Principle of Auditing And other

Assurance service

Chapter 3 Professional
Ethics
Lecturer : Yusuf Hussein
Mohamed

3-1

What Are Ethics?

Ethics can be defined broadly as
a set of moral principles or values.
Each of us has such a set of values.
We may or may not have considered
them explicitly.

3-2

Illustrative Prescribed
Ethical Principles
Trustworthiness

Respect

Responsibility

Fairness

Caring

Citizenship

3-3

Need for Ethics

Ethical behavior is necessary for a society
to function in an orderly manner.
The need for ethics in society is sufficiently
important that many commonly held
ethical values are incorporated into laws.

3-4

Why People Act Unethically

The persons ethical standards are different
from those of society as a whole.
The person chooses to act selfishly.

3-5

Ethical Dilemmas
An ethical dilemma is a situation a person
faces in which a decision must be made
about appropriate behavior.

3-6

Rationalizing
Unethical Behavior
Everybody does it
If its legal, its ethical
Likelihood of discovery and consequences

3-7

Resolving Ethical Dilemmas

1. Obtain the relevant facts
2. Identify the ethical issues from the facts
3. Determine who is affected

3-8

Resolving Ethical Dilemmas

4. Identify the alternatives available to the
person who must resolve the dilemma
5. Identify the likely consequence of each
alternative
6. Decide the appropriate action

3-9

Relevant Facts
A staff person has been informed that
he will work hours without recording
them as hours worked.
Firm policy prohibits this practice.
Another staff person has stated that
this is common practice in the firm.
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Ethical Issue
Is it ethical for the staff person to work hours and
not record them as hours worked in this situation?
Who is affected?

How are they affected?

What alternatives does the staff person have?

3-11

Why do auditors need

codes of ethics?
To maintain respect and
confidence of public
to distinguish the professional
from the general public
to maintain order within the
profession
and
provide
guidance to professionals
provide a means of selfpolicing the profession
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Need for Professional Ethics

Responsibility to serve the public
CPA is representative of the public

Complex body of knowledge

Abundance of authoritative pronouncements

Standards of Admission to the Profession

Min. standards for education and experience

Need for public confidence

CPA product is credibility

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Ethical Principles
1. Responsibilities:
Professionals should exercise sensitive and
moral judgments in all their activities.
2. The public interest:
Members should accept the obligation to act
in a way that will serve and honor the public.

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Ethical Principles
3. Integrity:
Members should perform all responsibilities
with integrity to maintain public confidence.
4. Objectivity and independence:
Members should be objective, independent,
and free of conflicts of interest.

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Ethical Principles
5. Due care:
Members should observe the professions
standards and strive to improve competence.
6. Scope and nature of services:
A member in public practice should observe
the Code of Professional Conduct.

3-16

Code of Professional
Conduct
Principles

Ideal standards of ethical conduct

stated in philosophical terms.
They are not enforceable.

Rules of
conduct

Minimum standards of ethical

conduct stated as specific rules.
They are enforceable.

Interpretation of the rules of conduct by

Interpretations
the AICPA Division of Professional Ethics.
of the rules
They are not enforceable, but a
of conduct
practitioner must justify departure.
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Code of Professional
Conduct
Ethical
rulings

Published explanations and answers

to questions about the rules of
conduct submitted to the AICPA by
practitioners and others interested
in ethical requirements.
They are not enforceable, but a
practitioner must justify departure.

