The Code of Ethics for Professional Accountants issued by the HKICPA establishes the five

fundamental principles that a professional accountant shall comply with when carrying out his/her

work. It also sets out the threats that could compromise a professional accountants compliance

with the fundamental principles.

Required:

(a)

For each of the above five threats to a professional accountants independence, provide an

example of an incidence that may compromise an auditors compliance with the

fundamental principles mentioned above.

(b)

Indicate what threats are being affected and explain your reasons:

(i)

CPA & Co is the external auditor of Good Hope Limited (Good Hope). The

finance director of Good Hope is leaving soon and a replacement is yet to be filled.

Management of Good Hope has asked CPA & Co to send an audit manager to the

company as a temporary CFO for at least 6 months.5 | P a g e

(ii)

Bluesky Limited is in dispute with one of its trading parties, Peony Limited, in

connection with the calculation of the amount of the right of use of a patent that

should be payable by Peony Limited to Bluesky Limited for the year ended 31

December 2019. The amount of the dispute in question is material to the financial

statements of both Bluesky Limited and Peony Limited. Knowing that your firm

is the auditor of both Bluesky Limited and Peony Limited, both parties have

therefore requested the help of your firm to be their arbitrator as they have good

faith that your firm will be impartial.

(iii)

John is a partner of Trinity & Co (the firm) which is the statutory auditor of

Brown Limited which is a medium-sized company listed on the Hong Kong Stock

Exchange. Johns expertise is in the area of information technology (IT) and he

is leading a team in the firm to help review the firms audit clients IT system

integrity for audit purposes. Brown Limited would like to engage John to help the

company upgrade its IT system related to financial reporting. Trinity & Co has

accepted the appointment as John considers that this is a client request which should

be entertained in order to maintain the firms good quality services.

(iv)

Paul has been asked to be the audit engagement partner for Bright Limited. Upon

understanding the background of Bright Limited, it has come to his attention that

Bright Limiteds executive finance director, Mr Sanderson, is a retired partner of

Pauls firm. Mr Sanderson was, before his retirement, the career coach of Paul.

(v)

The CFO of Mega Limited was in dispute with Jack who was the engagement

partner on the audit of Mega Limited about an accounting treatment for the

valuation of certain accounts receivable. As the impact of the treatment is material

to Mega Limiteds financial statements, the CFO was very upset and told Jack that

they would terminate the audit relationship unless he was agreeable to the treatment

adopted by the company.