BKAA 3023 – AUDITING AND ASSURANCE

TOPIC 1
CODE OF ETHICS FOR
AUDITORS
 LEARNING OBJECTIVES

To demonstrate the importance of professional ethics

To explain fundamental principles of ethics and professional
conduct in accordance to MIA-Bylaw
To define the concept of independence and explain its
importance
To identify situation that can influence independence in
appearance and in fact
To discuss advertising and other methods to attract customers
To discuss the amount of fee that can be charged
 1.1 Importance of professional
ethics

DE F IN IT I ON OF E THI C S

A system or code of conduct on moral duties and

obligations that indicate how an individual should behave
 Importance of ethics

 Ethical behavior is necessary for a society to function in orderly

manner.
 Due to its importance, many ethical values are incorporated into
laws, but some cannot be incorporated into laws because of its
judgmental value.
 The public rely on the objectivity and integrity of professional
accountants, and this imposes a public interest responsibility on
the profession. Imagine what would happen if we couldn’t depend
or trust the people we deal with to be honest.
 Therefore, self-regulation is essential in ensuring high moral
behavior among professionals and upholding the public respect
and confidence in the profession.
 Importance of ethics

 Most professions establish rules or codes of conduct that define

what is ethical (professional) behavior for its members, so that;
 Users of the professional services know what to expect when they
purchase such services,
 Members of the profession know what is acceptable behavior, and
 The profession can use the rules to monitor the action of its members.
 For the accounting profession in Malaysia, MIA has established
the By-laws (On Professional Conduct and Ethics) and is
responsible to monitor the actions of its professional members
to ensure compliance.
 1.2 Fundamental principles of
ethics and professional conduct

There are certain fundamental standards or principles which

professional accountants should observe in order to achieve
the objectives of the accounting profession and fulfill their
public interest obligation.
 Fundamental principles of ethics
and professional conduct

 INTEGRITY – A professional accountant should be straight

forward and honest in all professional and business relationship.
 Integrity means adherence to moral and ethical principles, soundness of moral
character, or simply honesty.
 Should not prepare, attest, certify or be associated with reports, returns, etc. if
the info is believed to contains materially false or misleading statement.
 OBJECTIVITY – should not allow bias, conflict of interest or undue
influence of others to override professional or business
judgment.
 Objectivity means impartiality in performing all services.
 Relationships that bias or unduly influence professional judgment should be
avoided.
 Fundamental principles of ethics
and professional conduct

 PROFESIONAL COMPETENCE AND DUE CARE – continuing duty

to maintain professional knowledge and skill at competence
level, and should act diligently and in accordance with applicable
technical and professional standards when providing
professional services.
 A member should decline to undertake/continue professional work which
he/she is not competent to perform, unless with necessary advice and
assistance.
 Due care and diligence encompasses the responsibility to act in accordance
with the requirements of an assignment, carefully, thoroughly and on a timely
basis.
 If appropriate, should explain limitations inherent in the services to avoid
misinterpretation by clients/employers.
 Fundamental principles of ethics
and professional conduct

 CONFIDENTIALITY – should respect the confidentiality of

information acquired as a result of professional and business
relationships and should not disclose any such information to
third parties without authority unless there is a legal or
professional right to disclose. It also should not be used for
personal or third party advantage.
 PROFESSIONAL BEHAVIOR – should comply with relevant laws
and regulations and should avoid any action that discredits the
profession.

* Each fundamental principles is discussed in details in sec 110-150 MIA By-laws

 1.3 Professional Independence

Professional independence concept is very important to the

accountancy profession, in particular with regard to auditing.

An audit of financial information by someone who is not

independent would lose its value to the users of the
information.
 Professional independence

Concept of independence
 Independence is an attitude of mind characterized by integrity
and objective approach to professional work.
 A member in public practice should be, and be seen to be, free
in each professional assignment he undertakes, of any interest
which might distract from objectivity.
 Independence includes the quality of integrity, objectivity,
honesty, and impartiality.
 Professional independence

 Independence requires:
 Independence of Mind
The state of mind that permits the expression of conclusion without being
affected by influences that compromise professional judgment, allowing an
individual to act with integrity, and exercise objectivity or professional
skepticism. (exist when auditor is able to maintain an unbiased attitude
throughout the audit)
 Independence in Appearance
The avoidance of facts and circumstances that are so significant that a
reasonable and informed third party would reasonably conclude a firm’s,
or a member of the assurance team’s, integrity, objectivity or professional
skepticism had been compromised. (is the result of other’s interpretation of
the independence)
 Professional independence

 Independence in auditing means taking an unbiased viewpoint

in the performance of audit test, the evaluation of the results
and issuance of audit report.
 The phrase “should be, and be seen to be”, means that not only
auditors should maintain an independent attitude but also
important that the users of financial statement have confidence
in that independence.
 Professional independence

Provisions of the MIA by-laws:

 Officer of a company [sect 290.103 (1)(c)] – prohibits member
from accepting appointment as auditor of a company if he is:
 An officer of the company
 A partner, employer or employee of an officer of the company
 Within past 12 months, has been associated with the company directly, such as
an officer or employee of the company.
Financial interest (sect 290.104) – prohibited from accepting
appointment as auditor if he:
 Has any interest in shares of the company, direct on indirect (by spouse,
dependent son/daughter).
 Professional independence

Provisions of the MIA by-laws:

 Non-audit services (sect 290.158) – auditor should know their
financial dependency when providing NAS to their clients. If
significant, they should reduce to an acceptable level and if not,
they should not accept those services. The following activities
would generally create self-interest or self-review threats that are
so significant that only avoidance of the activity or refusal to
perform the assurance engagement would reduce the threats to
an acceptable level:
 Authorizing, executing or consummating a transaction, or otherwise exercising
authority on behalf of the assurance client, or having the authority to do so.
 Determining which recommendation of the firm should be implemented.
 Professional independence

Continue…
 Reporting, in a management role, to those charged with governance.
 Acting as a court appointed liquidator, provisional liquidator, receiver, receiver
and manager, special administrator or persons of like description of the
assurance client within the previous two (2) years.

 Auditor may decline appointment if the client has not paid the
fees in every year of two consecutive financial years.
 Financial dependency exist when the total fees of one assurance
clients exceed 15% of the firm’s total fees in every year of two
consecutive financial years.
 1.4 Advertising, publicity and
solicitation

Advertising/publicity is the use of various media to

communicate favorable info about the services of CA firm.

Solicitation consist of various means to engage new clients,

other than accepting new clients that approach the firm.
 Advertising

 Advertising is permitted as long as is not false or deceptive (sect

250.3).
 However, it should not attempt to portray that public practice
firm is superior than other firm (sect 250.2)
 By-laws also prohibits member form responding to
advertisement to tender professional work except for non-
recurring professional or specialist work.
 1.5 Fees and commission

By Law Section 240.2A provides that the professional fees

should be a fair reflection of the value of the work performed
for the client, taking into account:
• the skill and knowledge required
• level of training and experience of the person engaged
• time occupied by each person engaged in the work
• the degree of responsibility and urgency that the work entails
 Fees and commission

 Sect 240.3 – fees should not be charged on a percentage or

similar basis except authorized by statute or is general practice
for certain specialist work; nor should be accepted on a
contingency fees basis.
 Member should not propose to a client loss fees or free services.
 By-laws prohibits members from paying a commission to obtain
a client, or accepting a commission for a referral to a client of
products and services.

Refer to sect 290.206 – 290.212 for more details on fees and

pricing