Auditing 81.3550Auditing 81.3550

Chapter 3

Ethics

Chapter 3

Ethics

HighlightsHighlights• Describe and explore ethics• look at ethical concerns relating to

accountants and typical codes of conduct– independence – confidentiality– behaviour requirements– integrity and due care– professional competence

• other rules of conduct

• Describe and explore ethics• look at ethical concerns relating to

accountants and typical codes of conduct– independence – confidentiality– behaviour requirements– integrity and due care– professional competence

• other rules of conduct

EthicsEthics

• 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

• 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 EthicsCode 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?

• 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 FrameworksEthical Frameworks

• Another framework for solving ethical dilemmas 1. Gather relevant facts2. Identify ethical issues3. Determine who stakeholders are and how affected by outcome4. Identify alternatives5. Identify consequences of each alternatives6. Decide appropriate action to take

• Another framework for solving ethical dilemmas 1. Gather relevant facts2. Identify ethical issues3. Determine who stakeholders are and how affected by outcome4. Identify alternatives5. Identify consequences of each alternatives6. Decide appropriate action to take

Ethical FrameworksEthical Frameworks

• Newspaper Test– Would you want your

decision to be covered by the newspaper?

– What would the reaction be?

• Newspaper Test– Would you want your

decision to be covered by the newspaper?

– What would the reaction be?

Professional & Codes of ConductProfessional & 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

• 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?

How are Public Accountants Encouraged to be Professional?

Conduct of AcctFirm Personnel

SecuritiesComm.

Prof.Code

Conduct

PracticeInspec.

Legal Liability CICA

Handbook& Guidelines

Prof.Exams

Quality Control

Cont.Ed

Code of Professional ConductCode 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

• 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/PrinciplesGeneral Ideals/Principles

• Members should be ethical and serve public interest

• Common principles include:– integrity– due care– confidentiality– objective state of mind

• Members should be ethical and serve public interest

• Common principles include:– integrity– due care– confidentiality– objective state of mind

SpecificsSpecifics

• 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)

• 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 SpecificsCommon Specifics

• Each professional accounting body has it own set of Rules of Professional Conduct

• Commonality between majority of rules

• Each professional accounting body has it own set of Rules of Professional Conduct

• Commonality between majority of rules

Specifics - IndependenceSpecifics - 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

• 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

IndependenceIndependence

• 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– Financial– Mental Attitude– Investigative– Reporting

• 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– Financial– Mental Attitude– Investigative– Reporting

Financial IndependenceFinancial 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

• 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 IndependenceFinancial 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

• 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

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

• 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?

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

• 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?

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

• 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 ShoppingOpinion 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

• 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

ConfidentialityConfidentiality

• Rules of conduct - cannot disclose client information without client consent

• Exception – if info requested by courts (can include all files/documents)

• Exception - practice inspections

• 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 ReputationProfessional 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

• 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

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

• 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

AdvertisingAdvertising

• 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

• 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 RulesOther 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

• 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

EnforcementEnforcement

• 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

• 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