Auditing 81.3550

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Auditing 81.3550

• Chapter 3
• Ethics

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Highlights

• 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

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Ethics

• 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

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Code of Ethics

• Many organizations 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?

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Ethical Frameworks

• Another framework for solving ethical dilemmas
• 1. Gather relevant facts
• 2. Identify ethical issues
• 3. Determine who stakeholders are and how
  affected by outcome
• 4. Identify alternatives
• 5. Identify consequences of each alternatives
• 6. Decide appropriate action to take

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Ethical Frameworks

• Newspaper Test
• Would you want your decision to be covered by the
  newspaper?
• What would the reaction be?

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Professional 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

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How are Public Accountants Encouraged to be
Professional?
Quality Control
Prof. Code Conduct
Cont. Ed
Practice Inspec.
Securities Comm.
Conduct of Acct Firm Personnel
Prof. Exams
Legal Liability
CICA Handbook Guidelines
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Code 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 CAs in Canada same rules

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General Ideals/Principles

• Members should be ethical and serve public
  interest
• Common principles include
• integrity
• due care
• confidentiality
• objective state of mind

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Specifics

• 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)

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Common Specifics

• Each professional accounting body has it own set
  of Rules of Professional Conduct
• Commonality between majority of rules

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Specifics - 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

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Independence

• 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

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Financial 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

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Financial 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

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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

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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

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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

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Opinion Shopping

• Management moves from one auditor to another
  looking for until they find the right someone
• 7600 - reqd to report/consult with previous
  auditing/accounting firm

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Confidentiality

• Rules of conduct - cannot disclose client
  information without client consent
• Exception if info requested by courts (can
  include all files/documents)
• Exception - practice inspections

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Professional 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

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Due Care, Integrity Competence

• Legal duty to users of financial statements to
  perform duties with due care
• Integrity key to professional accountants 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 clients often complex
  business if not should decline engagement

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Advertising

• Cannot solicit another firms clients (i.e.
  pursue to convince them to change firms)
• Can respond to a request for information
• Adverting must be in good professional taste

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Other 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 clients permission) review
  prior auditors working papers

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Enforcement

• 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