Lecture 2 Ethics Basic Auditing following framework

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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’.
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3. 1.1. WHAT ARE ETHICS?
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E A sense of agreement in a society as to what is right and
wrong.
E 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?
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5. 1.1. WHAT ARE ETHICS?
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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 PROFESSIONALACCOUNTANTS
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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.
o Part B applies to professional accountants in public practice
o Part C applies to professional accountants in business.

7. 1.2. IESBA’S CODE OF ETHICS FOR PROFESSIONALACCOUNTANTS
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.
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1.2. IESBA’S CODE OF ETHICS FOR PROFESSIONALACCOUNTANTS
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.
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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.
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11. 1.2. IESBA’S CODE OF ETHICS FOR PROFESSIONALACCOUNTANTS
 Threats to the Fundamental Principles
Threats fall into one or more of the following categories:
 Self-interest
 Self-review
 Advocacy
 Familiarity
 Intimidation.
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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
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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.
• …
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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
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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
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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
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17. 1.2. IESBA’S CODE OF ETHICS FOR PROFESSIONALACCOUNTANTS
 Safeguards
Safeguards fall into two broad categories:
• Safeguards created by the profession, legislation or
regulation; and
• Safeguards in the work environment.
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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.
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19.  Safeguards within the Work Environment
Comprise:
 Firm-wide safeguards and
 Engagement-specific safeguards.
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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
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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
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22. Resolution of Ethical Conflicts
1) If the matter remains unresolved, the
professional accountant should consult
with other appropriate persons within the
firm
2) 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.
3) If a significant conflict cannot be resolved,
obtain professional advice from the
relevant professional body or legal
advisors.
4) If, after exhausting all relevant
possibilities, the ethical conflict remains
unresolved, a professional accountant
should, where possible, refuse to remain

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:
(1) Independence of mind and
(2) Independence in appearance.
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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.
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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.
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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.
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