Session 2 New QP & Prof Skill, Values and Ethics

Session 2 Professional Skills and
Professional Values, Ethics and Attitudes
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** Material comes from Textbook (Ch1) and HKICPA QP Study Material
Learning Objectives
LO 1 Skills and Knowledge Needed by Today’s External
Auditors.
LO 2 Identify professional conduct requirements that help
auditors achieve audit quality.
● In Hong Kong
● In US (for references – slides are at the end)
LO 3 Describe and apply frameworks for professional and
ethical decision making.
LO 4 Describe factors considered by audit firms making
client acceptance and continuance decisions.
** Material comes from Textbook (Ch1) and HKICPA

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HKICPA - The New Qualification Program
● The new QP will introduce an integrated Capstone comprising

three-day workshops and the Final Examination with an
increased emphasis on developing and assessing higher-order
enabling skills such as problem solving, critical and lateral
thinking to enhance students' ability to identify complex
problems including aspects of ethical dilemma and to develop
professional solutions.
● The new QP will be launched stage-by-stage with the first
examination session for the Associate Modules, the
Professional Modules and the Capstone to be held in June
2019, December 2019 and June 2020 respectively.
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HKICPA - Skills and Knowledge Needed by External
Auditors
The enabling competences of the new QP are set in the following
areas:
IES 3 Professional Skills
(a) Intellectual
(b) Interpersonal and Communication
(c) Personal
(d) Organizational
IES 4 Professional Values, Ethics and Attitudes

(a) Professional Scepticism and Professional Judgment
(b) Ethical Principles
(c) Commitment to the Public Interest
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Professional Skills
Practical Experience Competence
(a) Intellectual
i. Evaluate information from a variety of sources and
perspectives through research, analysis, and integration
ii. Apply professional judgement, including identification and
evaluation of alternatives, to reach well-reasoned
conclusions based on all relevant facts and circumstances
iii. Justify when it is appropriate to consult with specialists to
solve problems and reach conclusions
iv. Apply reasoning, critical analysis, and innovative thinking to
solve problems
v. Recommend solutions to unstructured, multi-faceted
problems
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Professional Skills
(b) Interpersonal and Communication
i. Develop cooperation and teamwork when working towards
organizational goals
ii. Develop clear and concise communication when presenting,
discussing and reporting in formal and informal situations, both in
writing and orally
iii. Demonstrate awareness of cultural and language differences in all
communication
iv. Apply active listening and effective interviewing techniques
v. Develop negotiation skills to reach solutions and agreements
vi. Develop consultative skills to minimize or resolve conflict, solve
problems, and maximize opportunities
vii. Use ideas to influence others to provide support and
commitment
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Professional Skills
(c) Personal
i. Develop a commitment to lifelong learning
ii. Apply professional scepticism through questioning and
critically assessing all information
iii. Develop high personal standards of delivery and appraise
personal performance, through feedback from others and
through reflection
iv. Plan time and resources to achieve professional
commitments
v. Evaluate challenges and plan potential solutions
vi. Develop an open mind to new opportunities
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Professional Skills
(d) Organizational
i. Plan assignments in accordance with established practices
to meet prescribed deadlines
ii. Appraise own work and that of others to determine
whether it complies with the entity’s quality standards
iii. Develop people management skills to motivate and develop
others
iv. Develop delegation skills to deliver assignments
v. Consider appropriate tools and technology to increase
efficiency and effectiveness and improve decision making
vi. Develop time management techniques
vii. Develop project management skills
viii. Develop problem solving-skills
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.
Professional Skills
Practical Experience Competence
(e) Team Management and Leadership
i. Develop team leadership skills
ii. Develop exceptional client service
iii. Develop leadership skills to influence others to work
towards organizational goals
iv. Produce communications appropriate to an informed reader
integrating material across a range of areas
v. Appraise the management and leadership styles and culture
within an entity
vi. Apply change management skills
vii. Prepare to become a leader
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Professional Ethics
● Ethics is a core value of the profession that aspiring
accountants need to have instilled themselves as they
must accept the responsibility to act in public interest.
● The new QP puts more emphasis on ethical training by
designing learning and development activities in the
workshops and the workplace to raise students' ethical
capabilities.
● The focus of the ethical training is on identifying ethical
dilemmas, understanding their implications and
determining an appropriate approach.
Johnstone, Auditing: A Risk-Based Approach, 11th Edition. ©2019 Cengage. All Rights Reserved. May
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not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Professional Ethics
(a) Ethical Principles
i. Demonstrate the nature of ethics
ii. Justify the advantages and disadvantages of rules-based and
principles-based approaches to ethics
iii. Identify ethical issues using relevant ethical principles,
analyse alternative courses of action and determine the
ethical consequences of these
iv. Apply the fundamental ethical principles of integrity,
objectivity, professional competence and due care,
confidentiality, and professional behaviour to ethical
dilemmas and determine an appropriate approach
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Professional Ethics
(b) Commitment to the Public Interest
i. Determine the role of ethics within the profession and
in relation to the concept of social responsibility
ii. Analyse the interrelationship of ethics and law,
including the relationship between laws, regulations,
and the public interest
iii. Consider the consequences of unethical behaviour to
the individual, the profession, and the public
iv. Apply the relevant ethical requirements to professional
behaviour in compliance with standards
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Frameworks for Professional and Ethical Decision
Making
● To achieve audit quality, auditors need to make quality
decisions throughout the audit
● Quality decisions are:
● Unbiased
● Meet the expectations of reasonable users
● Comply with professional standards
● Incorporate sufficient appropriate evidence
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Exhibit 1.9
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Importance of Professional Skepticism in Making
Professional Judgments
● The auditor must exercise professional skepticism when
completing the steps in Exhibit 1.9
● Professional skepticism is an attitude that includes a
questioning mind and a critical assessment of audit evidence
● Critically question contradictory audit evidence
● Carefully evaluate the reliability of audit evidence
● Reasonably question the authenticity of documentation
● Reasonably question the honesty and integrity of
management, individuals charged with governance, and third-
party evidence providers
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Professional Conduct Requirements that Help
Auditors Achieve Audit Quality
Codes of professional conduct and related guidance on
professional responsibilities
In Hong Kong, guidance come mainly from:

