Chapter 2

Audit ethics andregulations

Dutiesbull Auditor duties are also typically set by government so will vary by countrybull Typical duties

= to issue an audit report giving opinions onbull truth and fairness of the Financial Statementsbull whether the Financial Statements are properly prepared (within national rules)bull any other opinions required by government eg

ndash whether proper accounting records keptndash whether Directors Report is consistent with the FS

= when leaving a client to issue a Statement of Circumstances explaining whether there are any specific reasons for them leaving= after leaving a client to respond to any requests for information from the firm of auditors who replace them

bull Duties of an Auditora) Duties of auditor arendash i) To give a report to the members on the accounts books of account balance sheet and profit and loss

account examined by him ndash ii) Where any matter reported upon is answered in the negative or with a qualification the report shall

include reasons for such qualification with factual positionndash iii) To include in the report of the company such matters as directed by the Federal Governmentndash iv) To attend those general meetings of a listed company either himself or through authorized person in

which the balance sheet profit and loss account and the auditors report are to be consideredb) To make report for inclusion in prospectus c) To certify receipts and payments account in the statutory report d) To make report on declaration of solvency in case of voluntary winding upe) To exercise reasonable care and skill in carrying out his duties and make such inquiries as considered necessary

RIGHTS AND DUTIESbull Rights Auditors are usually given rights within national law to help ensure they can do

their job properlybull Rights will vary between countries as they are set by governmentbull Typical rights include

= access to all books and records= access to all information and explanations= the right to

ndash be given notice of a general meetingndash attend the general meetingndash speak at the general meeting

= the right to resign without finishing the audit= the right to have information sent to shareholders should the auditors wish to

bull PowersRights of an Auditor i) Right of access to books of account and vouchers ii) Right to receive information and explanationsiii) Right of access to books and papers of branch iv) Right to receive notices of general meetings and to attend those meetings v) Right to make representation where another person is being appointed as auditor

General Principles of an AuditProfessional Ethics

bull There are a number of ethical matters that are extremely important for auditors to consider when performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

2bull In the light of this ethical guidelines emphasis the following key points about the

characteristics of accountantsbull a) Independence Auditor is independent of management ie he is not under the control or

influence of managementbull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his

professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based

on that evidence alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional

qualification has acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

3

bull International Standards on Auditing (ISAs) The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations

bull Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

Quality Controlbull Quality control is partly achieved by having

audit standards to follow (for example ISA 220 lsquoQuality Control for an Audit of Financial Statementsrsquo) however it is all achieved by the RSBs (eg ACCA) checking the audit work of their members and handling complaints

bull The RSBs also have rules to ensure their members are keeping up to date with technical changes

When the external auditor leavesbull Sometimes it is necessary for the auditors to RESIGN If an auditor resigns they

may wish to speak to the shareholders to explain their reasons Therefore the law allows them to require the company to call a General Meeting (GM) or to require the company to send a written explanation to shareholders

bull Sometimes the Board of Directors or some shareholders may wish to REMOVE a Firm of auditors before the annual vote at the AGM

bull A General Meeting will need to be called so that the shareholders can vote on this proposal

bull Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years ndash as such when the Board asks them to accept nomination for the following year the auditors politely decline as they DO NOT WISH TO SEEK REAPPOINTMENT

bull This may happen for several reasons= client is growing too large= audit risk is seen to be getting too high= audit firm wish to focus on other clients= client has decided it is time to change

Auditor Responsibilitiesbull Auditors cannot know and understand every law and regulation that affects every

client but they should aim to be aware of those that could materially affect the Financial Statements

bull By doing this they are more likely to spot breaches even if management do not tell them (or are themselves not aware)

bull If the auditor finds a material breach they have the following responsibilities= Report the breach to management= If the breach involves management report to the highest level possible (eg Audit Committee)= If the breach involves the highest level possible may need to take legal advice= Consider the effect of the breach on the accuracy of the Financial Statementsndash the company may need to provide for a fine and failure to do so could result in a qualified audit report= If the breach is severe consider the effect on the companyrsquos going concern status

bull = In some cases a breach may have external reporting consequences

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

Dutiesbull Auditor duties are also typically set by government so will vary by countrybull Typical duties

