Acc 309 Principles of Auditing
• Course Instructor: Mr G. Tobedza BCom,
MBA, FCCA, CFA.
• Office 245/213
• Email tobedzag@ub.ac.bw
• Whatsapp: +267 73146699
1
Nature of Auditing
•
•
•
•
Auditing is the accumulation and evaluation
of evidence about information to determine
and report on the degree of correspondence
between the information and established criteria.
Auditing should be done by a competent,
independent person.
1-2
Definition
• What? - Independent examination
• Why? – to express on opinion on whether F/S
have been prepared in accordance to GAAP or
IFRS.
• When? After management has prepared and
presented f/s. Auditors do not prepare f/s
• Who? Independent external professional
3
• Cannot be an employee
• Certified by a professional body.
• No personal relationship with those charged executive
management and governance.
• No financial interest/ shareholder or creditor etc
Information and Established
Criteria
To do an audit, there must be information in a
verifiable form and some standards (criteria)
by which the auditor can evaluate the information.
FASB
1-4
Criteria
IASB(ifr
s)
Competent, Independent Person
Judgment and
Experience
Competence
Independence
Evaluation
of Evidence
Proper
Conclusion
1-5
Accumulating Evidence and
Evaluating Evidence
Evidence is any information used by the auditor
to determine whether the information being
audited is stated in accordance with the
established criteria.
Transaction
data
Client
Testimony
1-6
Written and
electronic
Communications
with outsiders
Observations
Demand for Auditing its
benefits
in reducing information risk.
1-7
Causes of Information Risk
⮚ Remoteness of informationprovided by others and should be verified.
⮚ Biases and motives of the
provider
⮚ Voluminous data
⮚ Complex exchange transactions
1-8
Reducing Information Risk
⮚ User verifies information
⮚ User shares information risk with management
⮚ Audited financial statements are provided
1-9
Relationships Among Auditors,
Client, and External Users
Client or audit
committee hires
auditor
Auditor
Auditor issues
report relied
upon by users to reduce
information risk
Provides capital
Client
Client provides financial
statements to users
1-10
External
Users
Types of Audits
Operational Audit
review of company operational procedures to evaluate
efficiency and effectiveness. At completion is normally
recommendations for improvement. E.g. efficiency and
accuracy of payroll transaction processing
Compliance Audit
determine whether the auditee is following specific
procedures, rules or regulations. Eg review payroll to
determine if in agreement
with minimum wage laws.
Financial Statement
determine whether FS are prepared in
accordance
GAAP and IFRS
11
Types of auditors
• Certified Public Accountants/ Firms
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Deloitte – $59.3 billion (Deloitte Info)
PwC – $50.3 billion (PwC Info)
EY – $45.4 billion (EY Info)
KPMG – $34.64 billion (KPMG Info)
BDO – $12.8 billion (BDO Accounting Firm Information)
RSM $8 billion
Grant Thornton – $6.6 billion
Nexia International $5 billion
Crowe Horwath $ 4.3 billion
Baker Tilly $4.3 billion
• Auditor General
• BURS Agents
• Internal Auditors
12
Types of Audit Opinions
• Unmodified Opinion( Unqualified or clean)
• Unmodified with explanatory paragraphs.
• Qualified Opinion
• Adverse Opinion
• Disclaimer
13
Unmodified Opinion/ Clean
• Must meet the following conditions
• Include all financial statements
• Sufficient and appropriate evidence collected
• Financial Statement presented fairly in accordance with
GAAP or appropriate framework.
• No circumstances requiring the addition an emphasis of
matter paragraph or modification
• Unmodified with Explanatory paragraph
• Lack of consistency in application of GAAP.
• Auditor agrees with instances of departure from promulgated
accounting principles
• Substantial doubt about going concern
• Emphasis of other matters
•14 Reports involving other auditors (revised wording)
Unmodified
• the opinion that is expressed when the
auditor concludes that the financial
statements are presented fairly, in all
material respects, in accordance with the
applicable financial reporting framework or
generally accepted accounting principles.
15
Modified or Qualified Opinion
• Happens under three circumstances
• Financial statements are not prepared according to
GAAP and auditor disagree.
• Scope restriction by client or other circumstances
(GAAS)
• Auditor is not independent (GAAS)
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GAAP Issues
•
•
•
•
•
Changes in GAAP- consistency auditor disagree
Disclosure not enough
Departure for GAAP - auditor disagrees
Misapplication of GAAP
Unreasonable estimates- auditor disagrees
• What opinion can we give?
• Qualified opinion
• Issue is material but not severe and pervasive
