Ethics Flashcards
Why is there a need for professional ethics?
Purpose of assurance engagements – to increase the confidence of end users of information by reducing their level of risk
User needs to trust the professional who is providing the assurance. In order to be trusted the auditor needs to be independent of their client
‘Freedom from situations and relationships where objectivity would be perceived to be impaired by a reasonable and informed third party’
Improve image and restore trust – vital that accountants operate according to an accepted code of ethics.
What are the IFAC and ACCA codes and conceptual framework?
IFAC and ACCA issued a code of ethics, identical for our purposes
Both follow conceptual framework (principles not rules) which identifies:
- Fundamental principles of ethical behaviour
- Potential threats to ethical behaviour
- Possible safeguards which can be implemented to counter the threats
Members disciplined if infringe principles:
- Disciplinary hearings, fines, suspension of membership, withdrawal of membership
What are the fundamental principles of ethics?
Objectivity
Professional behaviour
Professional competence and due care
Integrity
Confidentiality
What are the threats to objectivity?
Self- interest
Self-review
Advocacy
Familiarity
Intimidation
How can you safeguard against threats to objectivity?
General (as recommended by ACCA)
- Safeguards created by the profession
- Safeguards in the work environment
- Safeguards created by individuals
Specific safeguards:
- Monitoring fees from significant clients compared to total fees (perception of dependence on clients)
- Rotating senior audit staff on an engagement (familiarity)
- Using separate teams and partners for additional services
- Not accepting gifts or hospitality
What is confidentiality?
External auditors have legal right of access to all information about their clients
Client must be able to trust auditor not to disclose anything about their business to anyone (outside the audit team) as it could be detrimental to their operations.
Disclosure under certain circumstances:
- Client given consent
- Obligation to disclose
- Required by regulatory body
- Court order obtained
- Member has to defend himself in court or at a disciplinary hearing
- In public interest (difficult to prove – fraud, environmental pollution)
What is conflict of interest?
Any advice given should be in the best interests of the client. But what if clients in same line of business?
Steps for auditor:
Once a conflict noted, advise both clients of the situation
Reassure client that adequate safeguards implemented eg separate engagement leaders, separate teams
Suggest seek additional independent advice
If adequate safeguards can’t be implemented, the auditor should resign.
What is integrity, objectivity and independence?
Audit firm will establish policies and procedures to ensure that the firm will act with integrity, objectivity and independence
Leadership of audit firm shall take responsibility for establishing a control environment re ethical principles above commercial considerations
Ethics partner
Policies and procedures re decision-making
Policies and procedures to assess significance of threats to auditor’s objectivity
Non-acceptance or non-continuation of audit engagement if threats too great
For listed companies, engagement quality control reviewer to consider audit firm’s compliance with Ethical Standards and form an independent opinion as to the appropriateness and adequacy of the safeguards applied
What are financial, business, employment and personal relationships?
Audit firm or employees shall not hold any financial interest in an audited entity
Audit firms and employees shall not make loans to, or guarantee the borrowings of, an audited entity (and vice versa)
Audit firms and employees shall not enter into business relationships with an audited entity
Audit firm shall not second partners or employees to an audit client unless for a short period of time and not in a management position. On return, no involvement in audit involving secondment
Partner joining audited entity, no connections remaining. If acted as engagement partner in previous 2 years, firm resigns as auditor
Partner or employee not to accept appointment to board of directors or subcommittee of that board
What is long association with the audit engagement?
Audit firm to establish policies and procedures to monitor length of time that senior staff serve as members of the engagement team for each audit
Where senior staff have long association with audit, assess threats and apply safeguards. Where no appropriate safeguards, audit firm to resign
Audit engagement partner held role for 10 years, careful consideration
Listed companies, engagement partner no > 5 years and review of safeguards to address threats arising for senior staff involved for > 7 years
What are the rules regarding fees, remuneration, evaluation policies, litigation, gifts and hospitality?
Audit fees not influenced by provision of non-audit services
Audit not undertaken on contingent fee basis
Audit fee for previous audit agreed before next acceptance
Where it is expected total fees regularly exceed 15% of annual fee income, auditor will resign
Policies and procedures to ensure objectives and appraisals do not include selling non-audit services.
Litigation with client, discontinue engagement
No gifts unless insignificant value
No hospitality unless reasonable frequency, nature and cost
