Download ppt - AC303 - Auditor Independence & Ethics

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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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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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• 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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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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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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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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• 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