• limited to certain area and does not alter the fundamental understanding of
the F/S.
•
Adverse opinion
•
Material severe and pervasive and can alter the fundamental understanding of
the financial statements.
GAAS issues
•
The scope of the audit has been restricted (scope limitation)
• Unable to obtain appropriate evidence but auditor conclude that possible effect of
material misstatement could be material but not severe and pervasive. Material
but not severe. Scope limitation.
• Then a qualified opinion.
•
Examples of scope limitation
• Time constraint not enough time
• Unable to observe inventory
• Unable or cannot confirm AR
• Unable to obtain attorney letter.
• Accounting records not adequate
•
Are we confined or restricted
•
Restricted or constrained by circumstances or management restrict us.
• If management the escalate to board committee.
• IF material severe and pervasive then – Disclaimer ( Not adversed)
• The auditor is not Independent (disclaim no reasons
should
be sited)
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Qualified
• the opinion that is expressed when the
auditor either;
•
(a) having obtained sufficient appropriate audit
evidence, concludes that misstatements,
individually or in the aggregate, are material
but not pervasive to the financial statements;
(GAAP)
• or (b) is unable to obtain sufficient appropriate
audit evidence on which to base the opinion,
but concludes that the possible effects on the
financial statements of undetected
misstatements, if any, could be material but not
pervasive.(GAAS)
19
Adverse
• the opinion that is expressed when the
auditor, having obtained sufficient
appropriate audit evidence, concludes that
misstatements, individually or in the
aggregate, are both material and pervasive
to the financial statements.
20
Disclaimer
• the opinion that is expressed when the
auditor is unable to obtain sufficient
appropriate audit evidence on which to base
the opinion, and the auditor concludes that
the possible effects on the financial
statements of undetected misstatements, if
any, could be both material and pervasive.
21
Describe assurance services and
distinguish audit services from other
assurance and non-assurance services
provided by CPAs.
1-22
Assurance Services
An independent professional service
Can be performed by CPAs or by a variety
of other professionals
1-23
Auditing, Attestation and
Assurance Services
Auditing
Auditing, Attestation and Assurance
Lends Credibility
Example
to financial Statements
only through an audit
B/S, IS, CF, SE ,
opinion
Attestation to any assertions by
Projections,
Management not just F/S
Any type of information
where an opinion is
rendered. Can be noAssurance financial information.
Sports Awards, Lottery Awards,
Therefore, auditing is an
assurance service on F/S
only.
24
Comparison Table
Comparison Table
Audit
Assurance
It involves the evaluation of the accounting
information available in financial statements.
Assurance is a way to analyze and assess the
procedures, operations, and processes.
The basic aim is to present fair and accurate
financial information that follows accounting
principles and standards.
It ensures that the presented accounting
information is accurate. Meaning thereby there are
no misrepresentations or irregularities in such a
report.
The audit is performed under international auditing The practitioner may restrict to a specific area due
standards.
to the assurance terms.
All stakeholders of a company are engaged
Assurance may restrict to one type of stakeholder
Resources and time necessary for conducting an
audit are relatively higher
Resources and time required for assurance are
relatively lower
Audit points out any dishonest activity or misuse of Assurance is done after the audit and provides
the funds in financial statements
essential information for better decision making.
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Attestation Services
Five
Categories
1. Audit
Historical
Financial
Statemen
ts
2. Internal
Control
over
Financial
Reporting
1-26
5. Other
3.
Review
4.
Informati
on
Technolo
gy
Other Assurance Services
Most of the other assurance services that CPAs
provide do not meet the formal definition
of attestation services.
The CPA is not required to issue a written report.
The assurance does not have to be about the
reliability of another party’s assertion about
compliance with specified criteria.
1-27
Green Initiatives Bring Assurance
Opportunities, Competition
Global interest has triggered a surge in reports.
95% of the Global Fortune 250 released
environmental, social, and governance data.
Presented in standalone reports or integrated
into annual financial reports.
1-28
Other Assurance Services
Examples
Assess risks of accumulation, distribution,
and storage of digital information…
including
assessing security risks and related
