AUDIT CHAPTER 3

GRAY
STEVANIE LAURENSIA 201850092
HAL 80-94
PUBLISHED CODES OF
ETHICS
Independence and fundamental
principles
Independence of mind, the state of mind that permits the expressions of a conclusion without
being affected by influences that compromise professional judgement, thereby allowing an
individual to act with integrity and exercise objectivity and professional scepticism.
Independence of 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 objectivity or professional scepticism has been
compromised.
 The fundamental principles identified by IFAC in paragraph 100.5 are :
A professional accountant shall comply with the following fundamental principles :
a. Integrity
b. Objectivity
c. Professional competence and due care
d. Confidentiality
e. Professional behaviour
 The IFAC Code conceptual framework requires professional accountants for :
a. Identify threats to compliance with the fundamental principles, and where operating in the
context of audit, to compliance with independence
b. Evaluate identified threats to determine whether any such threats are at an acceptable level
c. Where identified threats are evaluated as not being at an acceptable level, address the
threats to either eliminate or reduce them to an acceptable level.
IFAC and FRC Ethical Standard
potential threats to objectivity
Threats Comments
(a) Self-interest threat The threat arises where financial or other interest will inappropriately influence
the auditor’s judgement or behaviour.
(b) Self-review threat This threat arises when the outcomes of non-audit services performed by the
audit firm are reflected in the information to be audited.
(c) Advocacy threat This threat arises where the auditor supports to advocates a client’s position to
the point that objectivity is compromised.
(d) Familiarity threat In this case, the auditor, through a long or close association with the client,
might become accepting of their views, perhaps unknowingly.
(e) Intimidation threat This threat arises where the auditor is deterred from acting objectively or with
integrity because of pressure or intimidation existing in the audit environment.
(f) Management threat A management threat arises when the auditor’s views and judgements become
too closely aligned with those of management.
 Fees, compensation and evaluation, gifts
and hospitality, and litigation
Threats
(a) Self-interest threat Main threat
(b) Intimidation threat Main threat
(c) Familiarity threat If offering gifts and hospitality

o These include the significance of the amount of fees obtained from a client for both audit and
non-audit services, overdue fees and contingent fees.

o Both the IFAC Code and FRC Ethical Standard give more stringent guidance for those clients
considered to be public interest entities.
o For instance, IFAC requires the audit firm to disclose if total fees from a public interest entity
client are more than 15% of total audit firm fees from all clients.
Business, family and personal,
employment/service with an audit client
Threats
(a) Self-interest threat Main threat
(b) Self-review threat If a person associated with the audit engagement
is seconded to a client of the audit firm
(c) Familiarity threat Main threat
(d) Intimidation threat Main threat

o The application material in the IFAC Code outlines various scenarios

and gives guidance on identifying, evaluating, and addressing such
threats.
Long association with an audit client
Threats
(a) Self-interest threat Main threat
(b) Familiarity threat Main threat

oThe IFAC Code and FRC Ethical Standard give guidance on tenure, which takes into consideration
the seniority of the audit team member and whether the client is considered to be a public
interest entity.
oFor instance, the IFAC Code states an engagement partner shall not act as such for the same
client for a period of more than 7 years.
Provision of non-audit services to an
audit client
Threats
(a) Self-interest threat Main threat
(b) Self-review threat Main threat
(c) Advocacy threat Based on the nature of the non-audit services
(d) Familiarity threat Based on the nature of the non-audit services

o The IFAC Code specifically prohibits an audit firm from offering a

non-audit service that would lead to the firm assuming
management reponsibility.
Audit Firm’s Control
Environment
Audit team is much broader and includes not only those who are directly
involved in the audit engagement but also the wider group of people who
are in a position to influence the conduct and outcome of the audit.
The features of a strong control
environment within the audit firm
1. The establishment of a framework of responsibilities and reporting in the context of
maintaining compliance with the fundamental principles, in particular in the context of audit,
to integrity, objectivity and independence of the audit firm and staff.
2. The issue of documented policies and procedures by the audit firm to be available to all staff
involved in the provision of audit and assurance services.
a. Partners and staff to report the following in respect of an audited entity
b. Clarification of the role of the engagement partner regarding maintenance of integrity,
objectivity, and independence in the following respects
c. Continual review of audited entities to ensure that all persons who are in a position to
influence the conduct and outcome of the audit are independent
d. Empowerement of staff to communicate to the audit firm leadership/Ethics Partner any
issue of integrity, objectivity, or independence that concerns them
The features of a strong control
environment within the audit firm
3. The establishment of communication links to those charged with governance within the
audited entity to ensure that the client is aware of :
a. Threats that may affect objectivity and independence of the audit firm and staff
b. Safeguards to eliminate the threats or reduce them to acceptable levels
c. Action taken in the light of threats and safeguards.
Ethics Partner
The Ethics Partner is a partner in the audit firm with two particular responsibilities for :
a. The adequacy of the firm’s policies and procedures relating to integrity, objectivity, and
independence, their compliance with FRC Ethical Standard and the effectiveness of its
communication to partners and staff within the firm
b. Providing related guidance to individual partners
Engagement Quality Control Reviewer
ISA 200 (paragraph 19) required that the audit engagement partner of a listed company audit
shall :
• Determine that an EQCR has been appointed
• Discuss significant matters arising during the audit engagement, including those identified
during the engagement quality control review, with the EQCR; and
• Not date the auditor’s report until the completion of the engagement quality control review

The EQCR evaluates significant judgements made in the course of an audit engagement and the
conclusion reached by the audit team in coming to its opinion for the audit report.
Communication with those charged with
governance
It is composed of non-executive directors who are independent of executive management and
play a role in relation to audit quality, in respect of both internal and external audit.
Both IFAC code and FRC’s Ethical Standard expect the audit firm to keep those charged with
governance of the audit cliend informed with regard to :
Potential threats to ethical principles
The auditor’s evaluation of these threats
The appropriateness of actions taken to eliminate threats and create safeguards to reduce
threats to an acceptable level
It is clear that the Ethics Partner and the EQCR would also be involved, where appropriate.
End of the Audit Process
At the end of the audit process, when forming an opinion but before issuing the report on the
financial statements, engagement partners have to reach an overall conclusion that any threats
to objectivity and independence have been properly addressed.

If, after exhausting all possible actions to address threats the auditor concludes that ethical
conflicts remain unresolved, so :
1. The individual auditor should withdraw from the specific engagement
2. (it may be appropriate) The audit firm not to report and resign from the audit engagement
Safeguards to Counter
Threats to Integrity,
Objectivity, and
Independence
The IFAC Code identifies several sources of externally created safeguards, including :
1. Educational, training, and experience requirements for entry into the profession
2. Corporate governance regulations
3. Professional or regulatory monitoring and disciplinary procedures
4. Effective compliant systems which enable interested parties to draw attention to unethical
behaviour
5. An explicity stated duty to report ethical breaches
The IFAC Code (2016) splits these safeguards into three categories as follows :
Firm-wide safeguards
Engagement specific safeguards
Safeguards within the client’s systems and procedures