PROFESSIONAL ETHICS

Ethics – doing the right thing, the right way

IFAC is the international body responsible for issuing a Code of Ethics.
IESBA CODE OF ETHICS
ACCA as a professional body that has implemented the same Code of Ethics for consistency.

 Why auditors need to be ethical?

As the audit report is relied on by various stakeholders to make decisions like investment
decisions and its crucial that auditor seems to be an INDEPENDENT PROFESSIONAL who is
capable to provide this service.

 Why codes/guidelines and not rules?

Rules cannot define each and every situation will try to find loop holes. So for that reason Code
of Conduct is given. Auditors need to appear to be independent

ANU LIZA THOMAS 1

FUNDAMENTAL PRINCIPLES OF ETHICAL BEHAVIOUR ( P I C O P )
PROFESSIONAL COMPETENCE AND DUE CARE
Members should ensure that they have the skills and professional knowledge to complete each
assignment to a sufficiently competent level. If there is insufficient knowledge/skill, the member
should not carry out the assignment or they should take alternative steps to allow them to
complete the assignment such as training.
Due care is when member should ensure that they exercise diligence in accordance with
applicable technical and professional standards when providing services. ( adhering to ethical
principles , adhering to terms of LOE , ADHERING TO ALL ISA’s )
INTEGRITY
Members should be straightforward, honest, truthful and fair in all professional and business
relationships.
CONFIDENTIALITY
Members must refrain from disclosing any information acquired because of their
professional/business relationship to any parties outside their firm unless there is proper and
specific authority or unless there is a legal or professional obligation to do so.

Breach confidentiality :

1. Obligatory responsibility : Client is involved in ML , Drug trafficking, terrorist

offences + If required by law
2. Voluntary responsibility : To protect a firms or members interest

OBJECTIVITY
Members should not compromise their professional or business judgement by introducing bias,
conflict of interest or undue influence by others.
PROFESSIONAL BEHAVIOUR
Members should comply with laws and regulations and ensure that they avoid actions that may
discredit the profession.

ANU LIZA THOMAS 2

THREATS TO THE FUNDAMENTAL PRINCIPLES ( I S S A F )

Intimidation Self interest

Familiarity Self review

Advocacy

ANU LIZA THOMAS 3

 What are safeguards?
These are measures to reduce threats to an acceptable low level
If in a scenario where there are no safeguards to threats available – Politely Decline

Auditors responsibility with regards to threats :

The firm must establish procedures to guard against threats :

 Identify possible threats,
 Evaluate the risks arising from the threats
 Evaluate whether necessary safeguards are in place
 Take corrective action if necessary

Ethical principles must be considered when: / Threat identification should be done :

Accepting new audit

client;
Acting for an existing
audit client
Change in circumstances
of auditor or the client,

Planning of audit.

Completion of audit.

ANU LIZA THOMAS 4

INDEPENDENCE

Independence of mind – When the auditor doesn’t have

any undue influence over the judgements that is made.

Independence of appearance / behavior – A reasonable

third party should be concluding that the auditor is
independent of the client.

ANU LIZA THOMAS 5

Common exam scenarios for threats :

THREATS SAFEGUARDS
OWNING SHARES

The audit team member or their The firm or the member of the assurance team
immediate family owning shares in the should dispose the shares
audit client
The member of the team should be removed
This indicates that the firm or the member from this audit.
of the assurance team has a financial
interest in the client and thus gives rise to
a SELF INTEREST

LOANS

A loan will not create a threat to the firm if The firm or the member of the audit team can
it is on commercial terms and made in accept the loan as far as it is not material and
normal course of the business. it is under the normal course of the business.

If not ( if there is a preferential treatment If material, the firm should carry out a second
to the audit team ) , this will lead to SELF partners review – quality review.
INTEREST / INTIMIDATION THREAT
EQCR : ENGAGEMENT QUALITY CONTROL
Because the audit team member will try to REVIEWER
protect their business arrangement by
overlooking any issues during the audit

ANU LIZA THOMAS 6

THREATS SAFEGUARDS
PURCHASING FROM THE CLIENT

The member of the team purchasing
goods from the client.
There is no threat to independence if the
purchase is being carried as a normal
transaction at arm’s length basis.
If the transaction is not on a normal basis,
then this creates a SELF INTEREST
THREAT
The audit team member should be removed
from this audit if the purchase is not on
commercial terms.
Also the work done by the team member
should be reviewed for quality and reperformed
by another individual

ANU LIZA THOMAS 7

THREATS SAFEGUARDS
GIFTS AND HOSPITALITY

Accepting gifts or hospitality from an audit The gifts or hospitality should be evaluated to
client. understand if its of a substantial value.

