M. Com (4) Advanced Auditing

Professional Ethics

Ethics are about what is morally wrong or right.As we have ethical principles in our daily life, there are some ethical principles for professional accountants and auditors also to follow. Without following the ethical principles, the audit may not be an independent audit and will not have the due credibility attached to it. These ethical principles are essential to maintain the independence and objectivity during the audit. It is not a legal requirement to behave ethically and follow ethical principles but it is advisable to follow these.

But there might be some situations which may influence the auditor’s independence due to the following threats.

1. Self-interest threat- Where the auditor has some financial or other interests in the client, the auditor would not be able to remain independent normally and it will try giving some favor to the audit client in its audit report to protect his/her self-interest.

Example1:

- Having shares in the company whose financial statements the auditor is auditing.

Safeguard (how to eliminate the threat): Dispose off the shares so that you do not have any interest in the company.

Example2:

- Accepting gifts and hospitality from the client.

Safeguard (how to eliminate the threat): Refuse the gifts that are of significant value and do not accept hospitality that could influence independence and objectivity.

2. Self-review threat- When the auditor has to review and give opinion on some part of the financial statements in which he/she or the firm was involved and during the audit have to review their own work.

Example1:

- Preparing the financial statements and then auditing them

Safeguard (how to eliminate the threat): The same firm ideally should either not prepare the financial statements for the client or should not audit them. OR there should be a separate team who prepared financial statements and the team on the audit.

Example2:

- Providing Valuation services to the client. For example, inventory or assets valuation

Safeguard (how to eliminate the threat): Discontinue valuation services or the auditing services to the client.

Saad Hassan - B.Sc. Honors (Applied Accounting), ACCA Page 1

M. Com (4) Advanced Auditing

3. Advocacy threat- when the auditor is asked to promote the client’s position or represent them in some way as the client’s advocate.

Example1:

Advocating the client in any dispute in the court, for example in taxation dispute with the tax authorities.OR promoting some product or business venture publically on the client’s behalf.

Safeguard (how to eliminate the threat): The firm or the auditors should not be a party to the client in any dispute or promote the client’s business in the form of press releases/other media or in any other form. They should remain independent.

Example2:

Helping the client obtain loan from a bank by advocating about its good future prospects.

Safeguard (how to eliminate the threat): The firm should withdraw from audit or should not help the client in any such matters which could impair its independence.

4. Familiarity threat- when the auditor has some kind of familiarity in the form of relationship or friendship/familiarity with the client or its management.

Example1:

Having blood relations/any association with the people involved in the preparation of the financial statements.

Safeguard (how to eliminate the threat): The auditor should withdraw from the audit engagement or its audit work done should be independently reviewed by a third party.

Example2:

Having done job at the client previously and now coming as a team member in the audit team.

Safeguard (how to eliminate the threat): The person who has any association with the company previously should be rotated from the audit team and a new member should be sent on audit instead. OR his/her work on the audit should be reviewed by an independent third person at the firm.

5. Intimidation threat- Threatening the auditor in the form of physical threats or any other form to influence the audit report.

Example1:

- Threatening the auditor to harm him/her physically.

Safeguard (how to eliminate the threat): The auditor should report the matter to the relevant authorities or take legal advice.

Example2:

- Threatening the auditor that he/she will not be reelected as auditor next year or the fee will not be paid if an unqualified report is not given.

Safeguard (how to eliminate the threat): Report to shareholders, withdraw from the engagement or take legal advice.

Saad Hassan - B.Sc. Honors (Applied Accounting), ACCA Page 2