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Professional Ethics,
Independence and Quality
Control
Chapter Nineteen
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Ethics and Professional Behaviour
Ethics
Professionalism
Refers to a system or code of conduct based on moral duties and
obligations that indicate how an individual should behave in society.
Refers to the conduct, aims, or qualities that characterize or mark a profession or professional person.
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Theories of Ethical Behaviour
Utilitarianism
Rights-Based Approach
Justice-Based Approach
Recognizes that decision-making involves trade-offs between the benefits and
burdens of alternative actions and focuses on the consequences and individuals
affected.
Assumes that individuals have certain rights and other individuals have a duty to
respect those rights when making decisions.
Is concerned with issues such as equity, fairness and impartiality.
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IFAC Code of Ethics for Professional Accountants
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IFAC Code Part A: 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 of Ethics for Professional Accountants
A professional accountant in public practice: A professional accountant, irrespective of functional
classification (e.g. audit, tax or consulting) in a firm that provides professional services.
Professional services: Services requiring accountancy or related skills performed by a professional accountant including accounting, auditing,
taxation, management consulting and financial managementservices.
A professional accountant in business: 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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Fundamental Principles
Integrity Objectivity
Professional Competence & Due Care
ConfidentialityProfessional
Behaviour
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Fundamental Principles
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Conceptual Framework Approach
Identify threats to compliance with the fundamental principles.
Evaluate the significance of the threats identified.
Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level.
Threats are created by circumstances and relationships that could compromise an accountant’s ability to comply with the
fundamental principles.Safeguards are actions or other measures that may
eliminate threats or reduce them to an acceptable level.
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Conceptual Framework Approach•Establishes fundamental principles.
•Requires active consideration of issues.
•Requires judgement rather than literal interpretations encouraged by a pure rules approach.
•Can be applied to differing circumstances.
•Responsive to change.
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Categories of Threats
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Safeguards
Safeguards in the work environment
Safeguards created by the profession, legislation or regulation
Professional accountants in
public practice
Professional accountants in
businessProhibitions:When safeguards are not adequate
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Safeguards created by the profession, legislation or regulation
• Educational, training and experience. requirements for entry into the profession.
• Continuing professional development requirements.
• Corporate governance regulations.• Professional standards.• Professional or regulatory monitoring and
disciplinary procedures.• External review by a legally empowered third
party of the reports, returns, communications or information produced by a professional accountant.
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IFAC Code Part B: 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 in specific situations by professional accountants in public
practice.
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Part B: Situations
Professional Appointment
Second Opinions
Fees & Other Types of Remuneration
Marketing Professional
Services
Gifts & Hospitality
Custody of Client’s Assets
Objectivity – All Services
Conflicts of Interest
Independence – Audit and Review Engagements
Independence – Other Assurance Engagements
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Part B: Examples of Circumstances and Relationships That May Create Threats
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Part B: Examples of Circumstances and Relationships That May Create Threats
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Part B: Examples of Safeguards in Work Environment
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Part B: Examples of Safeguards in Work Environment (continued)
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Part B: Independence – Audit and Review Engagements
Independence of Mind
The state of mind that permits the expression of a conclusion without being affected by influences
that compromise professional judgement, thereby allowing an individual to act with integrity and
exercise objectivity and professional scepticism.
The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s, or a member of the audit team’s, integrity, objectivity or professional scepticism has been compromised.
Independence in Appearance
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Part B: Independence and the Conceptual Framework Approach
Identify threats to independence.
Evaluate the significance of the threats identified.
Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level.
When the practitioner determines that appropriate safeguards are not available or cannot be applied to
eliminate the threats or reduce them to an acceptable level, he or she shall eliminate the circumstance or
relationship creating the threats, or decline or terminate the audit engagement.
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Part B: Independence – Audit and Review Engagements
• Firm includes network firm, except where otherwise stated. • A network firm is a firm or entity that belongs to a network. A network is
a larger structure that is aimed at cooperation; and that is clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources.
• Public interest entities: Additional provisions for public interest entities.
• A public interest entity is a listed entity, and an entity defined by regulation or legislation as a public interest entity or for which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit or listed entities.
• Documentation: Conclusions regarding compliance with independence requirements, and substance of any relevant discussions that support those conclusions.
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Part B: Independence – Audit and Review Engagements
• Financial interests. • Loans and guarantees. • Business relationships. • Family and personal relationships. • Employment with an audit client. • Temporary staff assignments. • Recent service with an audit client. • Serving as a director or officer of an audit. • Long association of senior personnel with an audit client, including partner rotation.
• Provision of non-assurance services to audit clients.
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Part B: Provisions of Non-Assurance Services – Types of Services and Circumstances
• Preparing accounting records and financial statements.• Valuation services.• Taxation services.• Internal audit services.• IT systems services.• Litigation support services.• Legal services.• Recruiting services.• Corporate finance services.• Fees: Relative size of fees, overdue fees and contingent
fees.• Compensation and evaluation policies.• Gifts and hospitality.• Actual or threatened litigation.
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Part B: Examples of Safeguards Related to Provision of Non-Assurance Services
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Preparing Accounting Records and Financial Statements
Activities considered a normal part of the audit
process that generally do not threaten
independence. Technical assistance and advice on accounting
issues that generally do not threaten independence
Services related to the preparation of accounting
records and financial statements of a routine or
mechanical nature that may create self-review
threats.