This will create a SELF INTEREST threat If its of a substantial value politely decline the
as the auditors will feel indebted to the offer.
client
If its trivial and inconsequential in value this
And also a familiarity threat where auditor can be accepted.
will build a close relationship with client or
become too trusting of them losing
professional scepticism.

ANU LIZA THOMAS 8

THREATS SAFEGUARDS
LONG ASSOCIATION

The engagement partner being with the Rotate the audit partner and the member of
audit client for 12 years. the audit team.

This gives rise to familiarity threat

Listed clients:
- 7 years plus then a gap of 5 years for audit
partner
- In the 5 years gap period, not participate in
the auditor, provide quality control for the
engagement, or consult with the engagement
team or the client regarding technical or
industry-specific issues

However there is an exception to this rule

where if the required rotation is not possible
then the partner can stay for additional 1 more
year to maintain audit quality

EQCR: Maximum 7 years 3 years cooling off

period

In a non-listed client, there is no statutory

regulation as to when the member of the
partner of the audit client should be rotated but
to reduce the threat, it is advisable to rotate the
partner and (eqcr)

PERSONAL RELATIONSHIP
The member with personal relations with the
Family and personal relationships client should be removed from team if the
between a member of team and a director relationship is with a senior person at the client
of the client or any employee of the client with influence over the f/s.
who is able to exert significant influence
over the subject matter.

This gives rise to SELF INTERETS ,

FAMILAIRITY , INTIMIDATION

ANU LIZA THOMAS 9

THREATS
OTHER SERVICES
The total fees from an audit client
represent a large proportion of a firm's
total income
This gives rise to SELF INTEREST
THREAT OR INITMIDATION THREAT
Audit firm providing non-audit services
such as bookkeeping & accounting,
internal audit services, taxation services
This gives rise to a SELF REVIEW
THREAT
SAFEGUARDS
In a listed company or non-listed company, the
audit fee must not represent more than 15% of
the total firm’s fee income for two consecutive
years
- Discuss with client’s TCWG about the fee
income
- Independent QCR or external QCR before
OR after issuing 2nd year’s opinion to ensure
that the audit firm has implemented the
required safeguards.
- Consider resignation if the threat can’t be
reduced to an acceptable level
IF THE AUDIT FIRM IS ALSO PROVIDING A
NO NAUDIT SERVICE THE NON AUDIT FEE
SHOULD BE 70% OF THE AUDIT FEE
If it is a non-listed client, audit firm should
ensure two separate teams are performing
the audit and non-audit services.
If it is a listed client, non-audit service cannot
be provided as it is a financial service and will
impact the financial statements.
Any routine or mechanical in nature services
can be provided as it doesn’t involve significant
judgements. BUT SEPARATE TEAMS HAVE
TO BE USED FOR AUDIT AND NON AUDIT
SERVICE
ANU LIZA THOMAS
1
0
THREATS
REPRESENTING CLIENT
The audit client wants the audit firm to
represent them in a dispute with the
regulatory authorities.
This gives rise to advocacy threat.
OVERDUE FEES
The audit firm has not received the fee of
last year from the audit client
This gives rise to self-interest threat.
CONTINGENT FEES
If the audit fees are fixed based on a
predetermined outcome
The auditor would have incentive to
ensure a particular outcome is achieved
in order to maximise the audit fee.
E.g. overlook audit adjustments that
would reduce profit if the fee is a
percentage of the profit.
SAFEGUARDS
AS PER CODE REPRESENTING THE
CLIENT IS PROHIBITED
The audit firm must not represent the client in
any situation if the audit client has asked to do
so especially if the amounts are material
If the court or any other regulators have asked
to speak about an audit client of the firm then
the audit firm has the right to disclose the
client’s information to the regulators or
authorities. (confidentiality)
The firm should take steps to make sure the
fees are paid before the audit report is handed
over.
The firm should avoid providing services for the
current year till the outstanding fees are paid or
have arrangements with client about payment.
Have a second partner review to ensure that
the audit firm is not providing the services to
the audit client before the collection of the fees.
As per the code CONTINGENT fee
arrangement prohibited
The audit fee should be based on time involved
, skills required and risk of the audit.
ANU LIZA THOMAS
1
1
THREATS SAFEGUARDS

This will give rise to a self-interest threat

as the audit firm will have an interest to
increase the firm’s income by
manipulating the profit.
AUDIT FIRM MEMBER JOINS THE CLIENT

The member of the firm joins as finance
director with the client
This gives rise to familiarity, self – interest
and intimidation threat.
The team member should be changed in such
that the finance director is not familiar with any
of the member.
The audit plan should be reviewed and revised.

PERSONNEL AT CLIENT JOINS THE

FIRM

Director or employee of the client in a As per the code the client individual must not
position to exert influence over FS be involved in that audit for a period of 2
becomes an employee of the audit firm years

This will give rise to self-review and

familiarity threat.

