Lecture 2 Ethics Basic Auditing following framework.pptx

Lecture 2 Ethics Basic Auditing following framework

1. 1 LECTURE 2: ETHICS FOR PROFESSIONAL ACCOUNTANTS

2. Learning objectives After studying this lecture, students should be able to: Explain what ethics means to an accountant. Explain purpose and content of the IESBA Code of Ethics for Professional Accountants. Identify and discuss the fundamental principles of ethics as described by the IESBA Code of Ethics. Discuss what threats to the fundamental principles are. Define safeguards and give some examples. Explain the concept of independence and identify the principles-based approach for resolving the attendant issues. Differentiate between ‘independence of mind’ and ‘independence in appearance’. 2

3. 1.1. WHAT ARE ETHICS? 3 A sense of agreement in a society as to what is right and wrong. Ethics represent a set of moral principles, rules of conduct or values. Ethics apply when an individual has to make a decision from various alternatives regarding moral principles.

4. 1.1. WHAT ARE ETHICS? 4

5. 1.1. WHAT ARE ETHICS? 5 Ethics in the Accounting Profession The attitude and behaviour of professional accountants in providing auditing and assurance services have an impact on the economic well-being of their community and country. The distinguishing mark of the profession is acceptance of its responsibility to the public . => The professional auditors’ responsibility is not to satisfy only their client or employer, but to consider the public interest.

6. 1.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS 6 International Ethics Standards Board for Accountants (IESBA) issue Code of Ethics for Professional Accountants The Code is divided into three parts: Part A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework for applying those principles. (including: threats & safeguards) Parts B and C illustrate how the conceptual framework is to be applied in specific situations. Part B applies to professional accountants in public practice Part C applies to professional accountants in business .

7. 1.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Conceptual Framework Approach Rather than a list of rules that must be obeyed to be an ethical accountant, the so-called ‘rule based’ approach which holds sway in many countries, the IESBA and IFAC have chosen to use a ‘ conceptual framework’ approach. A conceptual framework requires a professional accountant to identify, evaluate and address threats to compliance with the fundamental principles , rather than merely comply with a set of specific rules which may be arbitrary. 7

8. 8 1.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS There are five fundamental principles of ethics: 1) Integrity (Sec 110) 2) Objectivity (Sec 120) 3) Professional Competence and Due Care (Sec 130) 4) Confidentiality (Sec 140) 5) Professional Behavior (Sec 150)

9. Integrity : A professional accountant should be straightforward and honest in performing professional services. Objectivity: A professional accountant should not allow bias , conflict of interest or undue influence of others to override professional or business judgments. Professional Competence and Due Care: A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. 9

10. Confidentiality: A professional accountant 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. Professional Behavior: A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession. 10

11. 1.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Threats to the Fundamental Principles Threats fall into one or more of the following categories: Self-interest Self-review Advocacy Familiarity Intimidation. 11

12. Self-interest threat – the threat that a financial or other interest will inappropriately influence a professional accountant’s judgment or behavior; Examples of circumstances that create self-interest threats A member of the assurance team having a direct financial interest in the assurance client. A firm having undue dependence on total fees from a client. A member of the assurance team having a significant close business relationship with an assurance client. A firm being concerned about the possibility of losing a significant client. A member of the audit team entering into employment negotiations with the audit client. Contingent fees relating to an assurance engagement. … Self-interest threat 12

13. Self-review threat Self-review threat – the threat that a professional accountant will not appropriately evaluate the results of a previous judgment made, or an activity performed by the accountant or by another individual within the accountant’s firm or employing organization, on which the accountant will rely when forming a judgment as part of performing a current activity; Examples of circumstances that create self-review threats A firm issuing an assurance report on the effectiveness of the operation of financial systems after designing or implementing the systems. A firm having prepared the original data used to generate records that are the subject matter of the assurance engagement. A member of the assurance team being, or having recently been, a director or officer of the client. … 13

14. Advocacy threat – the threat that a professional accountant will promote a client’s or employing organization’s position to the point that the accountant’s objectivity is compromised; Examples of circumstances that create Advocacy threat Selling, underwriting or otherwise promoting financial securities or shares of an assur - ance client; Acting as the client’s advocate in a legal proceeding. … Advocacy threat 14