controls over data and other information
stored electronically, including the
adequacy of backup and off-site storage.
1-29
Assurance, Attestation, and
Nonassurance Services
1-30
Understand the role of international
auditing standards
2-1
international and Botswana auditing standards
• International Standards on Auditing (ISAs) are issued by the
International Auditing and Assurance Standards Board
(IAASB) of the International Federation of Accountants
(IFAC).
• IFAC is a worldwide organization for the accountancy
profession.
• IAASB works to improve uniformity of auditing practices
throughout the world.
2-2
international and COUNTRY auditing
standards (cont.)
• ISAs do not override a country’s regulations governing audit practices.
• Most countries, base their auditing standards on ISAs, modified as
appropriate for each country’s regulatory environment.
• The BAOA has adopted ISA to be our local standards.
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GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES(STANDARDS) GAAP
1.0
Principle of Consistency: Consistent standards are applied throughout the financial reporting process.
2.0
Principle of Sincerity: GAAP-compliant accountants are committed to accuracy and impartiality.
3.0
Principle of Permanence of Methods: Consistent procedures are used in the preparation of all financial reports.
4.0
Principle of Non-Compensation: All aspects of an organization's performance, whether positive or negative, are fully
reported with no prospect of debt compensation.
5.0
Principle of Prudence: Speculation does not influence the reporting of financial data.
6.0
Principle of Continuity: Asset valuations assume the organization's operations will continue.
7.0
Principle of Periodicity: Reporting of revenues is divided by standard accounting periods, such as fiscal quarters or fiscal
years.
8.0
Principle of Materiality: Financial reports fully disclose the organization's monetary situation.
9.0
Principle of Utmost Good Faith: All involved parties are assumed to be acting honestly.
Generally Accepted Auditing Standards GAAS
• The Accounting Standard Board (ASB) introduces the "Principles Underlying
an Audit in Accordance with Generally Accepted Auditing Standards GAAS"
(the principles) as part of their codification of auditing standards
• These principles aren't mandatory but serve as a framework for auditors.
• Think of the conceptual framework for GAAP.
• These principles guide auditors.
• Let’s dive into OVERVIEW of GAAS
Generally Accepted Auditing Standards GAAS
This structure is organized around the following principles
1. Purpose of an audit (Purpose):
2. Management Responsibilities
3. Personal responsibilities of the auditor (Responsibilities)
1.
2.
3.
Competencies and capabilities
Ethical standard (independence)
Professional Skepticism & Judgement
4. Auditor actions in performing the audit (Performance)
1.
2.
3.
4.
Planning and supervision
Setting and applying materiality level
Assessing risk of material misstatement
Sufficient Appropriate Evidence
5. Reporting (Reporting)
Purpose of the Audit
1.Obtain reasonable assurance that financial statements are free
from significant misstatements, whether from fraud or error,
allowing the auditor to confirm their fair presentation in line with
the relevant reporting framework.
1.increasing user confidence in the presented information
2.Report on financial statements and communicate based on their
findings as mandated by GAAS.
Management Responsibilities
• Management is responsible for
preparing the financial statement
related notes and disclosures
Establishing and maintain internal control and
ensuring robust internal controls against misstatements.
Auditor Responsibilities: Appropriate
Competence and Capabilities
• Auditors must possess the necessary competence and skills to
execute an audit. This typically means they should have:
formal auditing and accounting education,
relevant practical experience, and
ongoing professional training. (CPD)
• Legal precedents emphasize that auditors should be proficient,
especially in their client's industry.
• If a CPA or their team lacks the qualifications, they're professionally
obligated to either acquire the needed expertise, recommend
another qualified individual, or refuse the assignment.
Auditor: In compliance with Relevant Ethical
Requirements
• The ISA Code of Professional Conduct defines ethical guidelines for
CPAs in accounting firms and managerial roles.
• Emphasizing audit independence, the Code necessitates CPA firms to
adopt practices ensuring personnel independence.
• This includes set protocols for major audits in case of managementauditor disagreements and methods to safeguard auditor
independence and adhere to pertinent ethical standards.
The five fundamental principles of ethics for
professional accountants

