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PART - I

CHAPTER- 4

PROFESSIONAL ETHICS

4.1. Fundamental Principles of Professional Ethics:

4.1.1. Integrity: Members should be straightforward and honest in all professional and businessrelationships.

 

4.1.2. Objectivity: Members should not allow bias, conflicts of interest or undue influence of others to override professional or business judgments.

4.1.3. Professional Competence & Due Care: Members have continuing duty to maintain professional knowledge and skill at a level required to ensure that a or employer receivescompetent professional services based on current developments in practice, legislation andtechniques.

 4.1.4. Confidentiality: Members should respect the confidentiality of information acquired aresult of professional and business relationships and should not disclose any suchinformation to third parties without proper or specific authority or unless there is a legal or  professional right or duty to disclose.Confidential information acquired as a result of professional and business relationshipsShould not be used for the personal advantage of members or third parties.Exercising power and decision-making for a group of people is called governance.

4.1.5. Professional Behavior:Members should comply with relevant laws and regulations and should avoid any actionthat discredits the profession.

4.2. Confidentiality:

Although auditors have a professional duty of confidentiality, they may be compelled by  law or consider it necessary in the Public Interest to disclose details of clients affairs to

third parties.

4.3. Integrity, Objectivity, and Independence:

Fundamental Principles require that, members should behave with integrity in all professional and business relationships and they strive for objectivity in all their  professional business judgments.It is important that, auditor should be impartial and independent of management so that

he/she can give objective view on the financial statements of an entity. The obligation isalways to the auditor not only to be ethical but also should be seen ethical.

4.4. Threats to Independence and Objectivity:

Compliance with fundamental principles of professional ethics may potentially bethreatened by a wide range of circumstances which may fall in to following categories.

a) Self Interest threat: This may arise as a result of financial or other interests of membersor immediate or close family.This may include; financial interests, close business relationships, employment, partner on client board, family and personal relationships, gifts and hospitality, loans and

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guarantees, overdue fees, % age or contingent fees, high % age of fees, low balling, andrecruitment.

b) Self – Review threat; It may occur when previous judgment needs to be re- evaluated bymembers responsible for that judgment.This may include; Recent Services, general services, preparing accounting records andfinancial statements, valuation services, tax services, internal audit services, corporatefinance and other services.

c) Advocacy threat; It may arise in those situations where the assurance/audit firm promotes a position or opinion to the point that subsequent objectivity is compromised.d) Familiarity threat; It occurs when because of close relationships, members become too

sympathetic to the interests of others.e) Pressure threat; it arises when members of the assurance team may be prevented from

acting objectivity by threats actual or perceived.These may arise from family and personal relationships, litigation, or close businessrelations.

4.5. Conflicts of Interest:

Conflicts of interest arises when firm has two or more audit clients all of them have reason

to be un happy that their auditors are also auditors of other company.This situation arises when the companies are in direct competition with each other, particularly when auditors have access to particular sensitive information.

4.6. Enforcement of Mechanism:

It considers how an organization enforces to the code of ethics and conduct.

Members will liable to disciplinary action if they breach the ethical guidance.

 4.7. Country-Specific Ethical Guidance:

Company/organization may keep country-specific ethical guidance other then theCompany’s ethical guidance also.

  4.8. Accepting Audit Appointments:

The present and proposed auditors must communicate with each other prior to the audit

 being accepted, however if the client refuses to give permission to the proposed auditorsto make contact, the proposed auditors must decline nomination.

4.8.1. Tendering & Obtaining Work:  Members are entitled to advertise their services and products.

4.8.2. Fee Negotiation and Lowballing:The Auditors Fee represents a cost for something the company often doesn’t really wantthe fee may be perceived as too high. The auditors must ensure that they can provide a

quality audit for the price.Sometimes firms charge less than market rate for an audit especially when tendering for new clients this practice is called lowballing.

4.9. Appointments Ethics:

4.9.1. Before Accepting Nomination:

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Before a new client is accepted, the auditors must ensure that there are no independence or other ethical problems likely to cause conflict with the ethical code. Furthermore, newauditors should ensure that they have been appointed in a proper and legal manner 

4.9.2. Nomination Letter:  This is the letter through which auditors request their company to nominate them through

letter to the client company as auditors of the company to go forth for further audit

 process.4.9.3. Procedure after accepting nomination:

Following procedure may be observed after accepting nomination;a) Ensure that, the outgoing auditors removal or resignation has been properly conducted in

accordance with national legislation;  b) Ensure that, the auditors’ appointment is valid. Auditors should obtain a copy of 

resolution passed at the general meeting appointing them as company auditors.c) Setup and submit a letter of engagement to the directors of the company.

