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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Code of Ethics for Professional Accountants

Orrin & Wake audits Seabrook Ltd, a PIE. Management asks the firm to provide a valuation of Seabrook's pension obligations, which will be recorded in the financial statements. The valuation involves a significant degree of subjectivity, and the amount is material. A partner suggests that a separate valuation team, with a review by an engagement quality reviewer, would make the service acceptable. Which response best reflects the Code's position?

The firm should decline the valuation. For a public interest entity audit client, the Code prohibits valuation services that would have a material effect on the financial statements, because the self-review threat is too significant for team separation, an engagement quality reviewer or management approval to resolve.

  1. AAccept, because a separate team and engagement quality review together eliminate the self-review threat
  2. BAccept, because valuations are always permitted when management approves the assumptions
  3. CDecline, because for a PIE audit client a valuation service that is material to the financial statements and involves significant subjectivity is prohibitedCorrect
  4. DDecline, but only if Seabrook's shares are not listed

Explanation

The Code prohibits valuation services for a PIE audit client where the valuation would have a material effect on the financial statements, regardless of subjectivity. Separate teams or a reviewer do not reduce the self-review threat to an acceptable level. Management approval of assumptions is not an effective safeguard in that case.

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