Integrity – to be straightforward and honest in all professional and business relationships.

Objectivity – not to compromise professional or business judgments because of bias, conflict of interest or undue influence of others.

Professional Competence and Due Care – to:
•
(i) Attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent
professional service, based on current technical and professional standards and relevant legislation; and
•
(ii) Act diligently and in accordance with applicable technical and professional standards.

Confidentiality – to respect the confidentiality of information acquired as a result of professional and business relationships.

Professional Behavior – to comply with relevant laws and regulations and avoid any conduct that the professional accountant knows or should know might
discredit the profession
Professional Skepticism and Professional
Judgement
• Auditors must consistently exercise professional skepticism and
judgment during the audit.
• This means having a questioning attitude, being vigilant to signs of
potential misstatements from fraud or error, and critically evaluating
evidence.
• In essence, auditors should be on guard for material discrepancies,
whether from deception or mistakes, throughout the audit process.
• When assessing potential misstatements, auditors must apply their
training, knowledge, and experience to make informed decisions
relevant to the audit context. They are obliged to perform their roles
with diligence and care.
Adequate Planning
• The auditor has the duty to meticulously plan an audit, ensuring its
thoroughness and the appropriate guidance of junior team members.
• Proper supervision is crucial in the auditing process since much of the
work is often carried out by less seasoned staff.
• This oversight ensures that even the tasks performed by newer staff
meet the high standards required in an audit.
Materiality
• The auditor's role is to determine if the financial statements have
significant inaccuracies.
• Hence, they must set and apply suitable materiality thresholds
during the audit.
• A misstatement is deemed significant if it would influence the
decisions of a rational user of the financial statements.
Assess The risk of Material Misstatement
• For a thorough audit, the auditor evaluates risks of significant inaccuracies
in financial statements and tailors audit procedures accordingly.
• A deep understanding of the client's business and industry is crucial,
enabling the auditor to pinpoint major business risks affecting the
statements.
• For instance, auditing a bank requires knowledge of its operations, relevant
regulations, and potential risks like loan loss reserves.
• A cornerstone of auditing is the significance of the client’s internal control
system. It's vital for reducing business risks, safeguarding assets, and
ensuring accurate financial data.
• If the client has robust internal controls, the auditor may need less
evidence. Conversely, exceptionally weak controls might render an effective
audit impossible.
Sufficient Appropriate Evidence
• The auditor must gather adequate and relevant audit evidence to
determine if significant misstatements exist, tailoring their approach
based on assessed risks.
• Deciding on the quantity and kind of evidence needed for specific
situations demands professional discretion.
Reporting
• The reporting principles state that auditors must express an
opinion in a written report on the fairness of financial statements
according to the relevant framework.
• This opinion stems from the audit evidence and findings. If no
opinion can be given, the report should clearly indicate that.
Audit Quality Control Standards(ISQC 1)
• If you provide assurance and attestation services  ISA requires to have a
quality control system within your firm
• Does not about to tax or consulting services
For a CPA firm, quality assurance encompasses the techniques applied to ensure
(purpose) the firm upholds its professional commitments to its clients in reasonable
assurance manner and not associate with client that lacks integrity.
Every firm should document its quality assurance protocols and practices.
The quality assurance framework should encompass six elements.
Let’s talk a look at these six elements
Elements of Quality Control System
• The six Elements of Quality Control System:
1. Leadership (tone at the top)
2. Compliance with ethical requirements
3. Policy for acceptance (new client) and continuation of
clients
4. Human resource policies
5. Engagement performance
6. Monitoring
Leadership (Tone at the top)
• The firm ought to foster a culture where quality is paramount in
undertaking tasks and should formulate guidelines and processes that
reinforce this culture.
• The firm might champion the belief that every financial statement, tax return, or
audit report should reflect the highest standards of accuracy and compliance. To
bolster this culture, the firm could:
1. Training and Workshops: Organize regular training sessions to keep employees updated with
the latest accounting standards, tax laws, and best practices in financial reporting.
2. Multiple Reviews: Implement a system where important financial statements undergo multiple
rounds of reviews by senior accountants or partners before they're finalized
1.Reinforced in performance evolution and compensations
Compliance with Ethical Requirements
• The firm ought to formulate guidelines and processes to offer a reasonable
guarantee that the firm, its staff, and any other parties bound by
independence stipulations remain impartial as mandated by pertinent
ethical standards.
• Example: Every partner and staff member is required to complete an
"independence survey" each year, addressing matters like equity holdings
and participation on directorial boards.
Policy for Acceptance and Continuation of client
• These guidelines should aim to reduce the possibility of partnering
with clients whose leadership lacks integrity.
• Moreover, the firm should commit only to tasks that can be executed
with professional expertise.
• Example: For every potential client, a client assessment form must be
compiled, addressing issues such as feedback from previous auditors
and an appraisal of the management, prior to acceptance.
• The firm holds a face-to-face (or virtual) interview with the potential
client's top management. The aim is to understand their expectations
and gauge their integrity and business ethics.
Human Resources
• Policies and protocols need to be put in place to ensure that the company has a
reasonable guarantee of possessing an adequate workforce equipped with the
necessary skills, abilities, and dedication to ethical values.
• This is essential to carry out tasks in alignment with professional norms and relevant legal
