Ethics Flashcards
Definition of ethics
Ethics is defined as “ moral principles that control or influence a person’s behaviour”
Principles based ethics vs rules based ethics
Principles based codes put responsibility on the auditor to exercise their judgement when evaluating different scenarios.
Rules based codes provide prescriptive instructions as to how the auditor must behave in difference situations.
Ethical principles
Professional behaviour Integrity Objectivity Confidentiality Competency & due care
Most important ethical principle
Independece - being in a position where there are no circumstances in the situation you find yourself in that could lead you to being either dishonest or biased.
2 types of independence
Independence of mind - how I feel about a situation
Independence in appearance - how the situation looks to someone else
As auditors operate in the public eye independence in appearance and how the public perceive the auditor is most important.
What to do when faced with a possible threat to independence
Step 1: Identify the threat to the audit - What is the issue?
Step 2: Evaluate the significance of the threat – Is the issue a big problem?
Step 3: Propose safeguards – What could be done to make the threat go away so that the auditor can continue with the audit?
Sometimes there are no safeguards that can be put in place allowing the auditor to continue with the audit. In these circumstances the only option for the auditor is to step down from the audit (resign!).
Threats to independence
Self interest - The auditor will in some way benefit from the client doing well or will be negatively affected if it does badly. E.g owning shares in the audit client, close family member working for the audit client.
Self review - The auditor (audit firm) is in a position where they must review work previously done by themselves. E.g performing the audit of a client who also uses the audit firm to assist with preparation of the accounts
Advocacy - The auditor takes the side of management and becomes too close to management. E.g Representing the client if they were to have a dispute with another company.
Management - The auditor takes on a role, or performs an activity, that is the job of management. E.g performing the recruitment process for a new FD for the client. Selecting and installing a new IT system for the client.
Familiarity - The auditor has a close relationship with the client to the extent that are not willing to question and challenge the work performed by the client. E.g A member of the audit team has a close family member working in the finance department at the client.
Intimidation - The auditor feels they cannot act objectively as they fear the actions of the client. E.g The FD is a dominating individual who has raised their voice at a junior audit team member.
Definition of conflict of interest
A conflict of interest is where the interest of two parties are not aligned. A conflict might be between an auditor and a client OR between two clients.
If two audit clients are involved in a conflict it would be hard for the auditors to act objectively and not take sides. The conflict does not need to be a serious falling out – it could be two companies who are in competition.
Definition of conflict of interest
A conflict of interest is where the interest of two parties are not aligned. A conflict might be between an auditor and a client OR between two clients.
If two audit clients are involved in a conflict it would be hard for the auditors to act objectively and not take sides. The conflict does not need to be a serious falling out – it could be two companies who are in competition.
If auditing two companies in the same industry
- Notify the clients of the situation
- Seek consent to act for both parties
- If consent given implement safeguards
Safeguards for two companies in the same industry - to maintain confidentiality so that sensitive information isn’t leaked from one client to another.
Separate teams - very common and fairly easy for firms with hundreds for of staff and more than one office location
Information barriers
o Making sure there is no overlap of team members between teams
o Keeping teams physically separate
o Good procedures for keeping records secure
- Confidentiality agreements signed by individuals involved in the audit
- Review of safeguards by an independent partner
Threats & safeguards
General - Every audit firm should select one partner to act as the firms’ ethics partner. The ethics partner should provide ethical guidance to staff and make sure necessary policies and procedures are in place.
Financial relationships - The audit firm, any partner, or member of the audit team may not hold a financial interest in the audit client. (GENERAL)
Loans - The auditor must not load money to any audit client. (SELF-INTEREST)
Fees - For a non-listed client: Regular fee income must not be more 15% of the firms’ total fee income (from all services provided). For a listed client: Regular fee income must not be more than 10% of the firms’ total fee income. The ethics partner should be informed if fee income rises above 5%. (SELF INTEREST)
Close, personal or family relationships - If a such a relationship exists between a member of the audit team and a member of client staff the affected audit team member should be removed from the audit. (SELF INTEREST)
Loaning staff - The audit firm must not loan staff to an audit client. (SELF REVIEW)
Long association with the audit - staff - An audit partner may only act as the engagement partner on a client for five years. (FAMILIARITY)
Long association with the audit - audit firm - The audit client must put the audit to tender after 10 years. An audit firm acting may stay in role for no longer than an additional 10 years (or a maximum of 20 years). A joint audit firm may stay in role for no longer than an additional 14 years. There is an extra two years that the regulator may permit in exceptional circumstances. (FAMILIARITY)
Non audit services (valuations/preparing tax calc/preparing accounts) - For a non-listed client: Allowed to perform provided safeguards exist (Separate teams/Review by independent partner/Quality control review). For a listed client: Not allowed to perform unless it is an emergency. Valuations may be performed if immaterial. (SELF REVIEW)
Non audit services - The auditor should not perform any service for the client that might involve decision making which is the role of management. Recommendations may be made. (MANAGEMENT)
Safeguards for two companies in the same industry - to maintain confidentiality so that sensitive information isn’t leaked from one client to another.
Separate teams - very common and fairly easy for firms with hundreds for of staff and more than one office location
Information barriers
o Making sure there is no overlap of team members between teams
o Keeping teams physically separate
o Good procedures for keeping records secure
Confidentiality agreements signed by individuals involved in the audit
Review of safeguards by an independent partner
Preparation of accounts
Tickitt & Run cannot prepare the accounts – they can assist with finalisation e.g. the consolidation or tax provisions, but the preparation of the figures is the responsibility of the directors and they must ensure that this is done- if necessary, by hiring in suitable staff from an independent agency.
Clearly Tickitt & Run cannot prepare the accounts and audit them as well for a company such as this. Even the use of separate teams from the audit firm may be ethically unsound as great care would have to be taken to ensure that audit independence and objectivity wasn’t compromised. If the accounts were subsequently found to be flawed Tickitt & Run would have a serious problem defending their actions.
Selecting and designing a new computerised Management information system
Tickitt & Run cannot audit their own system – they can thus only act as advisors not as designers
They can recommend and assist in the selection of software suppliers but must not be responsible for specifying the system
They should review the proposed system from the point of view of accounting controls
