CAUA 3751 – AUDITING 1A

Lecture 2

Topic and Reference:

PROFESSIONAL CONDUCT

Auditing Notes - Jackson & Stent

Chapter 2

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 Topics

➢ Introduction, Professional Conduct & Ethics

➢ The IFAC Code of Ethics
• Part A, General application of the Code
• Part B, Chartered Accountants in Public Practice
• Part C, Chartered Accountants in business

➢ Professional Conduct
➢ Disciplinary Rules

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 Professional Conduct
• Ethics
• A set of principles or morals (right or wrong); rules of conduct
• Importance of ethics to the Profession

• One set of rules (rule-based) is not possible

• Differences in race, religion, culture
• Conceptual framework approach is best
• Appropriate evaluation of, and response to, situations that may
threaten independence
• Four questions to ask yourself??? If YES, decision is correct
• Decision honest and trustful
• In making decision, will I be acting in a way that I like others to treat
me
• Will decision build goodwill (result in greatest good for the greater
number?)
• Would I feel comfortable explaining decision to others, I respect for
moral values? 3
 Professional Conduct

• The IFAC Code of Ethics

• With effect 30 June 2006, SAICA adopted IFAC Code of Ethics
• Part A (Sec 100 – 150)
• General application of the Code
• Part B (Sec 200 – 290)
• Chartered Accountants in Public Practice
• Part C (Sec 300 – 350)
• Chartered Accountants in business

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 Code of Ethics – Part A

• 5 Fundamental Principles, with which RA’s must

apply
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behavior

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 Code of Ethics – Part A
• Part A offers an approach for many different situations
• Conceptual approach –
• Understand the following:
• Fundamental principles
• Types of threats
• Safeguards to be applied

• Practically, you
• Identify threats to compliance with fundamental principles
• Evaluate significance of threat
• Apply professional judgment

• Apply appropriate safeguards to eliminate or reduce the threat to

appropriate level

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 Code of Ethics – Part A

• Integrity (Section 110)

• Straightforward, honest, fair, truthful in business and
professional relationships
• Should not be associated with information believed to be
false, misleading, recklessly provided

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 Code of Ethics – Part A
• Objectivity (Section 120)
• Remain free of bias , conflict of interest, undue
influence in professional judgment

• Professional competence and due care (Section 130)

• Competent
• Professional knowledge and skill
• Due care
• Act carefully, thoroughly
• Training and Supervision to trainees/staff (ensure
to prevent errors)
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 Code of Ethics – Part A

• Confidentiality (Section 140)

• SHOULD NOT disclose confidential client information
unless
• Specific authority (client or employer)
• Legal or professional obligation
• May NOT use confidential information for
• Own advantage
• Advantage of a third party

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 Code of Ethics – Part A

• Confidentiality (Section 140)

• Must maintain confidentiality in social
environment
• Applies to people under control of accountant
• Joint and vicarious liability (CPC)
• Duty remains even after the relationship ends
❑Disclosure permitted only when
❑ permitted by law
❑ Professional duty
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 Code of Ethics – Part A

• Professional behavior (Section 150)

• Comply with laws and regulations
• Do not bring the Profession into disrepute
• Marketing and promotion done in an honest and trustful
manner

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 Accounting scandals
• http://www.accounting-degree.org/scandals/

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 Code of Ethics – Part A

• Threats – threaten compliance with the fundamental

principles
1. Self-interest threats
• Financial or other interests of professional accountant or
someone close
• Example; Owns shares in Auditing Client
2. Self-review threats
• Evaluation of own work
• Example, written books of Audit Client and audit same

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 Code of Ethics – Part A

• Threats – threaten compliance with the

fundamental principles
3. Advocacy threats
• Promotion of an opinion or position to point where own
objectivity is compromised
• Example; Valuation and negotiate selling
4. Familiarity threats
• Too sympathetic to interests of others
• Silent on Fraud as perpetrator is a friend
5. Intimidation threats
• Deterred from acting objectively by receiving actual or
perceived threats
• Example; Threatened with dismissal 19
 Code of Ethics – Part A

• Safeguards
• To eliminate or reduce the threat to an acceptable level
• 2 categories
• Created by the Profession, legislation, regulation
• Imposed on companies, firms etc.
• Created in the work environment
• Company / firm specific

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 Code of Ethics – Part A

• Situation, circumstances, Relationships & Threats

& safeguards

• Refer to page 2/9 – 2/11 for examples of practical

situations.

