4 Flashcards
Why are professional ethics important in auditing?
✅ Ensures auditors act with integrity and in the public interest.
✅ Maintains trust in financial reporting and corporate governance.
✅ Prevents conflicts of interest and unethical behaviour.
What is independence in auditing?
✅ Freedom from situations that could impair objectivity.
✅ Must be perceived as independent by a reasonable and informed third party.
✅ Auditors must not just be ethical but must also appear ethical.
📌 Ethical conduct and independence are the foundation of a credible audit profession.
What happens if an auditor fails to comply with the code of ethics?
✅ Practitioners must apply the spirit of the code in daily practice.
Disciplinary hearings may result in:
💰 Fines – Monetary penalties for misconduct.
⏸ Suspension of membership – Temporary removal from the profession.
❌ Withdrawal of membership – Permanent removal and loss of auditing rights.
What are the fundamental principles of professional ethics?
✅ Integrity – Being honest and straightforward in all professional work.
✅ Objectivity – Avoiding bias, conflicts of interest, or undue influence.
✅ Professional Competence & Due Care – Keeping skills up to date and delivering high-quality work.
✅ Confidentiality – Not disclosing client information without authorization.
✅ Professional Behavior – Following laws, regulations, and ethical guidelines.
Five Key Threats to Ethics
Self-Interest Threat
Self-Review Threat
Advocacy Threat
Familiarity Threat
Intimidation Threat
Self-Interest Threat
A threat where the auditor has a financial or personal interest that could compromise their judgment or objectivity.
💰 Fee Dependency – Over-reliance on one client’s fees.
📈 Owning Shares/Financial Interests – Auditor has investments in the client.
🎁 Gifts and Hospitality – Receiving perks that may influence decision-making.
⏳ Overdue Fees – The auditor becomes a creditor of the client.
💳 Loans & Guarantees – Personal or business loans between auditor and client.
🤝 Business Relationships – Auditor and client have mutual business dealings.
👔 Potential Employment with Client – Auditor is offered a job at the company.
📄 Contingent Fees – Audit fees depend on the audit outcome.
💼 Compensation & Evaluation Policies – Performance incentives that affect independence.
⚖️ Litigation Between Auditor & Client – Legal disputes create bias.
📌 To maintain independence, auditors must identify and manage self-interest threats effectively.
Self-Review Threat
A threat where the auditor reviews their own work, making it difficult to identify or admit errors.
📊 Accounting & Bookkeeping Services – Auditor prepares financial statements they later audit.
🔍 Internal Audit Services – Auditor also provides internal audit functions.
💰 Taxation Services & Tax Advice – Auditor advises on tax matters and then audits tax compliance.
🖥 IT Services – Auditor develops or maintains client IT systems.
📈 Valuation Services – Auditor values assets or liabilities they later audit.
👨💼 Temporary Staff Appointment – Auditor’s staff temporarily works for the client.
💼 Corporate Finance Services – Auditor advises on client transactions.
🔄 Client Staff Join Audit Firm – Former client employees join the audit firm and work on their company’s audit.
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Advocacy Threat
threat where the auditor promotes or defends the client’s position, making them appear to be taking sides rather than remaining independent
⚖️ Representing the Client in Court – Acting as a legal advocate in disputes affecting financial statements.
💵 Negotiating Finance for the Client – Helping secure loans or investments.
Familiarity Threat
A threat where the auditor becomes too close to the client, leading to a loss of professional scepticism and objectivity.
👨💼 Long Association of Senior Personnel – Auditors working with the same client for too long.
👪 Family & Personal Relationships – Close relationships between auditors and client staff.
🏢 Recruitment Services – The auditor helps hire key client personnel.
👔 Employment with an Audit Client – Former auditors joining the client or vice versa.
Intimidation Threat
A threat where the auditor feels pressured or influenced by the client, compromising their objectivity and independence.
💰 Fee Dependency – Auditor relies heavily on the client’s fees, making them reluctant to challenge management.
👥 Personal Relationships – Close relationships between auditors and client executives may create pressure.
🔄 Audit Partner Joining the Client – A former audit partner takes a senior role at the client, affecting independence.
⚖️ Litigation Between the Auditor and Client – Legal disputes create tension and impact auditor neutrality.
how to prevent familiarity threat
📌 To prevent familiarity threats, auditors should rotate key staff, maintain professional boundaries, and avoid conflicts of interest.
What is confidentiality, and why is it important?
✅ Auditors must not disclose client information without permission.
✅ The auditor has a legal right to access all information but must handle it responsibly.
Where might auditors obtain confidential information?
✅ Their own firm or employer – Internal business data.
✅ Current clients – Information from ongoing audit work.
✅ Prospective clients & employers – Details shared during discussions or negotiations.
📌 Auditors must protect confidential information and not disclose it without proper authorization.
When can an auditor legally disclose confidential information?
✅ With Client or Employer Authorization – If the client permits disclosure.
✅ When Required by Law – For legal obligations (e.g., fraud reporting).
✅ Professional Duty or Right – If disclosure is necessary and not prohibited by law.
What is a conflict of interest in auditing?
A conflict arises when the same audit firm works for two companies that compete or trade with each other.
📌 Examples of Conflicts of Interest:
🔹 Auditing two competitors in the same industry.
🔹 Auditing companies that trade with each other - supplier and its customer.
Actions to manage conflicts of interest
The firm’s work should be arranged to avoid the interests of one being adversely affected by those of another and to prevent a breach of confidentiality.
The firm must notify all affected clients of the conflict and obtain their consent to act.—- likelihood is one of them will leave as a client
How can auditors manage conflicts of interest?
Separate engagement teams – Different partners and team members for conflicting clients.
Restrict information access – Use physical separation (different offices), secure data storage, and office divisions.
Team members must sign agreements to protect sensitive information–NDA.
Independent review – A senior professional regularly checks the effectiveness of safeguards.
Advise clients to seek independent professional advice when needed.
What should an auditor consider before accepting an audit?
An audit firm should only take on clients and work of
appropriate level of risk.
For this reason, the firm will perform ‘client screening’— due dilligance
