ACCT 356-S2

ADVANCED AUDITING
Lecture 3

Quality Controllers

HERE ex CAANZ

Rob Vosslamber
rob.vosslamber@canterbury.ac.nz

(Source: FreeDigitalPhotos.net)
STOP PRESS!
• Class rep

• Assignment

• Tutorials this week

• Wednesday 9.00-9.50 am in Jack Erskine 443

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 Lecture Menu
1. Professionalism
2. Professional ethics
3. Professional discipline
4. Putting theory into action
5. Professional judgment
6. Professional scepticism
7. Ethics and social media

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The course to date!

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Students
1. Professionalism
So what is a professional?

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 Which of these occupations is a
profession?
Plumber?
Lawyer?
Professional rugby league player?
Real estate agent?
Farmer?
Childcare worker?
University lecturer?

What criteria did you use?

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So…
What makes something a profession?

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Nature of a profession
Characteristics of a profession
• Autonomy
• Specialised knowledge base
• Control of training, certification and licensing
• Self-governing and self-policing
• Ethics
• Commitment to public service

Source: Burbules and Densmore (1991)

Nature of a profession
21st century version

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 What is a profession? (Cont.)

Occupational Continuum

Recognised and
well-respected Least skilled
professions and attractive
(e.g. law and occupations
medicine) (e.g. ________)

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 Professional bodies
Professional bodies perform several roles:
• set entry educational and experience requirements.
• determine ongoing educational requirements, e.g. CPD.
• establish and apply disciplinary procedures.
• establish rules.
• advocate on behalf of members for sound public policy in the
financial, regulatory and taxation areas.
• establish Codes of Ethics.
• promote themselves and the profession.
• undertake auditor licensing and audit firm registration on behalf of
FMA.
• Note: standard setting functions for financial reporting and auditing
shifted to XRB in 2011. Members must apply the financial reporting
and auditing & assurance standards as issued by the XRB.
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 Professions and public interest

“A distinguishing mark of the accountancy

profession is its acceptance of the responsibility
to act in the public interest. An assurance
practitioner’s responsibility is not exclusively to
satisfy the needs of an individual client.
Therefore, the Code contains requirements and
application material to enable assurance
practitioners to meet their responsibility to act in
the public interest.”
(XRB PES-1 100.1 A1)

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Professionalism vs. commercialism
Professionalism
Commercialism

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What is a profession?
‘Spirit’ in which job is carried out, not just the possession
of certain ‘attributes’:
“[Professionalism is] an attitude of mind. Whenever outrunning
the desire for personal profit, (one finds) joy in work, eagerness for
service, and a readiness for cooperative process, then trade has
been left behind and a profession entered”
(Mitchell, 1965)

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But is the 21st century auditing profession really a
profession?

“the ultimate goal was to change the firm’s self-image

from that of a professional firm that happened to be in
business (the traditional view among the giant CPA firms)
to a business that happened to market professional
services.”
(Zeff, 2003, 271)

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What factors have challenged professionalism in auditing?
Loss of self-restraint in pursuit of profit
Competition between firms
Growth obsession
Diversification into NAS
Loss of independence from clients
Loss of professional behaviour between firms
Advertising
Focus on rules, not principles
Lowballing for fees
Focus on auditee, rather than shareholders as the client
Social change

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Big 4 Revenue by source

Revenue of the Big Four accounting / audit firms

(in billion U. S. dollars)

NZ Govt core revenue 2021 was US$250B)

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2. Professional ethics

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Consider…
Class scenario
What are ethics?
Well-founded standards of right and wrong
The study and development of one’s ethical standards

Ethical issues:
“Situations where individuals have to make a choice from
unclear and complex alternatives, where each alternative
may be the right choice according to a specific moral
position or viewpoint”
(Leung et al. 2004)
Ethical issues for auditors
1. Should I underreport how much time I spend on a
section of client’s audit so I don’t blow the budget?
2. To save time, should I only sample and test invoices
that are easily accessible?
3. An invoice I have sampled seems to have an error on
it – should I replace it with another one and hope it is
error free?
4. The client has offered to give me a gift on
completion of the audit – should I accept?

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Aspects of ethical behaviour
On what basis do you make your ethical
decisions?

Morality
Law
Socially acceptability

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Characteristics of an ethical person

What are the characteristics of an ethical person?

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Factors in unethical behaviour
Why do people act unethically?

Pressures
·Financial
·Pressure to succeed
(not willing to admit mistakes, need to look good,
earn profits at all costs)
·Desire to be popular
Opportunity
Rationalisation

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Not just students!

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Types of Ethical Theories
Results-oriented (Teleological)
• Judge behaviour according to its consequence
e.g. Utilitarianism (Bentham, Mill)

Duty-oriented (Deontological)
• Judge behaviour according to the duties required and the rights of others
Focuses on compliance with rules, which are based on duties and rights
• Duties – activities a person expected to perform
• Rights – behaviours expected of others

e.g. Theological ethics

Rationalism
Social contract theory
e.g. Kant
Reasons for a Professional Code of Ethics

• Guidance to members

• Basis to judge failure

• Establishing public confidence

• Privileged position of professionals

= “power” position
Code of Ethics
• Minimum acceptable standards of professional conduct
• XRB CoE compliance mandatory for all members
• Structure of the NZICA COE:
Fundamental principles (FPs) (s. 110)
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behaviour
• Conceptual framework (s. 120)
(PES-1 Code of Ethics for Assurance Practitioners)

Requires threats to FPs to be identified, evaluated and

mitigated/eliminated through safeguards – see R120.6ff.