= to issue an audit report giving opinions onbull truth and fairness of the Financial Statementsbull whether the Financial Statements are properly prepared (within national rules)bull any other opinions required by government eg

ndash whether proper accounting records keptndash whether Directors Report is consistent with the FS

= when leaving a client to issue a Statement of Circumstances explaining whether there are any specific reasons for them leaving= after leaving a client to respond to any requests for information from the firm of auditors who replace them

bull Duties of an Auditora) Duties of auditor arendash i) To give a report to the members on the accounts books of account balance sheet and profit and loss

account examined by him ndash ii) Where any matter reported upon is answered in the negative or with a qualification the report shall

include reasons for such qualification with factual positionndash iii) To include in the report of the company such matters as directed by the Federal Governmentndash iv) To attend those general meetings of a listed company either himself or through authorized person in

which the balance sheet profit and loss account and the auditors report are to be consideredb) To make report for inclusion in prospectus c) To certify receipts and payments account in the statutory report d) To make report on declaration of solvency in case of voluntary winding upe) To exercise reasonable care and skill in carrying out his duties and make such inquiries as considered necessary

RIGHTS AND DUTIESbull Rights Auditors are usually given rights within national law to help ensure they can do

their job properlybull Rights will vary between countries as they are set by governmentbull Typical rights include

= access to all books and records= access to all information and explanations= the right to

ndash be given notice of a general meetingndash attend the general meetingndash speak at the general meeting

= the right to resign without finishing the audit= the right to have information sent to shareholders should the auditors wish to

bull PowersRights of an Auditor i) Right of access to books of account and vouchers ii) Right to receive information and explanationsiii) Right of access to books and papers of branch iv) Right to receive notices of general meetings and to attend those meetings v) Right to make representation where another person is being appointed as auditor

General Principles of an AuditProfessional Ethics

bull There are a number of ethical matters that are extremely important for auditors to consider when performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

2bull In the light of this ethical guidelines emphasis the following key points about the

characteristics of accountantsbull a) Independence Auditor is independent of management ie he is not under the control or

influence of managementbull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his

professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based

on that evidence alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional

qualification has acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

3

bull International Standards on Auditing (ISAs) The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations

bull Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

Quality Controlbull Quality control is partly achieved by having

audit standards to follow (for example ISA 220 lsquoQuality Control for an Audit of Financial Statementsrsquo) however it is all achieved by the RSBs (eg ACCA) checking the audit work of their members and handling complaints

bull The RSBs also have rules to ensure their members are keeping up to date with technical changes

When the external auditor leavesbull Sometimes it is necessary for the auditors to RESIGN If an auditor resigns they

may wish to speak to the shareholders to explain their reasons Therefore the law allows them to require the company to call a General Meeting (GM) or to require the company to send a written explanation to shareholders

bull Sometimes the Board of Directors or some shareholders may wish to REMOVE a Firm of auditors before the annual vote at the AGM

bull A General Meeting will need to be called so that the shareholders can vote on this proposal

bull Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years ndash as such when the Board asks them to accept nomination for the following year the auditors politely decline as they DO NOT WISH TO SEEK REAPPOINTMENT

bull This may happen for several reasons= client is growing too large= audit risk is seen to be getting too high= audit firm wish to focus on other clients= client has decided it is time to change

Auditor Responsibilitiesbull Auditors cannot know and understand every law and regulation that affects every

client but they should aim to be aware of those that could materially affect the Financial Statements

bull By doing this they are more likely to spot breaches even if management do not tell them (or are themselves not aware)

bull If the auditor finds a material breach they have the following responsibilities= Report the breach to management= If the breach involves management report to the highest level possible (eg Audit Committee)= If the breach involves the highest level possible may need to take legal advice= Consider the effect of the breach on the accuracy of the Financial Statementsndash the company may need to provide for a fine and failure to do so could result in a qualified audit report= If the breach is severe consider the effect on the companyrsquos going concern status

bull = In some cases a breach may have external reporting consequences

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

RIGHTS AND DUTIESbull Rights Auditors are usually given rights within national law to help ensure they can do

their job properlybull Rights will vary between countries as they are set by governmentbull Typical rights include

= access to all books and records= access to all information and explanations= the right to

ndash be given notice of a general meetingndash attend the general meetingndash speak at the general meeting