and regulatory obligations.
• Every professional's performance should undergo assessment for each
engagement using the unique evaluation report designed by the firm.
• Reinforced by proper compensation, promotion and reward
Engagement Performance
• The company must create protocols and processes to ensure a reasonable
level of confidence that projects are conducted in alignment with
professional norms and relevant legal and regulatory prerequisites.
• Address issue internally or externally
• Assign the right people to the appropriate task
• Additionally, the company should generate reports that are suitable for the
given situations.
• The Director of Accounting and Auditing at the firm is accessible for consultation and
must provide approval for all engagements prior to their finalization.
Firm Quality Control
• Conduct of CPA firm personnel:
•
•
•
•
•
•
•
CPA examination
Auditing standards
Continuing education requirements
Legal liability
Code of Professional conduct
Peer review
Quality control
Audit Quality
Control
Monitor
• Monitoring is a process,.
• The company needs to institute a monitoring procedure intended to offer a
reasonable level of confidence that the policies and procedures concerning
the quality control system are pertinent, sufficient, and functioning efficiently.
• Example: Annually (or as needed), the quality control partner is required to
conduct tests on the quality control procedures to verify the firm's adherence
to them.
Ethical behaviour and implications for accountants
Main Issues
Ethical behaviour by accountants is to complement
the various accounting and audit standards issued
by
• the International Accounting Standards Board
(IASB);
• the International Auditing and Assurance
Standards Board (IAASB); and
• other professional accounting bodies.
Individual ethical guidelines
•
•
•
•
•
•
•
Parents
Family
Social group
Peer group
Religion
Culture
Professional
Ethics for
Professional Accountants
The IFAC Fundamental Principles are
• Integrity To be straightforward and honest in all professional and business
relationships/conduct.
• Objectivity
•
Not permit bias, conflict of interest or undue influence of others to override professional or business
judgements
.
• Professional competence and due care
•
To maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent
professional services and to act in accordance with applicable technical and professional standards
.
• Confidentiality
•
To respect confidentiality of information acquired as a result of professional and business relationships and not disclose
any such information to third parties without proper specific authority unless there is a legal and professional right or
duty to disclose nor use the information for personal advantage
• Professional behaviour.
Problems arising for accountants
in practice
• Appointments
•
Before accepting appointment, accountants should consider desirability of accepting client given nature of business.EG QUESTION
OF LEGALITY
•
If size of fee will threaten independence.
•
Why previous accountants do not want to get involved any further.
•
Whether already doing other jobs for the client might compromise independence of audit.
• Second opinions
•
One must be careful before providing second opinion when asked for. It might be used to undermine an accountant who is trying to
be ethical.
•
Ask for full information before supplying second opinion.
• Remuneration
•
Adequate REMUNERATION REQUIRED TO ALLOW FOR PROFFESSIONAL WORK
• Marketing
•
Marketing should not exaggerate or make negative comments about other professionals.
• Independence
•
Accountants and relatives should not accept gifts from clients, independence of mind and appearance.
The IFAC Code of Ethics for
Professional Accountants
The IFAC Fundamental Principles are
• Professional behaviour.
•
To comply with relevant laws and regulations and avoid any action that discredits the profession
• Finally that:
•
‘A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the
public interest..’
Problems arising for accountants
in business
Financial pressures which arise from
• substantial financial interests in the form of shares, options,
pension plans; and
• dependence on employment income to support themselves
and their dependents.
• when these depend on reporting favourable performance it is
difficult to withstand pressure.
• Misrepresentation and the omission of additional significant
material which would change the assessment of the financial
position of the firm is not acceptable.
• Accountants must use internal steps to report pressure to act
unethically and if that fails to produce results they need to
willing to resign.
Threats to compliance with the fundamental
principles
• Self-interest threat
•
The threat that a financial or other interest will inappropriately influence the accountant’s behaviour or judgement.
•
arises when stake of auditor or that of an immediate or close family member is involved in the entity and thus he might cause the
auditor to violate multiple ethical requirements.
•
E.g if the auditor has investments in the same company he is auditing, issuing an adverse report will also affect his investment and this
might affect the auditor’s objectivity.
• Self-review threat
•
may occur when a previous judgement needs to be re-evaluated by members responsible for that judgement.
Circumstances that may give rise to self-review threats include but not limited to: • business decisions or data being
subject to review and justification by the same person responsible for making those decisions or preparing the data.
•
This type of threat occurs when a professional accountant is responsible for reviewing some work or a judgement that he
was responsible for originally. An extreme example would be a situation where a professional accountant prepares the
annual financial statements for a corporate client and then is appointed to do the audit.
• Advocacy threat
•
This type of threat can occur when an accountant promotes the point of view of a client, for example by acting as a
professional witness in a legal dispute. Acting as an advocate for the client can reach the point where the objectivity of
the accountant is compromised.
• Familiarity threat
•
arises from knowing someone closely, possibly through a long association in business. The risk is that an accountant
might be more sympathetic to the client and more willing to accept the client’s point of view.
Are principles linked to accounting standards?
• The current conceptual framework assumes that we
need to produce general-purpose financial accounts
using understandability, relevance, reliability and
comparability as guiding criteria.
• However, the individual standards do not demonstrate
