a) Explain the provision related to Second Opinions with reference to Code of Ethics.
b) Explain the various types of threat explained in ICAN Code of Ethics along with examples.
c) Pradhan Ghimire & Associates, a firm of chartered accountant has two partners. The firm is already holding audit of 100 companies including audit of 20 public limited companies. The firm is further offered for the audit of Premier Investment Limited.
Section 321 of Code of Ethics contains the provision relating to Second Opinions.
When asked to provide second opinion on the application of accounting, auditing, reporting or other standards or principles to specific circumstances or transactions a company or on behalf of a company or any entity that is not an existing client, a professional accountant in public practice shall evaluate the significance of any threats and apply safeguards where necessary to eliminate them or reduce them to an acceptable level.
The existence and significance of the threat will depend on the circumstances of the request and all the other available facts and assumptions relevant to the expression of professional judgment. Examples of such safeguards include seeking client permission to contact the existing accountant, describing the limitations surrounding any opinion on communications with the client and providing the existing accountant with a copy of the opinion. If the company or entity seeking the opinion will not permit communication with the existing accountant, a professional accountant in public practice shall determine whether, taking all the circumstances into account, it is appropriate to provide the opinion sought.
The various kinds of threats as explained in section 120.6.A3 of code of ethics are as follows:
Self Interest Threat: The threat which occur when an auditing firm, its partner or associate could benefit from a financial interest in an audit client Examples include direct financial interest or materially significant indirect financial interest in a client, loan or guarantee from concerned client, close business relationship with an audit client, potential employment with client.
Self-Review Threat: The threat that a professional accountant will inappropriately evaluate the result of a previous judgment made or service performed the professional accountant or another individual within the professional accountant‟s firm or employing organization on which the accountant will rely when forming a judgement as part of providing a current service. For e.g.: valuation service along with audit service, accounting service.
Advocacy Threat: The threat that a professional accountant will promote client‟s opinion to the point where people may believe that objectivity is getting compromised. For e.g.: Auditor acting as an advocate on behalf of audit client in litigation or dispute with the third parties.
Familiarity Threat: The threat that a profession accountant due to a long or close relationship with a client, will be too sympathetic to their interests or too accepting of their work. For e.g.: participation in client‟s affair, family and personal relationship, audit partners leaving to join the clients etc.
Intimidation Threat: The threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressure, including attempts to exercise undue influence over professional accountant. For e.g.: A firm being treated with dismissal from a client engagement.
The council vide its meeting no 194 dated Falgun 4, 2071 has amended provision relating to ceiling over the number of audit. The amended provision is as below and is effective for appointment from Shrawan 1, 2072.
A member holding Certificate of Practice of can perform the audit of not more than 100 entities in a financial year, out of which audit of public companies shall not exceed 10. The above limit is applicable for each member of a partnership firm. However, audit of certain entity having turnover of less than 20 lacs is not included while calculating the above limit.
Thus, the firm can take maximum of 200 audits (100*2), but the number of public company audit can‟t exceed 20. As, the firm is already holding audit of 20 public limited companies Pradhan, Ghimire & Associates can‟t take the audit of the Premier Investment Limited.