Originating or changing journal entries, or
determining the account classifications of
transactions.
Preparing or changing source documents or originating data, in
electronic or other form, evidencing the occurrence of a
transaction.
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Valuation Services
A valuation comprises the making of assumptions with regard to future developments, the application of appropriate methodologies and
techniques, and the combination of both to compute a certain value, orrange of values, for an asset, a liability or for a business as a whole.
A self-review threat may be created when a firm performs a valuation that is to be incorporated into the client’s financial statements.
The firm shall not provide a valuation service (or withdraw from the audit engagement) if the valuation service has a
material effect on the financial statements and the valuation involves a significant degree of subjectivity.
For public interest entity audit clients the firm shall not provide valuation services to an audit client if the
valuations would have a material effect, separately or in the aggregate, on the financial statements.
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Taxation Services1. Tax return preparation.2. Tax calculations for the
purpose of preparing the accounting entries.
3. Tax planning and other tax advisory services.
4. Assistance in the resolution of tax disputes.
For public interest entity audit clients the firm shall ordinary
not prepare such tax calculations of entries that are
material to the financial statements.
A firm is not permitted to provide tax advice when the tax advice depends on a particular accounting treatment or presentation in the financial statements, and (a) the audit team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework; and (b) the outcome or consequences of the tax advice will have a material effect on the financial statements.
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Internal Audit ServicesInternal audit services involve assisting the audit client in the
performance of its internal audit activities.
In providing such services the firm shall not
assume management responsibility.
Provision of internal audit services creates a self-
review threat to independence if the firm
uses the internal audit work in the course of a
subsequent external audit.
For public interest entity audit clients the firm shall not provide internal audit services that relate to a significant part of the
internal controls over financial reporting; financial accounting systems that generate information that is, separately or in the
aggregate, significant to the client’s accounting records or financial statements; or amounts or disclosures that are, separately or in the aggregate, material to the financial
statements.
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IT System Services
IT system services related to information
technology (IT) systems include the design or
implementation of hardware
or software systems.
Provision of IT systems services may create a self-review threat to
independence when the system generate information that affects
the accounting records or financial statements.
For public interest entity audit clients the firm shall not provide services involving the design or implementation of
IT systems that form a significant part of the internal control over financial reporting or generate information that is
significant to the client’s accounting records or financial statements.
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Litigation Support ServicesLitigation support services include activities such as acting as an expert witness, calculating estimated damages or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval.
Litigation support services to an audit client may createmay create a self-review
or advocacy threat.
Where the result of a valuation for litigation support will have a direct effect on the financial statements, the requirements in the Code relating to valuation
services are applicable.
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Recruiting ServicesRecruiting services include services such as reviewing
the professional qualifications of applicants,
interviewing candidates and providing advice on
their suitability for the post.
Providing recruiting services to an audit client may create
self-interest, familiarity or intimidation threats.
The significance of the threats will depend on factors such as the nature of the requested assistance and
the role of the person to be recruited. Safeguards shall be applied when necessary to reduce the threats to an acceptable
level.
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Corporate Finance ServicesCorporate finance services comprise a broad range of services including assisting in developing corporatestrategies, identifying possible targets for the client to acquire, advising on disposal transactions, assisting finance-raising transactions and providing structuring advice.
Providing corporate finance services to an audit client may create
services may create advocacy or self-review
threats.
Certain corporate finance services are not permitted, such as services involving promoting, dealing in or
underwriting an audit client’s shares.
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Independence for Other Assurance Engagements
Many of the same circumstances and relationships discussed previously related to independence requirements for audits and
reviews are also relevant for other assurance engagements.
Threats to independence typically arise more frequently and are of greater significance when a non-assurance service is provided to an audit client. Thus, the provision of non-assurance services
to audit clients is more restricted than to non-audit assurance clients.
An assurance engagement is an engagement in which a practitioner 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.
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IFAC Code Part C: 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.
Professional accountants in business must comply with the
IFAC Code’s fundamental principles and apply the
conceptual framework when threats to the principles exist.
Threats:• Potential conflicts.• Preparation and reporting of
information.• Acting with sufficient expertise.• Financial interests.• Inducements.
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Auditor Independence in the EUFrom 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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Systems of Quality Control
ISQC 1 Quality Control for Firms That Perform Audits and Reviews of Financial Statements, and Other Assurance and
Related Services Engagements
Elements of systems of quality control:• Leadership responsibilities for quality
within the firm.• Relevant ethical requirements.• Acceptance and continuance of client
relationships and specific engagements.• Human resources.• Engagement performance.• Monitoring.
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Elements of Systems of Quality Control
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Selected Quality Control Policies and Procedures
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Quality Control Programmes
IFAC SMO 1 Quality Assurance
EU 8th Directive.
European Commission, Recommendation on Quality Assurance for the Statutory Audit in
the EU: Minimum Requirements
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Quality Control Programmes
The objective of a quality assurance review is to:
1.Determine whether the member is subject to an adequate system of quality control.2.The system of quality control is in compliance with such system.3.The system of quality control has adhered to professional standards and applicable legal and regulatory requirements in performing engagements.
A member body shall choose either a cycle or risk-based approach for selecting members for review.
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End of Chapter 19
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