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08/04/23
1
TOPIC 3
Auditor Independence & Professional Ethics[Code of Conduct]
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Overview – Auditor Independence
1. Ethics
2. Independence
3. IFAC Ethical Standards
4. Safeguards to maintain independence
5. Sarbanes-Oxley
6. Improvements to independence
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IFAC CODE OF ETHICS
• The code of ethics establishes ethical requirements for professional accountants
• It provides a conceptual framework for applying the principles
• This code illustrates how the conceptual framework is to be applied in specific situation
• A proffesional accountant and auditor is requires to comply with the following fundamental principles
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IFAC comprises three parts:
A: General Principles Principles, threats, safeguardsB: Professional Accountants in Public
Practice (Application)Application guidance, general and
specific application, extensive section on independence
C: Professional Accountants in Business• Adopted by NBAA
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IFAC Outline (A & B)
A: Fundamental Principles A: Fundamental Principles
[Similar to NBAA][Similar to NBAA]Part B: Application GuidancePart B: Application Guidance
• Integrity
• Objectivity
• Competence & due care
• Confidentiality
• Professional Behaviour
Conceptual frameworkConceptual framework
• Identify, evaluate &
address threats to principles
• Guidance – threats
• Guidance - safeguards
GeneralGeneral
• Appointment
• Conflicts
• Second opinions
• Fees / remuneration
• Marketing
• Gifts and hospitality
• Custody of client assets
• Objectivity – All services
Independence – assurance engagementIndependence – assurance engagement
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1. Ethics
set of principles of proper conduct
system of moral values
or
IFAC CODE OF ETHICS – fundamental principles
• integrity
- Be honest in all prof. & business relationships
• objectivity
-Not allow bias, conflict of interest or undue influence of others to override professional or business judgments
• professional competence & due care
-has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques
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1. Ethics
set of principles of proper conduct
system of moral values
or
IFAC CODE OF ETHICS – fundamental principles
•Confidentiality
•PA should not disclose or use info acquired or received as a result of prof. and business re’ships.
• professional behaviour
•Imposes an obligations on PA to comply with laws and regulations and avoid an act that may bring discredit to the profession.
should be observed by all professional
accountants
“spirit of the code”
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2. Independence
Independence has two facets:
1.the FACT of independence
2.the APPEARANCE of independence
• required for all assurance engagements – eg audits
• fundamental principle of auditing (Topic 1 – Audit theories)
• required to make sound professional judgements
• individual auditors and the profession must strive to be seen as independent
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3. IFAC Ethical Standards -Threats
self-interest
threat
familiarity
threat
self-review
threat
advocacy
threat
intimidation
threat
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3. IFAC Ethical Standards – Self Interest
Financial interest
- investments
Close re’ships
Loan
Potential employment Undue dependence on
Total audit fees
Contingent fees
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3. IFAC Ethical Standards
auditor must
identify threats to
independence
Apply procedures/safeguards which with either:
• eliminate the threat
or
• reduce the threat to an acceptable level
• may not be possible to safeguard/eliminate every threat may not be able to accept engagement
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3. IFAC Ethical Standards
• Additional requirements
– ethics partner for each audit practice
– continual awareness of threats to independence
– identification and assessment of safeguards for each engagement
– communication with those charged with governance
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4. Safeguards to maintain independence
Scenario Threat
Financial interest self-interest
Loans & guarantees self-interest, self-review
Business relationships self-interest, advocacy, intimidation
Audit staff on secondment to audit client
management, self-review
Audit staff leaving to join audit client
self-interest, familiarity, intimidation
Family members employed by audit client
familiarity, self-interest
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ACTIVITY 1Enny [T] Ltd manufactures and sells sports bats and racquets. The company has been enjoying substantial growth over the last few years and its auditors have resigned due to the fact that they have insufficient staff to meet the needs of the expanding business. In light of this fact, Enny has approached your firm, SAM [T] to take on the audit going forward. You have been asked by the partners to assist in their assessment of whether or not SAM [T] can accept the Enny engagement by identifying which of the SAM members of staff identified below would be able to work on the engagement if it was accepted.
For each member of staff identify:
• any threats to independence;
• any safeguards that can be put in place to mitigate the threats identified; and
• conclude whether the member of staff could be included in the Enny audit team.
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4. Safeguards to maintain independence
ES
Scenario Threat Safeguard
3 Longstanding association with the audit engagement
familiarity, self-interest, self-review
•rotation•IRP•listed company rules
4 Dependence on one client
self-interest, intimidation
•limits of % of total audit fees
4 Remuneration for selling non-audit services
self-interest
•not permitted
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4. Safeguards to maintain independence
ES
Scenario Threat Safeguard
4 Gifts and hospitality
familiarity, self-interest
•no significant gifts•“reasonable” levels of hospitality
5 Non-audit services
Might include: self-interest, self-review, management, advocacy
•restrictions on internal audit
•no IT system design•some tax services allowed
•must not underwrite or promote share issues
•no accountancy services for public interest clients
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ACTIVITY 2SAM [T] is a medium-sized Tanzania-based accountancy firm that provides accountancy, audit, tax and advisory services to a broad range of clients across the URT. It has 70 partners across the business streams and has enjoyed an increase in revenues over the last few years (last year’s total revenue was TZS 52 bn).
The Ethics Partner at SAM, Gordon Goodman, has been reviewing the audit firm’s current and prospective client portfolio. He wants to identify if there are any independence threats in relation to the current and prospective clients that SAM needs to respond to.
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ACTIVITY 2 He has asked you to review a portion of the
current/prospective clients (see below) and for each one identify the following:
• The independence threats to SAM, if any; and
• What actions SAM should take in relation to the threats identified
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4. Safeguards to maintain independence
• Companies Act 2002– appointment by shareholders not directors– penalties for failing to provide information to
auditors– publication of fees paid to auditors
• Statutory Audit Directive– outgoing auditor to provide incoming auditor
with access to all relevant information– prevention of low-balling => audit firms from
offering the audit service for a marginal fee and compensating this with the fee income from other non-audit services
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5. Sarbanes-Oxley
• affects companies listed on US stock exchanges including their subsidiaries
• certain non-audit services prohibited
• all services provided by the auditor must be pre-approved by the audit committee
• requirement for audit partner rotation
• if audit staff (within past 2 years) become CEO, CFO or CAO can’t accept audit engagement
• disclosure of all fees paid to auditors
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6. Improvements to independence
• Proposals to further strengthen independence:
– compulsory further training (CPD)– prohibition of all non-audit services or further
restriction of non-audit services– appointment of auditors by an independent
body– compulsory rotation of
audit firms all engagement partners
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6. NBAA Code of Ethics
• Fundamental principles of professional conduct applicable to all members
–Integrity –Objectivity –Competence–Prof. Care–Prof. Behaviour
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Summary – Can You?
Leaning Objectives Recap:
• Describe the main constituents of auditor independence and ethics
• Identify and explain the main factors material to independence
• Discuss situations that might threaten auditor independence and any suggested safeguards
• Discuss ways in which auditor independence might be further improved
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