3-Ethics-and-acceptance-Of-Appointment.ppt

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1. Chapter 3
Ethics and acceptance Of
Appointment

2. Ethics and acceptance Of
Appointment
SimpleDefinitionofethic
Rulesofbehaviorbasedonideasaboutwhatis
morallygoodandbad
ethics:anareaofstudythatdealswithideas
aboutwhatisgoodandbadbehavior:abranchof
philosophydealingwithwhatismorallyrightor
wrong.
abeliefthatsomethingisveryimportant.

3. The need for professional ethics
•Trust is built by knowledge
•NeedstobeindependentandObjectivity
•Toimprovetheimageoftheprofession

4. The IFAC and ACCA codes and the
conceptual framework
CONCEPTUAL
FRAMEWORK
FUNDAMENTAL
PRINCIPLES
THREATS SAFEGUARDS
IFAC CODE
OF ETHICS
ICAB CODE OF
ETHICS

5. The fundamental principles
•Objectivity:Membersshouldnotallowbias,conflictsof
interestorundueinfluenceofotherstooverride
professionalorbusinessjudgements.
•Professionalbehaviour:Membersshouldcomplywith
relevantlawsandregulationsandshouldavoidany
actionthatdiscreditstheprofession.
•Professionalcompetenceandduecare:Members
shouldmaintainprofessionalknowledgeandskillata
levelrequiredtoensurethataclientoremployer
receivescompetentprofessionalservicesbasedon
currentdevelopmentsinpractice,legislationand
techniques.

6. •Integrity:Membersshouldbestraightforwardand
honestinallprofessionalandbusinessrelationships.
•Confidentiality:Membersshouldrespectthe
confidentialityofinformationacquiredasaresultof
professionalandbusinessrelationshipsandshould
notdiscloseanysuchinformationtothird
partieswithoutproperandspecificauthorityorunless
thereisalegalorprofessionalrightordutyto
disclose.Confidentialinformationshouldnotbeused
forthepersonaladvantageofmembersorthird
parties.

7. Threats and safeguards
1.Self-interest
2.Self-review
3.Advocacy
4.Familiarity
5.Intimidation

8. Self-interestthreats
This arises when personal interest of the auditor
conflicts with that of the client.For example-
•Financial:owningsharesintheclient,
•Closebusinessrelationships:Employment(ex-partners
>2years)
•Partneronclientboard
•Familyandpersonalrelationships
•Loansandguarantees
•Overduefees
•Contingentfees
•Highpercentagefees
•Low-balling
•Recruitmentfortheclient

9. Self-reviewthreats
This threat arises when the auditor has to review or
audit the work that he helps to carry out. For example-
•Recentservicewithassuranceclient
•Otherservices
•Preparingaccountingrecordsandaccounts
•Valuationservices
•Taxationservices
•Internalauditservices
•Corporatefinance
•Otherservice

10. 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

11. Familiaritythreats
This threat arises as a result of the auditor becoming
unduly sympathetic towards its client as a result of
long association.
•Becauseofacloserelationship,membersofthe
assurancefirmbecometoosympathetictomembersofthe
clientfirm,sothatobjectivityandscepticismarelost
•Careneededwhereseniorauditstaffhavealong
associationwiththeclient.
•ACCA/ICABsuggestthattheleadpartnershouldbe
changedatleastevery5years.
•Otherpartnersinvolvedchangedatleastevery7years.

12. 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.

13. TheACCA/ICABCodeofEthicsdividessafeguards
intotwobroadcategories:
•Safeguardscreatedbytheprofession,
legislationorregulation,theseinclude:
requirementsforentryintotheprofession,continuing
professionaldevelopment,corporategovernance,
professionalstandards,andmonitoringand
disciplinaryprocedures,etc.
•Safeguardscreatedbytheworkenvironment,
theseinclude:rotation/removalofrelevantstafffrom
theengagementteam,independentqualitycontrol
reviews,usingseparateteams,etc.

14. 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

15. Confidentiality/ Information disclosed
Members of an assurance team should notdisclose
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.

16. Righttodisclose:
•Iftheclienthasgiventheirpermission.
•Toprotectamemberorfirm'sinterests,e.g.to
defendthemselvesincourtoratadisciplinary
hearing.
•Whereauthorisedbylaw.
•Breachesofregulationstoanongovernmental
regulatorybodythathasthepowertocompel
disclosure,e.g.financialservicesauthority.
•Ifitisinthepublicinteresttodoso.

17. Acceptanceprocedures
•Ensureprofessionallyqualifiedtoact:legal/ethical
•Adequateresources:staff,time
•Thefee
•Obtainreferences:investigatedirectors
•Auditrisk
•Istheaccountingreportingframeworkacceptable?
•Moneylaunderingregulations
•Expertiseandcompetence
•Creditratingofclient
•Communicatewithpresentauditors.

18. Engagementletters
Theengagementletterwillbesentbeforetheaudit.It
specifiesthenatureofthecontractbetweentheaudit
firmandtheclientandminimisestheriskofany
misunderstandingoftheauditor’srole.

19. ObjectivesofEngagementLetter
•Defineauditors’/managementresponsibilitiesandit
shouldbereviewedeveryyear.
•Writtenevidenceofauditors’acceptance:theauditor
mustissueanewengagementletterifthescopeor
contextofassignmentchangesafterinitial
appointment.
•Sendanewlettereveryyeartoemphasiseits
importancetoclient.
•Identifyanyreportstobeproducedinadditionto
auditreport

20. Thecontentsoftheengagementletter
Thecontentsofaletterofengagementforaudit
servicesarelistedinISA210AgreeingtheTermsof
AuditEngagements.Thecontentsshouldinclude:
•theobjectiveandscopeoftheaudit
•theresponsibilitiesoftheauditor
•theresponsibilitiesofmanagement
•theidentificationofanapplicablefinancial
reportingframework
•referencetotheexpectedformandcontentofany
reportstobeissued.