● Codes of Ethics issued by HKICPA for Professional Accountants
● The Hong Kong Companies Ordinance
● The Stock Exchange of Hong Kong Limited's (Stock Exchange) Rules
Governing the Listing of Securities (Listing Rules)
In USA, Organizations providing such guidance for U.S. auditors include:

● AICPA
● SEC
● PCAOB
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Code of Ethics (HKICPA)
● Professional accountants are sometimes faced by ethical dilemmas. In their
business dealings they may encounter situations or be put under pressure
to act in ways that further their own advantage, or that of an entity, against
the wider public interest or the interest of their profession.
● Professional accountants are expected to demonstrate the highest

standards of ethical behaviour and to act in the public interest.
● Codes of ethics, such as that issued by the Hong Kong Institute of Certified
Public Accountants, give guiding principles to help professional
accountants carry out their responsibilities to both their profession and the
wider public.
● There are also a number of practical measures (safeguards) that a firm may
implement to ensure that these ethical principles are not breached.
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Code of Ethics for Professional Accountants (HKICPA)
The HKICPA have produced ethical guidance in the form of codes of ethics (the
HKICPA's Code of Ethics for Professional Accountants, “the Code”) in order to help
professional accountants carry out their responsibilities both to their profession and to
the wider public.
The Code is effective on 1 January 2011 with several subsequent amendments to bring
it into line with the IESBA Code of Ethics.
All Professional Accountants are required to comply with the Code.

Section A- GENERAL APPLICATION OF THE CODE ***
Section B- PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE ***
Section C- PROFESSIONAL ACCOUNTANTS IN BUSINESS
Section D -ADDITIONAL ETHICAL REQUIREMENTS
Section E - SPECIALISED AREAS OF PRACTICE
*** our focus is on these 2 sections
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Code of Ethics (HKICPA)
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Section A : General application of the Code

● Provides guidance on fundamental ethical principles
where professional accountants are required to apply this
conceptual framework to identify threats to compliance
with the fundamental principles, to evaluate the
significance of such threats and the safeguards to
eliminate them or reduce the threats to acceptable levels.
Section B : Professional accountants in public practice

● Provides specific ethical guidance for professional
accountants in public practice.
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The Code states the following about the particular

responsibilities of the professional accountant:
● 'A distinguishing mark of the accountancy profession is its
acceptance of the responsibility to act in the public interest.
Therefore, a professional accountant's responsibility is not
exclusively to satisfy the needs of an individual entity or
employer.
● The public interest is considered to be the collective well-
being of the community of people and institutions the
professional accountant serves, including entities, lenders,
governments, employers, employees, investors, the business
and financial community and others who rely on the work of
professional accountants.'
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The fundamental principles for Professional Accountants
Integrity
● Honest and straightforward in all professional and business relationships;
● Integrity also implies fair dealing and truthfulness.
● Should Not be associated with information that contains a materially false
and misleading statement or the information has been furnished recklessly.
Objectivity
● Should Not be biased nor have conflicts of interest or undue influence to
override professional or business judgment.
● Should not compromise professional or business judgment due to bias.
Should avoid being exposed to situations that may impair objectivity.
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Professional competence and due care.