how those principles lead to the standards which have
been produced.
Are principles linked to accounting standards?
(Continued)
• Also, the way in which principles are used will not lead
to good outcomes unless the accountants preparing
and reviewing accounts have high moral standards.
• An accountant, in preparing accounts, will always have
a potential clash between what his employer and
superior wants and what is best from an ethical or
community perspective.
Threats to compliance with the fundamental
principles
• Intimidation threat
• the threat that a professional accountant will be deterred from acting objectively because of
actual or perceived pressures, including attempts to exercise undue influence over the
professional accountant
Are principles linked to accounting standards?
(Continued)
• Ethics are an integral part of the formulation of accounting
principles.
• Does this mean different accounting being applicable to
different countries?
• Will principles differ if some countries place greater
emphasis on the impact on the community?
• How will cultural norms and religion affect ethics?
• Is it correct to assume that shareholders in every country
have identical information needs and apply identical
ethical criteria in assessing a company’s operations?
Implications of unethical behaviour for financial
reports
• Increased cost of capital
• Hidden liabilities
Requests that raise ethical issues
Requests to
•
•
•
•
manipulate tax returns by employers;
produce figures to mislead shareholders;
conceal information;
manipulate overhead absorption rates to extort more
income from customers (an occurrence in the defence
industries);
• authorise and conceal bribes to buyers and agents, a
common request in some exporting businesses;
• produce misleading projected figures to obtain additional
finance.
Requests that raise ethical issues (Continued)
Requests to
• conceal improper expense claims put in by senior
managers;
• over- or undervalue assets;
• misreport figures in respect of government grants;
• requests to redefine bad debts as ‘good’ or vice versa.
Negative pressures on standard setters
• Standard setters have been under pressure, which
could result in lower quality or expedient accounting
• Pressure from industry and commerce both directly,
and indirectly through threats from the legislators who
are beholden to industry.
• Proposals to replace the certain bodies in standard
setting is common.
Conflict between codes and targets
Accounting scandals
• Reflection of a deficient corporate climate
• Concentration on setting unrealistic targets
• Promoting competition between the staff
• Pressure not unethical standards of managers.
Company codes of ethics
• Level 1 – Comply with all the laws
• Level 2 – Focuses on ensuring fair and equitable
relations with all parties with which the company has
direct relations
• Level 3 – Where the companies take a global
perspective and recognise their responsibility to
contribute to a favourable global environment
• It is argued for example that European firms are more
likely than US firms to have a level-three orientation.
Multinationals face special problems
• Transactions are often extremely large, so that there
are greater pressures to bend the rules to get the
business.
• Ethical values in some of the countries may be
different from those in the group head office.
• What if wages paid to public officials are too low to
support a family?
Whistle-blowing
•
•
•
•
•
•
Immunity to the first party to report
Anonymous whistle-blowing
Proportionate response
Government support
Whistle-blowing – protection
Whistle-blowing – company policies.
Money laundering – implications for accountants
• Auditors in some jurisdictions (e.g Practices Board
(APB) in the UK) are required to
• take the possibility of money laundering into account
when carrying out their audit; and
• report to the appropriate authority if they become
aware of suspected laundering.
A future role for accountants in ethical assurance
• Ethical policing role as internal auditors
• Assessing managers’ compliance with the ethical code
of the organisation.
• Conflicts of interest are often highlighted by internal audits
and comments raised on managerial practices.
Chapter 42.01 of the Companies Act: Auditors
Companies Act is a RULE based Act. One should follow the rules as given in the sections and rules of the
Companies Act.
CA students should have very good knowledge on these provisions as these are going to be followed in
practice. Broadly, in this chapter you will understand “who can be appointed as an auditor under the
Act, i.e., qualifications and disqualifications, the manner of appointment and removal of an auditor and
rights and duties of an auditor”.
Section of Companies Act, to be discussed in this chapter
191
Appointment of Auditors, Appointment of partnerships as auditors, Automat
193
195
196
ic reappointment, Appointment of first auditors
197
Replacement of Auditors, Auditors not seeking reappointment.
198
194
Eligibility, Qualifications and Disqualifications of Auditors
192
Remuneration of Auditors
201
Access to information
204
Duties of auditor on becoming aware of irregularities
200
Auditors to sign Audit Reports, etc.
202
Auditors to attend General Meeting
2. Qualifications and Disqualifications of Auditor [Section 194]
The Section 194 has two sub-sections
194(1) – discuss about Qualifications;
194(2) – discuss about Disqualifications.
3. Qualifications of an auditor [Section 194(1)
Section 194
(1) A person shall be eligible for appointment as an auditor of a company only if he is a
member of BICA and qualified under the rules of the institute.
A partnership whereof at least one member is ordinarily resident in Botswana.
(2) Disqualifications of Auditors
[Section 194(2):
The following persons shall not be eligible for appointment as an auditor of a company,
namely:
(a) “a body corporate”;
Explanation
It means – If chartered accountants form a company (Whether public /private – like RK
Private Ltd./RK Limited) – This Company of CAs cannot be qualified for appointment as
auditor of another company.
What is body corporate?
Body corporate includes a company as per the Companies Act, and a foreign company
which is incorporated outside Botswana.
Logic behind why a body corporate is not eligible to be an auditor?
As you know a Limited company has “limited liability” & Separate legal entity – The
members of the company are responsible only to the extent of unpaid capital (if any). In
case of any issue – We cannot make members personally responsible.
In case of partnership, partners will have unlimited liability; hence it is allowed to be
auditor.
(b) an officer or employee of the company;
Explanation

