CHAPTER 2: REGULATORY FRAMEWORK AND

PROFESSIONAL ETHICS

College of Economics and Business Administration

Course : Principles of Auditing
Course Code : BSAC2104
Specialization: Accounting and Finance
Learning Outcomes
1. Explain the regulatory framework, fundamental ethical principles,
and professional conduct that govern accountants and auditors.

2. Identify the different ethical conflicts and dilemmas.

CONTENTS
1. Law and regulation governing accounting and auditing
2. Role of regulatory and professional bodies in promoting ethical and
professional standards in the accountancy profession
3. Code of Ethics for Professional Accountants
4. Fundamental ethical principles
5. Ethical conflicts and dilemmas
6. Qualities of a Professional Auditor
Regulatory Framework and Professional Ethics

Law And Regulation Governing Accounting And Auditing

• It is important that auditors have an understanding of how laws and
regulations affect an audit, not only in terms of the work that the auditor is
required to do, but also to appreciate the responsibilities of both
management and the auditor where laws and regulations are concerned.
• The auditing standard that is relevant to this is ISA 250, Consideration of
Laws and Regulations in an Audit of Financial Statements,
 Regulatory Framework and Professional Ethics
Law And Regulation Governing Accounting And Auditing (Contd.)
The objectives of the auditor according to paragraph 10 in ISA 250 are:

1. to obtain sufficient appropriate audit evidence regarding compliance with the

provisions of those laws and regulations that have a direct effect on the
determination of material amounts and disclosures in the financial statements
2. to perform specified audit procedures to help identify non-compliance with other
laws and regulations that may have a material effect on the financial statements
3. to respond appropriately to non-compliance or suspected non-compliance
identified during the audit.
Regulatory Framework and Professional Ethics

• The standard defines an act of ‘non-compliance’ as follows:

‘Acts of omission or commission by the entity, either intentional or unintentional, which

are contrary to the prevailing laws or regulations. Such acts include transactions
entered into by, or in the name of, the entity, or on its behalf, by those charged with
governance, management or employees. Non-compliance does not include personal
misconduct (unrelated to the business activities of the entity) by those charged with
governance, management or employees of the entity.’
 Direct and Indirect Laws and Regulations

Direct Laws and Regulations

• There are many laws and regulations that a reporting entity may have to comply with
in order to continue in business.
• For example, many entities will have to comply with strict health and safety
legislation; a food manufacturer may have strict food hygiene legislation to comply
with, and an accountancy firm will have a code of ethics to follow from its
professional body.
• Such laws and regulations will have both direct as well as indirect effect on the
financial statements.
• For those laws and regulations that have a direct effect on the financial statements,
the auditor will be concerned about gathering sufficient and appropriate audit
evidence to ensure that the entity has complied with such laws and regulations.
Direct and Indirect Laws and Regulations

Indirect Laws and Regulations

• For those laws and regulations that have an indirect effect on the
financial statements, the auditor will undertake procedures/methods
with the objective of identifying non-compliance with such laws and
regulations. ISA 250 gives examples in paragraph 6(b) of:
compliance with the terms of an operating license
compliance with regulatory solvency requirements, or
compliance with environmental regulations.
Direct and Indirect Laws and Regulations

What must the auditor do in such situations?

• The auditor must maintain a degree of professional skepticism and remain alert
to the possibility that other audit procedures applied may bring out instances of
non-compliance or suspected non-compliance with laws and regulations to the
auditor’s attention.
These procedures could include:

 reading minutes of board meetings

 enquiring about management and/or legal advisers concerning litigation or
claims brought against the entity, and
 undertaking substantive tests on classes of transactions, account balances or
disclosures.
 Role of Regulatory and Professional Bodies in the Accountancy
Profession

• High quality performance by professional accountants benefits the economy and society
by contributing to the efficient allocation and management of resources in both the
private and public sectors.
• In doing this, accountants help to improve standards of living and overall wealth.
• The International Federation of Accountants (IFAC) has advised that professional
accountancy bodies, acting in the public interest, must play an active role in the
regulation of auditing profession.
• It has also specified that professional accountancy bodies and governments need to work

together to ensure that regulation is effective and efficient .

 Accounting & Auditing: Governing Law
Laws Governing Accounting and Auditing
•The law of legal legislation includes the by-laws relating to the compliances with
Accounting and Auditing.
 The International Financial Reporting Standards (IFRS)
 The International Standards of Auditing (ISA)
 The national standard governing the requirements for professional development of
accountants and auditors and acquiring of professional titles.
 The national standard applied to accounting software, and other national standards
established in accordance with the statements issued by the governing bodies of the
International Federation of Accountants (IFAC).
 The professional rules shall mean the Code of Ethics for Professional Accountants
prescribed by IFAC
 Accounting & Auditing: Governing Law

Some of the popular terms used in these laws and regulations are:
 The International Accounting Standards (IAS)
 The International Financial Reporting Standards (IFRS)
 Relevant interpretations by the Standing Interpretation Committee (SIC),
as amended and interpreted from time to time
 The future standards and relevant interpretations issued or accepted by
the International Accounting Standards Board (IASB)
 The International Auditing Practices Committee (IAPC)
 The International Federation of Accountants (IFAC)
Statutory Requirements of Audit
Legal requirements
• Every public listed company should have an annual audit after which the auditor
must give an opinion on whether the client’s financial statements give a true
and fair view and comply with the relevant legislation.
• Reasonable skill and care should be exercised by auditors when carrying out an
audit assignment.
• Safeguard procedures should be carried out to identify conflict of interest and
maintain independence.

