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Chapter 2 Audit ethics and regulations

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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.

Duties

Auditors are usually given can do their job properly. to Rights. v) Right to make representation where another person is being appointed as auditor. should the auditors wish to.• • • RIGHTS rights withinDUTIES help ensure they AND national law. iii) Right of access to books and papers of branch . iv) Right to receive notices of general meetings and to attend those meetings. 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. . as they are set by government. Rights will vary between countries. Powers/Rights of an Auditor : i) Right of access to books of account and vouchers . ii) Right to receive information and explanations.

not just the shareholders on whose behalf the accountant is working. • It is important to recognize that many groups in society rely on accountant’s 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. The accountant therefore has a public accountability.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.

has acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence.e. f) Professional Behavior: He should not only act in a professional manner but should also appear to be a professional. he is not under the control or influence of management. g) Technical Standards: Audit should be performed by following certain standards. • • • . 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. ethical guidelines emphasis the following key points about the characteristics of accountants: a) Independence: Auditor is independent of management i.• • • • • 2 In the light of this. d) Professional Competence and Due Care: Auditor has attained certain professional qualification. b) Integrity: Auditor is honest and is not corrupt. 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. He is not subjective in forming his opinion. 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. international or national.

The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC). and membership of IFAC automatically confers. International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC). International auditing and accounting standards do not at present override local regulations. IFAC has more than 150 member bodies. Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view. Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition. 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. nor are there specific sanctions where organizations claim to have complied with international standards. The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs). The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs. representing over 2 million accountants in more than 100 countries.• 3 International Standards on Auditing (ISAs). but have not done so. which was formed in 1977 and is based in New York. Neither IFAC nor the IASC can currently compel any organization to comply with international standards. • • • .

ACCA) checking the audit work of their members.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. • The RSBs also have rules to ensure their members are keeping up to date with technical changes.g. . and handling complaints.

or to require the company to send a written explanation to shareholders.. when the Board asks them to accept nomination for the following year. • A General Meeting will need to be called so that the shareholders can vote on this proposal. When the external auditor leaves. • Sometimes the Board of Directors. they may wish to speak to the shareholders to explain their reasons. If an auditor resigns.. may wish to REMOVE a Firm of auditors before the annual vote at the AGM.• Sometimes it is necessary for the auditors to RESIGN. • 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. or some shareholders. . • Sometimes the auditors finish the annual audit and decide they do not wish to audit the company in future years – as such. the law allows them to require the company to call a General Meeting (GM). the auditors politely decline as they DO NOT WISH TO SEEK REAPPOINTMENT. Therefore.

they are more likely to spot breaches.Auditor Responsibilities • • • Auditors cannot know and understand every law and regulation that affects every client. Audit Committee). but they should aim to be aware of those that could materially affect the Financial Statements. If the auditor finds a material breach they have the following responsibilities: = Report the breach to management. a breach may have external reporting consequences • . consider the effect on the company’s going concern status = In some cases. even if management do not tell them (or are themselves not aware). report to the highest level possible (e. = If the breach involves management. = 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. By doing this. = If the breach involves the highest level possible.g. may need to take legal advice. = If the breach is severe.

. Guidance is contained in the ACCA Code of Conduct . there would be several codes in the UK alone. the Auditing Practices Board has created a series of Ethical Standards based on the IFAC Code. In the UK. as it would usually be possible to imagine a situation where the rules would lead to the wrong answer. . 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. but altered slightly for the UK market. Typically therefore.. These Ethical Standards have now been adopted by all UK Institutes.. ethics is about guidance. it is a difficult area to have rules. and hundreds around the World! An International Code of Ethics has been developed by IFAC.FUNDAMENTAL ETHICAL PRINCIPLES • • • • • • Ethics is concerned with behaviour. whatever that is! As such. including the ACCA. relying on the professionalism of auditors to apply this guidance in an appropriate manner when faced with difficult situations. but if every Institute had its own ethical code. and trying to ensure that auditors do “the right thing” ..

he is not under the control or influence of Management. 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.• • ETHICAL STANDARDS Professional Ethics There are a number of ethical matters that are extremely important for auditors to consider when performing their work. In the light of this. d) Professional Competence and Due Care: Auditor has attained certain professional qualification.e. The accountant therefore has a public accountability. He is not subjective in forming his opinion. b) Integrity: Auditor is honest and is not corrupt. 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. has acquired the requisite skill and has attained the experience necessary for the audit and performs his work with planning and due diligence. It is important to recognize that many groups in society rely on accountant’s work. ISA’s ethical guidelines emphasis the following key points about the Characteristics of accountants: a) Independence: Auditor is independent of management i. 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. g) Technical Standards: Audit should be performed by following certain standards. 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. international or national. f) Professional Behavior: He should not only act in a professional manner but should also appear to be a professional. • • • • • • • • • . not just the shareholders on whose behalf the accountant is working.