= the right to resign without finishing the audit= the right to have information sent to shareholders should the auditors wish to

bull PowersRights of an Auditor i) Right of access to books of account and vouchers ii) Right to receive information and explanationsiii) Right of access to books and papers of branch iv) Right to receive notices of general meetings and to attend those meetings v) Right to make representation where another person is being appointed as auditor

General Principles of an AuditProfessional Ethics

bull There are a number of ethical matters that are extremely important for auditors to consider when performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

2bull In the light of this ethical guidelines emphasis the following key points about the

characteristics of accountantsbull a) Independence Auditor is independent of management ie he is not under the control or

influence of managementbull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his

professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based

on that evidence alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional

qualification has acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

3

bull International Standards on Auditing (ISAs) The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations

bull Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

Quality Controlbull Quality control is partly achieved by having

audit standards to follow (for example ISA 220 lsquoQuality Control for an Audit of Financial Statementsrsquo) however it is all achieved by the RSBs (eg ACCA) checking the audit work of their members and handling complaints

bull The RSBs also have rules to ensure their members are keeping up to date with technical changes

When the external auditor leavesbull Sometimes it is necessary for the auditors to RESIGN If an auditor resigns they

may wish to speak to the shareholders to explain their reasons Therefore the law allows them to require the company to call a General Meeting (GM) or to require the company to send a written explanation to shareholders

bull Sometimes the Board of Directors or some shareholders may wish to REMOVE a Firm of auditors before the annual vote at the AGM

bull A General Meeting will need to be called so that the shareholders can vote on this proposal

bull Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years ndash as such when the Board asks them to accept nomination for the following year the auditors politely decline as they DO NOT WISH TO SEEK REAPPOINTMENT

bull This may happen for several reasons= client is growing too large= audit risk is seen to be getting too high= audit firm wish to focus on other clients= client has decided it is time to change

Auditor Responsibilitiesbull Auditors cannot know and understand every law and regulation that affects every

client but they should aim to be aware of those that could materially affect the Financial Statements

bull By doing this they are more likely to spot breaches even if management do not tell them (or are themselves not aware)

bull If the auditor finds a material breach they have the following responsibilities= Report the breach to management= If the breach involves management report to the highest level possible (eg Audit Committee)= If the breach involves the highest level possible may need to take legal advice= Consider the effect of the breach on the accuracy of the Financial Statementsndash the company may need to provide for a fine and failure to do so could result in a qualified audit report= If the breach is severe consider the effect on the companyrsquos going concern status

bull = In some cases a breach may have external reporting consequences

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

General Principles of an AuditProfessional Ethics

bull There are a number of ethical matters that are extremely important for auditors to consider when performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

2bull In the light of this ethical guidelines emphasis the following key points about the

characteristics of accountantsbull a) Independence Auditor is independent of management ie he is not under the control or

influence of managementbull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his

professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based

on that evidence alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional

qualification has acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

3

bull International Standards on Auditing (ISAs) The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations

bull Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

Quality Controlbull Quality control is partly achieved by having

audit standards to follow (for example ISA 220 lsquoQuality Control for an Audit of Financial Statementsrsquo) however it is all achieved by the RSBs (eg ACCA) checking the audit work of their members and handling complaints

bull The RSBs also have rules to ensure their members are keeping up to date with technical changes

When the external auditor leavesbull Sometimes it is necessary for the auditors to RESIGN If an auditor resigns they

may wish to speak to the shareholders to explain their reasons Therefore the law allows them to require the company to call a General Meeting (GM) or to require the company to send a written explanation to shareholders

bull Sometimes the Board of Directors or some shareholders may wish to REMOVE a Firm of auditors before the annual vote at the AGM

bull A General Meeting will need to be called so that the shareholders can vote on this proposal

bull Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years ndash as such when the Board asks them to accept nomination for the following year the auditors politely decline as they DO NOT WISH TO SEEK REAPPOINTMENT

bull This may happen for several reasons= client is growing too large= audit risk is seen to be getting too high= audit firm wish to focus on other clients= client has decided it is time to change

