirely under the personal supervision of himself, a member of his staff, another member of the Institute
or his partner;
§ Provided that the above will not apply in cases of accounts of foreign branches or subsidiaries of his clients which
have been duly certified by a public accountant;
§ gives estimates of future profits for publication in a prospectus or otherwise or certifies for publication statements
of average profits over a period of two or more years without at the same time stating the profits or losses for each
year separately;
§ charges or offers to charge, accepts or offers to accept in respect of any professional employment, fees which are
based on a percentage of profits or which are contingent upon the findings or result of such employment except in
cases which are permitted under any regulations of Government or requirements of law;
§ engages in any business or occupation other than the profession of chartered accountants unless permitted by the
Council so to engage;
§ Provided that nothing contained herein shall disentitle a chartered accountant from being a director of a company
or a cooperative society unless he or any of his partners is interested in such company as an auditor;
§ Allows a person not being a member of the institute or a member not being his partner to sign on his behalf or on
behalf of his firm, any balance sheet, profit and loss account, report or financial statements or any other document
required by his client;
§ discloses information acquired in the course of his professional engagement to any person other than his client,
without the consent of his client or otherwise than as required by any law for the time being in force;
§ expresses his opinion on financial statements of any business or any enterprise in which he his firm or a partner of
his firm has a substantial interest, unless he discloses the interest also in his report;

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Chapter 4: Professional Ethics

ICAB Code of conduct- Part of ICAB Bye-Laws (contd.)

§ fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which
is necessary to make the financial statement not misleading;
§ fails to report a material misstatement known to him to appear in a financial statement with which he is concerned
in a professional capacity;
§ is grossly negligent in the conduct of his professional duties;
§ fails to obtain sufficient information to warrant the expression of an opinion or his qualifications are sufficiently
material to negate the expression of an opinion;
§ fails to keep moneys of his client in a separate banking account or to use such moneys for purposes for which they
are intended;
§ has been guilty of any act or default discreditable to a chartered accountant or a member of he Insatiate;
(i) contravenes any of the provisions of the Order or the bye-laws made there under;
(ii) is guilty of such other act or omission as may be specified by the Council in this behalf, by notification in the
Gazette of Bangladesh;
§ not being a fellow styles himself as a fellow
§ does not supply the information called for or does not comply with the requirements asked for by the Council or any
of its Committees;
§ fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the
circumstances;
§ includes in any statement return or form to be submitted to the Council any particulars knowing them to be false;
§ permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon
future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast;
§ without first obtaining the permission of the Council associates himself with or promotes any body of accountancy
association or institute of accountancy, etc., in Bangladesh;

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Chapter 4: Professional Ethics

Summarised principal sections of the Companies Act 1994 relating to audit and accounts

Section Main Provision

181 Books to be kept by company and penalty for not keeping proper books
183 Annual Balance Sheet
184 Boards report
185 Form and contents of Balance Sheet and Profit & Loss Account
186 Balance Sheet of Holding company to include certain particulars as to its subsidiaries
187 Financial year of holding company & it subsidiaries
189 Authentication of Balance Sheet, Profit & Loss Accounts etc.
210 Appointment & remuneration of auditors
211 Provisions as to resolution for appointing or removing auditors
212 Qualification & disqualification of auditor
213 Power
214 Audit of accounts of branch office of company
215 Signature of Audit Report, etc.
216 Reading and Inspection of Auditor’s report
217 Right of auditor to attend general meeting
218 Penalty for Non-Compliance with section 211 to 217
219 Penalty for non-compliance by auditor with section 211 to 217
220 Audit of certain matters by Cost & Management Accountants

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Chapter 4: Professional Ethics

Any Questions

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