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Lecture 5
Professional Ethics and Codes
of Conduct
Fundamental principles
The application of professional ethics
The law regulates some aspects of auditing, to a
degree. Company law regulates the requirement
for external auditing, but internal auditing is not
normally subject to statutory regulation
However, all accountants who are members of a
professional body are required to comply with a
code of ethics and regulations of that professional
body
Such professional regulations therefore apply to
both external auditors and assurance providers
and internal auditors
In providing a code of ethics, the professional
body is complying with one of its regulatory
Fundamental principles
Code of ethics and conduct
Integrity
Objectivity
Professional competence
and due care
Confidentiality
Professional behaviour
Integrity
Members shall be
straightforward and honest in
all professional and business
relationships
Integrity implies not just
honesty but also fair dealing
and truthfulness
Objectivity
Members should not allow bias, conflicts of
interest or undue influence of others to
override their professional or business
judgements
The auditor must remain impartial and
independent of management, so that he can
give an objective opinion on the financial
statements of an entity
The onus is always on the auditor not only to
be ethical but also to be seen to be ethical
Professional Competence
Members have a duty to maintain their
professional knowledge and skill at
such a level that a client or employer
receives a competent service, based
on current developments in practice,
legislation and techniques
Members should act diligently and in
accordance with applicable technical
and professional standards
Confidentiality
Members should respect the confidentiality
of information acquired as a result of
professional and business relationships and
should not disclose such information to third
parties without authority or unless there is a
legal or professional right or duty to disclose
Confidential information acquired as a result
of professional and business relationships
should not be used for the personal
advantage of members or third parties.
Professional Behaviour
Members should comply with
relevant laws and regulations and
should avoid any action which
discredits the profession
They should behave with courtesy
and consideration towards all with
whom they come into contact in a
professional capacity
Disciplinary regime
Members of a professional body are
required to follow proper standards
of professional conduct
The professional body takes
disciplinary action against members,
firms and students where there is
evidence of a sufficiently serious
failure to observe those standards.
Conceptual framework
The application of the fundamental
principles set out above is considered
within a conceptual framework
This framework acknowledges that
these principles may be threatened by a
broad range of circumstances
This approach identifies the following
five potential categories of threats to
the fundamental principles
Threats
Safeguards
Safeguards which may remove or
reduce threats to members fall into
three categories:
safeguards created by the profession,
legislation or regulation
safeguards in the work environment
safeguards created by the individual
Confidentiality
Duty of confidentiality
One of the reasons for this requirement for
auditors is that auditors need to obtain full
and open disclosure of information from a
client in order to carry out their duties. If
the client cannot be assured of the
confidentiality of this information, he may
be unwilling to provide the auditors with
all the information that they need
Conflicts of Interest
Conflicts between Members and Clients
Conflicts of Interest
Conflicts between Competing Clients
An firm might act for two clients that are in
direct competition with each other
The firm has a professional duty of
confidentiality, and so will not disclose
confidential information about one client
company to its competitor
Again, the test is whether a reasonable
and informed third party would consider
the conflict of interest as likely to affect the
judgement of the firm
establish if the financial reporting framework to be used in the preparation of the financial
statements is acceptable
obtain the agreement of management that it acknowledges and understands its
responsibility:
for the preparation of the financial statements
for internal controls to ensure that the financial statements are not materially misstated
to provide the auditor with all relevant and requested information and unrestricted
access to all personnel
The auditor is required to refuse the engagement where:
Recurring audits
The engagement letter issued on the initial
appointment as auditors may state that its
provisions will apply to all future annual
audits, until it is revised
However, ISA 210 requires the auditor,
for recurring audits, to assess whether:
circumstances mean that the terms of
engagement need to be revised
management need to be reminded of the
existing terms of the engagement