Chapter 2

Audit ethics and

Regulations
Prepared by omnia hassan
 Duties
• Auditor duties are also typically set by government, so will vary by country.
• Typical duties:
= to issue an audit report, giving opinions on:
• truth and fairness of the Financial Statements
• whether the Financial Statements are properly prepared (within national rules)
• any other opinions required by government, e.g.:
– whether proper accounting records kept
– 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.
• Duties of an Auditor
a) Duties of auditor are:
– i) To give a report to the members on the accounts, books of account, balance sheet and profit and loss
account examined by him.
– 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 position.
– iii) To include in the report of the company such matters as directed by the Federal Government.
– 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 considered.
b) 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 up.
e) To exercise reasonable care and skill in carrying out his duties and make such inquiries as considered
necessary.
 RIGHTS AND DUTIES
• Rights; Auditors are usually given rights within national law, to help ensure they can do
their job properly.
• Rights will vary between countries, as they are set by government.
• Typical rights include:
= access to all books and records
= access to all information and explanations
= the right to:
– be given notice of a general meeting
– attend the general meeting
– 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.
• Powers/Rights of an Auditor :
i) Right of access to books of account and vouchers .
ii) Right to receive information and explanations.
iii) 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 Audit:
Professional Ethics
• 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.
• It is important to recognize that many groups in society
rely on accountant’s work, not just the shareholders on
whose behalf the accountant is working. The
accountant therefore has a public accountability.
 2
• In the light of this, ethical guidelines emphasis the following key points about the
characteristics of accountants:
• a) Independence: Auditor is independent of management i.e. he is not under the control or
influence of management.
• b) Integrity: Auditor is honest and is not corrupt. He is straight forward in performing his
professional work
• 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 opinion.
• 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.
• 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.
• 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.
• g) Technical Standards: Audit should be performed by following certain standards, international
or national.
 3
• 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.
• 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.
• 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.
 Quality Control
• Quality control is partly achieved by having
audit standards to follow (for example ISA 220
‘Quality Control for an Audit of Financial
Statements’) however it is all achieved by the
RSBs (e.g. ACCA) checking the audit work of
their members, and handling complaints.
• The RSBs also have rules to ensure their
members are keeping up to date with
technical changes.
When the external auditor leaves...
• 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.
• Sometimes the Board of Directors, or some shareholders, may wish to REMOVE a Firm
of auditors before the annual vote at the AGM.
• A General Meeting will need to be called so that the shareholders can vote on this
proposal.
• Sometimes the auditors finish the annual audit and decide they do not wish to audit the
company in future years – 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.
• 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 Responsibilities
• 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.
• By doing this, they are more likely to spot breaches, even if management do not tell
them (or are themselves not aware).
• 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 (e.g.
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 Statements
– 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 company’s going concern status
• = In some cases, a breach may have external reporting consequences
 FUNDAMENTAL ETHICAL PRINCIPLES
• Ethics is concerned with behaviour, and trying to ensure that auditors do “the right
thing” ... whatever that is!
• 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.
• 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.
• 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!
• 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 – and to try to create
some consistency in guidance around the World.
• 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 STANDARDS
• Professional Ethics
• 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.
• It is important to recognize that many groups in society rely on accountant’s work, not just the shareholders on
whose behalf the accountant is working. The accountant therefore has a public accountability.
• In the light of this, ISA’s ethical guidelines emphasis the following key points about the Characteristics of
accountants:
• a) Independence: Auditor is independent of management i.e. he is not under the control or influence of
Management.
• b) Integrity: Auditor is honest and is not corrupt. He is straight forward in performing his professional work
• 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 opinion.
• 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.
• 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.
• 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.
• g) Technical Standards: Audit should be performed by following certain standards, international or national.
 Sources of regulation:

• 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.
• The ACCA rules are now fundamentally the same as those of IFAC. They give
fundamental principles and specific guidance statements.
• The Code of ethics and conduct applies to members, affiliates and students of
the ACCA.
• International Auditing & Assurance Standards Board:
• A subsidiary of IFAC.
• Sets ISAs(currently 30 standards)
• Issue International Standards on quality control (ISQCI) [these are quality
control principles for all assurance engagements conducted under its standards
including audits)
• Issue standards for other types of assurance engagements in addition to audits
 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
• 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.
• 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.
 􀂃 International Standards on Auditing (ISAs).

• 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:

• IFAC publishes a code of ethics governing all assurance engagements carried out
• IAASB publishes international standard on quality control,(ISQCI) setting out
quality control principles for all assurance engagements (including audits)
conducted
• Under its standards.
• IAASB sets standards for other types of assurance engagement in addition to
audits.
•  
• The relationship between International & National standards and regulation, the
IFAC has no legal Standing in individual countries. Countries therefore need to
have arrangements in place for:
• Regulating the audit profession (self regulation by Audit accountancy Profession
or government/independent body setup by government.)
• Implementing auditing standards.
 National Regulatory bodies:

• Usually, it is the work of National Bodies:

• Enforce the implementation of auditing/accountancy
profession.
• Have disciplinary powers to enforce quality of audit work.
• Have right to inspect audit files to monitor audit quality.

• There are two possible schemes for regulation at the national

level:
• Self regulation by the audit/accountancy profession.
• Regulation by government or by some independent body set up
by government for the purpose.
 The Audit Requirement
• 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.
• • 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.
 
• Auditor's duties
• Form an opinion on whether FS give a true & fair view and prepared in accordance with
applicable reporting framework
• Issue an Audit Report on the above
• To do so auditors need the following:-
– Receive proper returns from branches not visited
– Ensure that CO's FS agree with underlying accounting records
– Proper accounting records are kept
– All Info & explanations obtained
– Info with FS agree with them (Consistency)
– Info required by law and not in FS included in auditor's report (called exception reporting)
– The first 5 points will not be included in the audit report unless there is a problem
 THREATS TO OBJECTIVITY
• = Self-Interest; The threat that auditors act in their own
personal interests (or are believed to be doing so). Examples
include:
• = owning shares in their client
• = receiving excessive gifts or hospitality from clients
• = receiving excessive fees from a single client
• = Self – Review; The threat that if auditors do certain tasks for
clients, their audit work may result in checking their own work.
Examples:
• = giving advice on accounting or control systems, then auditing them
• = preparing the accounting information, then auditing it
• = helping with calculations of numbers in the Financial Statements, then
auditing them.
 2
• = 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:
• = auditing companies where the auditor's relatives or friends work
• = auditing the same company for many years in a row
• = if a client is offering a lot of hospitality, this may be a clue that there is too close a
relationship with the auditor
• = Advocacy; The threat caused when auditors are asked to do other
work that means they are taking their client's position on something.
By taking this position, they may be seen to be “on the client's side”,
rather than being independent. Examples include:
• = representing an audit client in a legal case or tax enquiry
• = taking legal action against a client, or being sued by a client.
 3
• = 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 –
rather than the auditor is being nice to their client out
of their own choice.
• = 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 THREATS
• 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 “contingency fees” - i.e. 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 – 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

• 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.
• Information must be disclosed if:
– = client is suspected of money laundering
– = client is suspected of terrorism
– = client is suspected of treason
– = the ACCA are investigating your work
– = a court order is obtained requiring you to disclose.
• An auditor MAY decide to disclose information if:
– = client gives permission
– = the auditor feels it is in the public interest to know.