You are the training partner of a large audit firm. One of your responsibilities is to review each student’s training file before the student submits the file to ICAEW as evidence of fulfilling their professional experience. Ali, one of your first-year students, reported detailed information about a fixed asset acquisition in the accounts of a named client. Ali had disagreed with the capitalisation of this asset because it appeared to be for personal use and told his audit manager. The audit manager became noticeably angry and accused Ali of being insufficiently experienced to make such a judgment. The audit manager also pointed out that this long-standing client happens to be a personal friend of the engagement partner and should not be questioned about the decision to capitalise the fixed asset. Ali felt that the response from the audit manager did not reflect the philosophy of ICAEW ethics training.

(i) Explain the fundamental ethical principles for professional accountants and evaluate where there is an apparent conflict in relation to the scenario above.

(ii) Identify and evaluate potential threats to your firm’s independence and suggest how you would address them.