Auditor Responsibilitiesbull Auditors cannot know and understand every law and regulation that affects every

client but they should aim to be aware of those that could materially affect the Financial Statements

bull By doing this they are more likely to spot breaches even if management do not tell them (or are themselves not aware)

bull If the auditor finds a material breach they have the following responsibilities= Report the breach to management= If the breach involves management report to the highest level possible (eg Audit Committee)= If the breach involves the highest level possible may need to take legal advice= Consider the effect of the breach on the accuracy of the Financial Statementsndash the company may need to provide for a fine and failure to do so could result in a qualified audit report= If the breach is severe consider the effect on the companyrsquos going concern status

bull = In some cases a breach may have external reporting consequences

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

2bull In the light of this ethical guidelines emphasis the following key points about the

characteristics of accountantsbull a) Independence Auditor is independent of management ie he is not under the control or

influence of managementbull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his

professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based

on that evidence alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional

qualification has acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

3

bull International Standards on Auditing (ISAs) The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations

bull Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

Quality Controlbull Quality control is partly achieved by having

audit standards to follow (for example ISA 220 lsquoQuality Control for an Audit of Financial Statementsrsquo) however it is all achieved by the RSBs (eg ACCA) checking the audit work of their members and handling complaints

bull The RSBs also have rules to ensure their members are keeping up to date with technical changes

When the external auditor leavesbull Sometimes it is necessary for the auditors to RESIGN If an auditor resigns they

may wish to speak to the shareholders to explain their reasons Therefore the law allows them to require the company to call a General Meeting (GM) or to require the company to send a written explanation to shareholders

bull Sometimes the Board of Directors or some shareholders may wish to REMOVE a Firm of auditors before the annual vote at the AGM

bull A General Meeting will need to be called so that the shareholders can vote on this proposal

bull Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years ndash as such when the Board asks them to accept nomination for the following year the auditors politely decline as they DO NOT WISH TO SEEK REAPPOINTMENT

bull This may happen for several reasons= client is growing too large= audit risk is seen to be getting too high= audit firm wish to focus on other clients= client has decided it is time to change

Auditor Responsibilitiesbull Auditors cannot know and understand every law and regulation that affects every

client but they should aim to be aware of those that could materially affect the Financial Statements

bull By doing this they are more likely to spot breaches even if management do not tell them (or are themselves not aware)

bull If the auditor finds a material breach they have the following responsibilities= Report the breach to management= If the breach involves management report to the highest level possible (eg Audit Committee)= If the breach involves the highest level possible may need to take legal advice= Consider the effect of the breach on the accuracy of the Financial Statementsndash the company may need to provide for a fine and failure to do so could result in a qualified audit report= If the breach is severe consider the effect on the companyrsquos going concern status

bull = In some cases a breach may have external reporting consequences

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

3

bull International Standards on Auditing (ISAs) The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations

bull Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

Quality Controlbull Quality control is partly achieved by having

audit standards to follow (for example ISA 220 lsquoQuality Control for an Audit of Financial Statementsrsquo) however it is all achieved by the RSBs (eg ACCA) checking the audit work of their members and handling complaints

bull The RSBs also have rules to ensure their members are keeping up to date with technical changes

When the external auditor leavesbull Sometimes it is necessary for the auditors to RESIGN If an auditor resigns they

may wish to speak to the shareholders to explain their reasons Therefore the law allows them to require the company to call a General Meeting (GM) or to require the company to send a written explanation to shareholders

bull Sometimes the Board of Directors or some shareholders may wish to REMOVE a Firm of auditors before the annual vote at the AGM

bull A General Meeting will need to be called so that the shareholders can vote on this proposal

bull Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years ndash as such when the Board asks them to accept nomination for the following year the auditors politely decline as they DO NOT WISH TO SEEK REAPPOINTMENT

bull This may happen for several reasons= client is growing too large= audit risk is seen to be getting too high= audit firm wish to focus on other clients= client has decided it is time to change

Auditor Responsibilitiesbull Auditors cannot know and understand every law and regulation that affects every

client but they should aim to be aware of those that could materially affect the Financial Statements

bull By doing this they are more likely to spot breaches even if management do not tell them (or are themselves not aware)

bull If the auditor finds a material breach they have the following responsibilities= Report the breach to management= If the breach involves management report to the highest level possible (eg Audit Committee)= If the breach involves the highest level possible may need to take legal advice= Consider the effect of the breach on the accuracy of the Financial Statementsndash the company may need to provide for a fine and failure to do so could result in a qualified audit report= If the breach is severe consider the effect on the companyrsquos going concern status

bull = In some cases a breach may have external reporting consequences

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

Quality Controlbull Quality control is partly achieved by having

audit standards to follow (for example ISA 220 lsquoQuality Control for an Audit of Financial Statementsrsquo) however it is all achieved by the RSBs (eg ACCA) checking the audit work of their members and handling complaints

bull The RSBs also have rules to ensure their members are keeping up to date with technical changes

