BAC 3624

Advanced Auditing

Tutorial 2

Question 1
Malaysian Institute of Accountants By Laws (on Professional Conduct and
Ethics) requires its members, whether in public practice, in business or in
employment, to comply with the five fundamental principles of ethics.
You are required to discuss the meaning of each of these fundamental
principles.

ANSWER
The five fundamental principles of the Malaysian Institute of Accountants By
Laws (on Professional Conduct and Ethics) are;

Integrity

Objectivity

Competence and Due Care

Confidentiality

Professional behaviour

Integrity
The principle of integrity requires a member to be sincere, honest and
straightforward in his professional and business relationships. A member who
knowingly makes or permits false and misleading entries in the financial
statements or records would be considered to have violated the principle of
integrity.
Similarly, in dealing with his employer's external auditors, a member must be
truthful and not knowingly misrepresent facts or knowingly fail to disclose
material facts.
To protect the integrity of his professional services, a member should not
associate himself with any reports or statements that he believes is false,
materially misleading or is furnished negligently.

BAC 3624

Advanced Auditing

Tutorial 2

Objectivity
It is the duty of a member to present or report on information objectively.
Objectivity principle requires the members to maintain an attitude of
impartiality and not to allow biases to influence their objectivity in making
professional judgement.
In undertaking any professional assignment, a member should be aware of
factors that may give rise to conflict of interest. A conflict of interest can affect
objectivity.
To maintain objectivity in professional judgement, relationships, gifts or
entertainment that might impair judgement and create unfairness should be
avoided.
Competence and Due Care
Competency for professionals is attained through formal education, relevant
practical training and experience, and continuing professional education. The
MIA By Laws (on Professional Conduct and Ethics) states that the principle
of competence and due care must cover the following two requirements:
1) To maintain professional knowledge and skill at the level required to
ensure competent services are provided, and
2) To act diligently in accordance with technical and professional standards.
To maintain professional competence, members must continue to be aware of
and understand current technical and business developments.
Continuing professional development (CPD) is essential for every profession as
we are now operating in a rapidly changing environment. Rapid changes in
legislation, accounting standards, developments in technology and increased
public expectations continue to place increasing demands on the work of the
accountants and on the profession.

Confidentiality

BAC 3624

Advanced Auditing

Tutorial 2

In the course of performing their professional duties, members have access to

much confidential information about their client's or their employer's business
affairs, information not normally available to the public.
It would be harmful to the business of the client or employer if such information is
disclosed to outsiders without the knowledge and consent of the client or
employer.
The principle of confidentiality requires the member to refrain from the following:
1) Disclosing confidential information outside the firm or the employing
organisation without proper and specific authority.
2) Using such confidential information to their personal advantage or the
advantage of others.
It is important that this duty of confidentiality be observed not only during the
professional relationship between the client and the accountants but also after
the end of the relationship.
In addition to the ethical requirements, use of confidential information obtained in
official capacity for "insider" securities dealings at the stock exchange is also
a legal offence under Section 132A of the Companies Act, 1965.
Professional behaviour
Professional accountants have an obligation to act in a manner consistent with
the good reputation of the profession. A member should be law abiding and
refrain from any conduct or activity that might bring discredit to the profession.

Unprofessional conduct which is discreditable to the accountancy profession

includes negligence in the performance of their duties and unlawful activities.
Thus a member who is convicted of a serious crime could have his
membership revoked by the professional body.
Question 2

BAC 3624

Advanced Auditing

Tutorial 2

Explain the conceptual framework approach to ethics outlined in the IFAC

Code of Ethics.
ANSWER
The IFAC conceptual framework for applying the fundamental ethical principles is
essentially a principle-based approach.

The framework for ethical

compliance requires the professional accountants to identify, evaluate, and

address any threats to compliance with the fundamental principles. Under this
approach, a professional accountant has an obligation to
Identify circumstances, relationships or interests that may create a threat to
compliance with the fundamental ethical principles
Evaluate the significance of the threat when such a threat has been identified,
and
If the identified threat is considered significant, apply suitable safeguards to
eliminate or reduce the threat to an acceptable level.
The obligation to evaluate and address threats to compliance arises when a
professional accountant knows, or is expected to know of circumstances that
may compromise compliance with the fundamental principles.

BAC 3624

Advanced Auditing

Tutorial 2

Question 3
You are the audit manager of Bento Bhd, an audit client which is in the
manufacturing industry and is also listed on the Stock Exchange. You have
been asked lo prepare a proposal of other professional services for the
company. The client is growing rapidly and introducing many new products,
yet still has an out -of-date information and accounting system. The company
also has not undertaken any formal tax planning activities and feels that it
pays a higher percentage of its income in taxes than its competitors,
Additionally, it is concerned that its monitoring activities are inadequate
because it does not have an internal audit department.
Required:
a. What are the types of non-audit services that a public accounting firm normally
provides to its clients?
b. What types of non-audit services may not be permissible for audit clients
unless certain safeguards are applied?
c. What are the types of non-audit services your firm should not provide to Bento
Bhd. because the threats to independence are too significant and thus are
prohibited under the code of ethics?

ANSWER

BAC 3624

Advanced Auditing

Tutorial 2

a. Non-audit services commonly provided by accounting firms include

Tax services
Accounting and book keeping
Internal auditing
Management consultancy
Design of information and accounting systems
Secretarial
Business valuation
Developing an automated accounting system.
Providing tax-planning advice.
Outsourcing the internal audit function.
Developing projections and/or forecasts for the company's new products.
Helping the company develop an effective audit committee.
b. For most types of non audit services to audit clients, the auditors are required
to apply suitable safeguards to ensure that professional independence and
objectivity are not compromised. The auditors should avoid making
management decisions and ensure that the client acknowledges its
responsibility for the result of the work performed by the firm. The audit firm
should discuss with those charged with governance the independence issues
arising from provision of non audit services and inform them of the nature and
extent of fees charged for the non audit services. In addition, personnel
providing the non-audit services should not participate in the audit.
c. Because Bento Bhd is a public listed company audit client, the audit firm would
be prohibited from helping the client design or implement a software system
and from providing internal audit outsourcing. Provision of tax-planning advice
is allowed by independence rules. Assisting the client to develop projections
and/or forecasts for the company's new products and other non-audit work
would be subject to approval by the audit committee and would be strictly
limited by the principles of not performing a management function, not
auditing one's own work, and not performing an advocacy role.