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

In this chapter, the learning objectives are Know the definitions and general importance of ethics and professionalism, be able to explain three basic theories of ethical behavior, understand how to deal with ethical challenges through an example situation,...

Professional

Ethics, Independence and Quality Control

Chapter Nineteen

Ethics and Professional Behaviour

Ethics

Professionalism

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

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

Theories of Ethical Behaviour

individuals affected.

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

decisions.

Is concerned with issues such as equity,

fairness and impartiality.

IFAC Code of Ethics for Professional

Accountants

IFAC Code Part A: Fundamental Principles

and Conceptual Framework

principles for professional accountants’

applying those principles

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 accountant contracted by such entities.

Fundamental Principles

Integrity Objectivity

Professional Competence

& Due Care

Fundamental Principles

Conceptual Framework Approach

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.

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

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.

Categories of Threats

Safeguards in the work

environment

Safeguards created by the

profession, legislation or regulation

Professional accountants in

public practice

Professional accountants in

business

Prohibitions:

When safeguards are

not adequate

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.

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.

Part B: Situations

Professional

Appointment

Second Opinions

Fees & Other Types

of Remuneration

Marketing Professional Services

Gifts &

Hospitality

Custody of Client’s Assets

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

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

Part B: Examples of Safeguards in

Work Environment

Part B: Examples of Safeguards in

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.

Independence

in Appearance

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

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

• 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.

Part B: Provisions of Non-Assurance Services –

Types of Services and Circumstances

• Preparing accounting records and financial statements.

• Corporate finance services.

• Fees: Relative size of fees, overdue fees and contingent fees.

• Compensation and evaluation policies.

• Gifts and hospitality.

• Actual or threatened litigation.

Part B: Examples of Safeguards Related to

Provision of Non-Assurance Services

Preparing Accounting Records and Financial

Statements

Activities considered a normal part of the audit process that generally do

not threaten independence Technical assistance and

advice on accounting issues that generally do not threaten independence Services related to the

preparation of accounting records and financial statements of a routine or mechanical nature that may create self-review

threats.

Originating or changing journal entries, or determining the account classifications of transactions.

Preparing or changing source documents or originating data, in

electronic or other form, evidencing the occurrence of a

Valuation Services

A valuation comprises the making of assumptions with regard to future developments, the application of appropriate methodologies and techniques, and the combination of both to compute a certain value, or range of values, for an asset, a liability or for a business as a whole

A self-review threat may be created when a firm performs a valuation that is to be incorporated into the client’s financial statements.

The firm shall not provide a valuation service (or withdraw from the audit engagement) if the valuation service has a material effect on the financial statements and the valuation

involves a significant degree of subjectivity.

For public interest entity audit clients the firm shall not provide valuation services to an audit client if the

valuations would have a material effect, separately or in the

aggregate, on the financial statements.

Taxation Services

1 Tax return preparation

2 Tax calculations for the

purpose of preparing

the accounting entries

3 Tax planning and other

tax advisory services

statements.

A firm is not permitted to provide tax advice when the tax advice depends on

a particular accounting treatment or presentation in the financial statements, and (a) the audit team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework; and (b) the outcome or consequences of the tax advice will have a material effect on the financial statements

Internal Audit Services

Internal audit services involve

assisting the audit client in the

performance of its internal

in the course of a subsequent external audit

For public interest entity audit clients the firm shall not provide internal audit services that relate to a significant part of the internal controls over financial reporting; financial accounting systems that generate information that is, separately or in the aggregate, significant to the client’s accounting records or financial statements; or amounts or disclosures that are, separately or in the aggregate, material to the financial

statements

IT System Services

IT system services

related to information

technology (IT) systems

include the design or

statements.

For public interest entity audit clients the firm shall not

provide services involving the design or implementation of

IT systems that form a significant part of the internal control over financial reporting or generate information that is

significant to the client’s accounting records or financial

statements.

Litigation Support Services

Litigation support services

include activities such as

acting as an expert witness,

calculating estimated

damages or other amounts

that might become receivable

or payable as the result of

litigation or other legal dispute,

and assistance with document

management and retrieval

Litigation support services to

an audit client may create may create a self-review

or advocacy threat.

Where the result of a valuation for litigation support will have a direct effect on the financial statements, the requirements in the Code relating to valuation

services are applicable.

Recruiting Services

Recruiting services include

services such as reviewing

the professional

qualifications of applicants,

interviewing candidates

and providing advice on

their suitability for the post.

Providing recruiting services to an audit client may create

self-interest, familiarity

or intimidation threats

The significance of the threats will depend on factors such as the nature of the requested assistance and the role of the person to be recruited Safeguards shall be applied when necessary to reduce the threats to an acceptable

level.

Corporate Finance Services

Corporate finance services

comprise a broad range of

services including assisting

Independence for

Other Assurance Engagements

Many of the same circumstances and relationships discussed previously related to independence requirements for audits and reviews are also relevant for other assurance engagements

Threats to independence typically arise more frequently and are

of greater significance when a non-assurance service is provided to an audit client Thus, the provision of non-assurance services to audit clients is more restricted than to non-audit

assurance clients

An assurance engagement is an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or

measurement of a subject matter against criteria

IFAC Code Part C: Professional Accountants in Business

A professional accountant in business is an accountant holding

membership in an IFAC body and is

employed or engaged in an executive or non-executive capacity

in an organization other than an

audit firm

Professional accountants in business must comply with the IFAC Code’s fundamental principles and apply the

conceptual framework when threats to the principles exist

Auditor Independence in the EU

From European Commission, Recommendation on Statutory

Auditors’ Independence in the EU: A Set of Fundamental Principles

(2002):

‘A principles-based approach to statutory auditors' independence is preferable to one based on detailed rules because it creates a robust structure within which statutory auditors have to justify their actions It also provides the audit profession and its regulators with the flexibility

to react promptly and effectively to new developments in business and

in the audit environment At the same time, it avoids the highly

legalistic and rigid approach to what is and is not permitted which can arise in a rules-based regime A principles-based approach can cater for the almost infinite variations in individual circumstances that arise

in practice and in the different legal environments throughout the EU Consequently, a principles-based approach will better serve the needs

of European capital markets, as well as those of SMEs (small and

medium sized enterprises).’

Systems of Quality Control

ISQC 1 Quality Control for Firms That Perform Audits and Reviews of Financial Statements, and Other Assurance and

Related Services Engagements

Elements of systems of quality control:

• Leadership responsibilities for quality

within the firm

• Relevant ethical requirements

• Acceptance and continuance of client

relationships and specific engagements

• Human resources

• Engagement performance

• Monitoring

Elements of Systems of Quality Control

Selected Quality Control Policies and

Procedures

Quality Control Programmes

IFAC SMO 1

Quality Assurance

EU 8th Directive.

European Commission, Recommendation on Quality Assurance for the Statutory Audit in the EU: Minimum Requirements

Quality Control Programmes

The objective of a quality assurance review is to:

1.Determine whether the member is subject to an adequate

system of quality control

2.The system of quality control is in compliance with such system.3.The system of quality control has adhered to professional

standards and applicable legal and regulatory requirements in performing engagements

A member body shall choose either a cycle or risk-based

approach for selecting members for review

End of Chapter 19