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 Quick recap - QUESTION

• Erik Erickson, an audit Partner at an audit firm,

owns 67% of one of his audit clients, Nexus (Pty)
Ltd.

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 Quick recap - REQUIRED

• YOU ARE REQUIRED TO:

• Identify the type of threat
• determine 1 or 2 out of the five we have learned
• Identify the fundamental principles threatened
• determine 1 or 2 out of the five we have learned
• Indicate the safeguards to each scenario
• Once you have determined the type of threat, you can
understand the type of safeguard we need to apply

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 Quick recap - ANSWER

• Is it significant?
• Yes – most likely as this is a quarter of the total shares issued, indicating a significant
investment.

• Type of threat:
• Self-interest Threat – why?
• Fundamental principle threatened
• Objectivity, Integrity, Professional Behavior (Erik Erickson may overlook issues that arise on
audit to protect his investment)

• Safeguards to apply
• 1. A policy within the audit firm which prohibits partners and employees from holding shares in
an assurance client. (The audit partner should dispose of his investment)
• 2. A procedure for monitoring this prohibition and a disciplinary follow up for transgressors

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 Code of Ethics – Part B

• Part B
• Applicable to Chartered Accountants in Public Practice
• Addresses specific situations that are relevant and likely to such
members

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 Code of Ethics – Part B

• Section 210 – Professional Appointment

• Client acceptance
• Responsibility
• Would acceptance of a new client threaten compliance with the
Fundamental Principles?
• E.g. Adult movie producer
• E.g. Company that organizes “Raves”
• Threatens
• Integrity
• Professional behavior
• Objectivity
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 Code of Ethics – Part B

• Section 210 – Professional appointment

• Client acceptance
• Safeguards
• Screening of clients before acceptance
• Quality control (ISA 220R)
• Discussions with Mgt, CFO
• Previous Auditor
• Discussion with 3 rd Parties, i.e. Bankers
• Search the Internet

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 Code of Ethics – Part B

• Section 210 – Professional appointment

• Engagement acceptance
• Responsibility
• Consider competence to perform the engagement to the required standard
• Threats
• Self-Interest Threat
• Professional competence and due care
• Professional behavior
• Safeguards
• Quality control policies and procedures
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 Code of Ethics – Part B
• Section 210 – Professional appointment
• Changes in professional appointment
• Responsibility
• Replacing another professional accountant
• Reasons for not accepting the appointment
• Responsibilities to other Chartered Accountants
• Confidentiality considerations
• Threats
• Professional competence and due care
• Professional behavior
• Integrity
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 Code of Ethics – Part B
• Section 210 – Professional appointment
• Changes in professional appointment
• Safeguards
• Discuss client’s affairs with existing accountant
• Client’s permission, else significant threat?
• Enquiring of circumstances that should be aware of
• Existing accountant
• Obtain client’s permission to discuss affairs with proposed
accountant
• Provide correct information
• Rather put Senior partner in charge of matter
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 Code of Ethics – Part B

• Section 220 – Conflicts of Interests

• Responsibility
• Consider situations where the interests of the firm may conflict with
the interests of the client (same market or two similar clients in similar
market)
• Threats
• Competing in the same industry or market
• Clients that are in direct competition
• Objectivity
• Confidentiality

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 Code of Ethics – Part B

• Section 220 – Conflicts of Interests

• Safeguards
• Notification of conflict of interests; consent to offer services
• Use of separate engagement teams
• Guidelines regarding confidentiality and professional behavior
• Confidentiality agreements

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 Code of Ethics – Part B
• Section 240 – Fees and other types of remuneration
• Normal fees
• Responsibility
• Are entitled to fair remuneration
• Threats
• Fees too low – unable to perform the engagement in accordance
with the applicable standards
• Threats to professional competence and due care, integrity and
objectivity
• Quoting of fixed fees
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 Code of Ethics – Part B

• Section 240 – Fees and other types of remuneration

• Normal fees
• Safeguards
• Providing basis on which fees will be charged
• Knowledge and skill required
• Level of training and experience
• Time spent on engagement
• Degree of responsibility
• Investment in technology
• Alerting client of possible changes to fee
• Terms of engagement
• Time and staffing