● Competent to perform professional services and should act diligently and in
accordance with applicable technical and professional standards when
providing professional services.
● Professional competence requires both attainment and maintenance of
professional competence which requires continuing awareness and
understanding of relevant technical professional and business development.
● Diligence includes the responsibility to act in accordance with the
requirements of an assignment, carefully, thoroughly and on a timely basis.
● The engagement team should have appropriate training and supervision and
if there are any inherent limitations, the professional accountant should
notify the entity or users of the financial statements.
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Conceptual framework of the Code of Ethics for
Professional Accountants (HKICPA)
The Code requires a professional accountant
● Identify, evaluate and address threats to compliance with the
fundamental principles.
● Has an obligation to evaluate any threats to compliance with the
fundamental principles.
● Take into account both qualitative and quantitative factors when
considering the significance of a threat.
When the threats are identified and the threats are clearly significant
● Apply safeguards to eliminate the threats or reduce them to an
acceptable level, where appropriate,
● Decline or discontinue the service if no safeguards can be
implemented.
● Use professional judgment in applying this conceptual framework.
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Threats to compliance with the fundamental principles
There are five general sources of threat:
(a) Self-interest threats- may occur as a result of the financial or other interests of a
professional accountant or of an immediate or close family member (for example,
having a financial interest in an entity)
(b) Self-review threats - may occur when a previous judgment needs to be reviewed
by the professional accountant responsible for that judgment (for example, auditing
financial statements prepared by the firm)
(c) Advocacy threats- may occur when a professional accountant promotes a position
or opinion that subsequently objectivity may be compromised (for example,
promoting shares in a listed entity when that entity is a financial statement audit
entity)
(d) Familiarity threats- may occur when due to a close relationship, a professional
accountant becomes too sympathetic to the interests of others (for example, an
engagement team member having family member at the entity)
(e) Intimidation threats- may occur when a professional accountant may be deterred
from acting objectivity by threats, actual or perceived (for example, threats of
replacement due to disagreement)
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Available safeguards
There are three general categories of safeguards:
• Safeguards created by the profession, legislation or regulation
• Safeguards in the work environment
• Safeguards created by the individual
HKICPA issues ethical standards, quality control standards and auditing standards which work
together to ensure independence is safeguarded and quality audits are carried out.
Examples of safeguards created by the profession, legislation or regulation:
a) Educational training and experience requirements for entry into the profession
b) Continuing professional development requirements
c) Corporate governance code
d) Professional standards
e) Professional or regulatory monitoring and disciplinary procedures
f) External review by a legally empowered third party of the reports, returns, communication
or information produced by a professional accountant
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Available safeguards
Examples of safeguards in the work environment:

a) Strong firm leadership to emphasise the importance of compliance
with the fundamental principles and their expectation that
members of the assurance team will act in the public interest
b) Establish policies and procedures to implement and monitor
quality control of assurance engagement
c) Document the firm's independence policies including identification
and evaluation of threats
d) Document the internal policies and procedures requiring
compliance with the fundamental principles
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Examples of safeguards in the work environment
e) Establish policies and procedures to identify interests or relationships
between the firm or assurance team members, to monitor and manage the
undue dependence on fee from a single entity
f) Rotate senior audit staff, partners with separate reporting lines of the
provision of non-assurance services to an entity
g) Establish policies and procedures to prohibit non-team members
influence the outcome of the engagement
h) Update all partners and professional staff of firm's policies and
procedures including giving appropriate training
i) Senior management should review the adequate functioning of the
safeguarding system
j) Advise partners and professional staff to be independent
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Examples of safeguards in the work environment
k) Establish disciplinary mechanism to promote compliance with the firm's
policies and procedures
l) Involve an additional professional accountant to review the work done
or otherwise advise as necessary
m) Consult an independent third party, such as a committee of
independent directors, a professional regulatory body or another
professional accountant
n) Use different partners and engagement teams with separate reporting
lines for the provision of non-assurance services to entities
o) Discuss ethical issues with those in charge of entity governance
p) Disclose to those charged with governance the nature of services
provided and extent of fees charged
q) Involve another firm to perform or reperform part of the engagement
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Example of safeguards created by the individual
a) Comply with continuing professional development

requirements
b) Keep records of contentious issues and approach to
decision-making
c) Maintain a broader perspective on how similar
organisations function through establishing business
relationships with other professionals
d) Use an independent mentor
e) Maintain contact with legal advisers and professional bodies
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Professional accountants in public practice
Specific guidance: Independence
Professional accountants in public practice should not engage in any activities that impair or
might impair integrity, objectivity or the good reputation of the profession.
Objective of the guidance

The guidance states its purpose in a series of steps. lt aims to help firms and members:
Step 1 - Identify threats to independence
● Self-Interest Threat
● Self-Review Threat
● Familiarity Threat
● Advocacy Threat
● Intimidation Threat
Step 2 - Evaluate whether the threats are insignificant.
Step 3 - If the threats are not insignificant, identify and apply safeguards to eliminate risk, or
reduce it to an acceptable level.
lt also recognises that there may be occasions where no safeguard is available. In such a situation,
it is only appropriate to:
● Eliminate the interest or activities causing the threat
● Decline the engagement, or discontinue it
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Independence
A provider of assurance services must be, and be seen to be, independent. What is meant by
independence?
Independence of mind: The state of mind that permits the expression of a conclusion
without being affected by influences that compromise professional judgment, thereby
allowing an individual to act with integrity, and exercise objectivity and professional
scepticism.
Independence in appearance: The avoidance of facts and circumstances that are so

