Professional Ethics
Ethics - doing the right thing, the right way
IFAC is the international body responsible for issuing a Code of Ethics.
ACCA as a professional body that has implemented the same Code of Ethics for consistency.
• Why auditors need to be ethical?
Stakeholders rely on the audit report and opinion, so it must be objective and independent
• Why codes / guidelines and not rules?
Rules cannot define each and every situation will try to find loopholes. So, for that reason Code
of Conduct is given. Auditors need to appear to be independent
PwC 1
Fundamental Principles of Ethical
Behavior
PICOP
Professional competence and due care
Members should ensure that they have the skills and professional knowledge to complete each
assignment to a sufficiently competent level. If there is insufficient knowledge/skill, the member
should not carry out the assignment or they should take alternative steps to allow them to
complete the assignment such as training.
Due care is when member should ensure that they exercise diligence in accordance with
applicable technical and professional standards when providing services.
Integrity
Members should be straightforward, honest, truthful and fair in all professional and business
relationships.
Confidentiality
Members must refrain from disclosing any information acquired because of their
professional/business relationship to any parties outside their firm unless there is proper and
specific authority or unless there is a legal or professional obligation to do so.
PwC 2
Fundamental Principles of Ethical
Behavior
Objectivity
Members should not compromise their professional or business judgement by introducing bias,
conflict of interest or undue influence by others.
Professional behaviour
Members should comply with laws and regulations and ensure that they avoid actions that may
discredit the profession.
PwC 3
Conflict of interest:
Conflict of interest is a situation in which the professional accountants cannot make a fair
decision because they will be affected by the result.
If an auditor audits two competitors in the same industry, then,
The firm should ensure no conflict of interest may arise by implementing the safeguards
• Advice both the clients of the possible conflict of interest,
• Have separate teams with different engagement partner and team,
• Procedures to prevent access to information - confidential secure data filing,
• Clear guidelines for the member of each audit team on issues of security and confidentiality
- these will be included as part of the engagement letter,
• Confidentiality agreements signed by both member and partner of the audit team,
• Advise the client to seeks independent professional advice,
• Review of the safeguards on a regular basis by an independent quality reviewer.
If safeguards will not reduce the conflict of interest to an acceptable level, the auditor should not
accept the engagement or resign from one
PwC 4
Independence
Independence of mind - When the auditor
Independence of appearance / behavior - A
doesn’t have any undue influence over the
reasonable third party should be concluding
judgements that is made.
that the auditor is independent of the client.
PwC 5
Threats to the Fundamental Principles
Intimidation Self interest
Familiarity Self
review
Advocacy
What are safeguards?
Ethical principles must be considered when:
These are measures to reduce threats
If in a scenario where there are no safeguards Accepting new audit client
1
to threats available - Politely Decline
Auditors' responsibility with regards to
2 Acting for an existing audit client
threats:
The firm must establish procedures to guard Change in circumstances of auditor
against threats : 3 or the client
Identify possible threats,
4 Planning of audit
Evaluate the risks arising from the threats
Evaluate whether necessary 5 Completion of audit
safeguards are in place
Take corrective action if necessary
PwC 6
Sample Exam scenarios :
THREATS SAFEGUARDS
OWNING SHARES
The audit team member or their immediate
family owning shares in the audit client
This indicates that the firm or the member
of the assurance team has a financial
interest in the client and thus gives rise to a
LOANS
A loan will not create a threat to the firm if it The firm or the member of the audit team can
is on commercial terms and made in accept the loan as far as it is not material and it
normal course of the business. is under the normal course of the business.
If material, the firm should carry out a second
partners review - quality review.
PwC 7
Sample Exam scenarios :
THREATS SAFEGUARDS
PURCHASING FROM THE CLIENT
The member of the team purchasing goods
from the client.
There is no threat to independence if the
purchase is being carried as a normal
transaction at arm’s length basis.
If the transaction is not on a normal basis,
then this creates a
GIFTS AND HOSPITALITY
Accepting gifts or hospitality from an audit
client.
This will create a
PwC 8
Sample Exam scenarios :
THREATS SAFEGUARDS
LONG ASSOCIATION
The engagement partner being with the Rotate the audit partner and the member of the
audit client for 12 years. audit team.
This gives rise to familiarity threat Listed clients:
• The audit partner can stay for 7 years and
then should cool off for 5 years
• In the 5 years gap period, not participate in
the auditor, provide quality control for the
engagement, or consult with the
engagement team or the client regarding
technical or industry-specific issues
EQR: Maximum 7 years 3 years cooling off
period
In a non-listed client, there is no statutory
regulation as to when the member of the partner
of the audit client should be rotated but to
reduce the threat, it is advisable to rotate the
partner and the member of the team.
