CA Intermediate · Auditing and Ethics

Ethics and Terms of Audit Engagements: formula sheet

Full chapter guide

Key formulas

Five fundamental principles: Integrity + Objectivity + Professional competence and due care + Confidentiality + Professional behaviour; Write all five by name. Define each in one line. Exam answers lose marks when a principle is missed.
Conceptual framework approach: Identify threats → Evaluate significance → Address threats (eliminate, safeguard, or decline/end engagement); Use this sequence in every case-study answer. Safeguards apply only when the threat can be brought to an acceptable level.
Categories of threats: Self-interest, Self-review, Advocacy, Familiarity, Intimidation; Match the facts to the category. For example, a close relative of the auditor holding a key post in the client is a familiarity threat.
Acceptable level: Threat acceptable if a reasonable and informed third party would likely conclude compliance with the principles is not compromised; This is the test for whether safeguards are enough. If not, decline or withdraw.
Integrity vs Objectivity: Integrity = honesty and straightforwardness; Objectivity = impartial judgment free from bias and undue influence; Use this for 'differentiate' questions.
Professional skepticism (SA 200): Questioning mind + alertness to conditions indicating possible misstatement + critical assessment of audit evidence; An attitude. It must be maintained throughout planning and performance of the audit.
Professional judgment (SA 200): Training + knowledge + experience, applied within auditing, accounting and ethical standards → informed decisions; Needed in materiality, risk assessment, evidence, estimates and opinion. It must be supported by facts, circumstances and sufficient appropriate evidence.
Where judgment is documented (SA 230): Document significant judgments so an experienced auditor with no previous connection to the audit can understand them; This test comes from SA 230 on audit documentation. SA 200 (para A24) also links judgment to documentation.
Skepticism and reasonable assurance: Skepticism is needed to obtain sufficient appropriate evidence and to reduce audit risk to an acceptably low level; Auditor gives reasonable assurance, not absolute assurance.
Mandatory contents of the letter (SA 210): Objective and scope of audit + Auditor's responsibilities + Management's responsibilities + Identification of applicable financial reporting framework + Expected form and content of reports; Remember these five heads. They are the core of any answer on contents.
Management's responsibilities to be acknowledged: Prepare financial statements in line with the framework + Maintain internal control needed for preparation free from material misstatement + Give auditor access to all relevant information, additional information requested, and unrestricted access to persons; Management must agree to these before the audit proceeds. This is the basis on which the audit is conducted.
Expected form of reports: Reference to the expected form and content of the auditor's report + Statement that the actual report may differ from the expected form; Circumstances may require a different report, so the letter should say the actual report can differ.
Preconditions for an audit: Acceptable financial reporting framework + Management's agreement to its responsibilities; If a precondition is absent, discuss the matter with management. The auditor shall not accept the engagement if the framework is unacceptable, unless required by law to do so. In that case the audit is not an SA-compliant audit, and the auditor's report must not say it was conducted in accordance with SAs. The auditor also shall not accept the engagement if management does not agree to its responsibilities.
Recurring audits rule: Fresh engagement letter = needed only if circumstances suggest revised terms; No automatic yearly letter. The auditor decides based on changes and records the reason.
Factors to consider for revising terms: Misunderstanding of scope | special terms | change in management | change in ownership | change in nature or size of business | change in law | change in framework | change in other reporting; Learn these as a list. Questions often give a scenario and ask which factor applies.
Acceptance test for a change: Change accepted = reasonable justification exists; Without reasonable justification, the auditor must not agree to a lower assurance level.
Examples of reasonable justification: Change in circumstances affecting the need for the service OR misunderstanding about the nature of the original engagement; Not justified if the reason is incorrect, incomplete or unsatisfactory information.
If change is not agreed: Withdraw (where law permits) + tell those charged with governance + consider reporting obligations; If the auditor cannot continue the original audit and management does not permit it, withdraw where law permits and consider any obligation to report the circumstances to others.
Acceptance considerations: Integrity of client + Competence and resources + Ethical compliance (including independence); All three must be satisfied before accepting or continuing. Failing any one means decline or withdraw.
Rule on previous auditor: Incoming auditor must communicate in writing with the previous auditor before accepting the appointment; Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949: applies to a chartered accountant in practice accepting a position as auditor previously held by another chartered accountant or a certified auditor holding a certificate under the Restricted Certificate Rules, 1932. Not doing so is professional misconduct. The previous auditor has no veto under this Act, but the company's removal or replacement must still meet the Companies Act conditions.
Order of steps for a replacement auditor: Check eligibility → Communicate with previous auditor → Check validity of removal or resignation → Accept → Document; Memory sequence. Use it to structure written answers.
Companies Act provisions to cite: Section 139 (appointment), section 140 (removal, resignation, special notice), section 141 (eligibility); Cite them in your answer for companies. Removal before the term ends: section 140(1). Resignation, with Form ADT-3 filed by the auditor: section 140(2). Special notice for a resolution at an AGM to appoint a person other than the retiring auditor, or to provide expressly that the retiring auditor shall not be re-appointed, with the retiring auditor's right to make representations: section 140(4). Otherwise state the rule in words.
Engagement documentation: Acceptance decision and reasons are recorded in the audit file; Examiners credit a mention of documentation.