significant that a reasonable and informed third party would be likely to conclude weighing
all the specific facts and circumstances that a firm's or a member of the engagement team's
integrity, objectivity or professional scepticism has been compromised.
Firms must evaluate the significance of any threats to independence and then put safeguards
in place, where this is possible, to reduce the threat to acceptable levels. If it is not possible
to put adequate safeguards in place, it may be better to withdraw services than to risk a
conflict of interest. Certain entities, listed companies or those deemed to be of significant
public interest due to the wide range of stakeholders involved may be subject to more
stringent rules.
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Section 290 Independence- Audit and review engagements
Degree of independence:
The degree of independence required is less rigid for a low level assurance engagement to non
audit clients than for audit.
Self-interest threat
The HKICPA Code of Ethics highlights a great number of areas in which a self-interest threat might
arise.
● Financial Interests
● Employment with entity
● Close Business Relationships
● Partner on Entity Board
● Family and personal relationships
● Gifts and hospitality
● Loans and guarantees
● Overdue fees
● Percentage or contingent fees
● High percentage of fees
● Lowballing
● Recruitment
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Financial interest
A financial interest exists where a firm has a financial interest in an entity's affairs, for
example, the firm owns shares in the entity, or is a trustee of a trust that holds shares
in the entity.
When considering whether a financial interest in a client constitutes a self interest

threat, the significance of the threat should be considered in the light of the following
factors:
• Whether the financial interest is direct or indirect
• Role of the owner
• Materiality of the interest
Examples:
● Beneficial interests in shares/other interest
● Overdue fees
● Hold shares in a company's client
● Being trustee of a trusts that holds the shares in the company
● Having a retirement plan that owns shares in the company
● Material indirect ownership of shares
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Financial interest in an audit entity
Self-interest threat
If a member of the engagement team, a member of that
individual's immediate family or a firm has a direct financial
interest or a material indirect financial interest in the audit client
the self-interest threat created would be so significant that no
safeguards could reduce the threat to an acceptable level.
The parties listed below are not allowed to own a direct financial
interest or an indirect material financial interest in a client:
● The assurance firm
● A member of the assurance team
● An immediate family member of a member of the assurance
team
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Close business relationships
There are various ways of determining whether a firm has an inappropriately close relationship
with an entity and methods to address the issue if this is found to be the case. However, there is
often a degree of judgment involved.
For example, purchasing goods and services from an entity on an arm's length basis does
not usually constitute a threat to independence. However, if there are a substantial number of
transactions constituting a material interest, there may be a threat to independence and safeguards
may be necessary.
Whether distribution or marketing arrangements under which the firm acts as distributor or
marketer of the entity's products or services or vice versa constitute a material interest will also
depend on the degree of involvement and the effect of the transactions on both businesses overall.
Where a degree of judgment is involved, unless the interest is clearly insignificant, an

assurance provider should not participate in a venture with an entity. Unless any financial
interest is immaterial and the business relationship is insignificant to the firm, the threat created
would be so significant that no safeguards could reduce the threat to an acceptable level.
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Employment with the entity
Independence may be threatened when a professional accountant is employed by both
an audit firm and a client entity during the course of his career, or even where there is
the prospect of employment at an entity. Where an accountant has been connected with
an audit at an entity which subsequently offers employment (or may offer
employment):
● Objectivity might be impaired by the motivation to impress a potential future
employer
● A finance director who has a background as an audit partner has too much
knowledge of the audit firm's systems and procedures to perform independently
Again, the significance of the threat to independence depends on the specific

circumstances. In considering the safeguards that may need to be put in place,
consideration would be made of the influence the individual held over the audit in the
past, the time interval between the audit and the acceptance of the employment and the
capacity for influence the appointment gives over the subject matter of the assurance
engagement.
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Employment with the entity
If a former member of the engagement team or a partner of the firm joins an
audit client as a director, officer or employee in a position to exert significant
influence over the preparation of the client's accounting records of the
financial statements and a significant connection remains between the firm and
the individual the threat would be so significant that no safeguards would
reduce it to an acceptable level. Where no connections remains the
significance of the threat would depend on factors including:
● The position taken

● The extent of involvement with the engagement team
● The length of time since the individual was a member of the engagement
team
● Former position of the individual in the engagement team
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Employment with the entity - Safeguards
Safeguards which may be used include:
● Modification of the assurance plan
● Reassigning the engagement to another professional accountant with appropriate expertise
● Involving an additional independent professional accountant to review the work performed
● Carrying out a quality control review of the engagement
A firm should also have quality control procedures requiring an individual involved in serious
employment negotiations with an entity to disclose the fact that these negotiations are taking
place to the firm. The firm may then exercise its discretion and remove the individual from the
engagement.
'Cooling off’ period

where partners intend to join public interest entities as follows:
Key audit partner: one audit opinion covering a period of not less than 12 months for which the
partner was not a member of the engagement team
Firm's Managing Partner (or equivalent): one year
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Gifts and hospitality
This is a notoriously difficult area;

