9.401 Auditing
Chapter 3
Professional Ethics
Why do auditors need codes of
ethics?
To maintain respect and confidence of
public
 to distinguish the professional from the
general public
 to maintain order within the profession
and provide guidance to professionals
 provide a means of self-policing the
profession

Format of code of ethics
General rules: Encourage high standard of
behaviour, but vague and difficult to enforce.
 Specific rules: Sets out only minimum
standards, but easier to observe and thus to
enforce.
 Interpretations: Even more specific. Not
specifically enforeceable, but practitioner
must justify departures.

Codes of Ethics
Enforceability
Level of Standard
of Behaviour
General
Rules
Specific
Rules
Applicability of C.A. Rules
All Rules apply to C.A.’s engaged in public
practice
 Some rules do NOT apply to students or
C.A.’s not engaged in public practice.
 When rules DO apply to students and C.A’s
not engaged in public practice they will use
the terminology “members”.

Fundamental Principles

The member should
 act to maintain the profession’s reputation
 Act to serve the public interest
 Act with integrity and due care
 maintain independence in fact and in appearance
 preserve client’s confidentiality
 show professional courtesy to other members at
all times
Independence



Audit must be performed with an objective state of
mind
This is facilitated by independence in fact:
 Investigative independence:
 Sufficient time and resources
 Sufficient access
 Reporting independence
 Free to report honestly, without undue
influence
However, independence in fact is impossible to
observe and thus difficult to enforce
Independence in appearance




Specific rules regarding prohibited relationships
between auditor and client
Minimum standard, but visible and enforceable
Rules reflect 2 general insights: You’re not
independent if:
 You’re evaluating your own work/decisions (or that
of someone close to you)
 You (or someone close to you) are better off under
certain outcomes
Eg. Can’t be employee, owner, manager or
shareholder of auditee, or closely related to owner,
manager or shareholder of auditee
Independence in appearance vs.
Independence in fact




Independence in appearance facilitates but does not
guarantee independence in fact
Can have one without the other
Even if you have independence in fact, if you don’t
have independence in appearance your credibility will
be undermined.
If you have independence in appearance without
independence in fact, you may be conforming to the
letter of the rules of p.c. but you are violating the
spirit.
Other Rules
Confidentiality
 Members shall not disclose confidential
info about client or employer without
specific consent OR unless ordered by
courts
 Act with integrity and due care

Other Rules
Competence
 Must have necessary technical training,
knowledge of business and industry to
perform audit
 Adhere to GAAP and GAAS
 Advertising and Solicitation
 Can’t solicit another auditor’s client (but
can respond to a request for info)
 Can’t claim superior skills or being a
“specialist”
 Must be in good taste

Other Rules
Contingent Fees
 Can’t charge fee that is a function of the
outcome
 Communication with predecessor auditor
 Must communicate with predecessor
before accepting engagement
 Association with false or misleading
information
 Auditor cannot be associated with info that
s/he knows or should know is false or
misleading.

Threats to Professional Ethics
Competition
 Temptation to cut corners, let problems
slide, accept unsuitable clients
 Merger mania
 Difficult to maintain culture, internal
policies, independence issues
 Non-audit services
 Auditing own work
 Pressure on audit partners to “keep client
happy” to maintain lucrative non-audit
work

Threats to Professional Ethics
Financial Dependence
 Opinion Shopping
 Puts pressure on both new and incumbent
auditors to accept questionable accounting
treatment

Solving Ethical Dilemmas
1)
2)
3)
4)
5)
6)
Obtain relevant facts
Identify the ethical issues
•
Consider rules of p.c.
Determine stakeholders affected and how
they are affected
•
Don’t forget the public at large
Identify the alternatives
Identify likely consequences
Decide appropriate action