Auditing 81.3550
Chapter 3
Ethics
Highlights
• Describe and explore ethics
• look at ethical concerns relating to
accountants and typical codes of conduct
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independence
confidentiality
behaviour requirements
integrity and due care
professional competence
• other rules of conduct
Ethics
• Set of values or principles
• unethical behaviour often the result of
selfishness
• Misconceptions:
– unethical practices = normal businesses
– cannot have successful ethical business
• Everyone faces ethical dilemmas
Code of Ethics
• Many organization’s have
developed codes to
encourage ethical behaviour
• Rotary 4 Way Test
– Is it the truth?
– Is it far to all? Concerned?
– Will it build goodwill and
better friendships?
– Will it be beneficial to all
concerned?
Ethical Frameworks
• Another framework for solving ethical dilemmas
1. Gather relevant facts
2. Identify ethical issues
3. Determine who stakeholders are and how affected by
outcome
4. Identify alternatives
5. Identify consequences of each alternatives
6. Decide appropriate action to take
Ethical Frameworks
• Newspaper Test
– Would you want your
decision to be covered
by the newspaper?
– What would the
reaction be?
Professional & Codes of Conduct
• Professional - held to higher standard, going
beyond basic standards due to need for
public confidence
• Professional often provide complex services
that users do not have qualification and/or
the time to perform such services
• Quality of profession key to success
How are Public Accountants
Encouraged to be Professional?
Cont.
Ed
Practice
Inspec.
Legal
Liability
Quality
Control
Conduct of Acct
Firm Personnel
CICA
Handbook
& Guidelines
Prof.
Code
Conduct
Securities
Comm.
Prof.
Exams
Code of Professional Conduct
• Sets standards for
members of a particular
group
• provides benchmark and
standards which must be
met
• Same rules normally apply
to all members
• Example - all CA’s in
Canada same rules
General Ideals/Principles
• Members should be ethical and serve public
interest
• Common principles include:
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integrity
due care
confidentiality
objective state of mind
Specifics
• Outlined in Rules or Codes of Professional
Conduct & enforceable
• Interpretations may be issued to aid in
clarity of a particular rule/code
• Accounting members not only responsible
for their own compliance but also for that of
other partners and employees of
organization (Firm)
Common Specifics
• Each professional
accounting body has it
own set of Rules of
Professional Conduct
• Commonality between
majority of rules
Specifics - Independence
• Means taking an bias viewpoint
• applies to attest engagements
• critical to provide value on attest
engagements - most critical auditors
characteristic
• need to have two types
– Independence in Fact
– Independence in Appearance
Independence
• In fact - auditor able to maintain unbiased attitude
throughout audit process
• In Appearance - other outside of the situation must
view the auditor as being independent
• 4 Components to independence
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Financial
Mental Attitude
Investigative
Reporting
Financial Independence
• Not owning stock in
company audited
• Not owing a significant
mount of money or being
owed significant amount
by client
• Not having a single large
client whom financial
dependant one
Financial Independence
• Not being engage and paid by management
• Not performing advisory services for client
– big issue for firms with consulting services
– note permitted to do bookkeeping only (not
take part in operations/management) for client
but client must be aware of their ultimate
responsibility for statements
– many firms have now set up separate consulting
firms in order to aid in preserving independence
Mental Attitude, Investigative
Independence & Reporting
• Using professional skepticism
when evaluating audit evidence
and performing audit functions
• have enough time and resource to
properly perform the audit
• audit report and finding must be
reported to a high level in the
organization to promote action if
required
Where does the Audit Committee
Fit In?
• CBCA requires all corporations who trade their
securities to the public to have an audit committee
• Audit Committee - independent of organizations
management
• Made up of directors from outside the company (i.e.
not company managers)
• Aids both internal and external auditors in
maintaining independence
Where does the Audit Committee
Fit In?
• Typical activities:
– review scope and cost of external
audit
– review annual report in its entirety
– liaison and adjudicate between
internal auditors and management
– liaison and adjudicate between
external auditors and management
• Note auditors are selected
via shareholder vote
Opinion Shopping
• Management moves from
one auditor to another
looking for until they find
the “right” someone
• 7600 - req’d to
report/consult with
previous
auditing/accounting firm
Confidentiality
• Rules of conduct cannot disclose client
information without
client consent
• Exception – if info
requested by courts
(can include all
files/documents)
• Exception - practice
inspections
Professional Reputation
• Should behave in best
interest of profession
and the public
• One professional
accountant should not
be publicly critical of
another without giving
a chance to explain
actions
Due Care, Integrity &
Competence
• Legal duty to users of financial statements to
perform duties with “due care”
• Integrity key to professional accountant’s career
• Prof. Accountants required to do min. number of
hours of updating each year
• Clearly outlined in GAAS – adequate technical
training and proficiency required
• Need to understand client’s often complex
business – if not should decline engagement
Advertising
• Cannot solicit another
firm’s clients (i.e. pursue
to convince them to
change firms)
• Can respond to a request
for information
• Adverting must be in
good professional taste
Other Rules
• Duty bound to report breaches -if aware of breach
of rules need to inform offender of intent to report
then report to discipline committee
• Cannot have fees based on any type of
contingency
• Must communicate with prior auditors of client
before accepting a new client
• Previous auditor should respond in a open/honest
manor and allow (with client’s permission) review
prior auditors working papers
Enforcement
• Normally falls under
provincial branch of the
association
• Each association can
impose penalties such as:
– mention or highlight of
process in prof member
newsletter
– Fines
– Require courses to be taken
– expulsion