TOPIC: ETHICS, PROFESIONAL CONDUCT AND QUALITY CONTROL

REVIEW QUESTION ANSWERS

1. Briefly describe the three theories of ethical behavior that can
be used to analyze ethical issues in accounting.
The three theories of ethical behavior are (1) utilitarianism, (2) rightsbased approach, and (3) justice-based approach. Utilitarian theory
recognizes that decision-making involves trade-offs among the benefits
and burdens of alternative actions, and it focuses on the consequences
of an action on the individuals affected. The theory proposes that the
interests of all parties affected, not just one's self-interest, should be
considered. The theory of rights assumes that individuals have certain
rights and other individuals have a duty to respect those rights. Thus,
a decision maker who follows a theory of rights should undertake an
action only if it does not violate the rights of any individual. The theory
of justice is concerned with issues such as equity, fairness, and
impartiality. Decisions made within this theory should lead to a fair
and equitable distribution of resources among those individuals or
groups affected.
2. Identify the six stages of ethical development. What level of
development would a professional such as auditor typically
attains?
The six stages of ethical development are:
Stage I: The individual's actions are judged in terms of their physical
consequences, such as avoidance of punishment.
Stage II: The individual is aware of others' needs, but satisfaction of
the individuals own needs is the basic motivation for action.
Stage III:The individual attempts to conform to group norms. The
others view of the situation is considered, and conflicts are
resolved through the use of these norms.
Stage IV:The individual is concerned about order in society and its
rules. The individual uses the laws and rules for guidance in
conflict situations.

Stage V: The individual views social contracts and mutual obligations

as important. Differences in conflict situations are resolved
impartially and with consideration of everyone's interests.
Stage VI:
The individual bases actions on universal moral and
ethical principles (such as justice, equality, and dignity) that
apply to all individuals and groups.
3. Explain the conceptual framework approach to ethics outlined
in the IFAC Code of Ethics.
The conceptual framework approach is now extended to all the
fundamental ethical principles. Professional accountants, whether in
public practice, in business or employment are require to apply the
conceptual framework approach to ethics. The IFAC conceptual
framework for applying the fundamental ethical principles is essentially
a
principle-based approach. A principal- based approach is
preferred to a rules-based
approach that provided a set of specific
rules for each identified ethical situation.
4. What are the five types of threats to compliance with
fundamental ethical principles?
Examples of self-interest threats and applicable safeguards
A team member has a financial interest in the client.
Disclose to those charged with governance the extent and
nature of the financial interest.

Dispose part of or the complete financial interest.

Potential employment of team member to a client.

Restrict the members responsibilities on the engagement.

Remove the member from the team.

Recruiting client senior management.

Restrict the services to review the professional

qualifications of applicants and provide advice on their
suitability for the post.

Restrict the services to produce a short-list of candidates

for interview, provided it has been drawn up using criteria
specified by the client

Examples of self-review threats and applicable safeguards

Temporary staff assignments to a client.

Ascertain that the staff providing the assistance is not

given audit responsibility for any function or activity that
they performed or supervised during their temporary staff
assignment.

Disclose to those charged with governance the extent and

nature of the temporary staff assignment.

Preparing accounting records for the client.

Ascertain that all underlying assumptions are originated

and approved by the client.

Restrict the involvement to accounting services of routine

and mechanical nature.

Provision of IT system services to the client.

Ascertain that the client makes all management decisions

with respect to the design and implementation process.

Ascertain that the client evaluates the adequacy and

results of the design and implementation of the system

Examples of advocacy threats and applicable safeguards

Provision of legal services to the client.

Consult an independent third party, such as an audit

committee, a professional regulatory body or another
professional accountant.

Ascertain that members of the team are not involved in

providing the legal service.

A contingent fee charged by a firm for a non-assurance service

provided to a client.

Disclose to those charged with governance the extent and

nature of the fee charged.
Review of the final fee by an unrelated third party.

Auditor is assisting the client in resolving a tax dispute.

Restrict the nature of the involvement.

