3-Ethics-and-acceptance-Of-Appointment.ppt
- 1. Chapter 3 Ethics and acceptance Of Appointment
- 2. Ethics and acceptance Of Appointment Simple Definition of ethic Rules of behavior based on ideas about what is morally good and bad ethics : an area of study that deals with ideas about what is good and bad behavior : a branch of philosophy dealing with what is morally right or wrong. a belief that something is very important.
- 3. The need for professional ethics • Trust is built by knowledge • Needs to be independent and Objectivity • To improve the image of the profession
- 4. The IFAC and ACCA codes and the conceptual framework CONCEPTUAL FRAMEWORK FUNDAMENTAL PRINCIPLES THREATS SAFEGUARDS IFAC CODE OF ETHICS ICAB CODE OF ETHICS
- 5. The fundamental principles • Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgements. • Professional behaviour: Members should comply with relevant laws and regulations and should avoid any action that discredits the profession. • Professional competence and due care: Members should maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques.
- 6. • Integrity: Members should be straightforward and honest in all professional and business relationships. • Confidentiality: Members 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 proper and specific authority or unless there is a legal or professional right or duty to disclose. Confidential information should not be used for the personal advantage of members or third parties.
- 8. Self-interest threats This arises when personal interest of the auditor conflicts with that of the client. For example- • Financial: owning shares in the client, •Close business relationships: Employment (ex-partners >2 years) • Partner on client board • Family and personal relationships • Loans and guarantees • Overdue fees • Contingent fees • High percentage fees • Low-balling • Recruitment for the client
- 9. Self-review threats This threat arises when the auditor has to review or audit the work that he helps to carry out. For example- • Recent service with assurance client • Other services •Preparing accounting records and accounts • Valuation services • Taxation services • Internal audit services • Corporate finance • Other service
- 10. Advocacy threats This is a situation where the auditor finds himself in a position he has to defend or promote the interest of its client before a third party. • Where the assurance firm promotes a point of view or opinion to the extent that subsequent objectivity is compromised
- 11. Familiarity threats This threat arises as a result of the auditor becoming unduly sympathetic towards its client as a result of long association. • Because of a close relationship, members of the assurance firm become too sympathetic to members of the client firm, so that objectivity and scepticism are lost • Care needed where senior audit staff have a long association with the client. • ACCA/ICAB suggest that the lead partner should be changed at least every 5 years. • Other partners involved changed at least every 7 years.
- 12. Intimidation threats This threat arises when the auditor comes under intimidation by dominant individual or aggressive atmosphere at the clients. • Where the assurance team is deterred from acting properly by actual or perceived threats. • Examples are actual/threatened litigation.
- 13. The ACCA/ICAB Code of Ethics divides safeguards into two broad categories: • Safeguards created by the profession, legislation or regulation, these include: requirements for entry into the profession, continuing professional development, corporate governance, professional standards, and monitoring and disciplinary procedures, etc. • Safeguards created by the work environment, these include: rotation/removal of relevant staff from the engagement team, independent quality control reviews, using separate teams, etc.
- 14. Safeguards ● Rotate audit staff (especially senior audit staff). ● Do not allow shares to be held in client companies. ● Use separate teams for other services. ● Remind management that they remain responsible for all company decisions. ● If asked for a second opinion from a non-client, refuse to provide an opinion unless allowed to consult with their current auditor. ● No contingency fees. ● No single client to exceed a set % of the audit firm’s total revenues. ● Carry out “Hot Reviews” on audit working papers just before audit report finalised ● for Listed and Public Interest clients, get a 2nd partner to review the analysis of objectivity threats before the audit work starts
- 15. Confidentiality/ Information disclosed Members of an assurance team should not disclose any information to anyone outside of the engagement team, whether or not they work for the same firm. Information should only be disclosed with proper and specific authority or when there is a legal or professional right or duty to disclose. Duty to disclose: • Breaches of specific laws to the appropriate public authority, e.g. money laundering, terrorism, treason, or drug trafficking. • If a court order has been obtained. • If it is required by ACCA or another professional body.
- 16. Right to disclose: • If the client has given their permission. • To protect a member or firm's interests, e.g. to defend themselves in court or at a disciplinary hearing. • Where authorised by law. • Breaches of regulations to a nongovernmental regulatory body that has the power to compel disclosure, e.g. financial services authority. • If it is in the public interest to do so.
- 17. Acceptance procedures •Ensure professionally qualified to act: legal /ethical • Adequate resources: staff, time • The fee • Obtain references: investigate directors • Audit risk •Is the accounting reporting framework acceptable? • Money laundering regulations • Expertise and competence • Credit rating of client • Communicate with present auditors.
- 18. Engagement letters The engagement letter will be sent before the audit. It specifies the nature of the contract between the audit firm and the client and minimises the risk of any misunderstanding of the auditor’s role.
- 19. Objectives of Engagement Letter • Define auditors’/management responsibilities and it should be reviewed every year. • Written evidence of auditors’ acceptance: the auditor must issue a new engagement letter if the scope or context of assignment changes after initial appointment. • Send a new letter every year to emphasise its importance to client. • Identify any reports to be produced in addition to audit report
- 20. The contents of the engagement letter The contents of a letter of engagement for audit services are listed in ISA 210 Agreeing the Terms of Audit Engagements. The contents should include: • the objective and scope of the audit • the responsibilities of the auditor • the responsibilities of management • the identification of an applicable financial reporting framework • reference to the expected form and content of any reports to be issued.