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 Code of Ethics – Part B

• Section 240 – Fees and other types of remuneration

• Contingency fees
• Calculated on a predetermined basis
• Determined by outcome of work done
• Self-interest threat to objectivity
• Not allowed for assurance engagements
• Referral fees
• Permissible – do not compromise fundamental principles

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 Code of Ethics – Part B
• Section 250 – Marketing Professional Services
• Responsibility
• Market services in manner not to discredit profession, not bad
taste
• Threats
• Dishonest, exaggerated, obnoxious, critical of other firms
• Threats to integrity and professional behavior
• Safeguards
• Quality control policies and procedures
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 Code of Ethics – Part B
• Section 260 – Gifts and Hospitality
• Responsibility
• May accept insignificant gifts
• Turn down gifts which may alter relationship
• Threats
• Significant gifts are a threats to objectivity
• Safeguards
• Policy of prohibiting the acceptance of gifts
• Quality control committee to approve acceptance of gifts or
hospitality
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 Code of Ethics – Part B

• Section 270 – Custody of client Assets

• Responsibility
• May take assets, provided not from illegal sources
• Kept separately identifiable
• Threats
• May misuse client assets
• Client may launder illegal money
• Treats to integrity, objectivity and professional behavior

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 Code of Ethics – Part B

• Section 270 – Custody of client Assets (continue)

• Safeguards
• All client assets kept separately from firm assets
• Agree in writing purpose of use of assets
• Records all movements, and available for inspection
• Prior to accepting, ensure that source is not illegal.

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 Code of Ethics – Part B

• Section 290 – Independence (Assurance engagements)

• Approach to be applied
• Identify threats to independence
• Evaluate whether threat is clearly insignificant
• Independence in mind
• Independence in appearance
• Extent of public interest
• Reasonable person test
• Where NOT clearly insignificant, apply safeguards

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 Code of Ethics – Part B

• Situation, circumstances, Relationships &Threats &

safeguards

• Refer to page 2/21 – 2/35

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 Code of Ethics – Part B
• Section 280 – Objectivity
• Threats
• Any threat to fundamental principle needs to be considered
• In providing services, a CA needs to be
✓Independent in Mind and
✓Independent in appearance
To enable to express an conclusion that is
➢Free of bias
➢Free of conflict of interest and
➢free of undue influence
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 Code of Ethics – Part B
• Section 280 – Objectivity (continued)
• Safeguards
• Withdraw from the engagement team
• Supervisory procedures
• Terminating Financial-/business relationships (that caused the
threat)
• Discuss the matter with
• Senior Management
• Those charged with Governance
• What to do if safeguards don’t reduce it to an acceptable level?
❑Decline/terminate engagement!
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 Disciplinary Rules

• The opposite of “Professional Conduct” is “Improper

Conduct’’

• Link Rules to Code where possible

• Refer to page 2/47 – 2/49

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 Disciplinary Rules

• Improper Conduct
• Contravention of Auditing Profession Act and any other Act
• Dishonesty
• Theft, Fraud, perjury, bribery, corruption
• In carrying out work and duties
• In relation to any office of trust
• Failure to perform work with reasonable care and skill
• Evasion of any tax etc..
• Failing to account separately clients possessions
• Divulging confidential information

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 Disciplinary Rules

• Improper Conduct
• Contingent fees (Permitted under certain circumstances)
• Accepting reward from 3rd Party
• Vouching for accuracy of forecasts

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 Disciplinary Rules

• Regarded as Improper Conduct

• Contraventions in respect of Trainee accountants
• Imposing restraints after traineeship
• Requiring compensation for cancellation of training
contract
• Failing in responsibilities to IRBA / other persons
• Contraventions in respect of relinquishing engagements

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 Disciplinary Rules

• Regarded as Improper Conduct

• Soliciting, advertising or canvassing for work
• Contravention of IRBA Code
• Conduct bring Profession into disrepute
• Improper
• Discernible
• Unprofessional
• Dishonorable

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 Disciplinary Rules

• A Registered auditor found guilty of Improper Conduct

may be sentenced to
• A caution or reprimand
• A fine not exceeding N$100 000
• A suspension of the right to practice for a specific period
• Cancellation or registration and removal of practitioner’s name
from register

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