ETHICS

FUNDAMENTAL PRINCIPLES OF PROFESSIONAL ETHICS

Objectivity:

Members should not compromise their professional /business judgment by introducing bias,
conflicts of interest or undue influence by others

Professional behaviour:

Members should comply with relevant laws and regulations and ensure they avoid any action
that discredits the profession.

Professional competence and due care:

Members should maintain professional knowledge and skill at a level required to ensure that a
client or employer receives competent professional services based on current developments in
practice, legislation and techniques.

Due care includes Appling up-to date standards, Adhere to Ethical principles, Aware of terms
and conditions by law and engagement letter

Integrity:

Members should be straightforward honest and fair in all professional and business
relationships.

Confidentiality:

Members should not disclose any information acquired because of the professional or 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.
THREATS TO THE FUNDAMENTAL PRINCIPLES

INTIMIDATION THREAT

Actual or Perceived pressure from the client or attempts to exercise undue influence over the
assurance provider.

SELF INTEREST THREAT

Where the auditor has a financial or other interest that will inappropriately influence the
judgement or behaviour of the assurance provider.

SELF REVIEW THREAT

Where non -audit work is provided to an audit client (example: taxation, accounting) and is then
subject to audit, the auditor will be unlikely to admit to errors in their own work, or may not
identify the errors in their own work.

ADVOCAY THREAT

Promoting the position of the clients or representing them in some way would mean the audit
firm would seem to be taking sides with the client.

FAMILIARITY THREAT

When the auditor becomes too sympathetic or too trusting of a client and loses professional
scepticism, or where the relationship between the auditor and client goes beyond professional
boundaries.

SAFEGUARD

A safeguard is an action or measure that eliminates a threat, or reduces it to an acceptable

level. The ACCA Code of Ethics divides safeguards into two broad categories:

Safeguards created by the profession, legislation or regulation, these include: requirements for
entry into the profession, continuing professional development, corporate governance,
professional standards, monitoring and disciplinary procedures, etc.

Safeguards created by the work environment, these include: rotation/removal of relevant sta
from the engagement team, independent quality control reviews, using separate teams, etc.
INDEPENDENCE

Independence of mind – the state of mind that permits the expression of a conclusion without
being a ected by influences that compromise professional judgement.

CONFLICT OF INTEREST

A conflict of interest arises when the same audit firm is appointed for two companies that
interact with each other, for example: Companies which compete in the same market

A conflict of interest may create a threat to the fundamental principles of objectivity and
confidentiality.

It may be perceived that the auditor cannot provide objective services and advice to a company
where it also audits a competitor.

 Notify both the clients

 Obtain consent from both the companies
 Use separate teams
 Prevent access to information by teams
 Confidentiality agreements and guidelines
 Review of safeguard by independent senior
 If the threats can’t be reduced, do a commercial judgement and retain big client and
give away smaller one

CONFIDENTIALITY

OBLIGATORY RESPONSIBILITY

This is the responsibility of the auditor to disclose the information to third party as they have a
duty to disclose the information under the following situations:

• There is an obligation to do so (money laundering)

• Legally required by the court of law.
VOLUNTARY RESPONSIBILITY

Under this responsibility, the auditors have the right to disclose but it depends on the auditor as
to whether do they want to disclose the information to third parties.

• Client has given permission

• To protect members of firm’s interest (in a court case for disciplinary hearing)

• Authorised by law

• In public interest (board of directors being involved in any fraudulent activity)

METHODS OF ACCEPTING NEW CLIENTS

ADVERTISING

CLIENT REQUESTS

TENDERING

STEPS TAKEN TO OBTAIN A NEW AUDIT ENGAGEMENT

Client screening:

PROFESSIONAL CLEARANCE

 Ask the client for permission to contact the existing auditor (and refuse the engagement
if the client refuses).
 Contact the outgoing auditor, asking for all information relevant to the decision whether
or not to accept appointment (e.g. overdue fees, disagreements with management,
breaches of laws & regulations).
 consider the outgoing firm's response and assess if there are any ethical or professional
reasons why they should not accept appointment.

Independence and objectivity

If the assurance provider is aware, prior to accepting an engagement, that the threats to
objectivity cannot be managed to an acceptable level, the engagement should not be accepted.

Management integrity

If the firm has reason to believe the client lacks integrity there is a greater risk of fraud and
intimidation.

Money laundering (client due diligence)

If there is any suspicion of money laundering, or actual money laundering committed by the
prospective client, the firm cannot accept the engagement.
Resources

The firm should consider whether there are adequate resources available at the time the
engagement is likely to take place to perform the work properly.

Risk

Any risks identified with the prospective client (e.g. poor performance, poor controls, unusual
transactions) should be considered.

Fees

The firm should consider the acceptability of the fee. The fee should be reflect with the level of
risk. In addition, the creditworthiness of the prospective client should be considered as non-
payment of fees can create a self-interest threat

Professional competence

An engagement should only be accepted if the audit firm has the necessary skill and experience
to perform the work competently.

Reputation of the client

The audit firm should consider the reputation of the client and whether its own reputation could
be damaged by association.

Preconditions for an audit

Auditor should accept an agreement only if the preconditions of the audit exist. ISA requires the

auditors to:

Determine whether the financial reporting framework used in the financial statement is
acceptable

Obtain agreement from the management that it acknowledges and understand its
responsibility for the following;

- Preparing the FS in line with the financial reporting framework

- Internal controls are free from material misstatements
- Providing the auditor with access to information relevant for the audit and access to
sta
ENGAGEMENT LETTER

The engagement letter is a contract between the client and the audit firm which specifies the
nature of the contract. The purpose of the engagement letter is to

• Minimise the risk of any misunderstanding between the practitioner and client

• Confirm acceptance of the engagement

• Set out the terms and conditions of the engagement.

The engagement letter should be reviewed every year to ensure that it is up to date but does not
need to be reissued every year unless there are changes to the terms of the engagement.

Reasons for changes would include:

• Changes to statutory duties due to new legislation

• Changes to professional duties, for example, due to new or updated ISAs

• Changes to other services as requested by the client.

LOE should be signed by the client and auditor prior to the commencement of the audit.

CONTENTS OF THE ENGAGEMENT LETTER

• The objective and scope of the audit of the financial statements

• The responsibilities of the auditor
• The responsibilities of management
• Identification of the applicable financial reporting framework for the preparation of the
financial statements
• Reference to the expected content of any reports to be issued by the auditor
• Reference to professional standards, regulations and legislation applicable to the audit
• Limitations of an audit
• Expectation that management will provide written representations
• Basis on which the fees are calculated
• Agreement of management to notify the auditor of subsequent events after the auditor's
report is signed
• Agreement of management to provide draft financial statements in time to allow the
audit to be completed by the deadline
• Form (and timing) of any other communication during the audit.
• Arrangements concerning the involvement of internal auditors and other sta of the
entity Limitations to the auditor’s liability.