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AICPA Professional Ethics

3-19

The Rules of the AICPA Code of

Professional Conduct
Rule

Title

101
Independence
102
Integrity and Objectivity
201
General Standards
202
Compliance with Standards
203
Accounting Principles
301
Confidential Client Information
302
Contingent Fees
501
Acts Discreditable
502
Advertising and Other Forms of
Solicitation
503
Commissions and Referral Fees
504
(Deleted)
505
Form of Organization and Name
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Independence

The value of auditing depends heavily on the publi

publ
perception of the independence of auditors.
Independence

in fact, means the member

must be unbiased and objective mentally it
is a state of mind.
Independence in in appearance means that
knowledgeable users of financial statements
must believe the auditor is independent
avoiding observable conflicts of interest

3-21

AICPA Conceptual Framework

for Independence
The AICPA Conceptual Framework for
Independence is used to evaluate threats to
independence. When a threat arises, the
approach considers
Whether the Code directly addresses the threat
If the Code does not directly address the threat, the
auditor considers whether adequate safeguards
exist to eliminate the threat to independence

The perspective used throughout is whether a

reasonable person, aware of all the relevant
facts would conclude that an unacceptable
risk of non-independence exists.

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Threats to Independence
(and an example of each)

323

Self-ReviewCPA firm has provided consulting

services that relate to audit
Advocacy of clientCPA promotes client securities
as part of an initial public offering
Adverse Interest Litigation between client and
CPA firm
FamiliaritySpouse holds a key position with client
Undue Influence--Pressure from client to reduce
audit procedures
Financial Self-Interest of CPACPA owns stock in
the client
Management ParticipationCPA Serves as officer
of client

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Independence Safeguards
Created by profession, legislation or
regulation (e.g., education
requirements)
Implemented by attest client (e.g.,
effective board of director oversight)
Put in place by CPA firm (e.g.,
stressing importance of
independence)
3-24

Covered Members
Interpretation 1 of Rule 101 is particularly important for
understanding independence. It relies in part on the
concept of a covered member.
Covered Members include
Staff working on the attest engagement
An individual who may influence the attest engagement
A partner in the office in which the partner in charge of
the attest engagement primarily practices
Partners or managers that provide a specified amount of
nonattest services to client
The public accounting firm and its employee benefit
plan
Any entity controlled by one or more of the above

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Interpretation 101-1 States That

Independence is Impaired if a Member:
Section
A. Has direct or material indirect financial
interest, loan, or joint business investment; trustee or administrator of estate
or trust that has such interest

Applies to:
Covered Members

B. Owns 5% or more of clients outstanding

equity or other ownership interest

All Partners and

Professional Staff

C. Simultaneously associated with client as

director, officer, employee, etc.

All Partners and

Professional Staff

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Financial Interests from

Interpretation 101-1

Example

Direct

Indirect

Investment in client,
such as owning
capital stock or
providing a loan

Investment in a
mutual fund, which
in turns owns
capital tock of a
client

Type allowed
for individual None
CPA to retain
independence

Immaterial

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Figure 3.5 The effects of partner and professional

staff relationships on firm independence*

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Figure 3.6 Effects of Interests of Family Members,

Relatives and Friends

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Consulting Services Prohibited

by the Sarbanes-Oxley Act

Bookkeeping
Financial systems design and Implementation
Appraisal or valuation services
Actuarial services
Internal audit outsourcing
Management functions or human resource
services
Investment services
Legal services and expert services
Certain tax services
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Rule 102
Rule 102 Integrity and Objectivity
Applies to all members of the AICPA and
to all services provided by CPAs
Violations
Makes, or permits or directs another to make, materially
incorrect entries in a clients financial statements or
records
Fails to correct financial statements that are materially
false or misleading when member has such authority
Signs, or permits or directs another to sign, a document
containing materially false and misleading information

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Rule 201
Rule 201 General Standards
Apply to all CPA services
Member shall comply with following
standards:

Professional competence
Due Professional Care
Planning and Supervision
Sufficient Relevant Data

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333

Rule 202 Standards

Technical Body

Auditing Standards Board

(ASB)
Management Consulting
Services Executive
Committee (MCSEC)
Accounting and Review
Services Committee
(ARSC)

Standards
Statements on Auditing
Standards
Statements on Standards for
Consulting Services
Statements on Standards for
Accounting and Review
Services

ASB, MCSEC, and ARSC

Statements on Standards for

Attestation Engagements

FASB, GASB and FASAC

FASB, GASB and FASAC

Statements and related
Interpretations
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Rule 203
Accounting Principles
Designates GAAP
The Statements and Interpretations of
FASB
GASB
FASAB