Professional requirements
• As part of the regulatory mechanism to monitor professional accountants’
conduct, Auditing and Reporting Standards of a Recognized Supervisory Body
shall be followed by the members in their professional practices.
 Appointment of Auditors
Persons Qualified to be Appointed as Auditors
 Auditors have primary responsibility to the performance of the audit function on published financial
statements of publicly traded companies and non-public companies.
 Therefore, only qualified professional accountants shall be appointed as Independent Auditors.
 The designations for qualified professional accountants vary from jurisdiction to jurisdiction:
 Chartered Accountant (CA),
 Associate of Chartered Certified Accountant (ACCA),
 Certified Public Accountant (CPA),
 Associate of Chartered Management Accountant (ACMA),
 Certified Management Accountant (CMA),
 Chartered Public Finance Accountant (CPFA).
 The auditor needs to be a member of a professional accounting body to hold out to the public of the
jurisdiction, as an accountant.
 A professional accounting body is an organization or association of accountants in a particular
jurisdiction.
Appointment of Auditors
Persons Not Qualified to be Appointed as Auditors

The following persons cannot act as auditors of public financial statements:

• An officer or a director or an employee of the company

• An officer or a director or an employee of its subsidiary or holding company.
• A business partner or an employee of the above
Appointment of Auditors
Appointment Procedures
The appointment of an auditor in a company includes the following procedures:
 Every company is required to appoint an auditor for each financial year by an ordinary

resolution passed at the Annual General Meeting (AGM).

 In most jurisdictions, the members (shareholders) of the company appoint the auditor

during the AGM of the company.

 Directors can appoint the first auditor and fill a ‘casual vacancy. But it needs members’

approval at the next Annual General Meeting (AGM).

Appointment of Auditors
Appointment Procedures
 If the directors fail to appoint the first auditors before the first AGM of the company,

then the company may appoint an auditor in a general meeting.

 Where no AGM – automatic annual reappointment unless a shareholder objects.

 The term of office of an auditor runs from the end of an Annual General Meeting (AGM)

up to the end of the next AGM.

Vacation of Office
Removal Procedures
 The auditors can be removed if there are doubts about their ongoing skills to
carry out their responsibilities effectively.
 The removal of an auditor before the expiry of term of office includes the
following procedures:
• The removal of auditors can usually be achieved by a simple majority at a
general meeting of the company
• The company shall send a copy of such resolution to the auditor proposed to
be removed to the Registrar
• Notice of the resolution so passed shall be given to the Registrar of
Companies within 15 days.
Vacation of Office
Resignation Procedures
 In practice, if the auditors and management find it difficult to work together, the auditors will usually
resign.
 Upon resignation, the auditor must deposit a notice in writing known as the “Statement of
Circumstances” surrounding their resignation to the registered office of the company.
 A copy of the Statement of Circumstances must be deposited at the registered office of the company.
 The resigning auditor should require the company to circulate the notice of circumstances relating to
the resignation.
 On resignation, the auditor has rights to request an Extraordinary General Meeting (EGM) of the
company to explain the circumstances of the resignation.
 Code of Ethics for Professional Accountants
• ACCA has adopted the International Code of Ethics for Professional
Accountants (Including International Independence Standard), issued by the
International Ethics Standards Board for Accountants (IESBA) in April 2018.
• The ACCA Code of Ethics and Conduct (CEC) provides a set of five
fundamental principles to address the ethical problems:
1.Integrity
2.Objectivity
3.Professional Competence and Due Care
4.Confidentiality
5.Professional Behaviour
Code of Ethics for Professional Accountants

1. Integrity: Being straightforward and honest in all professional and business

relationships
2. Objectivity: No Biasness, conflicts of interest or undue influence of others to
override professional or business judgments.
3. Professional Competence and Due Care: Maintain professional knowledge and
skill at the required level to the client by providing professional service based on
current developments in practice, legislation and techniques and act diligently in
accordance with applicable technical and professional standards.
 Code of Ethics for Professional Accountants

• Confidentiality: Respect the confidential information acquired in the professional

and business relationships. Moreover, it is not to disclose any such information to
third parties without proper and specific authority. Unless, there is a legal or
professional right or duty to disclose to use the information for the personal
advantage of the professional accountant or third parties.
• Professional Behavior: To comply with relevant laws and regulations and avoid any
conduct that discredits the profession.
 Ethical Conflicts and Dilemmas

• According to ACCA Rulebook, each member has to safeguard the fundamental principles and

ensure that any threats to them should be adequately addressed by safeguarding measures.

