This question provided two short scenarios both of which described an ethical dilemma that had arisen at an audit firm. Candidates were required to identify and discuss the ethical, commercial and other professional issues raised, and to recommend any actions that should take place. This was the most popular of the optional questions.

Part (a) was for 8 marks. The scenario described a situation in which an audit client has approached the audit firm with a business opportunity involving the development and sale of accounting and tax software, with the audit firm’s client base being a potential customer base. The audit firm had been invited to jointly develop the business with the audit client.

Sound answers here used a logical approach, being prompted by the question requirement to discuss in turn the ethical issues, then commercial issues, then professional issues and leading to a set of recommended actions. There were some sound answers in which the ethical threats to objectivity had been fully evaluated, especially the self-interest and self-review threats.

Commercial issues were explored in the better answers, where typically the audit firm’s level of skill to develop software was questioned, as well as the issue as to whether the audit firm would want to diversify into this type of business as it may detract from the quality of audit and accounting services they offer to clients.

Weaker answers tended to just list in bullet point format all of the possible threats to objectivity without any real discussion or development of the threats specific to the scenario. Candidates are reminded that the IESBA’s Code of Ethics for Professional Accountants provides a framework for the evaluation of threats to objectivity, including the identification of threats, the evaluation of the significance of threats identified, and the use of professional judgement in deciding whether the application of safeguards can reduce threats identified to an acceptable level.

The use of this framework is recommended in answering questions of this type.