When the external auditor leavesbull Sometimes it is necessary for the auditors to RESIGN If an auditor resigns they

may wish to speak to the shareholders to explain their reasons Therefore the law allows them to require the company to call a General Meeting (GM) or to require the company to send a written explanation to shareholders

bull Sometimes the Board of Directors or some shareholders may wish to REMOVE a Firm of auditors before the annual vote at the AGM

bull A General Meeting will need to be called so that the shareholders can vote on this proposal

bull Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years ndash as such when the Board asks them to accept nomination for the following year the auditors politely decline as they DO NOT WISH TO SEEK REAPPOINTMENT

bull This may happen for several reasons= client is growing too large= audit risk is seen to be getting too high= audit firm wish to focus on other clients= client has decided it is time to change

Auditor Responsibilitiesbull Auditors cannot know and understand every law and regulation that affects every

client but they should aim to be aware of those that could materially affect the Financial Statements

bull By doing this they are more likely to spot breaches even if management do not tell them (or are themselves not aware)

bull If the auditor finds a material breach they have the following responsibilities= Report the breach to management= If the breach involves management report to the highest level possible (eg Audit Committee)= If the breach involves the highest level possible may need to take legal advice= Consider the effect of the breach on the accuracy of the Financial Statementsndash the company may need to provide for a fine and failure to do so could result in a qualified audit report= If the breach is severe consider the effect on the companyrsquos going concern status

bull = In some cases a breach may have external reporting consequences

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

When the external auditor leavesbull Sometimes it is necessary for the auditors to RESIGN If an auditor resigns they

may wish to speak to the shareholders to explain their reasons Therefore the law allows them to require the company to call a General Meeting (GM) or to require the company to send a written explanation to shareholders

bull Sometimes the Board of Directors or some shareholders may wish to REMOVE a Firm of auditors before the annual vote at the AGM

bull A General Meeting will need to be called so that the shareholders can vote on this proposal

bull Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years ndash as such when the Board asks them to accept nomination for the following year the auditors politely decline as they DO NOT WISH TO SEEK REAPPOINTMENT

bull This may happen for several reasons= client is growing too large= audit risk is seen to be getting too high= audit firm wish to focus on other clients= client has decided it is time to change

Auditor Responsibilitiesbull Auditors cannot know and understand every law and regulation that affects every

client but they should aim to be aware of those that could materially affect the Financial Statements

bull By doing this they are more likely to spot breaches even if management do not tell them (or are themselves not aware)

bull If the auditor finds a material breach they have the following responsibilities= Report the breach to management= If the breach involves management report to the highest level possible (eg Audit Committee)= If the breach involves the highest level possible may need to take legal advice= Consider the effect of the breach on the accuracy of the Financial Statementsndash the company may need to provide for a fine and failure to do so could result in a qualified audit report= If the breach is severe consider the effect on the companyrsquos going concern status

bull = In some cases a breach may have external reporting consequences

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

Auditor Responsibilitiesbull Auditors cannot know and understand every law and regulation that affects every

client but they should aim to be aware of those that could materially affect the Financial Statements

bull By doing this they are more likely to spot breaches even if management do not tell them (or are themselves not aware)

bull If the auditor finds a material breach they have the following responsibilities= Report the breach to management= If the breach involves management report to the highest level possible (eg Audit Committee)= If the breach involves the highest level possible may need to take legal advice= Consider the effect of the breach on the accuracy of the Financial Statementsndash the company may need to provide for a fine and failure to do so could result in a qualified audit report= If the breach is severe consider the effect on the companyrsquos going concern status

bull = In some cases a breach may have external reporting consequences

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

FUNDAMENTAL ETHICAL PRINCIPLES

bull Ethics is concerned with behaviour and trying to ensure that auditors do ldquothe right thingrdquo whatever that is

bull As such it is a difficult area to have rules as it would usually be possible to imagine a situation where the rules would lead to the wrong answer

bull Typically therefore ethics is about guidance relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations

bull Guidance is contained in the ACCA Code of Conduct but if every Institute had its own ethical code there would be several codes in the UK alone and hundreds around the World

bull An International Code of Ethics has been developed by IFAC in the hope of providing countries with a starting point for developing their own Codes ndash and to try to create some consistency in guidance around the World

bull In the UK the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code but altered slightly for the UK market These Ethical Standards have now been adopted by all UK Institutes including the ACCA

