Lecture Auditing and assurance services (Second international edition) Chapter 19 Professional ethics, independence and quality control

Chapter Nineteen

Professional
Ethics,
Independence
and Quality
Control

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Ethics and Professional Behaviour
Ethics

Refers to a system or code of
conduct based on moral duties and
obligations that indicate how an
individual should behave in society.

Professionalism

Refers to the conduct, aims, or
qualities that characterize or mark a
profession or professional person.

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Theories of Ethical Behaviour
Utilitarianism

Recognizes that decision-making involves
trade-offs between the benefits and
burdens of alternative actions and
focuses on the consequences and
individuals affected.

Rights-Based
Approach

Assumes that individuals have certain
rights and other individuals have a duty to
respect those rights when making
decisions.

Justice-Based
Approach

Is concerned with issues such as equity,
fairness and impartiality.

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IFAC Code of Ethics for Professional
Accountants

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IFAC Code Part A: Fundamental Principles

and Conceptual Framework
Part A of the Code establishes the fundamental
principles for professional accountants’
behaviour and the conceptual framework for
applying those principles.

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IFAC Code of Ethics for Professional
Accountants
A professional accountant in public practice: A professional
accountant, irrespective of functional
classification (e.g. audit, tax or consulting) in a firm that provides
professional services.
Professional services: Services requiring accountancy or related skills
performed by a professional accountant including accounting, auditing,
taxation, management consulting and financial management
services.
A professional accountant in business: A professional accountant
employed or engaged in an executive or non-executive capacity in such
areas as commerce, industry, service, the public sector, education,
the not for profit sector, regulatory bodies or professional bodies, or a
professional accountant contracted by such entities.

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Fundamental Principles
Integrity

Objectivity

Professional
Competence
& Due Care

Confidentiality

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Professional
Behaviour


Fundamental Principles

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Conceptual Framework Approach
Threats are created by circumstances and relationships that
could compromise an accountant’s ability to comply with the
fundamental principles.
Safeguards are actions or other measures that may
eliminate threats or reduce them to an acceptable level.

Identify threats to compliance with the
fundamental principles.
Evaluate the significance of the threats identified.

Apply safeguards, when necessary, to eliminate the
threats or reduce them to an acceptable level.
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Conceptual Framework Approach
• Establishes fundamental principles.
• Requires active consideration of issues.
• Requires judgement rather than literal
interpretations encouraged by a pure rules
approach.
• Can be applied to differing circumstances.
• Responsive to change.

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Categories of Threats

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Safeguards
Safeguards created by the
profession, legislation or regulation

Safeguards in the work
environment
Prohibitions:
When safeguards are

not adequate
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Professional
accountants in
public practice

Professional
accountants in
business


Safeguards created by the profession,
legislation or regulation
• Educational, training and experience.
requirements for entry into the profession.
• Continuing professional development
requirements.
• Corporate governance regulations.
• Professional standards.
• Professional or regulatory monitoring and
disciplinary procedures.
• External review by a legally empowered third
party of the reports, returns, communications
or information produced by a professional
accountant.
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IFAC Code Part B: Professional Accountants

in Public Practice
Part B Professional Accountants in Public
Practice illustrates how the conceptual
framework contained in Part A is to be
applied in specific situations by
professional accountants in public practice.

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Part B: Situations
Fees & Other Types
of Remuneration

Professional
Appointment
Second
Opinions
Conflicts of
Interest
Marketing
Professional
Services
Objectivity – All
Services
Independence – Audit and
Review Engagements
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Gifts &

Hospitality

Custody of Client’s
Assets

Independence – Other
Assurance Engagements


Part B: Examples of Circumstances and
Relationships That May Create Threats

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Part B: Examples of Circumstances and
Relationships That May Create Threats

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Part B: Examples of Safeguards in
Work Environment

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Part B: Examples of Safeguards in
Work Environment (continued)

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Part B: Independence –
Audit and Review Engagements
Independence
of Mind

Independence
in Appearance

The state of mind that permits the expression of a
conclusion without being affected by influences
that compromise professional judgement, thereby
allowing an individual to act with integrity and
exercise objectivity and professional scepticism.

The avoidance of facts and circumstances that are
so significant that a reasonable and informed third
party would be likely to conclude, weighing all the
specific facts and circumstances, that a firm’s, or a
member of the audit team’s, integrity, objectivity or
professional scepticism has been compromised.

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Part B: Independence and the Conceptual
Framework Approach
Identify threats to independence.

Evaluate the significance of the threats identified.
Apply safeguards, when necessary, to eliminate the
threats or reduce them to an acceptable level.
When the practitioner determines that appropriate
safeguards are not available or cannot be applied to
eliminate the threats or reduce them to an acceptable
level, he or she shall eliminate the circumstance or
relationship creating the threats, or decline or
terminate the audit engagement.
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Part B: Independence –
Audit and Review Engagements
• Firm includes network firm, except where otherwise stated.
• A network firm is a firm or entity that belongs to a network. A network is
a larger structure that is aimed at cooperation; and that is clearly aimed
at profit or cost sharing or shares common ownership, control or
management, common quality control policies and procedures,
common business strategy, the use of a common brand name, or a
significant part of professional resources.

• Public interest entities: Additional provisions for public interest
entities.
• A public interest entity is a listed entity, and an entity defined by
regulation or legislation as a public interest entity or for which the audit
is required by regulation or legislation to be conducted in compliance
with the same independence requirements that apply to the audit or
listed entities.

• Documentation: Conclusions regarding compliance with
independence requirements, and substance of any relevant
discussions that support those conclusions.
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Part B: Independence –
Audit and Review Engagements
• Financial interests.
• Loans and guarantees.
• Business relationships.
• Family and personal relationships.
• Employment with an audit client.
• Temporary staff assignments.
• Recent service with an audit client.
• Serving as a director or officer of an audit.
• Long association of senior personnel with an
audit client, including partner rotation.
• Provision of non-assurance services to audit
clients.
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Part B: Provisions of Non-Assurance Services –
Types of Services and Circumstances
• Preparing accounting records and financial statements.
• Valuation services.
• Taxation services.
• Internal audit services.
• IT systems services.

• Litigation support services.
• Legal services.
• Recruiting services.
• Corporate finance services.
• Fees: Relative size of fees, overdue fees and contingent
fees.
• Compensation and evaluation policies.
• Gifts and hospitality.
• Actual or threatened litigation.
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Part B: Examples of Safeguards Related to
Provision of Non-Assurance Services

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