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Rule 301
Confidential Client Information
A member in public practice shall not
disclose any confidential client
information without the specific consent
of the client.
Auditors cannot directly disclose illegal
acts by the client unless they have a legal
duty to do so
Confidential but not privileged
communications with client
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Rule 302
Allowable Contingent Fees
Allowable for clients for which the CPA
provides none of the following services:
An audit or review of financial statements
A compilation of financial statements expected to be
used by a third party and does not disclose a lack of
independence
An examination of prospective financial information

Contingent fees are not allowed to prepare an

original or amended tax return or claim for tax
refund (Note: All tax contingent fees are
prohibited under PCAOB Standards)

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Rule 501
Retaining client records may be considered
an act discreditable to the profession
Rules:
Client prepared recordsshould always be returned
to the client.
Client records prepared by the CPA (e.g. payroll
records)should be provided to client, except they may
be withheld if they are incomplete or fees are due for
them.
Supporting records (e.g., adjusting entries)should
be provided to client, but may be withheld if fees are
due for them.
CPA working papers (e.g., audit programs)CPAs
property and need not be provided to client , unless
required by law.

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Rules 502, 503, 505

Rule 502 Advertising
May advertise as long as it is not false,
misleading or deceptive
Rule 503 Commissions
Allowable commissions received must be
disclosed to the client
Rule 505 Form of Organization & Name
Can practice in any legal business form
Allows fictitious names as long as not false,
misleading or deceptive

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Figure 3.9
Alternative Practice Structures

3-39

IIA Code of Ethics--Principles

Internal auditors are expected to apply & uphold the following
principles:

Integrity. The integrity of internal auditors establishes trust and

thus provides the basis for reliance on their judgment.
Objectivity. Internal auditors exhibit the highest level of
professional objectivity in gathering, evaluating, and communicating information about the activity or process being examined.
Internal auditors make a balanced assessment of all the relevant
circumstances and are not unduly influenced by their own interests
or by others in forming judgments.
Confidentiality. Internal auditors respect the value and ownership
of information they receive and do not disclose information without
appropriate authority unless there is a legal or professional obligation to do so.
Competency. Internal auditors apply the knowledge, skills, and
experience needed in the performance of internal auditing services.
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IIA Code of Ethics

Rules of Conduct
1. Integrity; Internal auditors:
.1 Shall perform their work with honesty, diligence,
and responsibility.
.2 Shall observe the law and make disclosures
expected by the law and the profession.
.3 Shall not knowingly be a party to any illegal
activity, or engage in acts that are discreditable to
the profession of internal auditing or to the
organization.
.4 Shall respect and contribute to the legitimate and
ethical objectives of the organization.

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IIA Code of Ethics

Rules of Conduct
2. Objectivity; Internal Auditors:
.1 Shall not participate in any activity or
relationship that may impair or be presumed to
impair their unbiased assessment. This
participation includes those activities or
relationships that may be in conflict with the
interests of the organization.
.2 Shall not accept anything that may impair or be
presumed to impair their professional judgment.
.3 Shall disclose all material facts known to them
that, if not disclosed, may distort the reporting of
activities under review.
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IIA Code of Ethics

Rules of Conduct
3. Confidentiality; Internal auditors:
.1 Shall be prudent in the use and protection
of information acquired in the course of their
duties.
.2 Shall not use information for any personal
gain or in any manner that would be
contrary to the law or detrimental to the
legitimate and ethical objectives of the
organization.

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IIA Code of Ethics

Rules of Conduct
4 Competency; Internal auditors
.1 Shall engage only in those services for
which they have the necessary knowledge,
skills, and experience.
.2 Shall perform internal auditing services in
accordance with the Standards for the
Professional Practice of Internal Auditing.
.3 Shall continually improve their proficiency
and the effectiveness and quality of their
services.

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