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TOPICS OUTLINE

– Ethical Issues and conducts


– Fundamental Principles: MIA By-Laws
– Decision making: Professional judgment /
skepticisms

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Importance of Ethics

(1) a responsibility to serve the public and


stakeholders – fair information ~ professionalism
(2) a complex body of knowledge – to enhance
understanding of accounting technical concepts and
practices ~ integrity
(3) standards of admission to the profession –
quality control ~ image & reputation
(4) a need for public confidence – credibility
Ethical Issues…

– ETHICS – set of moral principles and


values express through code of conduct on
moral duties and obligations
– Ethical problem occurs when an
individual is morally or ethically required
to take an action that may conflict with his
or her immediate self-interest
– Ethical dilemma occurs when there are
conflicting moral duties or obligations

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Assume that you have worked for a public accounting firm for approximately six
months, and you were recently assigned to the audit of a small manufacturing company.
The senior auditor on the job assigned you the task of extracting financial information
about comparing companies from several financial databases on the Internet. She
indicated that the work must be completed by Monday morning. While you had hoped to
complete the assignment on Friday, things didn't work out and you had to come to work
on Saturday.
On Saturday, your expectation that it would take only a couple hours to complete the task
faded and you didn't finish until 4 p.m., after eight hours of work. You believe that part
of the problem was that you were out late Friday and you just weren't all that efficient.
Although you completed the task, you exceeded the budgeted hours for the task by six
hours. Because of the circumstances (inefficient work and the blown budget), you are
tempted to underreport the number of hours that you actually worked. While your firm
has an informal policy that encourages employees to report all hours worked, you are
aware that the policy is often ignored by other staff auditors. In addition, you are aware
that your evaluation on this audit will be based not only on the quality of your work, but
also on your ability to meet time budgets. You have been criticized on your evaluations
on previous engagements for taking too long to perform certain tasks.

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Ethical Dilemma

– Issues
– Parties involved & rights
– Alternative courses of action
– Likely consequences or impact
– Decision on appropriate action

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Regulatory Framework on
Ethical Conducts

– Audit firm
– Auditor
– Audit process

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Elements of Quality Control
ISQC 1
Acceptance and
Leadership: Tone at the Relevant Ethical
Continuance of
Top Requirements
Relationships

Engagement
Human Resources Monitoring
Performance

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IFAC: International Ethical Standards
Board (IESB) & MIA By-Laws

– Integrity
– Objectivity and Independence
– Professional competence and due care
– Confidentiality
– Professional behavior – commission, fees,
marketing/advertising/promotion, solicitation,
family relationship, loans, non audit services

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Integrity & Objectivity

– Integrity
• Not breach public trust.
• straightforward, honest, sincere, responsible
• members should perform all professional responsibilities with
the highest sense of integrity

– Objectivity
• fair, not prejudice/ bias
• members should be objective and free of conflicts when
performing professional responsibilities.

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Auditor Independence

– Independence is the cornerstone of auditing profession


– Auditors must be independent
– in fact – objective state of mind and unbiased in their actions
– in appearance – perceived by knowledgeable users of financial
statements as independent
– Free of any interest
– Unbiased viewpoint
– A reasonable person, having knowledge of relevant facts –
will place himself where his objectivity not be impaired.
Threats to independence
Threat Summarized Definition
Self-interest Benefit financially or otherwise, from an interest in, or
relationship with a client.
Advocacy Promote or represent client's interests which may compromise
objectivity or independence.

Familiarity Sympathetic to the client's interests or too accepting of client's


work or product due to a long or close relationship.

Self-review Accountant will not appropriately evaluate results of a previous


judgment made or service performed or supervised by the
accountant or the accountant's firm.
Intimidation Subordinate judgment to that of an individual associated with a
client due to client's reputation, expertise, dominant personality,
or attempts to coerce or excessively influence
Major Threats to
Independence
– Holding official position – Relationship
– Directors, secretaries, – Family related / close personal
employees
– who has significant influence
– Financial interest over the operation/ finance
– shares, loan, guarantee to/from
client above RM 2,500. – – Familiarity with the client
exception in banks/financial – Compensation schemes
inst.
– custody of clients’ assets – Fee, gifts
– Provision of non audit services – Beneficial
interest/shareholdings
– accounting work, internal audit,
assurance engagement. – Time pressure

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Safeguards to threats

– Controls that mitigate or eliminate the threats of


independence:
– Regulation on profession (profession level)
– Person charged with governance (client level)
– ISQC policy and procedures (AF level)
Managing Threats to Independence
- Firm level

