Professional Ethics Flashcards
Threats to auditor independence
Self interest
Self review
Advocacy
Familiarity
Intimidation
Threats to auditor independence
Self interest
Inappropriate influence from financial or other personal interest
Financial interest - have big deposit in bank they will audit …. if they find financial misstatements & know highlighting it will cause bank to go down & they will loose deposit.
If audit firm depends heavily on one client for income. Highlighting material error could ruin relationship and cause them to stop being a client. Dont want to lose money firm is making from them - job security
Personal interest
Incentive schemes or bonuses tied to success of the client. Owning shares in company you will audit … if your own investment will be affected.
All these can affect you from highlighting material misstatements
Threats to auditor independence
Self review
When assurance team evaluate and form opinion of their own or colleagues in the same firm/under same employer’s work.
Eg
Reviewing financial statements that audit firm prepared for its client
Assessing the effective internal controls that the audit firm implemented for the client.
Threats to auditor independence
Advocacy
Danger of compromising objectivity by excessively advocating for a clients or employers position … can lead to questioning auditors objectivity
Eg
Acting as advocate for client in legal / financial disputes
Promoting clients shares or bonds to potential investors
Publicly commenting on the clients future prospects when info is incomplete
Threats to auditor independence
Familiarity
Developing excessive sympathy and or predisposition to accept the work due to an excessively long or close relationship with client or employer. Assurance staff can become too sensitive to clients needs and lose objectivity due to familiarity
Eg
Having close personal relationship with management / staff
Long term association with client influencing audit judgements
Acceptance if gifts or preferential treatment from client, even minor
Threats to auditor independence
Intimidation
Actual or perceived pressures may deter you from acting objectively
Eg
Distorting findings to be favourable to the client in fear of being fired
Dominant figure within client firm attempting to influence audit decisions
Pressure from client to reduce audit hours to lower fees
Safeguards to auditor independence
Professional level - created by professional legislation or regulation
Client level - created by clients
Firm level - created by accounting firms
Safeguards to auditor independence threats
Profession, legislation, regulation
eg by CAANZ
Entry requirements - education, training, experience criteria + continuous professional development - relevant degree and practice
Corporate governance regulation (external audit) which demand discussion or approval of audit & non-audit services by the governing bodies. - Board of director audit committee and auditor need to check conflict of interest and transparency
Professional standards and pronouncements + monitoring and disciplinary procedures governed by professional + regulatory bodies - can be publicly named and license revoked
Duty to report breaches of ethical requirements eg ‘whistleblowing’ to expose unethical behaviour - law made to protect whistleblowers
External legal reviews of reports by professional accountants - eg unethical behavior hotline
Safeguards to auditor independence threats
Firm level eg what kpmg can do
Leadership highlights importance of complying with professional ethics & public interest - leader sets tone for the rest of the firm… cant have ethical firm without ethical leader
Quality control & review measures are in place for all client engagements … audit work needs to meet firms standards, high level employee reviews work of senior auditor on the job
Policies to ensure disclosure of all relationships or interests with different partners and teams having different reporting lines eg telling someone your friend is a member of x firm or you have investment with x bank
Senior management oversees the safeguard system
Timely comms of policies and procedures, extends to all partners and professional staff
Using different partners and staff for non assurance services provided to assurance client, as well as rotating senior team members - use different teams from same firm for different job to avoid self review
Disclosing fees and making a threshold.
Involving another firm to perform or re-perform part of the engagement
Safeguards to auditor independence threats
Client level - created by client
Appointment of an independent firm to ratify the engagement. If ey did audit, get kpmg to check and ratify their work
Competence of employees
Internal procedures to ensure objective decisions on engagements - context of internal controls
Proper corporate governance structure with appropriate oversight and communications - clear lines of reporting within the auditing firm
Integrity
Being straightforward and honest in all professional and business relationships
Not knowingly being associated with materially false or misleading statements or making statements recklessly
eg. correctly reporting material misstatements to ensure correct representation of the firm’s accounts.
Objectivity
Avoiding bias, conflict of interest, external pressures overpowering professional or business decisions is crucial. Objectivity is a mental state, can exist without complete independence
Independence is vital for assurance tasks eg audits and reviews, demands both independence if mind & appearance
Eg reporting material error on a long time client’s financial statement
Competence and due care
Maintaining expertise, professional knowledge & skill to deliver services to clients or employers diligently, complying with technical and professional standards
Sound judgement in applying professional knowledge
Ongoing education & continuous professional development to stay current with business, professional and technical developments… keeping up to date with changes in regulations
Training, supervision & awareness if service limitations for clients and employers
eg. XXX
Confidentiality
Not to reveal information obtained through professional or business relationships unless authorised by client or legal obligation
Mandates refraining form exploiting confidential data for personal gain or others gain eg insider trading
Apply to potential, current and past clients & employers
Practicing confidentiality also involves vigilance against accidental disclosures to close associates, family members, or in social settings.
Eg not telling your friend information about a firm you are auditing
Auditors independence
Freedom from conditions (physical and mental) that could threaten their ability to be unbiased