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

ETHICAL STANDARDSbull Professional Ethicsbull There are a number of ethical matters that are extremely important for auditors to consider when

performing their work It is vital to the public image and credibility of the profession that the auditor is seen to be behaving in an acceptable manner in addition to actually complying with the ethical requirements

bull It is important to recognize that many groups in society rely on accountantrsquos work not just the shareholders on whose behalf the accountant is working The accountant therefore has a public accountability

bull In the light of this ISArsquos ethical guidelines emphasis the following key points about the Characteristics of accountants

bull a) Independence Auditor is independent of management ie he is not under the control or influence of Management

bull b) Integrity Auditor is honest and is not corrupt He is straight forward in performing his professional workbull c) Objectivity He obtains the evidence needed to form an opinion and his opinion is based on that evidence

alone He is not subjective in forming his opinionbull d) Professional Competence and Due Care Auditor has attained certain professional qualification has

acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence

bull e) Confidentiality Auditor neither discloses the information obtained during the course of his audit without permission of his client (except when required in a court of law) nor uses that information himself

bull f) Professional Behavior He should not only act in a professional manner but should also appear to be a professional He should maintain his professional knowledge and skill at a level required to ensure that a client or employer receives the benefit of competent professional service based on up-to-date developments in auditing practice and relevant legislation

bull g) Technical Standards Audit should be performed by following certain standards international or national

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

Sources of regulation

bull As a member of IFAC (the International Federation of Accountants) the ACCA is required to enforce ethical standards no less stringent than those of the global body

bull The ACCA rules are now fundamentally the same as those of IFAC They give fundamental principles and specific guidance statements

bull The Code of ethics and conduct applies to members affiliates and students of the ACCA

bull International Auditing amp Assurance Standards Boardbull A subsidiary of IFACbull Sets ISAs(currently 30 standards)bull Issue International Standards on quality control (ISQCI) [these are quality

control principles for all assurance engagements conducted under its standards including audits)

bull Issue standards for other types of assurance engagements in addition to audits

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

International Standards on Auditing (ISAs)

bull The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs

bull International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC) The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC) which was formed in 1977 and is based in New York IFAC has more than 150 member bodies representing over 2 million accountants in more than 100 countries and membership of IFAC automatically confers

bull The IAPC issued standards and statements on auditing and related services in order to improve the degree of uniformity of auditing practice and related services throughout the world

bull The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs) Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view

bull International auditing and accounting standards do not at present override local regulations Neither IFAC nor the IASC can currently compel any organization to comply with international standards nor are there specific sanctions where organizations claim to have complied with international standards but have not done so

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

1048707 International Standards on Auditing (ISAs)

bull ISAs contain basic principles and essential procedures together with related guidance in the form of explanatory and other material including appendices The basic principles and essential procedures are to be understood and applied in the context of explanatory and other material that provides guidance for their application The text of a whole standard is considered in order to understand and apply the basic principles and essential procedures

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

Other IFAC and IAASB activities

bull IFAC publishes a code of ethics governing all assurance engagements carried out

bull IAASB publishes international standard on quality control(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted

bull Under its standardsbull IAASB sets standards for other types of assurance engagement in addition to

auditsbull bull The relationship between International amp National standards and regulation

the IFAC has no legal Standing in individual countries Countries therefore need to have arrangements in place for

bull Regulating the audit profession (self regulation by Audit accountancy Profession or governmentindependent body setup by government)

bull Implementing auditing standards

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

National Regulatory bodies

bull Usually it is the work of National Bodiesbull Enforce the implementation of auditingaccountancy

professionbull Have disciplinary powers to enforce quality of audit workbull Have right to inspect audit files to monitor audit quality

bull There are two possible schemes for regulation at the national level

bull Self regulation by the auditaccountancy professionbull Regulation by government or by some independent body set