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3. Professional discipline
Necessary to maintain public’s confidence in the
profession
NZICA Act 1996 requires establishment of rules providing
for a:
Professional Conduct Committee (PCC) (s. 6(1)(f))
Disciplinary Tribunal (s. 6(1)(g))
Appeals Council (s. 6(1)(h))

Similar rules apply to CPAA members

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 4. Putting Theory into Action

Assuming you want to act ethically when faced with an

ethical dilemma …

How do you work out

what to do?
“NZICA” Model
1. Review the facts, the principal stakeholders and the ethical
issues
2. Determine the ethical principles that are going to guide your
decision making
3. Consider what options are available
4. Evaluate the options – what are the consequences and what are
ethically acceptable
5. Decide what to do – based on the information provide what
solutions exist? What would be the most appropriate?
(NZICA, (2013) CPD Course: Professional Ethics, p. 15f.)
Costs of unethical behaviour

Conscience driven costs

Society-imposed costs

Loss of freedom of choice

5. Professional judgment

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Professional judgment
• Judgment is at the heart of any profession
• Standards and guidelines set parameters for exercise of
judgment but do not replace it
• Judgment pervades all phases of the audit

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Professional judgment (cont.)
Examples of audit judgments include
• Client acceptance and retention decisions
• Establishing materiality
• Assessing various types of risk
• Allocating audit effort between tests of controls and substantive testing
• Evaluating internal control effectiveness
• Establishing expectations in analytical procedures
• Determining what deviations from expectations should be investigated in
analytical procedures
• Selecting audit procedures
• Determining sample sizes judgementally
• Evaluating the competence of evidence
• Determining the appropriate audit opinion
No standard deals solely with ‘judgment’ per se, but the concept is
referred to throughout auditing standards
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 Professional judgment (cont.)

All (deliberate) auditing decisions (including related ethical decisions) can be

viewed as following a standard process:

Define the Define the Weight Generate Rate Make a

problem criteria criteria alternatives alternatives choice

Judgement is the process by which the individual has to think about relevant
aspects of the decision problem
Errors in judgement revealed as erroneous decisions

By understanding and minimise judgement errors, we can improve auditor

decision making quality.
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 Professional judgment:
Influences on an auditor’s judgments

Education

The client Experience

Auditor’s
Judgments
Audit firm
Standards,
policies
guidelines, law

Biases and Professional

cognition scepticism
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 Professional judgment:
Judgment biases
• Humans, including professionals, are imperfect processors
of information
• Heuristics
• Ways people simplify complex information processing
tasks
• Most people unaware that they are using them
• May lead to errors in judgements and poor decision-
making

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 Professional judgment:
Judgment biases (cont.)
 Availability Heuristic:

“People assess the frequency of a class or the probability of an

event by the ease with which instances or occurrences can be
brought to mind.” (Tversky and Kahneman, 1974)

 Characteristics
 Ease of recall
 Retrievability
 Presumed associations

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 Professional judgment:
Judgment biases (cont.)
 Representativeness Heuristic

“the degree to which [an event] (i) is similar in essential

characteristics to its parent population, and (ii) reflects the salient
features of the process by which it is generated.” (Tversky and
Kahneman, 1974)

Characteristics
 Insensitivity to base rates

 Insensitivity to sample size

 Misconceptions of chance
 Regression to the mean
 Conjunction fallacy

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Professional judgment:
Judgment biases (cont.)
 Anchoring and Adjustment Heuristic (Base rate)

“In many situations, people make estimates by starting from an

initial value that is adjusted to yield the final answer.” (Tversky
and Kahneman, 1974).

Characteristics
 Insufficient anchor adjustment
 Overconfidence

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 Professional judgment:
Improving auditor judgments
• Improved theoretical framework for the audit process
• Expert systems and other decision aids
• Improved judgment and decision making skills, including
debiasing techniques
• Improved expertise
• Framing and perspective
• Group decision making and review of individual
judgments
• Justification and accountability
• Professional skepticism

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6. Professional scepticism
Professional skepticism is necessary for high-quality
professional judgment
ISA(NZ) 200, para 13(l) defines it as:
“an attitude that includes a questioning mind, being alert
to conditions which may indicate possible misstatement
due to error or fraud, and a critical assessment of audit
evidence.”
Professional scepticism is relevant and necessary throughout
the audit, even though reference to it is not repeated within
each ISA (ISA (NZ) 200, para A71).

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Professional scepticism (cont.)
Why the renewed interest in professional
skepticism?
• Increasing complexity of business transactions
• Increasing use of principles-based accounting
standards
• Expanded use of fair values
Inspection reports by regulators around the world
have expressed concerns with the application of
skepticism by auditors

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Professional scepticism (cont.)
Problems:
• Lack of common understanding
• Lack of practical guidance
• Unclear how it can be demonstrated and documented
Professional skepticism influenced by:
• Personal behavioural traits (attitudes/ethical values)
• Competence level (i.e., knowledge)
• Firm’s leadership and engagement partner
• Culture and business environment of firm

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 Professional scepticism (cont.)
The Global Public Policy Committee (representing the largest accounting
firms) believe that professional scepticism ought to be viewed as a
continuum:

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7. Ethics and Social Media

Source: PwC (2018) Professional ethics: Doing the right thing (online course)
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Coffee!

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