● in some parts of the world, offering gifts or corporate
hospitality is an accepted part of business life;
● in others, it falls into a grey area somewhere between
inducement and downright bribery!
● In general, unless the value of the gift or hospitality is trivial

and inconsequential a member of an engagement team should
decline any offers which may be seen to be intended to
influence the judgment of a professional accountant.
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Lowballing
Lowballing is the term used to describe the situation where a firm
quotes a significantly lower fee level for an assurance service than
would have been charged by the predecessor firm usually in order to
gain other more lucrative business.
A self-interest threat arises which must be safeguarded against. If the

firm wins the tender the following safeguards should be applied:
● Careful record keeping to demonstrate that the firm used appropriate
staff, spent sufficient time, and adhered to appropriate technical and
professional standards in carrying out the engagement
● Demonstration that the assurance engagement complied with all
applicable assurance standards, guidelines and quality control
procedures
● In other words, the low generation of fee revenue must not have any
adverse impact on the quality of the review carried out.
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Self-review threat
● Bookkeeping
● Preparation of financial statements
● Tax services, although generally these are not seen to impair independence
● Design and implementation of financial information systems
● Appraisal, valuation services and fairness opinions
● Actuarial services
● Internal audit services
● Management functions, but there are strict rules about the degree to
which
● assurance advisers may intervene in the management decisions of the
entity
● Human resources- such as recruitment and selection of senior
management,
● provision of temporary staff cover and so on
● Corporate finance, broker-dealer services, accessing finance and so on
● Legal services and litigation support
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Advocacy threat
● An advocacy threat often arises in the provision of legal or
corporate finance services.
● To avoid this threat firms must avoid being in the position of
taking the entity's part in a dispute or somehow acting as their
advocate in a way that threatens the appearance of
independence.
● The firm may be able to reduce the threat by using appropriate
safeguards, including separate teams and disclosures, but if the
threat cannot be reduced to an acceptable level the firm must
withdraw from the engagement.
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Familiarity threat
A familiarity threat often arises in conjunction with a self-interest
threat. Independence is jeopardised by the firm and its staff
becoming too closely connected or too familiar with or
sympathetic to the entity and its employees. Professional
scepticism may be severely impaired in
circumstances.
● The significance of the threat depends upon how long the staff
member has been in the team, their role, the nature of the
engagement, whether the client management has changed
and the structure of the audit firm.
Long association of senior personnel with entities
The rules state that for the audit of public interest entities:
An individual shall not be a key audit partner for more than
seven years, and shall not be a member of the engagement team
or key audit partner for another two years
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Intimidation threat
An intimidation threat arises when members of the assurance team are intimidated or pressured to
act unethically by entity staff. This generally means the firm has something to lose or is under
pressure in some way which the entity is trying to push to its own advantage.
Loss of business, replacement with another auditor and litigation are some of the methods by
which an entity may try to intimidate a firm.
A professional accountant may be dissuaded from using objectivity and exercising professional
scepticism by threats, whether actual or perceived from directors of an entity. There are three main
types of threat:
(a) Loss of business: for instance, as a result of a disagreement over the application of an
accounting principle, the entity may threaten to change its auditors if they wish to modify their
report as a result of the dispute.
(b) Loss of fee revenue: for instance, the entity may apply pressure to reduce the extent of work
performed by the professional accountants unjustifiably in order to reduce the fees.
(c) Litigation: defending a claim for negligence can be time consuming, publicly damaging and
expensive, even if the assurance firm were to eventually win the case
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Quality control: Independence
Firm should establish policies and procedures to emphasise the compliance on principles of
professional ethics which should be enforced by:
(a) Leadership of the firm
(b) Training
(c) Monitoring
(d) Process of dealing with non-compliance
The firm shall establish policies and procedures designed to provide it with reasonable assurance
that the firm, its personnel and, where applicable, others subject to independence requirements
(including network firm personnel), maintain independence where required by the Code. Such
policies and procedures shall enable the firm to:
(a) Communicate its independence requirements to its personnel and, where applicable, others
subject to them
(b) Identify and evaluate circumstances and relationships that create threats to independence,
and to take appropriate action to eliminate those threats or reduce them to an acceptable
level by applying safeguards, or, if considered appropriate, to withdraw from the engagement
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Familiarity threat
The firm shall establish policies and procedures:
(a) Setting out criteria for determining the need for safeguards to
reduce the familiarity threat to an acceptable level when using
the same senior personnel on an assurance engagement
over a long period of time
(b) Requiring for audits of financial statements of listed entities,

the rotation of the engagement partner and the individuals
responsible for engagement quality control review, and, where
applicable, others subject to rotation requirements after a
specified period in compliance with relevant ethical
requirements
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Professional accountants in public practice
Specific guidance: Responding to Non-Compliance with Laws and
Regulations
Professional accountants in public practice or in business may encounter non-compliance or
suspected non-compliance with laws and regulations during the course of their work. Guidance on
an appropriate response was issued in December 2016 and is effective on 15 July 2017
● Non-compliance with laws and regulations (non-compliance) comprises acts of omission or

commission, intentional or unintentional, committed by a client, or by those charged with
governance, by management or by other individuals working for or under the direction of a
client which are contrary to the prevailing laws or regulations.
● The determination of whether to make a disclosure to an appropriate authority depends