up by government for the purpose

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

The Audit Requirementbull Not all limited companies are required to have their financial statements audited Nor are

all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies

bull bull Broadly speaking small companies are exempt from the audit requirement small and medium sized companies may file abbreviated accounts with the registrar of companies and small companies may prepare accounts with reduced disclosures for their members

bull Auditors dutiesbull Form an opinion on whether FS give a true amp fair view and prepared in accordance with

applicable reporting frameworkbull Issue an Audit Report on the abovebull To do so auditors need the following-

ndash Receive proper returns from branches not visitedndash Ensure that COs FS agree with underlying accounting recordsndash Proper accounting records are keptndash All Info amp explanations obtainedndash Info with FS agree with them (Consistency)ndash Info required by law and not in FS included in auditors report (called exception reporting)ndash The first 5 points will not be included in the audit report unless there is a problem

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

THREATS TO OBJECTIVITY

bull = Self-Interest The threat that auditors act in their own personal interests (or are believed to be doing so) Examples include

bull = owning shares in their clientbull = receiving excessive gifts or hospitality from clientsbull = receiving excessive fees from a single client

bull = Self ndash Review The threat that if auditors do certain tasks for clients their audit work may result in checking their own work Examples

bull = giving advice on accounting or control systems then auditing thembull = preparing the accounting information then auditing itbull = helping with calculations of numbers in the Financial Statements then

auditing them

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

2bull = Familiarity The threat that if auditors are too familiar friendly

with a client they might deliberately or accidentally put too much trust in their client and not be sceptical enough leading to under-auditing Examples include

bull = auditing companies where the auditors relatives or friends workbull = auditing the same company for many years in a rowbull = if a client is offering a lot of hospitality this may be a clue that there is too close

a relationship with the auditor

bull = Advocacy The threat caused when auditors are asked to do other work that means they are taking their clients position on something By taking this position they may be seen to be ldquoon the clients siderdquo rather than being independent Examples include

bull = representing an audit client in a legal case or tax enquirybull = taking legal action against a client or being sued by a client

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

3

bull = Intimidation The threat caused by a client being in a position to put pressure on an auditor Examples are the same as Self-Interest the difference here is that the presumption is that the client is being a bull ndash rather than the auditor is being nice to their client out of their own choice

bull = Management The threat that auditors may agree to do other services that result in them making decisions for clients If they take on management functions their independence is likely to be questioned

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

MANAGING ETHICAL THREATSbull Before accepting clients auditors must assess any ethical threats and either put

appropriate safeguards in place or resign reject appointment Safeguards include= not owning shares in clients= keeping staff off the audit team if they are connected with the client= not accepting gifts or hospitality if they would appear valuable to the outside world= ensuring clients accept responsibility for all management decisions even where the audit firm provides a lot of advice= not doing other non-audit work if it results in the audit work being undermined= not putting staff on the audit team if they have been employed by the client within the last 2 years= no ldquocontingency feesrdquo - ie fees that are dependent on the result of the audit work

= rotate audit staff to ensure nobody works on the same audit so many years in a row that they might become close to the client (Note ndash on Listed clients the engagement partner must be changed at least every 5 years)= for any client where there is high risk or a potential ethical threat review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review)

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY

CONFIDENTIALITY

bull There are a small number of situations where auditors may decide or may be forced by law to pass client information to a 3rd Party

bull Information must be disclosed ifndash = client is suspected of money launderingndash = client is suspected of terrorismndash = client is suspected of treasonndash = the ACCA are investigating your workndash = a court order is obtained requiring you to disclose

bull An auditor MAY decide to disclose information ifndash = client gives permissionndash = the auditor feels it is in the public interest to know

• Chapter 2
• Duties
• RIGHTS AND DUTIES
• General Principles of an Audit Professional Ethics
• 2
• 3
• Quality Control
• When the external auditor leaves
• Auditor Responsibilities
• FUNDAMENTAL ETHICAL PRINCIPLES
• ETHICAL STANDARDS
• Sources of regulation
• International Standards on Auditing (ISAs)
• 1048707 International Standards on Auditing (ISAs)
• Other IFAC and IAASB activities
• National Regulatory bodies
• The Audit Requirement
• THREATS TO OBJECTIVITY
• 2 (2)
• 3 (2)
• MANAGING ETHICAL THREATS
• CONFIDENTIALITY