Transcript 19-1 Chapter Nineteen Professional Ethics, Independence, and Quality Control McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc.

19-1
Chapter Nineteen
Professional Ethics, Independence,
and Quality Control
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19-2
Ethics and Professional Behaviour
Ethics
Refers to a system or code of conduct
based on moral duties and obligations that
indicate how an individual should behave
in society.
Professionalism
Refers to the conduct, aims, or qualities
that characterize or mark a profession or
professional person.
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19-3
Theories of Ethical Behaviour
Utilitarianism
Recognizes that decision making involves
trade-offs between the benefits and burdens
of alternative actions and focuses on the
consequences and individuals affected.
Rights-Based
Approach
Assumes that individuals have certain
rights and other individuals have a duty to
respect those rights when making
decisions.
Justice-Based
Approach
Is concerned with issues such as equity,
fairness and impartiality.
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Development of Moral Judgment
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Conceptual
Framework
Approach to
Independence
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Conceptual Framework Approach to
Independence
• The definitions of independence in the frameworks acknowledge that
independence only indirectly affects the ultimate goal of auditor objectivity,
i.e. to make unbiased audit decisions.
• Independence is considered a relatively observable trait of an auditor that
should be correlated with the relatively unobservable trait of objectivity.
• Consequently, auditor independence is viewed as the main mean to ensure
and demonstrate auditor objectivity and independence has therefore been in
regulatory focus.
Independence of mind relates to the fact of independence, i.e. if the auditor
actually behaves without being affected by interests than may impair objectivity.
Independence in appearance relates to perception of independence, i.e. if third
parties perceive that auditor interests that may impair objectivity do not exist.
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Conceptual Framework Approach to
Independence
Threats to auditor independence are pressures and other factors
that impair or are perceived to impair an auditor’s objectivity.
Safeguards to auditor independence are controls that mitigate
the effects of the threats.
Independence risk is the likelihood that auditor’s objectivity
would be compromised or reasonably would appear to be
compromised to informed investors and other users of the audit
report.
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Conceptual Framework Approach to
Independence
• Self-interest threats arise from the auditors favouring or is perceived
to favour self-interests over their interest in performing an unbiased
audit.
• Self-review threats arise from auditor’s difficulty to evaluate without
bias one’s own work, or that of one’s firm.
• Advocacy threats arise from auditors acting biased in promoting or
advocating for or against the auditee.
• Familiarity threats arise from auditors compromising objectivity due to
being influenced by a close relationship with the auditee.
• Intimidation threats arise from auditors deterred from acting
objectively because they are being, or believing that they are being,
overtly or covertly coerced by auditees or by other interested parties.
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Conceptual Framework Approach to
Independence
Safeguards created by the
profession, legislation, or
regulation.
Safeguards within the
auditor’s and audit firm’s
own system and procedures.
Safeguards created and
maintained within the auditee.
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19-10
IFAC Code of Ethics for Professional
Accountants
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IFAC Code: Fundamental Principles and
Conceptual Framework
Part A of the Code establishes the fundamental
principles for professional accountants’
behaviour and the conceptual framework for
applying those principles.
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IFAC Code: Fundamental Principles and
Conceptual Framework
A professional accountant in public practice is defined as a
professional accountant that provides professional services in
a firm.
• Professional services are defined as services requiring accountancy or related
skills performed by a professional accountant including accounting, auditing,
taxation, management consulting, and financial management services.
• A firm is defined as a sole practitioner, partnership, or corporation of
professional accountants; an entity that controls such parties, and an entity
controlled by such parties.
A professional accountant in business is defined as a professional
accountant employed or engaged in an executive or non-executive
capacity in such areas as commerce, industry, service, the public
sector, education, the not-for-profit sector, regulatory bodies or
professional bodies, or a professional accountant contracted by
such entities.
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IFAC Code: Fundamental Principles and
Conceptual Framework
Integrity
Objectivity
Professional
Competence
& Due Care
Confidentiality
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Professional
Behaviour
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IFAC Code: Fundamental Principles and
Conceptual Framework
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IFAC Code: Fundamental Principles and
Conceptual Framework
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IFAC Code: Conduct of Professional
Accountants in Public Practice
Part B Professional Accountants in Public
Practice illustrates how the conceptual
framework contained in Part A is to be
applied by professional accountants in
public practice in specific situations.
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IFAC Code: Conduct of Professional
Accountants in Public Practice
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IFAC Code: Conduct of Professional
Accountants in Public Practice
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IFAC Code: Conduct of Professional
Accountants in Public Practice
Fees & Other Types of
Remuneration
Professional Appointment
Conflicts of Interest
Second Opinions
Gifts & Hospitality
Marketing Professional
Services
Custody of Client Assets
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Objectivity – All Services
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IFAC Code: Independence - Assurance
Engagements
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Assurance
Engagement
An engagement in which a professional accountant in
public practice expresses a conclusion designed to
enhance the degree of confidence of the intended users
other than the responsible party about the outcome of
the evaluation or measurement of a subject matter
against criteria.
Independence of
Mind
The state of mind that permits the expression of a
conclusion without being affected by influences that
compromise professional judgment, allowing an
individual to act with integrity, and exercise objectivity,
and professional scepticism.
Independence in
Appearance
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The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party,
having knowledge of all relevant information, including
safeguards applied, would reasonably conclude a firm’s,
or a member of the assurance team’s, integrity,
objectivity, or professional scepticism had been
compromised.
