LECTURE TWO: PROFESSIONAL ETHICS AND INTERNATIONAL STANDARDS ON

AUDITING

Introduction
This lecture is aimed at providing the learner with basic knowledge of auditing one

2.1 Specific objectives:

At the end of the lecture you should be able:

Define and explain the professional ethics guiding auditors
Describe the qualities required by an auditor to be credible in his/her work
Discuss the standards of auditing

Lecture Outline

Title 2.3.1: Professional Ethics

Title 2.3.2: International Auditing Standards

Lecture
PROFESSIONAL ETHICS
These are the rules of conduct that govern the behaviour of an accountant. These are issued by
ICPAK.
The auditor gives credibility to financial statements and to do this he must be credible himself.
To be credible, the auditor must possess and be seen to possess certain qualities:
Integrity

Straightforward honest and sincere in his approach to his professional work. A member must be
aware of his role in the society and maintain high standards of conduct and should not certify
what he knows is untrue as true and should take caution not to mislead intentionally or
unintentionally.

Competence
He should carry out his work with due care and skill in conformity with professional and ethical
standard issued by ICPAK or the laws of Kenya. A member should not undertake or continue
professional work, which he himself is not competent to perform unless he obtains such advice
and assistance as will enable him to perform such work. To be competent a member should be
fully conversant with accounting bookkeeping, auditing, financial management, information
technology, receivership, liquidation and bankruptcy law, contract law, taxation both personal
and corporate and must be aware of the economic environment within which his clients operate.
To be competent, he must also possess sound judgement. This is in professional as well as
economic issues. He should be a good communicator.

Confidentiality
The guide to professional ethics states that information acquired in the course of professional
work should not be disclosed except consent has been acquired from clients employer or other
proper source or where there is public duty to disclose or where there is a legal or professional
duty or right to disclose.
A member acquiring information in the course of professional work should neither use nor
appear to use that information for his personal advantage or for the advantage of a third party.

Independence
The guide states that this is a fundamental concept to the accounting profession. It is essentially
an attitude of mind characterised by objectivity and integrity. A member in public practice
should be and should appear to be free in every professional assignment he undertakes of any
interest which might distract him from being objective. He must be impartial and must not allow
prejudice or bias to affect his judgement. A member not in practice may be unable to be or seen
to be free of any interest which might conflict with the proper approach to his professional work.
However this does not diminish his duty of objectivity in relation to that work.
Guidance of matters of Independence

Professional independence is considered to be crucial to the life of a professional accountant.

Therefore guidance is given on the best code of conduct in situations where the accountants
independence may be compromised or impaired.

Fees

It is undesirable for a practice to receive to significant a proportion of recurring fee income

from a client or a group of connected clients. A new or old practice in decline may be unable to
comply with the criteria. Therefore when an accountant finds himself with such a client he need
not resign immediately but should in the first instance look for opportunities to reduce the
significance of that client such as by looking for more work.
ii. Personal or family relationships
These relationships can impair independence. Therefore an accountant should take steps to
ensure family or personal relationships do not interfere with objectivity in approach to his work.

iii. Financial involvement with a client.

Beneficial shareholding: A partner in an accounting firm, spouse of such a partner and minor
children of such partners should not have beneficial shares in an audit client. If appointed as
auditor when possessing such shares the member should dispose of them at the earliest
opportunity. If the company’s articles of association require that the auditor has qualified shares
then the member should take minimum number allowed. The shares cannot be used by the
member in an annual general meeting to vote on the appointment of the auditor and his
remuneration.
Loans to and from client: An accounting firm should not accept loans from its clients or give
loans to clients. This includes guarantees. A firm may, however accept a loan from a client if it
is that clients’ ordinary course of business to give loans. Loans thereof should not be accepted
on terms more favourable than those available to others.
Goods and Services

Members should resist from accepting goods and services from the client on terms more
favourable to the generality of the client’s employees. Undue hospitality poses a similar threat to
a member’s independence.

Conflicts of interests.

Provision of other services to clients; A member should be alert to the danger posed to his
independence by providing accounting and other services which place him in an executive
position to his client. A member should use different staff for those services and also that the
client takes full responsibility for that work.
Competing clients in conflict; the member should frankly disclose to both parties and advice
them to choose another auditor and then disengage one of the appointments. However he can
also provide advice to resolve the conflict.
Receiverships and liquidation; If a company, a member is auditing goes into receivership, the
member should not accept an appointment as a receiver - manager unless at least two years have
elapsed. If there is a company which a member has been a receiver of and the receivership ends,
a member who has the receiver should not accept an appointment unless two years have elapsed.
A member who is a receiver of a company which goes into liquidation should not accept an
appointment as liquidation of that company.
Previous employment; A member who has been an employee of a company, having left that
employment should not accept appointment as an auditor of that company until at least 2 years
have elapsed.