4.9.4. Other Matters:The new auditors should not decline the appointment solely for the reason of old auditors

owing their fees to the client.Once the appointment has taken place, the new auditors should obtain all books andpapers form old auditors which belong to client.They should also pass any useful information on to the new auditors if it will be of helpwithout charge.

4.10. Client Screening:

Many firms particularly large ones check on potential client companies and their management.

4.10.1. Management Integrity:Integrity of those managing company is of great importance particularly if the company

is controlled by one or few dominant personalities. 

4.10.2. Risk:Low Risk may be observed if the company is having;

a) good long term forecast b) Well – Financedc) Strong internal controlsd) conventional, careful accounting policiese) competent and honest managementf) few unusual transactions

High Risk may be observed if the company is having;

a) Poor recent or forecast performance b) Likely lack of financec) Significant control weaknessd) Evidence of questionable integrity, doubtful accounting policiese) Un explained transactions

4.10.3. Engagement Economics:Expected fees from a new client should reflect the level of risk expected. They shouldalso offer the same sort of return expected of clients of this nature and reflect the overallfinancial strategy of the audit firm

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4.10.4. Relationship with Client:The audit firm generally wants the relationship with client to be long term. This is notonly the to enjoy fees but to allow audit work to be enhanced by better knowledge of theclient and thereby offer a better service. 

4.10.5. Ability to perform work:Audit firm must have enough resources to perform audit activity work properly as well asspecial knowledge or skills.

4.11. Approval:

Once all the procedures and information gathered, the company can be put forward for approval. The engagement partner will have to complete a client acceptance form and thisalong with any other documentation will be submitted to the partner who is in overallcharge of accepting clients.

4.12. Agreeing the Terms of Engagement (ToE): 

ISA 210 agreeing the terms of audit engagements states that the objective of the auditor is

to accept or continue an audit engagement only when the basis on which it is to be carriedout has been agreed by establishing whether the preconditions for an audit are present andconfirming that there is common understanding between the auditor and management of the terms of the engagement.

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4.12.1. Preconditions for Audit:Are the use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and whereappropriate, those charged with governance to the premise on which an audit isconducted.To determine preconditions for an audit:

 – Determine whether the financial reporting framework is acceptable.  – Obtain management’s agreement that it acknowledges and understands itsresponsibilities for preparing;a) Financial Statements in accordance with applicable financial reporting

framework;b) Internal Control that is necessary to enable the preparation of financial

statements which are free from material misstatement;c) Providing Auditor with access to all information.

4.12.2. The Audit Engagement Letter:The Audit Engagement letter is written terms of engagement (ToE) in the form of a letter;this is required to be done before audit engagement starts.

Audit Engagement Letter shall include; – The Objective and Scope of the Audit, – The Auditor’s Responsibilities, – Management’s Responsibilities, – Identification of the applicable financial reporting framework for the preparation of 

the financial statements, –  Reference to the expected form and content of any reports to be issued by the auditor.

4.12.3. Additional Matters that may be included in the Terms of Engagement (ToE):- Strengthening of scope of audit,- Arrangements regarding planning & performance,- Agreement of management to provide draft financial statements,- Fees & Billing Arrangements,- Involvement of other Auditors and Experts,- Involvement of Internal Auditors and other staff,- Any obligations to provide audit working papers to other parties,- Any restriction of auditor’s responsibility.

4.12.4. Recurring Audits:On recurring audits the auditors shall assess whether the terms of engagement need to berevised and whether there is a need to remind the entity of the existing terms.Following Factors may cause a revision to the Terms of Engagement; – If the entity misunderstands the objective and scope of the audit,

 – Any revised or special terms of the audit engagement, – A recent change of senior management, – A significant change in ownership – A significant change in nature or size of the audit engagement, –  A change in the legal or regulatory requirements, – A change in the financial reporting framework, – A change in other reporting requirements. 

4.12.5. Acceptance of a Change in Terms:A change in the terms of audit engagement prior to completion may result from:

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a) A change in circumstances affecting the need of the services,b) A misunderstanding as to the nature of an Audit of the related service originally

requested,c) A restriction on the scope of the audit engagement, whether imposed by management

or caused by circumstances. *The Auditor should not agree to a change in the terms of the audit engagement where there isno reasonable justification.