ANU LIZA THOMAS

1
2
 CONFLICT OF INTEREST:
Conflict of interest is a situation in which the professional accountants cannot make a fair
decision because they will be affected by the result.
If an auditor audits two competitors in the same industry then,
The firm should ensure no conflict of interest may arise by implementing the safeguards

 Advice both the clients of the possible conflict of interest,

 Have separate teams with different engagement partner and team,
 Procedures to prevent access to information – confidential secure data filing,
 Clear guidelines for the member of each audit team on issues of security and
confidentiality – these will be included as part of the engagement letter,
 Confidentiality agreements signed by both member and partner of the audit team,
 Advise the client to seeks independent professional advice,
 Review of the safeguards on a regular basis by an independent quality reviewer.
If safeguards will not reduce the conflict of interest to an acceptable level, the auditor should
not accept the engagement or resign from one based on commercial viability

ANU LIZA THOMAS

1
3
SECTION B : PAST QUESTION

You are an audit manager of Pink Partners & Co (Pink) and are planning the audit of Golden
Finance Co (Golden), a banking institution which provides a range of financial services
including loans. Your firm has audited Golden for four years and the company’s year-end is 30
September 2015.

At the end of August, Golden’s financial controller left and the new replacement is not due to
start until approximately two months after the year end. The finance director, who is the sister-
in-law of the audit engagement partner, has asked if a member of the audit team can be
seconded to Golden for three months to act as the temporary financial controller.

You are aware that a number of the audit team members currently bank with Golden and two
team members have significant loans owing to the company. Pink’s taxation department also
provides services to Golden. They have been approached by Golden to represent them in
negotiations to resolve some outstanding issues with the taxation authorities, for which the fees
quoted are substantial.

The finance director has informed the audit engagement partner that when the audit is
complete, she would like the whole team to attend an evening watching the national football
team play a match followed by a luxury meal.

Required:
Using the information above:
(i) Identify and explain FIVE ethical threats which may affect the independence of Pink
Partners & Co’s audit of Golden Finance Co; and
(ii) For each threat, explain how it might be reduced to an acceptable level.
Note: The total marks will be split equally between each part.
(10 marks)

Threats - Safeguards - 1 mark

Identification – ½
Explanation – ½ ( one threat per scenario)
The FD is the sister in law of the audit The audit partner should be removed from
engagement partner. this team and hire a new partner to
enhance independence.
This is FAMILAIRITY THREAT as the
finance director is in a position to exert
significant influence on the FS and the
partner is responsible for the audit and this

ANU LIZA THOMAS

1
4
family relationship can cloud his
judgements compromising independence
and objectivity.
The Golden’s FD has asked if a member can
be seconded for a period 3 months as
financial controller.
This is A SELF REVIEW threat as the
seconded member might be involved in
preparation of FS and later when he
returns to the firm will review his own
work and will not highlight any
shortcomings of the work
Two members of the audit team have
significant loans with Golden
This is a SELF INTEREST threat as if the
members have any preferential rates in
this arrangement it might impair their
independence and they wont be objective
in their decision making.
Golden has requested Pink to represent
them in a dispute with taxation authorities.
This is an ADVOCACY THREAT as if Pink
represent the client the authorities might
deem that Pink is not independent which
can have an impact on the credibility of the
auditors report.
The fees quoted for the taxation work is
substantial
This is SELF INTEREST threat as the fee
that is collected for taxation can have an
impact on the audit judgements as there
might be an overdependency on this fees
compromising the independence and
objectivity
The seconded member is going to take the
role of financial controller looks like a
significant and therefore this request
should be politely decline
OR
The seconded member should not be part
of the audit team when he rejoins to ensure
objectivity and independence.
As per Code the loan from a client is
allowed as far as it is under normal
commercial terms.
Therefore the terms of this loan
arrangement should be reviewed to ensure
whether there is a preferential treatment
or not.
If yes , then the team members must be
removed from the team .
If no, the work should be reviewed by an
independent partner to ensure quality
As per code representing client is
prohibited and therefore Pink should
politely decline this request.
As per Code the maximum amount of non-
audit fee is 70% of the audit fees
Therefore, the taxation fees should be
reviewed to see whether its within the
limit and if not the team should try to
reduce the fee and that if its not possible
should stop providing taxation service
ANU LIZA THOMAS
1
5
The audit team was invited for a national As per code gifts and hospitality can be
match and a luxury meal. accepted if its trivial and inconsequential

This is a FAMILIARITY THREAT as the The treatment provided to the client

auditors will build relationships and doesn’t seem to trivial and inconsequential
become too sympathetic or too trusting as it’s a luxury treatment and therefore
with the client and their judgements will must be politely declined .
not be objective.

ANU LIZA THOMAS

1
6