on the nature and extent of the actual or potential harm that is or may be caused by the matter
to investors, creditors, employees or the general public. For example, disclosure may be
determined to be appropriate if the business is producing products that are harmful to public
health.
● If the professional accountant determines that disclosure of the non-compliance or suspected
noncompliance to an appropriate authority is an appropriate course of action in the
circumstances, this will not be considered a breach of the duty of confidentiality under Section
140 of the Code.
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Specific guidance: Confidentiality
Duty of confidence
● A professional accountant has a duty of confidentiality to his client. This principle is
encapsulated in the HKICPA Code of Ethics which states that a professional accountant who
acquires sensitive information in the course of his work, should not use, nor appear to use, that
information to his own advantage or to the advantage of any third party with which he is
connected.
● lt is an implied term of any agreement of engagement that that the professional accountant will
not discuss the entity's affairs to any third party without the entity's consent. There are a few
recognised exceptions to this rule of confidentiality
Obligatory disclosure. If a member knows or suspects the entity to have committed an offence of
treason he is obliged to disclose all the information at his disposal to a competent authority. Local
legislation may also require the firm to disclose other infringements.
A professional accountant must disclose information if compelled to do so by a court order

(process of law). If a member is requested to assist the police, the tax authorities or any other
authority by providing information about an entity's affairs in connection with inquiries being
made he should first inquire under what statutory authority the information is demanded. If the
demand for information is pressed without any statutory authority the professional accountant
should seek the permission of the entity as to whether the information should be disclosed.
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Specific guidance: Confidentiality
● A member should not voluntarily co-operate with the authorities by assisting
with any investigations unless he acts with the entity's consent or is required
to do so by law (see the three circumstances in which he is compelled to do
so below). If he volunteers the information, it constitutes a breach of
confidentiality.
● From time to time a professional accountant may know or suspect that an
entity has committed a wrongful act and in these circumstances he must
give careful thought to his own position. Even in a criminal matter
(excluding treason, money-laundering and terrorist offences),he is under no
obligation to disclose his information to the relevant authority, but he must
ensure that he has not prejudiced himself by, for example, relying on
incorrect information.
● However, the professional accountant may himself be chargeable with a
criminal offence if he acted directly, without lawful authority or reasonable
excuse, in such a manner as to impede with intent the arrest or prosecution
of a entity whom he knows or believes to have committed an arrestable
offence.
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Specific guidance: Conflicts of interest
Professional accountants should identify potential conflicts of interest as they could
result in ethical codes being breached.
A conflict of interest is a situation that may undermine the judgment of a professional

accountant. There may be too much personally at stake either for himself or for his
firm for the professional accountant to reconcile the stakeholders' or public interest
against his own. In these situations:
● Principles of independence, integrity and objectivity are not satisfied
● Promoting personal interest may result in adverse consequences to stakeholders
Firms should take reasonable steps to identify circumstances that could pose a conflict
of interest before they happen. A conflict of interest may result in the Code being
breached (often conflicts of interest give rise to self-interest threats).
The key principle for the firm is that it firm should not accept an engagement in which
there is likely to be a significant conflict of interest.
51
Professional Ethics - Recap
52
Client Acceptance and Continuance Decisions
53
Importance of Client Acceptance and Continuance
Decisions to Audit Quality
● Conducting a quality audit begins with client acceptance and
continuance decisions
● New clients become part of an audit firm’s portfolio based on
the client acceptance decision, which includes an evaluation of
the client’s relative risk and audit fee profile
● Each year, the audit firm makes a client continuance decision
to determine whether the audit firm should continue to
provide services in the next period
● Similar to the client acceptance decision, the client
continuance decision is based on a consideration of the
client’s relative risk and audit fee profile
● Discontinued clients are those the audit firm decides to
eliminate from its portfolio
54
Exhibit 1.11
55
Risks Considered in Client Acceptance
and Continuance Decisions
● Audit firms consider many key risks when making client
acceptance and continuance decisions
● Types of key risks
● Client entity characteristics
● Independence risk factors
● Third-party/due diligence risk factors
● Quantitative risk factors
● Qualitative risk factors
● Entity organizational or governance risk
● Financial reporting risk
56
Other Considerations in Client Acceptance
and Continuance Decisions
● An audit firm should not perform an audit that it is not
qualified to perform
● Firms should not provide audit services if they do not
have the size or expertise to serve the client as the client
grows larger, becomes more geographically dispersed, or
increases in complexity
● Auditors should provide audit services only when the
preconditions for an audit are present
● Management’s use of an acceptable financial reporting
framework
● The agreement of management that it acknowledges and
understands its responsibilities
57
Engagement Letters
An engagement letter states the scope of the audit work to be performed and
letter documents the expectations agreed to by the auditor and the client
Items in the engagement letter typically include:

● The objective and scope of the audit of the financial statements
● The responsibilities of the auditor
● The responsibilities of management
● A statement that because of the inherent limitations of an audit, together with
the inherent limitations of internal control, an unavoidable risk exists that some
material misstatements may not be detected, even though the audit is properly
planned and performed in accordance with relevant auditing standards
● The identification of the applicable financial reporting framework for the
preparation of the financial statements
● A reference to the expected form and content of any reports to be issued by the
auditor and a statement about circumstances that may arise in which a report
may differ from its expected form and content
58
Engagement acceptance (HKICPA)
Accepting and continuing appointment
Assurance engagements should only be accepted if the firm meets the requirements of the Code of
Ethics for Professional Accountants and HKSQC 1 (Clarified). The standard requires that
practitioners ensure they comply with the Code of Ethics for Professional Accountants and the
Quality Control Standard (HKSQC 1 (Clarified)) with regard to the assignment.
Before accepting a new engagement, the professional accountant in public practice should
consider whether there is any threat to compliance with the fundamental principles, that is
any potential threats to integrity or professional behaviour, for example, entity involvement in
illegal activities.
The significance of any threats should be evaluated and safeguards should be applied to eliminate
them or reduce them to an acceptable level.
If it is not possible to reduce the threat to an acceptable level, the professional accountant in
public practice should decline the engagement. For recurring entity engagement, acceptance
decisions should be reviewed annually
59
Engagement acceptance (HKICPA)
A professional accountant must only accept engagement that he is
competent to perform and safeguards may be applied:
Obtain appropriate understanding of the nature of the client's

business, complexity of the operations, specific requirement of the
engagement, the relevant industries and the scope of work
Obtain and be familiar with the relevant regulations or reporting

requirement
● Assigning sufficient competent staff
● Consider the use of experts
● Consider the deadline
● Comply with quality control policies and procedures to provide
reasonable assurance that specific engagements are accepted only
when they can be performed competently
60
Changes in professional appointment (HKICPA)
A professional accountant should determine whether there are
any reasons for not accepting the engagement. Safeguards may
be applied such as the following:
● Discuss client's affairs with existing accountant

● Enquire of the existing accountant regarding information of
which the proposed accountant needs to be aware before
deciding whether to accept the engagement
● Before any initiation to contact the existing accountant, there
must be client's consent Any client's information to be
released by the existing client, must be with the client's
consent or there must be a legal or ethical requirement for
such disclosure
61
Requirements of Professional Ethics
in the USA
62
AICPA Requirements: Code of Professional Conduct
● AICPA has a code of professional conduct to aid auditors

in conducting a quality audit
● The Code applies to professional services performed by
AICPA members
● Compliance with the Code
● Depends primarily on the voluntary cooperation of AICPA
members
● Depends secondarily on public opinion, reinforcement by
peers, and ultimately, on disciplinary proceedings
63
Principles Of Professional Conduct
● AICPA’s Code of Professional Conduct consists of a set of
principles of professional conduct
● Topics include:
● Responsibilities
● Public interest
● Integrity
● Objectivity and independence
● Due care
● Scope and nature of services
● Refer to Exhibit 1.6 for a summary
64
Exhibit 1.6
65
Conceptual Framework
● AICPA’s Code of Professional Conduct includes a
conceptual framework for members in public practice
● This framework incorporates a “threats and safeguards”
approach to help auditors analyze relationships and
circumstances that the Code does not specifically address
● Exhibit 1.7 provides a flowchart of the steps in the
conceptual framework
66
Exhibit 1.7
67
Conceptual Framework Threats
● Threats are circumstances that could result in an auditor
lacking independence in fact or in appearance
● Threats to independence include:
1. Self-review threat
2. Advocacy threat
3. Adverse interest threat
4. Familiarity threat
5. Undue influence threat
6. Self-interest threat
7. Management participation threat
68
Conceptual Framework Safeguards
● Safeguards are actions or other measures that may
eliminate a threat or reduce a threat to an acceptable
level
● These safeguards include:
● Safeguards created by the profession, legislation, or regulation
● Safeguards implemented by the audit client
● Safeguards implemented by the audit firm
69
AICPA Rules of Conduct for Members in Public
Practice
● The rules and related interpretations address many
situations; however, they cannot address all relationships
or circumstances that may arise
● Refer to Exhibit 1.8 for summaries of all rules applicable
to members in public practice
70
Independence Rule
● The Independence Rule requires that a member in public
practice be independent in the performance of
professional services as required by standards
promulgated by bodies designated by the AICPA
● Covered Member
● Financial Interests
● Employment of Family Members
● Loans
● Performing Other Nonaudit Services
● Network Firms
71
SEC and PCAOB: Other Guidance on Professional
Responsibilities
● The Securities and Exchange Commission (SEC) and Public
Company Accounting Oversight Board (PCAOB) have
independence requirements that apply only to auditors of
public companies
● These two organizations have complementary
independence requirements
72
SEC’s Commitment to Independence
● The independence requirement serves two related, but
distinct, public policy goals:
● Foster high-quality audits by minimizing the possibility that any
external factors will influence an auditor’s judgments
● Promote investor confidence in the financial statements of
public companies
73
Impairment of Auditor Independence
● Auditor independence is impaired when auditor has a
relationship that:
● Creates a mutual or conflicting interest between the
accountant and the audit client
● Places the accountant in the position of auditing his or her
own work
● Results in the accountant acting as management or an
employee of the audit client
● Places the accountant in a position of being an advocate for
the audit client
74
Additional Requirements For Professional Conduct
● Auditors of public companies have additional