Consult an independent third party, such as an audit
committee, a professional regulatory body or another
professional accountant.

Examples of familiarity threats and applicable safeguards

Using the same senior personnel on the engagement over a long
period of time.

Engagement quality control review.

Rotate senior personnel on the engagement.

A member of the engagement team has a family relationship

with client personnel.

Reduce the members responsibilities on the team.

Remove the member from the team.

A member of the engagement team has served with the client.

Involve an additional professional accountant to review the

work done by the member.

Discuss the issue with those charged with governance.

Examples of intimidation threats and applicable safeguards

The client threatens the auditor with litigation.

Disclose to those charged with governance the extent and

nature of the threatened litigation.

Involve an additional professional accountant in the firm

who was not a member of the team to review the work
done.

 An audit firm is threatened with replacement over a

disagreement about an auditees application of an accounting
principle.

Discuss the issue with those charged with governance.

Involve an additional professional accountant to review the

work done.

A business relationship exists between a member of the

engagement team and client personnel.

Reduce the members responsibilities on the team.

Reduce the magnitude of the business relationship.

5. What are the five fundamental principles of professionals

ethic?
The five principles in The IFAC Code of Ethics are:
Integrity. A professional accountant should be straightforward and
honest in all professional and business relationships.
Objectivity. A professional accountant should not allow bias, conflict of
interest, or undue influence of others to override professional or
business judgments.
Professional , competence and due care. A professional accountant has
a continuing duty to maintain professional knowledge and skill at the
level required to ensure that a client or employer receives competent
professional service based on current developments in practice,
legislation and techniques. A professional accountant should act
diligently and in accordance with applicable technical and professional
standards when providing professional services.
Confidentiality. A professional accountant should respect the
confidentiality of information acquired as a result of professional and
business relationships and should not disclose any such information to
third parties without proper and specific authority unless there is a
legal or professional right or duty to disclose. Confidential information
acquired as a result of professional and business relationships should

not be used for the personal advantage of the professional accountant

or third parties.
Professional behavior. A professional accountant should comply with
relevant laws and regulations and should avoid any action that
discredits the profession.
6. What are the types of services commonly
professional accountants in public practice?

provided

by

Providing valuation services to the audit client may be acceptable if

the valuation services are neither separately, nor in the aggregate,
material to the financial statements, or that do not involve a significant
degree of subjectivity.
Applicable safeguards are:
Involving an additional professional accountant who was not a
member of the audit team to review the work done or otherwise
advise as necessary.
Confirming with the audit client their understanding of the
underlying assumptions of the valuation and the methodology to
be used and obtaining approval for their use.
Obtaining the audit clients acknowledgment of responsibility for
the results of the work performed by the firm.
Making arrangements so that personnel providing such services
do not participate in the audit engagement.
7. What are the factors that are to be taken into accounts in the
determination of professional fees charged by professional
accountants in public practice?
When entering into negotiations regarding professional services, a
practitioner may quote whatever fee deemed to be appropriate. The
fact that one practitioner may quote a fee lower than another is not in
itself unethical. Practitioners must take cognizance of the provision of
the Institutes By-Law 240. However, practitioners should take note
that fee under-cutting will bring disrepute to the profession as a
whole.

Fees charged for assurance engagements should be a fair reflection of

the value to the client and should take into account, inter alia:
a) the skill and knowledge required for the type of work involved;
b) the level of training and experience of the persons necessarily
engaged on the work;
c) the time necessarily occupied by each person engaged on the
work; and
d) the degree of responsibility and urgency that the work entails.
(By-Laws Section 240.2A) Laws Section 240.2A)
The Institute encourages all practitioners to adopt Value-based billing.
However, the Institute also recognizes that practitioners may
encounter some difficulties in their negotiation with the clients. Hence,
further guidance is provided under Section 4 of this RPG for
practitioners reference.
8. For professional accountants in public practice,what are the
circumstances they are likely to pose a conflict of interest with
the client?
A professional accountant in public practice should consider his
business interests or relationship with a client or a third party and
evaluate whether such relationship may give rise
to
conflict
of
interest and threat to objectivity. In such threats are predictable, the
IFAC Code requires the professional accountant to apply the
following safeguards:
Inform the client of his business interest that may give rise to
conflict of interest and obtain the clients consent to act in such
circumstances.
Notify all relevant parties that professional accountant is acting for
two or more parties where their respective interest are in conflict
and obtain their consent to do so.
Inform the client that he does not act exclusively for any one client
in the provision of the proposed services and obtain the clients
consent for doing so.
9. Explain what is meant by providing professional services on

