L2 Ethics, Audit Quality & Corporate Governance Flashcards
What are the 3 main categories of ethical theory?
- Teleological ethics
- Deontological ethics
- Virtue ethics
What is teleological ethics?
- It deals with the consequences/outcomes of actions.
- Generally, if the benefits of a proposed action outweigh the costs, the decision is mormally correct.
What is deontological ethics?
- Based on duties and rights.
- Duties and rights set down in rules must be followed.
What is virtue ethics?
Focus on personal qualities, such as the integrity of the decision maker.
What is a code of ethics?
Formal, systematic statement of rules, principles, regulations or laws developed by a community to promote its well-being and punish undermining behaviour.
What are the 6 fundamental principles that an auditor must follow?
- Integrity
- Objectivity
- Professional competence
- Due care
- Confidentiality
- Professional behaviour
What is integrity in reference to the fundamental principles that an auditor must follow?
This principle imposes an obligation on an auditor to be straightforward and honest in all professional and business relationships and requires fair dealing and truthfulness.
What is objectivity in reference to the fundamental principles that an auditor must follow?
Auditors must not allow bias, conflict of interest or the undue influence of others to override their objectivity.
What is professional competence and due care in reference to the fundamental principles that an auditor must follow?
Auditors have a duty to attain and maintain their level of professional competence and must only take up work if they expect to complete it with professional competence and due care in accordance with appliable technical and professional standards.
What is confidentiality in reference to the fundamental principles that an auditor must follow?
States that they must respect the confidentiality of information obtained during the course of their work and must not disclose such information to a third party without authority or unless there is a legal or professional duty that is not prohibited by law to do so
What is professional behaviour in reference to the fundamental principles that an auditor must follow?
- Auditors need to comply with relevant legislation.
- Act in a manner that is consistent with the good reputation of their profession.
- Refrain from any conduct that could bring discredit to it.
Ethical rules emphasise perceived independence. What is perceived independence?
Independence in appearance - it is how a reasonable and informed third party will view the auditor.
Ethical rules emphasise actual independence. What is actual independence?
Independence of mind - Whether the auditor can actually eliminate bias and personal interest from his or her decisions and not succumb to any undue pressures or influences. Related to integrity, objectivity and strength of character.
What are the 5 threats to independence?
- Self-review
- Self-interest
- Advocacy
- Familiarity
- Intimidation
What is self-interest threat in relation to the threats to independence?
The possibility that the firm or individuals within it could benefit from a financial interest in, or conflict with, an assurance client
What is a self-review threat in relation to the threats to independence?
The possibility that the firm or individuals within it would have to re-evaluate their own work to form a judgment.
What is an advocacy threat in relation to the threats to independence?
Situations where the firm or individuals within it could promote the audit client’s point of view in a manner that compromises objectivity.
What is a familiarity threat in relation to the threats to independence?
Where there is a possibility that the firm/individuals within it have become too sympathetic to the client’s interests due to a long/close relationship with the client.
What is an intimidation threat in relation to the threats to independence?
The possibility that the firm or individuals within it may be deterred from acting objectively by threats from the client concerning dismissal, litigation or fees.
Should auditing fees be commensurate with the service provided?
Yes, as the fees should reflect the time taken to audit and the knowledge, skills and expertise required.
What is a fee arrangement that could compromise an auditors independence?
Low-balling – Occurs in a tender situation where an audit firm bids a price for its audit services at an unreasonably low level to win the tender. This is done because there is an expectation of recovering the losses from the bid from the fees earned from future audits or the provision of other services to the client.
What is corporate governance?
The system by which companies are directed and managed, and covers the conduct of the board of directors and the relationship between the board, management and shareholders.
Why aren’t contingent fees allowed for audit procedures?
Fees for a period should not be dependent on fees from the provision of future audits or other services. Fees charged for assurance services must not be calculated on a predetermined basis relating to the outcome of the work. Contingency fees may create a self-interest (financial incentive) or advocacy threat (generally advocate the clients interests).
