AUDITING -AFU 07305

AUDITING PRINCIPLES AND QUALITIES OF

AN AUDITOR

LECTURE 2

Dr. Mwiga Wiljonsi Mbesi

 Professional ethics

 Professional ethics: Are behavioural aspects established to guide the activities

of a certain profession.

 Professional ethics sets standards of conduct for professional accountants

(Auditors) and states the fundamental principles that should be observed by
professional auditors in order to achieve common objectives

 Are code of ethics, detailed rules, guidelines, standard of conducts that

provide guidance, encouragement of efforts, and promoting harmonisation of
best practices.

 The ISA describes the basic principles, which govern the auditor's professional
responsibilities and which should be complied with whenever an audit is
carried out.
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 Cont…..

 Auditing like any other profession is distinguished by certain characteristics

including:-

 Mastery of a particular intellectual skills, acquired by training and

education

 Adherence by its members to a common code of values and conduct

established by its administering body e.g NBAA, ACCA, CIMA,ERB
etc

 Acceptance of duties to the society as a whole

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 Fundamental principles and code of
conduct
 Integrity : The auditor should be straight forward and honest in performing professional
services. It implies not merely honesty but fair dealing and truthfulness

 Objectivity : It means non-allignment, open minded, neutrality, attitude of fairness,

balanced or maintain impartial attitude.

 Independence :
 The auditor should be fair and should no follow prejudice or bias,
conflict of interest or influence of others to override objectivity.
 Members should not allow bias, conflicts of interest or undue
influence of others to override professional or business judgements

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 Cont…..

 Professional competence and due care:

 The auditor should perform professional services with due care,
competence and diligence.

 To ensure that a client receives the advantage of competent

professional services based on up date developments in practice,
registration and techniques.

 And has a duty to maintain professional knowledge and skill at a level

required.

 Members should act diligently and in accordance with applicable

technical and professional standards when providing professional
services
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 Cont…..
 Confidentiality:
 The auditor should respect the confidentiality of information acquired during
the course of performing professional services

 And should not disclose such information without proper and specific
authority

 Confidential information acquired as a result of professional and business

relationships should not be used for the personal advantage of members or
third parties

 The Client- Auditor relationship is like a Patient – Doctor relationship and

therefore should be treated with great confidentiality

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 Cont…..

 Professional behaviour and judgement:

 The auditor should avoid any conduct, which might bring discredit to the
profession.

 Technical standard:
 The auditor should carry out professional services in accordance with
relevant technical and professional standards. E.g standard of fieldwork
and standard of reporting

 Accountability:
 Auditors should carry their work regarding the public interest and not
their interest
 Responsibilities to the client and other third parties

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 Qualities of an Auditor
A professional auditor should possess minimum of the following qualities:-
 Independent:
 An auditor should not only be independent but also must be seen to be
independent
 Independence is an attitude of mind characterised by integrity and an
objective approach to professional work
 Integrity
 Honest
 Strong character
 Reasonable skill, care and caution
 Professionally competent

 Objectivity

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 Independence Threats
The independence and objectivity of an auditor can be threatened or impaired in
the following forms:-
 Self-interest; This may arise as a result of the financial or other interests of members (auditors) or
of immediate or close family. It may take the form of:-
 Financial interest e.g an audit firm owns shares in the client or is a trustee of a trust that
holds shares in the client

 Close business relationships e.g. when the audit firm and an audit client have an
inappropriate close business relationship.

 Employment with assurance clients

 Partner on client board

 Family and personal relationships

 Gifts and hospitality- do not accept if the value is clearly significant

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 Cont………
 Loans and guarantees

 Overdue fees- this constitutes a loan to the client

 Percentage of contingent fees

 High percentage of fees

 Lowballing –where a firm quotes a significantly lower fees for an assurance

service than would have been by the predecessor firm, there is a significant
self-review threat.

 Recruitment

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 Cont………

Possible Safeguards available:

 To end the assurance provision or terminate the other business relationship

 Disposing of the interest

 Removing the individual from the team

 Keeping the client’s audit committee informed of the situation

 Using an independent partner to review the work carried out if necessary

 Making disclosures to the audit committee about the fees (in case of contingent fees)

 Taking steps to reduce the dependency on the client (in case of high % of fees)
 Complying with all applicable assurance standards, guidelines and quality control
procedures

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 Cont………
 Self-review threat: This threat may occur when a previous judgement needs to be
evaluated by members (Auditors) responsible for that judgement. The key area in which
there is likely to be a self-review threat is where a firm provides services other than
assurance services to an assurance client (providing multiple services). Circumstances that
may give rise to this type of threat include:-
 Internal audit services

 Tax services

 Valuation services

 Preparing accounting records and financial statements

 General other services

 General other services

 Recent service with assurance client

 Corporate finance

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 Cont………

The safeguards available may include:-

 Discussing the issue with the audit committee

 Involving an independent professional accountant to advise

 Obtaining client approval for work undertaken

 Using separate personnel for the valuation and audit (in case of valuation services

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 Cont………
Advocacy threat: This threats arise in those situations where the assurance firm promotes
a position or opinion to the point that subsequent objectivity is compromised. E.g.:-
 Acting as an advocate on behalf of an assurance client in litigation or disputes
with third parties;

 Commenting publicly on future events in particular circumstances, having

made assertions without detailing the assumptions.

 Advocacy threats might also arise if the firm promoted shares in a listed audit
client.

 The safeguards available may include

 The safeguards include might include using different departments to carry
out the work and making disclosures to the audit committee.

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 Cont………

 Familiarity threat:
 This threat occurs as result of close relationship, members become too
sympathetic to the interests of others. Therefore, there is a substantial risk of
loss of professional scepticism in such circumstances.

 These include situations where there are family and personal relationships
between the client and the firm, long association with a client, employment
with a client and recent service with a client.

 Safeguards available:
 Rotating the senior staff off the assurance team, obtaining second partner
reviews and independent quality control reviews

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 Cont………

 Intimidation threat
 Arises when members of the assurance team may be deterred from acting
objectively by threats, actual or perceived.

 These could arise from family and personal relationship, litigation, or close
business relationships.

 E.g when the client threatens to sue, or does sue, the assurance firm for work
that has been done previously. The firm is then faced with the risk of losing
the client, bad publicity and the possibility that it will be found to have been
negligent. This may lead to the firm being under pressure to produce an
unqualified report when it has been qualified in the past.

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 Cont………

 Safeguards available include:-

 Disclosing to the audit committee the nature and extent of the litigation

 Removing specific affected individuals from the engagement team

 Involving an additional professional accountant on the team to review work.

Note: if the litigation becomes so serious it may be necessary to resign from the
engagement, as the threat to independent is too great.

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 END OF PRESENTATION

THANK YOU FOR LISTENING

Dr. Mwiga Wiljonsi Mbesi 18