Professional Ethics

AUDIT AND
ASSURANCE

Chapter 4

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4-1

 Learning Objective 1

Distinguish ethical from unethical

behavior in personal and
professional contexts.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4-2

 What Are Ethics?

Ethics can be defined broadly as

a set of moral principles or values.

Each of us has such a set of values.

We may or may not have considered

them explicitly.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4-3

 Need for ethics?

It is common for people to differ in their moral principles and

values and the relative importance they attach to these
principles. These differences reflect life experiences, successes
and failures, as well as the influences of parents, teachers, and
friends.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4-4

 Need for ethics?

Ethical behavior is necessary for a society to function in an orderly manner.

It can be argued that ethics is the glue that holds a society together. Imagine,
for example, what would happen if we couldn’t depend on the people we deal
with to be honest. If parents, teachers, employers, siblings, coworkers, and
friends all consistently lied, it would be almost impossible to have effective
communication. The need for ethics in society is sufficiently important that
many commonly held ethical values are incorporated into laws.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4-5

 Need for Ethics?

Ethical behavior is necessary for a society

to function in an orderly manner.

The need for ethics in society is sufficiently

important that many commonly held
ethical values are incorporated into laws.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4-6

 Illustrative Prescribed
Ethical Principles

Trustworthiness Respect

Responsibility Fairness

Caring Citizenship

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 Why People Act Unethically

The person’s ethical standards are different

from those of society as a whole.

The person chooses to act selfishly.

In many instances, both reasons exist.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4-8

 People ethical standard differ from
general society
Extreme examples of people whose behavior violates almost
everyone’s ethical standards are drug dealers, bank robbers, and
larcenists. Most people who commit such acts feel no remorse when
they are apprehended because their ethical standards differ from
those of society as a whole.

There are also many far less extreme examples when others violate
our ethical values. When people cheat on their tax returns, treat other
people with hostility, lie on resumes and employment applications, or
perform below their competence level as employees, most of us
regard that as unethical behavior. If the other person has decided
that this behavior is ethical and acceptable, there is a conflict of
ethical values that is unlikely to be resolved.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4-9

 A Person Chooses to
Act Selfishly – Example
Person A finds a briefcase containing important
papers and $1,000.

He tosses the briefcase and keeps the money.

He brags to his friends about his good fortune.

This action probably differs from most of society.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 10

 A Person Chooses to
Act Selfishly – Example
Person B faces the same situation but
responds differently.

He keeps the money but leaves the briefcase.

He tells nobody and spends the money.

He has violated his own ethical standards

and chose to act selfishly.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 11
 Learning Objective 2

Resolve ethical dilemmas using

an ethical framework.

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 Ethical Dilemmas

An ethical dilemma is a situation a person

faces in which a decision must be made
about appropriate behavior.

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 Rationalizing
Unethical Behavior

Everybody does it.

If it’s legal, it’s ethical.

Likelihood of discovery and consequences

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 14

 Resolving Ethical Dilemmas

1. Obtain the relevant facts.

2. Identify the ethical issues from the facts.

3. Determine who is affected.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 15

 Resolving Ethical Dilemmas

4. Identify the alternatives available to the

person who must resolve the dilemma.

5. Identify the likely consequence of each

alternative.

6. Decide the appropriate action.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 16

 Relevant Facts

A staff person has been informed that

he will work hours without recording
them as hours worked.

Firm policy prohibits this practice.

Another staff person has stated that

this is common practice in the firm.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 17

 Ethical Issue

Is it ethical for the staff person to work hours and

not record them as hours worked in this situation?

Who is affected? How are they affected?

What alternatives does the staff person have?

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 18

 PRACTICE
QUESTIONS
Ethical dilemma
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 Fundamentals principles of code
of Professional Ethics
1. Integrity:
Members should perform all responsibilities
with integrity to maintain public confidence.

2. Objectivity and independence:

Members should be objective, independent, and free of
conflicts of interest. Members should not allow bias,
conflicts of interest or undue influence of others to
override their professional or business judgments.
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 20
 Ethical Principles

3. Professional competence and Due care:

Members should observe the profession’s
standards and strive to improve 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.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 21

 Ethical Principles
4. 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.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 22

5. Professional Behavior:

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.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 23

 The conceptual framework
Self interest:
threat (for example, if the auditor earns a large
proportion of his revenue from a particular client,
he may be unwilling to upset that client by issuing
an unfavorable audit report).

Self Review:
threat (for example, if the auditor performs accountancy
work for a client in addition to the audit, he may find
himself in a situation where he is reviewing his own work
and may therefore not be as critical of it as he might be
if he was reviewing someone else's work).
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 24
Advocacy Threat:
threat (for example, supporting the client in a legal case
may lead to a perceived loss of independence).

Familiarity Threat:
threat (for example, acting for a client for a long period
of time may mean that the auditor becomes less critical
of that client's reporting practices).
Intimidation:
threat (for example, a strong finance director may
intimidate junior members of the audit team and
persuade them not to report errors found during
their testing).
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 25
 INDEPENDENCE AND OBJECTIVITY
The main areas are:

· fees and pricing

· family and personal relationships
· close business relationships
· financial interests
· loans and guarantees
· employment or former employment with assurance clients
· long association of senior personnel with assurance clients
· provision of non-audit services
· gifts and hospitality
· Actual and threatened litigation.

©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder 4 - 26

 PRACTICE QUESTIONS

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