PwC 9
Sample Exam scenarios :
PERSONAL RELATIONSHIP
Family and personal relationships between The member with personal relations with the
a member of team and a director of the client should be removed from team if the
client or any employee of the client who is relationship is with a senior person at the client
able to exert significant influence over the with influence over the f/s.
subject matter.
This gives rise to
PwC 10
Sample Exam scenarios :
THREATS SAFEGUARDS
OTHER SERVICES
Audit firm providing non-audit services If it is a listed client, non-audit service cannot
such as bookkeeping & accounting, internal be provided as it is a financial service and will
audit services, taxation services impact the financial statements.
This gives rise to a
If it is a non-listed client, audit firm should
ensure two separate teams are performing the
audit and non-audit services.
REPRESENTING CLIENT The audit firm must not represent the client in
any situation if the audit client has asked to do
The audit client wants the audit firm to so especially if the amounts are material
represent them in a dispute with the
regulatory authorities. If the court or any other regulators have asked to
speak about an audit client of the firm then the
This gives rise to advocacy threat. audit firm has the right to disclose the client’s
information to the regulators or authorities.
(confidentiality)
PwC 11
Sample Exam scenarios :
The total fees from an audit client represent In a listed company or non-listed company, the
a large proportion of a firm's total income audit fee must not represent more than 15% of
the total firm’s fee income for two consecutive
This gives rise to years
Mandatory Safeguards
• Discuss with client’s TCWG about the
fee income
• Independent QCR or external QCR before
OR after issuing 2nd year’s opinion to ensure
that the audit firm has implemented the
required safeguards.
• Consider resignation if the threat can’t
be reduced to an acceptable level
PwC 12
Sample Exam scenarios :
THREATS SAFEGUARDS
OVERDUE FEES
The audit firm has not received the fee of The firm should take steps to make sure the fees
last year from the audit client are paid before the audit report is handed over.
This gives rise to self-interest threat. The firm should avoid providing services for
the current year till the outstanding fees are
paid or have arrangements with client about
payment.
Have a second partner review to ensure that the
audit firm is not providing the services to the
audit client before the collection of the fees.
CONTINGENT FEES
The auditor would have incentive to ensure
a particular outcome is achieved in order
to maximise the audit fee.
E.g. overlook audit adjustments that would
reduce profit if the fee is a percentage of
the profit.
This will give rise to a self-interest threat as
the audit firm will have an interest to
increase the firm’s income by manipulating
the profit.
AUDIT FIRM MEMBER JOINS THE CLIENT
The member of the firm joins as finance The team member should be changed in such
director with the client that the finance director is not familiar with any of
the member.
This gives rise to familiarity, self - interest
and intimidation threat. The audit plan should be reviewed and revised.
PwC 13
Sample Exam scenarios :
THREATS SAFEGUARDS
PERSONNEL AT CLIENT JOINS THE
FIRM
Director or employee of the client in a
position to exert influence over FS
becomes an employee of the audit firm
This will give rise to self-review and
familiarity threat.
PwC 14
Section B: Past Question
You are an audit manager of Pink Partners & Co (Pink) and are planning the audit of Golden
Finance Co (Golden), a banking institution which provides a range of financial services including
loans. Your firm has audited Golden for four years and the company’s year-end is 30 September
2015.
At the end of August, Goldens financial controller left, and the new replacement is not due to start
until approximately two months after the year end. The finance director, who is the sister-in-law of
the audit engagement partner, has asked if a member of the audit team can be seconded to
Golden for three months to act as the temporary financial controller.
You are aware that a number of the audit team members currently bank with Golden, and two
team members have significant loans owing to the company. Pink’s taxation department also
provides services to Golden. They have been approached by Golden to represent them in
negotiations to resolve some outstanding issues with the taxation authorities, for which the fees
quoted are substantial.
The finance director has informed the audit engagement partner that when the audit is complete,
she would like the whole team to attend an evening watching the national football team play a
match followed by a luxury meal.
Required:
Using the information above:
i. Identify and explain FIVE ethical threats which may affect the independence of Pink
Partners & Co’s audit of Golden Finance Co; and
ii. For each threat, explain how it might be reduced to an acceptable level.
Note: The total marks will be split equally between each part.
(10 marks)
PwC 15