• Understanding the Conceptual Framework:

 In case of failing to recognize the threats to fundamental principles, it is the responsibility of the auditor

to address them. Otherwise, he will be liable to disciplinary action.

 The principles based approach is to address the ethical dilemmas and to recognize threats and satisfy

that the auditor acted ethically in addressing the issue.

 Finally, the auditor should be confident in making the decision and applying any necessary safeguards .
 Ethical Conflicts and Dilemmas

The conceptual framework comprises five steps in the form of questions, which you should

consider when confronted with an ethical dilemma:

a) What are the relevant facts?

b) What are the ethical issues involved?

c) Which fundamental principles are threatened?

d) Do internal procedures exist that mitigate the threats?

e) What are the alternative courses of action?

Qualities of a Professional Auditor

1.Integrity
2.Independence
3.Objectivity
4.Logical Abilities
5.Communication Abilities
6.Tactfulness
7.Technical Competence
8.Continuing Awareness of Latest
9.Developments
 Qualities of a Professional Auditor

Integrity:
 Auditor is responsible for his opinion expressed about state of affairs of an enterprise.
 Auditor should be honest, straightforward & sincere in his professional work for
discharging his function, Due to this; he may face pressures from interest-groups.
Ex: In auditing, the management may wish to report profit at a higher than actual. So, they
give pressure to auditor to abstain from reporting figure of profits that is not correct.
Independence:
 Independence is basically a state of mind.
 The auditor should take the decision independently.
Ex: In case, the directors involved in some frauds, it may be very difficult to an auditor to
decide whether to state this fact in his report or not.
 Qualities of a Professional Auditor
Objectivity:
 Auditor should give his opinion based on objective, which should be Fair, Impersonal and Unbiased
 An independent and unbiased state of mind are the main cornerstones (Basis) of a professional of
auditor.
Ex: If any clients do not like his advice & opinion, he should not change his honest opinion in order to
avoid offence or secure his fee.
Logical Abilities:
 Auditor should have a logical approach to analyze, interpret problems and facts.
 Several problem appear in auditing, like audit procedure and application of accounting principles in
a proper way.
 Auditor should able to manage all these problem. So that, he can make logical conclusion about
the auditing work.
 Qualities of a Professional Auditor
Communication Abilities:
 Proficiency in written & oral communication is important
 Communication is an essential tool to report the auditing work in a proper way.
 During auditing work, the auditor interacts from time to time with officers and staff of the
enterprise and others.
Tactfulness:
 Auditor should be tactful in dealing with the officers and staff of the enterprise and also with his
assistants.
 Auditor should exercise utmost discretion in deciding what is appropriate to do or to say in dealing
with others.
Technical Competence:
 Auditor should have technical competency in subjects like Financial Accounting, Law, Management
Accounting, Information Technology, Taxation, Business Finance, Statistics and Economics.
 Qualities of a Professional Auditor
Continuing Awareness of Latest:
 Number of economic, legal and technological factors and professional
developments affect the work of the auditor.
• Ex: Recent growth in the use of computers for maintaining accounting records
have a significant effect on auditing techniques. Similarly, changes in law may
affect the auditor’s duties and responsibilities.
Developments:
 Auditor should know the developments happening in the auditing field and
update his knowledge
 Auditor should know the benefits and concession available for the companies and
link to company auditing work.
 References

• 1. http://icap.org.pk/userfiles/file/MIES-18.pdf
• 2.
http://www.accaglobal.com/middle-east/en/student/exam-support-resources/fundamentals-exams-study-
resources/f8/technical-articles/isa-240.html
• 3. http://mastermindsindia.com/AUDTING%20SM.pdf
• 4. http://www.centraleurope.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exam
s-study-resources/f8/technical-articles/laws-and-regulations.html
• 5. https://www.iasplus.com/en/binary/ifac/0712regulationpaper.pdf
 Glossary
Terms Definition
International Standards on Auditing (ISA) professional standards for the auditing of financial information

Direct Laws Laws having a direct impact on the financial statements

Indirect Law Laws having an indirect impact on the financial statements

Non- compliance Intentional or unintentional disobedience of laws

An annual general meeting (AGM) It is a mandatory annual assembly of a company's executives,
directors, and interested shareholders

Statement of Circumstances When the external auditor ceased to hold office, they are required
to deposit a statement of circumstances at your company's
registered office.

Extraordinary General Meeting (EGM) It is a meeting held by a company or an organization to deliberate

upon matters that require the urgent attention of senior
executives, the board of directors, and all shareholders and cannot
be deferred until the next scheduled annual general meeting
CONTACT INFORMATION:

Name of the Staff : Ms. Wijdan Saleem

Office: BS050
Email: wijdan.Salim@utas.edu.om

VERSION HISTORY

Version No Date Approved Changes incorporated

05 Sem. (I) 2023/2024 Revision and Update of PPT

33