requirements for professional conduct that extend
beyond those of the AICPA
● Requirements include:
● Preapproval of services
● Fee disclosures
● Audit partner rotation
● Not performing prohibited services
75
Prohibited Services
● The types of nonaudit services that audit firms can provide to public
company audit clients are more restricted than those that can be
provided to non-public companies
● Prohibited nonaudit services for public company audit clients
include:
● Bookkeeping or other services related to the accounting records or
financial statements of the audit client
● Financial information systems design and implementation
● Appraisal or valuation services, fairness opinions, or contribution-in-kind
reports
● Actuarial services
● Internal audit outsourcing services
● Management functions or human resources
● Broker or dealer, investment adviser, or investment banking services
● Legal services and expert services unrelated to the audit
● Any other service that the PCAOB determines, by regulation, is
impermissible
76
International Professional Requirements That Help
Auditors Achieve Audit Quality
● The International Ethics Standards Board for Accountants
(IESBA), under the International Federation of
Accountants, outlines fundamental principles that should
guide auditors’ ethical decision making.
77
IESBA Code of Ethics for Professional Accountants
● Five fundamental principles

● Integrity
● Objectivity
● Professional Competence and Due Care
● Confidentiality
● Professional Behavior
● In addition to these five principles, the Code contains
specific standards addressing many of the same topics
contained in the AICPA’s Code of Professional Conduct.
78
What Do You Think? (p. 28)
● In the U.S. there is a requirement for audit partner rotation,
but no requirement for audit firm rotation. Requirements
differ internationally. For example, European Union Countries
have mandatory audit firm rotation. Deloitte has been the
audit firm used by Procter & Gamble since 1890. In fact, as of
January 2017, 13 public companies have engaged the same
auditor for at least a century.
● Should investors be concerned about the remarkable length of
these relationships and the ability of an audit firm to be
independent when conducting the audit?
● Does a relationship of this length improve or diminish audit
quality?
● Should there be a requirement for mandatory firm rotation for
audit firms of U.S. public companies?
79
Utilitarian Theory
● Utilitarian theory holds that what is ethical is the action
that achieves the greatest good for the greatest number
of people
● Utilitarianism requires:
● Identification of the potential problem and possible courses of
action
● Identification of the potential direct or indirect impact of
actions on each affected party (stakeholders)
● Assessment of the desirability (goodness) of each action
● An overall assessment of the greatest good for the greatest
number
80
Rights Theory
● Rights theory focuses on evaluating actions based on the
fundamental rights of the parties involved
● Not all rights are equal – higher-order rights take precedence
over lower-order rights
● The highest-order rights include the right to life, to autonomy, and to
human dignity
● Second-order rights include rights granted by the government, such
as civil rights, legal rights, rights to own property, and license
privileges
● Third-order rights are social rights, such as the right to higher
education, to good health care, and to earning a living
● The fourth-order rights relate to one’s nonessential interests or one’s
personal tastes
● Rights theory requires that the “rights” of affected parties be
examined as a constraint on ethical decision making
81

Session 2 New QP &amp; Prof Skill, Values and Ethics

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Session 2 Professional Skills and

Professional Values, Ethics and Attitudes

** Material comes from Textbook (Ch1) and HKICPA

● The new QP will introduce an integrated Capstone comprising

IES 4 Professional Values, Ethics and Attitudes

In Hong Kong, guidance come mainly from:

In USA, Organizations providing such guidance for U.S. auditors include:

● Professional accountants are expected to demonstrate the highest

All Professional Accountants are required to comply with the Code.

Section A : General application of the Code

Section B : Professional accountants in public practice

The Code states the following about the particular

Professional competence and due care.

Examples of safeguards created by the profession, legislation or regulation:

Examples of safeguards in the work environment:

a) Comply with continuing professional development

Objective of the guidance

Independence in appearance: The avoidance of facts and circumstances that are so

When considering whether a financial interest in a client constitutes a self interest

Where a degree of judgment is involved, unless the interest is clearly insignificant, an

Again, the significance of the threat to independence depends on the specific

● The position taken

'Cooling off’ period

This is a notoriously difficult area;

● In general, unless the value of the gift or hospitality is trivial

A self-interest threat arises which must be safeguarded against. If the

(b) Requiring for audits of financial statements of listed entities,

● Non-compliance with laws and regulations (non-compliance) comprises acts of omission or

● The determination of whether to make a disclosure to an appropriate authority depends

A professional accountant must disclose information if compelled to do so by a court order

A conflict of interest is a situation that may undermine the judgment of a professional

Items in the engagement letter typically include:

Obtain appropriate understanding of the nature of the client's

Obtain and be familiar with the relevant regulations or reporting

● Discuss client's affairs with existing accountant

● AICPA has a code of professional conduct to aid auditors

● Auditors of public companies have additional

● Five fundamental principles

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Session 2 New QP & Prof Skill, Values and Ethics

Session 2 New QP & Prof Skill, Values and Ethics