B.

Professional and ethical

consideration
 Ethics and acceptance Of
Appointment
Simple Definition of ethic
Rules of behavior based on ideas about what is
morally good and bad
ethics : an area of study that deals with ideas
about what is good and bad behavior : a branch of
philosophy dealing with what is morally right or
wrong.

a belief that something is very important.

 The need for professional ethics

• Trust is built by knowledge

• Needs to be independent and Objectivity
• To improve the image of the profession
The IFAC and ICAB codes and the
conceptual framework

IFAC CODE ICAB CODE OF

OF ETHICS ETHICS
 The fundamental principles
• Objectivity: Members should not allow bias, conflicts of
interest or undue influence of others to override
professional or business judgements.
• Professional behaviour: Members should comply with
relevant laws and regulations and should avoid any
action that discredits the profession.
• Professional competence and due care: Members
should maintain professional knowledge and skill at a
level required to ensure that a client or employer
receives competent professional services based on
current developments in practice, legislation and
techniques.
• Integrity: Members should be straightforward and
honest in all professional and business relationships.
• Confidentiality: Members should respect the
confidentiality of information acquired as a result of
professional and business relationships and should
not disclose any such information to third
parties without proper and specific authority or unless
there is a legal or professional right or duty to
disclose. Confidential information should not be used
for the personal advantage of members or third
parties.
Threats and safeguards
1. Self-interest
2. Self-review
3. Advocacy
4. Familiarity
5. Intimidation
Self-interest threats

This arises when personal interest of the auditor

conflicts with that of the client. For example-
• Financial: owning shares in the client,
•Close business relationships: Employment (ex-partners
>2 years)
• Partner on client board
• Family and personal relationships
• Loans and guarantees
• Overdue fees
• Contingent fees
• High percentage fees
• Low-balling
• Recruitment for the client
Self-review threats

This threat arises when the auditor has to review or

audit the work that he helps to carry out. For example-
• Recent service with assurance client
• Other services
•Preparing accounting records and accounts
• Valuation services
• Taxation services
• Internal audit services
• Corporate finance
• Other service
Advocacy threats

This is a situation where the auditor finds himself in

a position he has to defend or promote the interest
of its client before a third party.

• Where the assurance firm promotes a point of view or

opinion to the extent that subsequent objectivity is
compromised
Familiarity threats

This threat arises as a result of the auditor becoming

unduly sympathetic towards its client as a result of
long association.
• Because of a close relationship, members of the
assurance firm become too sympathetic to members of the
client firm, so that objectivity and scepticism are lost
• Care needed where senior audit staff have a long
association with the client.
• ACCA/ICAB suggest that the lead partner should be
changed at least every 5 years.
• Other partners involved changed at least every 7 years.
Intimidation threats

This threat arises when the auditor comes under

intimidation by dominant individual or aggressive
atmosphere at the clients.

• Where the assurance team is deterred from acting

properly by actual or perceived threats.
• Examples are actual/threatened litigation.
The ACCA/ICAB Code of Ethics divides safeguards
into two broad categories:

• Safeguards created by the profession,

legislation or regulation, these include:
requirements for entry into the profession, continuing
professional development, corporate governance,
professional standards, and monitoring and
disciplinary procedures, etc.

• Safeguards created by the work environment,

these include: rotation/removal of relevant staff from
the engagement team, independent quality control
reviews, using separate teams, etc.
 Safeguards
● Rotate audit staff (especially senior audit staff).
● Do not allow shares to be held in client companies.
● Use separate teams for other services.
● Remind management that they remain responsible for all
company decisions.
● If asked for a second opinion from a non-client, refuse to
provide an opinion
unless allowed to consult with their current auditor.
● No contingency fees.
● No single client to exceed a set % of the audit firm’s total
revenues.
● Carry out “Hot Reviews” on audit working papers just before
audit report finalised
● for Listed and Public Interest clients, get a 2nd partner to
review the analysis of objectivity threats before the audit work
starts
Confidentiality/ Information disclosed
Members of an assurance team should not disclose
any information to anyone outside of the engagement
team, whether or not they work for the same firm.
Information should only be disclosed with proper and
specific authority or when there is a legal or
professional right or duty to disclose.
Duty to disclose:
• Breaches of specific laws to the appropriate
public authority, e.g. money laundering, terrorism,
treason, or drug trafficking.
• If a court order has been obtained.
• If it is required by ACCA or another professional
body.
Right to disclose:

• If the client has given their permission.

• To protect a member or firm's interests, e.g. to
defend themselves in court or at a disciplinary
hearing.
• Where authorised by law.
• Breaches of regulations to a nongovernmental
regulatory body that has the power to compel
disclosure, e.g. financial services authority.
• If it is in the public interest to do so.
Acceptance procedures

•Ensure professionally qualified to act: legal /ethical

• Adequate resources: staff, time
• The fee
• Obtain references: investigate directors
• Audit risk
•Is the accounting reporting framework acceptable?
• Money laundering regulations
• Expertise and competence
• Credit rating of client
• Communicate with present auditors.
• Case analysis
• Ethics