– Establishing and monitoring corporate codes of


conduct
– Developing appropriate compensation schemes
– Implementing high-level reviews of decisions to
accept or retain clients
– Separating consulting activities from audit
activities
– Performing within-firm reviews of audit work and
audit documentation
– Performing reviews and inspections within the
profession – peer review / quality control
Competence & Due Care

Competence – attained through formal education, relevant practical


training, experience & continuing professional development
(structured or unstructured).
Due care—members shall observe the profession’s ethical and
technical standards, strive to improve competence and quality of
services provided, and discharge professional responsibilities to
the best of their ability
4 rules of the MIA By-laws:
(1) Member should continually improve knowledge, up to date,
due care & diligent
(2) Should not take work if not competent to perform
(3) Comply with CPE required by MIA
(4) Comply with all standards/ guidelines
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Confidentiality
– Without consent from client: – Allowed to disclose without consent
from client if:
– Not disclose confidential
information – For the purpose of discharge his duty
– Not use info for personal gain/ – Required by law to disclose/ court
advantage of 3rd party (insider orders
trading) – to protect member’s interest
(i.e. enable member to sue for fees, to
defending members from legal action on
negligence, to clear suspicion of a
criminal offence, to resist penalty under
Income Tax Act)
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Advertising, Marketing &
Promotions

Publicity/ announcements allowed on thing such as staff


vacancy, sales of business etc.
(not mean to lobby for professional work)

Announcement however must be:


• Not displayed more than necessary or too prominent.
• Not claim as specialist, exaggerated claims

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Compensation – Fees, commission,
profit sharing

• Should BE:
• Fair reflection of work done (i.e. skill, knowledge,
time & degree of risk).
•Fee should be based on MIA recommended basis - %
of turnover/ Net assets
• Should NOT:
• Charge on a percentage/ contingency basis
• Too low
• Referral fee or Commissions is prohibited

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Changes In Professional
Appointments
PROPOSED AUDITOR need to: EXISTING AUDITOR (upon
– Request client’s permission to received the request) needs to:
communicate with existing – If no professional reason why
auditor. If such permission should not take to appointment –
refused, he should not take the reply the fact to the proposed
appointment. auditor
– On receipt permission, write to – If there are such reason – obtained
existing auditor for any client permission to disclose the fact
professional reason he should to the proposed auditor. If this
not take appointment. permission is not granted, report the
– Upon received reply, determine fact to the proposed auditor.
to accept or not.

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Unacceptable Acts

– Discrimination and harassment in employment practices


– Negligence in the preparation of financial statements or records
– Failure to follow requirements of governmental bodies, commissions,
or other regulatory agencies
– Confidential information obtained from employment or volunteer
activities
– False, misleading, or deceptive acts in promoting or marketing
professional services
– Improper use of the Certified or Chartered Accountant credential
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Disciplinary actions

– Suspension
– Termination
Professional Judgment
&
Skepticisms

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Financial Reporting
Framework
– Objective of Financial – Assumptions
Reporting – Going concern
– True & Fair view – Business as economic entity
– Conceptual Framework – Accrual basis
(Accounting Standards)
– Constraints
– Measurement – valuation
– Materiality
– Recognition – classification
– Presentation
– Disclosure

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Qualitative characteristics of
FR
– Usefulness – Faithful representation
– Comparability – Completeness
– Verifiability – Neutrality (free from
– Timeliness bias)

– Understandability – Free from error

– Relevance
– Predictive / confirmatory
value

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Financial Reporting & Professional
Judgment
– Measurement / Valuation
– Historical cost – acquisition price
– Fair value – market based
– Current cost – replacement cost
– Impairment loss: historical cost vs fair value
– Recognition
– Asset or expense ??
– Liability or revenue ??

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Professional Judgment
Process
– Definition of Professional Judgment
– Process of reaching a decision where there are number of
alternatives solutions
– f(PJ) = cognitive, job training, knowledge, cultural, tone at
the top
– Threats: Time constraint, Limited capacity (mentality,
resources), Bias (self-interest)

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The Role of Professional
Skepticism in Auditors’
Judgments
– skepticism defined as “an attitude that includes a questioning
mind and a critical assessment of audit evidence”
– Professional skepticism includes being alert to
– contradictory evidence,
– authenticity & integrity of evidence,
– Management explanations against corroborated evidence
– (unusual) conditions that may indicate possible fraud
– circumstances that suggest the need for audit procedures in
addition to those required by the ISAs
The Role of Professional
Skepticism in Auditors’
Judgments
– An auditor who is professionally skeptical will do the following:
Planning
– Reasonably question the honesty and integrity of management;
risk indicators (risk / control)
– Fieldwork
– Critically question contradictory audit evidence
– Carefully evaluate the reliability of management explanation
– Critically evaluate reliability and sufficiency of evidence