• 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 . • The Code of ethics and conduct applies to members. They give fundamental principles and specific guidance statements. affiliates and students of the ACCA. • The ACCA rules are now fundamentally the same as those of IFAC.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.

International Standards on Auditing (ISAs) are issued by the International Auditing Practices Committee (IAPC). representing over 2 million accountants in more than 100 countries.International Standards on Auditing (ISAs) • • The auditor should follow basic principles and essential procedures together with related guidance as contained in ISAs. nor are there specific sanctions where organizations claim to have complied with international standards. Neither IFAC nor the IASC can currently compel any organization to comply with international standards. Standard setters increasingly refer to the international position in their consultative documents as authoritative support for a particular view. The IAPC works closely with its members and national standard setters in order to gain acceptance of international Standards of Auditing (ISAs). but have not done so. IFAC has more than 150 member bodies. 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. Member bodies have increasingly sought to align the national position with the international positions IFAC and the IASC have gained influence and recognition. The IAPC is a standing committee of the Council of the International Federation of Accountants (IFAC). • • • . International auditing and accounting standards do not at present override local regulations. which was formed in 1977 and is based in New York.

• ISAs contain basic principles and essential procedures. .􀂃 International Standards on Auditing (ISAs). The text of a whole standard is considered in order to understand and apply the 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.

) • Implementing auditing standards.(ISQCI) setting out quality control principles for all assurance engagements (including audits) conducted • Under its standards. 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.Other IFAC and IAASB activities: • IFAC publishes a code of ethics governing all assurance engagements carried out • IAASB publishes international standard on quality control. . • • The relationship between International & National standards and regulation. the IFAC has no legal Standing in individual countries. • IAASB sets standards for other types of assurance engagement in addition to audits.

• There are two possible schemes for regulation at the national level: • Self regulation by the audit/accountancy profession. • Have disciplinary powers to enforce quality of audit work. it is the work of National Bodies: • Enforce the implementation of auditing/accountancy profession. • Have right to inspect audit files to monitor audit quality. .National Regulatory bodies: • Usually. • Regulation by government or by some independent body set up by government for the purpose.

• Broadly speaking. Nor are all companies required to produce financial statements in the same formats as many exemptions may apply to small and medium sized companies. 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 • • • • . 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. small companies are exempt from the audit requirement.The Audit Requirement • • Not all limited companies are required to have their financial statements audited.

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. their audit work may result in checking their own work. The threat that if auditors do certain tasks for clients. then auditing them. then auditing it • = helping with calculations of numbers in the Financial Statements. then auditing them • = preparing the accounting information. Examples: • = giving advice on accounting or control systems.

they may be seen to be “on the client's side”. . they might deliberately or accidentally put too much trust in their client and not be sceptical enough.2 • = Familiarity. 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. rather than being independent. The threat caused when auditors are asked to do other work that means they are taking their client's position on something. leading to underauditing. 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. The threat that if auditors are too familiar / friendly with a client. By taking this position. this may be a clue that there is too close a relationship with the auditor • = Advocacy.

. Examples are the same as Self-Interest . • = Management. 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. If they take on management functions. their independence is likely to be questioned.3 • = Intimidation. The threat caused by a client being in a position to put pressure on an auditor.. The threat that auditors may agree to do other services that result in them making decisions for clients..

or a potential ethical threat.MANAGING ETHICAL THREATS • Before accepting clients. review of the audit work by an independent partner BEFORE the audit report is signed (a HOT Review) . 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” . auditors must assess any ethical threats and either put appropriate safeguards in place or resign / reject appointment. 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.i.e.

or may be forced by law. • 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. to pass client information to a 3rd Party.CONFIDENTIALITY • There are a small number of situations where auditors may decide. • An auditor MAY decide to disclose information if: – = client gives permission – = the auditor feels it is in the public interest to know. .