Quick revision

The fundamental principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour.
Threats to compliance are managed by applying safeguards or by declining or ending the engagement if they cannot be reduced.
Professional skepticism means a questioning mind and a critical look at audit evidence, not assuming dishonesty or honesty.
Professional judgment means applying relevant training, knowledge and experience to the facts in making informed decisions.
An audit can be accepted only if the preconditions are met, including an acceptable financial reporting framework.
Management must acknowledge its responsibilities for the financial statements, internal control and giving the auditor access to information.
If the preconditions are not present, the auditor discusses with management and does not accept the engagement unless they are fixed.
The engagement letter records the objective and scope, auditor and management responsibilities, and the framework used.
In recurring audits, the auditor considers whether circumstances need the terms to be revised and whether to remind the client of existing terms.
A request to change terms needs a reasonable justification. Without it, the auditor should not agree to the change.
Before accepting, the auditor must communicate with the previous auditor in writing. This is required under the Chartered Accountants Act, 1949 and its First Schedule (Part I, Clause 8), and is also reflected in the Code of Ethics. Accepting without doing so is professional misconduct.
Attempt every MCQ in the exam, since there is no negative marking.

Common mistakes

Treating integrity and objectivity as the same thing. Fix: Remember: integrity is about honesty and not misleading; objectivity is about impartial judgment free from bias or undue influence. Quote the distinction in one line.
Listing only three or four fundamental principles. Fix: Memorise the order: integrity, objectivity, competence and due care, confidentiality, professional behaviour. Count to five before moving on.
Treating skepticism as suspicion or assuming management is dishonest. Fix: Write that the auditor does not assume management is dishonest, but also does not assume unquestioned honesty. The auditor cannot accept less persuasive evidence because of a belief that management is honest and has integrity, even if past experience suggests it is.
Using the two terms as synonyms. Fix: Say skepticism is the attitude and judgment is the informed decision. Give one example of each.
Saying an engagement letter is not needed for a statutory audit because the law fixes the terms. Fix: State that SA 210 still requires agreed terms in writing. Where law prescribes terms in sufficient detail, the letter can just refer to the law, but terms the law does not cover, such as the expected report form, must still be recorded.
Addressing the letter to the wrong party. Fix: It is addressed to management or those charged with governance, as appropriate to the entity's circumstances.
Saying a new engagement letter must be sent every year in a recurring audit. Fix: Write that the auditor may send a fresh letter only when circumstances call for revised terms.
Accepting a change to a review engagement just because the client requests it. Fix: State that the auditor needs reasonable justification before agreeing to any lower assurance level.
Saying communication with the previous auditor can be oral or after accepting. Fix: Remember: in writing and before acceptance. Failing this is professional misconduct under the First Schedule.
Treating the previous auditor's reply as a veto. Fix: The reply informs your decision. You judge any adverse reasons yourself. His consent is not required under the Chartered Accountants Act. The company's removal or replacement must still meet the Companies Act conditions.

Exam tips

Learn the five principles as a list and write each with a one-line definition. This alone earns marks in theory questions.
In scenario questions, name the principle, then the threat category, then the response. Use the facts from the question in each line.
For 'differentiate' questions, give at least three points of difference in a tabular-style layout using short lines, since the examiner rewards clear contrast.
In MCQs, watch for options that claim safeguards always work or that confidentiality can never be broken. Both are usually wrong.
Link ethics to SA 200 in one line where the question mentions audit compliance or independence.
Always write both definitions in SA 200 language when a question names both terms. Examiners look for the three elements of skepticism.
In case studies, quote the exact trigger in the facts, such as conflicting evidence or evasive answers, then link it to skepticism.
Link judgment to specific areas: materiality, risk assessment, evidence, estimates and opinion. This earns extra marks.