contingent fee basis. Why is a contingent fee arrangement not

allowed for assurance engagement?
The meant for providing professional services on contingent fee basis
is calculated on arrangement in which the amount of the fee is
dependent upon the finding or result of such service, or in which no fee
will be charge unless a specific finding or result in attained. Fees
changed based on complexity of work are not be considered as
contingency-based. Code of ethics for the accounting profession
generally prohibits an accountant from charging contingent fee for any
professional services where the elements of objectivity and
independent are a focal point of the assignment.
Contingent fee arrangement not allowed for assurance engagement
because the
threats are so
significant that no safeguards are
appropriate. The IFAC Code prohibits fee arrangements
for
assurance engagement where the fee is contingent upon the result of
the contingent work. A contingent fee in respect of a non-assurance
service to an assurance client is also prohibited if the fee for the nonassurance engagement was agreed to during the assurance
engagement and was contingent on the result of that assurance
engagement.
10.
Explain the meaning of independence mind and
independence in appearance as provided in the IFAC Code of
Ethics.
Independence mind is the state of mind that permits the rendering of a
conclusion without being affected by influences that compromise
professional judgment. A state of mind that allows an individual to act
with integrity and exercise objectivity and professional
scepticism.
Independence in appearance is refers to the avoidance of 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.
11.
Why is it important that professional accountants should
participate
in
continuing
professional
development
programmes?
CPD is applicable to all professional accountants, regardless of sector
or size of the organization in which they operate, because:

(a) all professional accountants have an obligation of due care to their

clients, employers, and relevant stakeholders, and are expected to
demonstrate their ability to competently discharge this
responsibility;
(b)professional accountants in all sectors are subject to public
accountability and the maintenance of public trust;
(c) the public is likely to rely on the designation and professional
standing of the professional accountant. Professional accountants
carry a professional designation. Any lack of competence of an
individual accountant has the potential to damage the reputation
and standing of both the individual and the profession as a whole;
(d)all sectors are affected by the rapidly changing environment, and
consequently adapt the strategic or business plans of those
organizations relying on the professional accountants professional
competence; and
(e) employers recruiting professional accountants in any sector rely, to
some extent, on the professional designation as proof of
professional competence.
12.
List three types of relationships between a professional
accountant and his assurance client that may pose a threat to
his professional independence.
When litigation takes place, or appears likely, between the firm or a
member of the assurance team and the assurance client, a self-interest
or intimidation threat may be created. The relationship between client
management and the members of the assurance team must be
characterized by complete candor and full disclosure regarding all
aspects of a clients business operations. The firm and the clients
management may be placed in adversarial positions by litigation,
affecting managements willingness to make complete disclosures and
the firm may face a self-interest threat. The significance of the threat
created will depend upon such factors as:
The materiality of the litigation;
The nature of the assurance engagement; and
Whether the litigation relates to a prior assurance engagement.

13.
What are the objectives of the MIA Practice Review
Programme?

Develop and enhance the competency

professionals to meet market demand.

Advance and enhance the status

accountancy profession in Malaysia.

Regulate the practice of the accountancy profession in Malaysia

consistent with global standards and best practices.

of

of

accountancy

members

and

the

14.
Functions of Investigation Committee and Disciplinary
Committee.
1. The Investigation Committee shall investigate any complaints
made against any member in the manner laid down in the rules
and where it considers that this is justified shall refer the matter
to the Disciplinary Committee.
2. The Disciplinary Committee shall if it thinks fit exercise in respect
of that member any disciplinary powers conferred upon it by
rules.