Publicity Advertising and Obtaining Professional Work

Under the Accountancy Act, advertising is prohibited. Members of ICPAK resolved in 1997 to
permit advertising.

General Consideration
A member may seek to promote the services he/she offers through advertising or other means so
long as this is consistent with the dignity of the profession and it does not project an image
inconsistent with that of a professional person bound to high ethical and technical standards. A
member should use judgement in determining whether a course of action will be inconsistent or
not.

Advertising
An advertisement should not mislead through claims that are not substantial and must observe
strict standards as to legality, decency, clarity, honesty and truthfulness.
A member may advertise services subject to the general requirements that the media should not,
in the opinion of the council of the institute, reflect adversely on the member, the institute or
accountancy profession. The advertisement in itself should not;

As a content or presentation bring the institute into dispute or

discredit to the members, the firm or accountancy profession.
Discredit the services offered by other members, whether by proclaiming superiority for the
advertisers of the services or otherwise.
Contain comparisons with other members or firms.
Contain testimonies or endorsements.
Particular care should be exercised if references to size or quality are to
be included in the advertisement for example it is difficult to establish
whether a claim to be the largest firm is in reference to number of partners
or staff, or to offices or the amount of fees income.
A claim to be the best firm is subjective and not sustainable.

Although advertisement may refer to the bases on which fees are calculated and where they
contain any statements concerning the hourly rate charged by the firm, care should be taken to
avoid giving the impression that lower quality performance is provided than that expected from
professional persons.

Publicity
Publicity for members is accepted as long as it does not cast the institute and the accounting
profession into disrepute or project the member in any way that is inconsistent with the dignity
of the profession.

Solicitation
A member may contain or seek professional work by any direct approach to a prospective client.

Charging for professional work

Statement number 9 of ethical guidelines provides that fees for professional services should not
be charged on a percentage or similar benefit unless where that source is authorised by statute or
is a generally accepted practice for certain specialist’s work nor, should instructions be accepted
on a contingency basis for example a bonus of 5% on profits. The explanatory not amplifying
this statement states that:

The principle is that the independence of judgement of the member should not be impaired by
the hope of a financial gain. Therefore any basis of fees which may influence the practising
members judgement or findings or which may even subject him in the public eye to the suspicion
that his judgement was improperly influenced is to be extended. Therefore, fees should be
computed in reference to:

The skill and knowledge required for the type of work involved for example if the work required
an expert the fees would be higher.
The seniority of the person necessarily engaged in the work.
The time necessarily engaged on each person on the work.
Nature of responsibility, which the work entails.

INTERNATIONAL STANDARDS ON AUDITING

Within each country, local regulations govern to a greater or lesser degree, the practices followed
by the auditors. Such regulations may either be of a statutory nature of in the form of statements
issued by the regulatory or professional bodies in the country concerned.

National standards on auditing published in may countries differ in form and content.
International Auditing Practices Committee (IAPC) takes cognisance of such documents and
differences and in the light of such knowledge issues auditing standards which are intended for
international acceptance.

These standards:

a. Are applied in the audit of financial statements or to the audit of other information.
b. Contain basic principles and essential procedures together with related guidance in form
of explanatory and other material.
c. Have to be understood wholly and not in part so as to understand and apply them.
e. May be departed from in exceptional circumstance so as to more effectively achieve the
objective of an audit.

2.4 Activities
Activity 1:
Discuss the various professional values and ethics that guide auditors to practice

Activity 2
List and explain the advantages for an auditor to adopt professional values and
ethical code of conduct in their work

2.5 Self – Test Questions

Question One:

In additions to the guidelines issued by ICPAK on professional independence,

suggest other steps that may be undertaken to improve auditors’ independence.

Question Two

Discuss the two levels of auditor’s independence and explain their significance
2.6 Summary

In this lecture you have learnt that:

i. Professional ethics are rules of conduct that govern the behaviour of
an accountant
ii. Discuss the importance of International Standards on auditing

2.7 Suggestion for further reading

Students are recommended to do further reading on the following;
i. How to safeguard auditors independence
ii. How an auditor can avoid possible conflict of interest