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IFAC Code: Independence - Assurance
Engagements
Financial Statement
Audit Engagements
Other Assurance
Engagements
Listed Entities
Engagement Period
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IFAC Code: Independence
• Financial interests.
• Loans and guarantees.
• Close business relationships with the assurance
clients.
• Family and personal relationships.
• Employment with assurance clients.
• Recent service with assurance clients.
• Serving as an officer or director on the board of
assurance clients.
• Long association of senior personnel with assurance
clients.
• Provisions of non-assurance services to assurance
clients.
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IFAC Code: Provisions of Non-Assurance
Services – Types of Services
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Preparing accounting records and financial statements.
Valuation services.
Provisions of taxation services to audit clients.
Provisions of internal audit services to audit clients.
Provisions of IT systems services to audit clients.
Temporary staff assignments to audit clients.
Provisions of litigation support services to audit clients.
Provisions of legal services to audit clients.
Recruiting senior management.
Provisions of corporate finance services to audit clients.
Fees, pricing and partner compensation.
Gifts and hospitality.
Actual or threatened litigation.
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IFAC Code: Provisions of Non-Assurance
Services – Examples of Prohibited Activities
Acting in the capacity of
management by authorizing,
executing or consummating
a transaction.
Making decisions on behalf
of management.
Reporting in a management
role to those charged with
governance.
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IFAC Code: Provisions of Non-Assurance
Services – Examples of Safeguards
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Summary of Code Provisions for Selected
Non-Assurance Services to Audit Clients
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IFAC Code: Conduct of Professional
Accountants in Business
A professional accountant in
business is an accountant holding
membership in an IFAC body and is
employed or engaged in an executive
or non-executive capacity in an
organization other than an audit firm.
Threats:
• Potential conflicts.
• Preparation and reporting of
information.
• Acting with sufficient expertise.
• Financial interests.
• Inducements.
Professional accountants in business
must comply with the IFAC Code’s
fundamental principles and apply
the conceptual framework when
threats to the principles exist.
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EU Rules on Auditor Independence
From European Commission, Recommendation on Statutory
Auditors’ Independence in the EU: A Set of Fundamental Principles
(2002):
“A principles-based approach to statutory auditors' independence is
preferable to one based on detailed rules because it creates a robust
structure within which statutory auditors have to justify their actions. It
also provides the audit profession and its regulators with the flexibility
to react promptly and effectively to new developments in business and
in the audit environment. At the same time, it avoids the highly
legalistic and rigid approach to what is and is not permitted which can
arise in a rules-based regime. A principles-based approach can cater
for the almost infinite variations in individual circumstances that arise
in practice and in the different legal environments throughout the EU.
Consequently, a principles-based approach will better serve the needs
of European capital markets, as well as those of SMEs (small and
medium sized enterprises).”
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EU Rules on Auditor Independence
Threats to Independence:
• Preparing of accounting records and financial statements.
• Design and implementation of financial information technology systems.
• Valuation services.
• Participating in the audit client’s internal audit.
• Acting for the audit client in the resolution of litigation.
• Recruiting of senior management.
• Audit and non-audit fees (contingent fees, relationship between total fees
and total revenue, overdue fees and pricing).
• Litigation.
• Senior personnel acting for a long period of time.
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Quality Control Standards
ISQC 1 Quality Control for Firms That Perform Audits and Reviews
of Historical Financial Information and Other Assurance and Related
Services Engagements
• Leadership responsibilities for quality
within the firm.
• Ethical requirements.
• Acceptance and continuance of client
relationships and specific engagements.
• Human resources.
• Engagement performance.
• Monitoring.
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Elements of Quality Control
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Selected Quality Control Policies and
Procedures
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Monitoring Quality Control
Provide an evaluation of:
(1) Adherence to professional standards and regulatory and legal
requirements.
(2) Whether the quality control system has been appropriately
designed and effectively implemented.
(3) Whether the firm’s quality control policies and procedures have
been appropriately applied, so that reports that are issued by the
firm or engagement partners are appropriate in the circumstances.
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Monitoring Quality Control
Procedures for monitoring include:
•
Inspection procedures of a selection of completed engagements.
•
Analysis of
— New professional standards and regulatory and legal requirements.
— Written confirmation of compliance with policies and procedures on
independence.
— Continuing professional development, including training.
— Decisions related to acceptance and continuance of client
relationships and specific engagements.
Determination of any corrective actions to be taken and improvements to
be made in the system.
Communication to appropriate firm personnel of weaknesses identified in
the system, in the level of understanding of the system, or compliance with
it.
Follow-up by appropriate firm personnel to ensure that any necessary
modifications are promptly made to the quality control policies and
procedures.
•
•
•
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Quality Assurance Programmes of Firms’
Practices
• Mandatory or voluntary review.
• Firms and auditors covered by reviews.
• Selection and qualities of reviewers.
• Scope and thoroughness of reviews.
• Frequencies of reviews.
• Sanctions initiated as a result of negative outcomes
of reviews.
• Public reporting of outcomes of reviews and
sanctions imposed.
• Public oversight of programs.
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Quality Assurance Programmes of Firms’
Practices - Regulations
EU 8th Directive
IFAC SMO 1 Quality
Assurance
European Commission,
Recommendation on
Quality Assurance for the
Statutory Audit in the EU:
Minimum Requirements
PCAOB
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End of Chapter 19
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