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Chap 4 Code Ethics 28022025 061946pm

The document outlines the five fundamental principles of professional ethics according to ACCA: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. It also discusses various threats to objectivity and independence in auditing, including self-interest, self-review, familiarity, and intimidation, along with safeguards to mitigate these threats. Additionally, it addresses conflicts of interest and the importance of fair audit fee negotiations to maintain auditor independence.

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h.zaidi569
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13 views5 pages

Chap 4 Code Ethics 28022025 061946pm

The document outlines the five fundamental principles of professional ethics according to ACCA: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. It also discusses various threats to objectivity and independence in auditing, including self-interest, self-review, familiarity, and intimidation, along with safeguards to mitigate these threats. Additionally, it addresses conflicts of interest and the importance of fair audit fee negotiations to maintain auditor independence.

Uploaded by

h.zaidi569
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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From the desk of Irfan Lakhani

Professional Ethics

F UNDAMENTAL P RINCIPLES OF P ROFESSIONAL E THICS

ACCA’s five fundamental principles of professional ethics as set out in the Code of Ethics and Conduct
( I C O P2 ):
1- Integrity: Honest and straight forward

2- Objectivity: Fair, not allow bias, conflict of interest or undue influence of others

3- Professional competence and due care: Professional knowledge and skills, upto date on current
developments in audit practice, legislation and techniques

4- Confidentiality: Should not disclose client information to outsider nor use that information for
personal advantage, EXCEPT where consent has been obtained, there is a public duty (e.g.
unauthorized release of waste materials) or there is a legal or professional right or duty to disclose
(e.g. drug trafficking, terrorism). Duty of confidentiality still continues after the end of the
relationship

5- Professional behavior: Comply with profession’s guidelines and should not discredit the
profession

T HREATS T O O BJECTIVITY & I NDEPENDENCE

It is very important that the auditor should be INDEPENDENT of the Audit Client, so that he can give an
objective opinion (i.e. unbiased and straightforward opinion) on the financial statements.
The auditor should be independent both mentally and in appearance

There are several THREATS to independence for which adequate SAFEGUARDS should be adopted by the
auditor. Threats fall in 5 categories:
( S2 A F I ):
1. Self Interest
2. Self Review
3. Advocacy
4. Familiarity
5. Intimidation

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From the desk of Irfan Lakhani

1- SELF INTEREST THREATS


 Financial Interest(SIT)
 A financial interest exist where an audit firm or the audit team has a financial interest in
client’s affairs
 E.g. includes audit firm / auditor owns shares in the clients
 ACCA does not allow the following to own a direct financial interest or indirect
material financial interest in a client:
 The audit firm
 The member of the audit team
 Immediate family member of the audit team
 Safeguards:
 Disposal of client shares
 Remove the individual from the audit team
 Carrying out a quality review of the audit by another independent partner

 Close business relationship (SIT/IT)


 Close business relationship means that the audit firm has a close business relationship
with the client. E.g. includes:
 Audit firm and client have entered in a separate joint venture to sell combined
products or market / distribute each other’s products
 Purchasing of goods and services from client on an arm’s length basis (i.e. no special
discount or favours) does not constitute a threat of independence
 Safeguards:
 Terminate other business relationship
 Remove the individual from the audit team

 Employment or employment negotiations with the Client


 E.g. includes
 Audit Senior has given interview for a vacant position at the client (SIT)
 Safeguards
 Process whereby audit team member should inform his audit firm if he is being
interviewed for a vacant position
 Carrying out a quality review of the audit by another independent partner

Chp 4 - Page 2 of 5
From the desk of Irfan Lakhani

 Close family / personal relationships


 This could seriously affect the independence
 Safeguards
 Remove the individual from the audit team
 Process whereby audit team member should inform his audit firm if he has close
family / personal relationship with key members of the client
 Carrying out a quality review of the audit by another independent partner

 Audit partner / team is a director on client’s Board (SIT)


 Should resign from the Board

 Gifts and Hospitality(SIT)


 Should be clearly insignificant in value, otherwise do not accept

 Loans and Guarantees(SIT)


 If client is a bank, then the loan should be on arm’s length basis / normal commercial
terms (i.e. no special discount or favours)
 If client is not a bank, audit firm should not enter any loan / guarantee arrangement at
all

 Matters related to Audit Fees


 Previous audit fees not yet paid
 Contingent fees (fees should not be set based on the outcome of the audit)
 High fees (fee from a particular client should not exceed 15% of the total fee income of
the audit firm for 2 consecutive years)

2- SELF REVIEW THREATS


 Recent employment with the Client
 Individuals who were past employees of the client and now working with the audit firm
should not be part of the future audit team
 Providing Accounting Services
 Audit firm should not provide accounting services to its audit clients (such as preparing
financial statements )

Chp 4 - Page 3 of 5
From the desk of Irfan Lakhani

3- FAMILIARITY THREAT
 Familiarity threat occurs when, because of long association with the client, the concerned
partners becomes sympathetic or loses ‘professional skepticism’ (i.e. start trusting client)
 Safeguards:
 Rotate engagement partner every 5 years and other partners
 Appropriately rotating members of the audit team

C ONFLICT O F I NTEREST

Conflict of interest arises where the audit firm has 2 clients and both these clients are not comfortable
with each other. This happens in case of direct competitors.

E.g. P&G and Unilever are direct competitors of each other. If our audit firm is the auditor for both these
companies, then both P&G and Unilever will not be comfortable, as the auditor has access to sensitive /
confidential information.

 Safeguards:
 Both companies should be informed and ask to give consent
 Withdraw from one or both the engagements if consent not received

 Audit fee negotiation and low-balling:


 The auditor should always quote fees based on
 estimated hours worked by each member of the team
 multiplied by the hourly rate
 Low-balling:
 Sometimes an audit firm charges much lower audit fees as compared to the ‘market’
fees, in order to obtain new client
 Low-balling could lead to perceived threat on objectivity / independence
 Following aspects are considered for low-balling / threat
 Fee should be calculated based on # of hours X standard rate
 A reasonable discount from the calculated cost / existing audit fee may be
given (for e.g. a 5-10% discount may be deemed as reasonable)
 Quality of audit should not suffer under any circumstance / discount

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From the desk of Irfan Lakhani

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