Any director;

Manager;

Key managerial personnel (KMP); or

Any person in accordance with whose directions or instructions the
BOD or any one or more of the directors is or are accustomed to act.

‘Key Managerial Personnel’, in relation to a company, means:
 the
chief
executive
officer
(CEO) or the
managing
director or the manager;
 the company secretary;
 the whole-time director;
 the chief financial officer (CFO); and
 such other officer as may be prescribed. Like Chief Operating
Officer (COO), etc.
Reason
An officer or employee – cannot be independent – If those are appointed as auditors of
the company, they cannot express independent opinion on the financial statements.
(c) a person who is a partner, or who is in the employment (employee), of
an officer or employee of the company;
Explanation
In this case, two relations are possible i.e.,
Reason
These people have indirect relationship; hence they are not independent and cannot be
appointed as auditor.
(d) a person who, or his relative or partner
(e) is holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company;
Who is relative?
“Relative” includes

Step father, Step mother, Step brother, Step sister & Step son, Step
daughter.
It says Auditor (himself) or his Relative or Partner should NOT hold security in GROUP.
What do you mean by Security ?
The word “Securities” include – All Shares, scrips, bonds, debentures, stock, derivatives
etc.
(e) a person (auditor) or a firm who, whether directly or indirectly (through
agent/relation), has business relationship with the company, or its subsidiary, or its
holding or associate company or subsidiary of such hold ing company or associate
company;
It says – Auditor or Firm should not have business relationship with the group either
directly or indirectly.
What is business relationship?
‘Business relationship’ shall be understood as any transaction entered into for a
commercial purpose, except (means the following are not treated as business
relationship)
(i) commercial transactions which are in the nature of professional services permitted to
be rendered by an auditor or audit firm.
(ii) commercial transactions which are in the ordinary course of business of the
company at arm’s length price – like sale of products or services to the auditor, as
customer, in the ordinary course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses.
Just think,
Mr. A is a chartered accountant in practice – His wife (relative) is a director in ABC Ltd.
and she has P50,000 face value equity shares in the company.
Can Mr. A be appointed as auditor for ABC Ltd.?
.
(f) A person
(In simple words – a person whose relative is a director or key managerial person of the
company is disqualified)
Frequently Asked Questions (FAQs)
FAQ 1. Whether a Non-Executive Director (Part time director OR independent director)
be appointed as Auditor?
No. The reason is every director is covered under the term “Officer”.
FAQ2. Whether a Person who is Relative of Director or Employee of the Company be
appointed as Auditor?
If relative is a director – NO
If Relative is an employee other than KMP – Yes; partner of an employee and employee
of an employee are prohibited to be appointed as Auditor. Whereas, relative of an
employee is prohibited to be appointed as Auditor only when such employee is
Director/KMP)
FAQ 3. Can an Auditor be said to be Indebted if he recovers travelling and other
expenses in Advance?
Yes. It is treated as “indebted” and disqualified if the amount is greater than P5,000.
5. Appointment of Auditors [Section 191,193,194,196,197]
These sections discuss appointment of first auditor, subsequent auditor, rotation of
auditors and casual vacancy.
6. Appointment of the First Auditor [Sec. 196]

The first auditor of a company shall be appointed by the Board of Directors
(only by BOD) before the first AGM.

In the case of failure of the Board to appoint such auditor, it shall inform
the members of the company, who shall appoint at the first general
meeting.

The first auditor shall hold office from the date of appointment
to till the conclusion of the first AGM.
7. Appointment of Subsequent Auditor/Reappointment of Auditor
[Sections 195,197,198]
(1) Every company shall, at the First AGM, appoint an individual or a firm as an auditor
of the company.

Every company means ALL the companies incorporated under the
Act;

Ordinary resolution is sufficient to appoint an auditor.
8. Manner and Procedure for Appointment
The competent authority to appoint auditor is Audit committee of the company (if the
company has); If it does not have audit committee, Board of directors are competent
authority.