15. Familiarity threat – the threat that due to a long or close relationship with a client, or employing organization, a professional accountant will be too sympathetic to their interests or too accepting of their work; Examples of circumstances that create Familiarity threat A member of the engagement team having an immediate family member or close family member who is a director or officer of the assurance client. A member of the engagement team having a close family member who is an employee of the assurance client and in a position to significantly influence the subject matter of the assurance engagement. A professional accountant accepting gifts from a client. Senior personnel having a long association with the assurance client. … Familiarity Threat 15

16. Intimidation threat – the threat that a professional accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the accountant Examples of circumstances that create Intimidation threat A firm being threatened with dismissal from a client engagement. An audit client indicating that it will not award a planned non-assurance contract to the firm if the firm continues to disagree with the client’s accounting treatment for a particular transaction. A firm being threatened with litigation by the client. A firm being pressured to reduce inappropriately the extent of work performed in order to reduce fees. … Intimidation Threat 16

17. 1.2. IESBA’S CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS Safeguards Safeguards fall into two broad categories: Safeguards created by the profession, legislation or regulation; and Safeguards in the work environment. 17

18. Safeguards created by the Profession, Legislation or Regulation Examples: Educational, training and experience requirements to become a certified member of the profession; Continuing education requirements; Professional accounting, auditing and ethics standards and monitoring and disciplinary processes; Peer review of quality control; and Professional rules or legislation governing the independence requirements of the firm. 18

19. Safeguards within the Work Environment Comprise: Firm-wide safeguards and Engagement-specific safeguards. 19

20. Safeguards within the Work Environment Examples: Leadership of the firm that stresses the importance of compliance with the fundamental principles and requires that members of an assurance team act in the public interest. Policies and procedures to implement and monitor quality control of engagements. Policies and procedures that will enable the identification of interests or relationships between the firm or members of engagement teams and clients. Using different partners and engagement teams with separate reporting lines for the provision of non-assurance services to an assurance client. …. Firm-wide safeguards 20

21. Safeguards within the Work Environment Examples: Using an additional professional accountant not on the assurance team to review the work done. Consulting an outside third party (e.g. a committee of independent directors or a professional regulatory body). Rotation of senior assurance team personnel. Communicating to the audit committee the nature of services provided and fees charged. Involving another audit firm to perform or re-perform part of the assurance engagement. …. Engagement- specific safeguards 21

22. Resolution of Ethical Conflicts If the matter remains unresolved, the professional accountant should consult with other appropriate persons within the firm Where a matter involves a conflict with, or within, an organization, consult with those charged with governance of the organization , such as the board of directors or the audit committee. If a significant conflict cannot be resolved, obtain professional advice from the relevant professional body or legal advisors . If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a professional accountant should, where possible , refuse to remain associated with the matter creating the conflict . .

23. 1.3. INDEPENDENCE The independence of the auditor from the firm that he is auditing is one of the basic requirements to keep public confidence in the reliability of the audit report. IFAC strongly believes that a high-quality principles-based approach to independence will best serve the public interest by eliciting thoughtful auditor assessment of the particular circumstances of each engagement. The conceptual framework involves two views of independence to which the auditor must comply: Independence of mind and Independence in appearance. 23

24. 1.3. INDEPENDENCE Independence of mind Independence of mind is a state of mind that allows to draw conclusions that are unaffected by influences that compromise professional judgment. Independence in mind allows the professional accountant to act with integrity, objectivity, and professional scepticism . 24

25. 1.3. INDEPENDENCE Independence in appearance Independence in appearance involves avoidance of significant circumstances that a reasonable informed third party , considering all the facts and circumstances, might conclude that the professional accountant's integrity, objectivity or professional scepticism has been compromised. 25

26. 1.3. INDEPENDENCE The Ethics Code discusses independence in assurance services in terms of a principles- based approach that takes into account threats to independence, accepted safeguards and the public interest. A professional accountant shall use professional judgement in applying this conceptual framework to: Identify threats to independence; Evaluate the significance of the threats identified; and Apply safeguards , when necessary, to eliminate the threats or reduce them to an acceptable level. 26