The entity should obtain written consent and a certificate before the
appointment is made at AGM. Auditor should certify that
(a) Individual/firm is eligible for appointment and is not disqualified for appointment
under
a. the Companies Act,
b. the Accountants Act,
(i) the proposed appointment is as per the term provided under the Act;
(ii) the proposed appointment is within the limits laid down by or under the authority of
the Act;
(iii) the provided list of proceedings relating to professional matters of conduct against
the auditor or audit firm or any partner of the audit firm pending with respect to is true
and correct.
After this
Company appoints the auditor at AGM by passing ordinary resolution and thereafter, the
company should
1. Give the information of appointment to the auditor i.e., it should write a
letter to the auditor by attaching “extract of resolution in the minutes of
AGM”; and
We must note that:
Where a company is required to constitute an Audit Committee, all appointments,
including the filling of a casual vacancy of an auditor under this section shall be made
after taking into account the recommendations of such committee.
.
9. Term & Rotation of Auditor
Rotation of auditors is a new topic in Botswana. As per the Code, a company should rotate
auditors after specified time. It means, the same auditor cannot continue forever. Let us
get into the details of the section.
Cooling off Period
An auditor who completed the term as discussed above i.e., Individual (one term of 5
years)/Firm (two terms of 5 years each) is NOT eligible for re -appointment as auditor for
5 years.
Professional Liability of Auditors
Legal Environment
Auditing and Attestation Course
Expectation gap
• 1% of audits are deficient
• Perception of users versus reality
• Clients don’t read!
• Reasonable not absolute assurance.
• Nothing is guaranteed.
Sampling: not 100% auditing
• When users suffer losses, expect someone else to pay
Attorney and Plaintiff Awareness of Potential
rewards. TV Ads
• Contingency fee arrangement:
No cost to plaintiff unless they win. Attorney deduct cost and fees.
No skin in the game
Class action lawsuits:
Bundle many plaintiff claim in one case
Large publicly traded companies
1000 Investors x 1,000
Attorney and Plaintiff Awareness of Potential
rewards. TV Ads
Joint and several liability:
Collect fully from any defendant even those partially responsible
Client is bankrupt
Auditors are marginally at fault but with “deep pockets”
Management 95% at fault, Auditor is at 5%
More Reasons
Increases complexity of audits:
Computerized system, drone, block-chain, robots
Technical accounting standards
Increase the chance of an audit failure
Time and fee pressures:
Perform complex audit with lower fees
SOX lessen this pressure. Focus on quality
Causes of Legal Action
Auditing and Attestation Course
Causes of Legal Action
• 3 level under need to dinstinguih when it comes to auditor misconduct
• 1) Ordinary negligence:
Failure to exercises a reasonable level of care that causes the damage.
I was careless.
No intent to deceive
2) Gross negligence:
Failure to exercise even the minimal level of care.
Reckless disregard.
Really careless
No Intent to deceive
3) Fraud: Rare
Intentional concealment or misrepresentation of material facts that causes damages to those deceived.
The plaintiff must approve the auditor knowingly deceived the plaintiff
Act with scienter
Which of the three is the easiest for lawyers to prove?
Careless or reckless
Show the paperwork
No need to prove intent
ESM Gov. Securities in Florida.
Civil Liability
• Contract law (least concern to auditors)
• Common Law
Contract law
• When does it occur?
• When the auditor fails to meet the terms of the engagement.
• Where do we find the terms of the engagement?
• Engagement letter:
• Specific condition: audit process, deadline, fees
• Implied condition: professional quality work
• Parties to the contract: typically the client
• On rare occasion you might have a third party. When?
• Example: Audit in support of loan applications (mostly what I did).
Seldom.
Causes for suing under Contract law
1) Failing to complete the work engagement within agreed upon time specified
time in the engagement letter.
May 6th. Potential breach. What are you defenses? Will discuss on next slide
2) Withdrawing from the engagement without sufficient justification.
Can they client fire you? Yes. Can you sue them? yes. Bad for business.
Can the auditor withdraw? Yes as long as justified.
Client dishonesty, withhold information, not cooperative.
Going to Florida because we had a bad winter on the East coast is not valid reason!
3) Violating client confidentiality .
Unilaterally start talking about engagement to the EPA
Regulatory agency, subpoena. Disciplinary actions
4) Failing to provide professional quality work
Auditor Defenses to Allegation of Breach of
Contract
1) I did not breach the contract
2)The losses were not caused by the breach.
Something else. Client has to prove damages were caused by the breach
3) The client was contributory negligent.
• For example failing to provide required material to the auditor on timely basis.
Case: Sam Antar. Auditor planned to finish the audit in 10 weeks (even flow). Sam did not provide
access to the inventory count and other required material. Hussle to finish.
• Court action In case of breach:
1) Order the auditor to fulfill the contract
2).
Stop discussing with EPAIssuing a junction to prohibit the auditor from continuing the breach
3)Order the auditor to pay compensatory damages
*Breach of contract don’t make it to the news. Why?
Limited number of parties involved and limited damages
What is common Law?
• Common law is shaped by precedent in a specific court's jurisdiction.
• Prior court decision
• Subject to change over time as a results judges' and juries’ decision. Evolve over
time
• There can be significant difference in common law across different jurisdictions.
• Depending where the suit is filed. The Precedent could be different
• 50 different states with 50 different jurisdiction.
• Think of Marijuana: What is legal in one state is not legal in another
• 3 different precedents to approach auditor liability among all jurisdictions
• Who the plaintiff is and degree of auditor misconduct? Different in jurisdiction
• What is civil liability requirement in one state is different from another state
Civil Liability
• Contract law (least concern to auditors)
• Common Law
To prevail under common law: plaintiff must
show 4 things
1) Financial statement were materiality misstated
Easy to prove. Net income (EPS) was inflated as per restatement
2) Damages: The existence amount of damages. How?
Easy to prove. Decrease in the stock price after the news
3)Causality: That the damage results from relying on the statement
The auditor action caused the damaged! How can we link it?
Bit more difficult
Market efficiency theory. Stock price reflects information about the company. Information
is embedded in the stock price.
Did not have to look at them! I relied on the market
4) Auditor misconduct: Who am I as a plaintiff and the jurisdiction!
You Messed up!
4) Auditor misconduct: Who I am and the
jurisdiction!
Who can file suit under common law?
Client and third parties reasonably expected to rely on the audited FS: More than
contract law
Third parties reasonably expected are classified in three groups:
1) Identified users:
Users that the auditors know will rely on the statements to make decision. (loan
application for 1st Bank of Philadelphia) Orally or specific. Small number
2) Foreseen users
Not individually known but belong to a specific group of users that the auditor
know will use the audited financial statements (5 Banks in Philadelphia area). Small
number but larger than identified
3) Foreseeable users
General class of users whose members may or may not use the financial
statements (Stockholders, shareholders, creditors, lenders, suppliers). Large group