Professional ethics,

independence and audit

quality
Modern Auditing & Assurance Services
6th edition Leung et al.
Chapter 3

Learning Objectives
explain the role and duties of the
professional accountant
discuss the basic ethical principles
for auditors
describe the conceptual framework
of professional independence
state the importance of audit quality
and the standards for technical
competence

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Standards

ASA 200 Overall Objectives of the Independent

Auditor and the Conduct of an Audit in
Accordance with Australian Auditing Standards
ASA 220 Quality Control for an Audit of a
Financial Report and Other Historical Financial
Information
ASA 700 Forming and Opinion and Reporting on
a Financial Report
APES 110 Code of Ethics for Professional
Accountants
APES 210 Conformity with Auditing and
Assurance Standards

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The Concept of a Profession

A systematic body of theory
Authority
Community sanction
Ethical codes
Culture

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Characteristics of a
profession
(as defined by IFAC p.99)

Mastery of skills acquired by training and

education.
Adherence to a common code of values and
conduct.
Acceptance of a duty to society as a whole.

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Duties of a profession
Competence
Integrity in client dealings
Objectivity in the offering of services
Confidentiality in client matters
Discipline

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Professional accountants duties

Sustaining a fiduciary relationship
Behavior, skills and knowledge, reputation

Values required to carry out duties and

maintain rights
Honesty, integrity, due care, objectivity,
confidentiality, competence

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Ethics

Ethics espouses principles that:

Distinguish right from wrong
Guide how one ought to behave

Ethical theories and codes

Provide the bases for developing and
understanding principles and obligations

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Why is ethics important?

Ethics is concerned with the evaluation of

choices where options are not clear, or
where there is no absolute right or wrong.

The study and practice of ethics are

important to be able to examine a situation
critically where there is a conflict of loyalties
and interest.

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Ethical Theories

An understanding of ethics and

ethical issues

Teleology
Deontology
Virtue ethics
Ethical relativism

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Teleology or Consequentialism

Considers actions according to the

consequences of that behaviour

Utilitarianism is the most common form

A right action is one that maximises net benefits

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Deontology or
Non-Consequentialism

An action is right because of the intention

rather than the outcome

Duties generally include a responsibility to

be:
Fair to all
Respect others, particularly their rights

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Other theories

Virtue ethics
To act morally based on ones character
Moral behaviour is a natural result of one's
character

Ethical relativism
Moral values are relative to the particular
environment
Relevant to international business

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Professional Ethics and the

Accountant

Professional ethics for accountants

Standards of behavior for accountants
Professionalism, highest level of
performance
Serving the public interest

The Code of Ethics for Professional

Accountants APES 110

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Code of Ethics for Professional

Accountants APES 110

Part A Fundamental principles

Part B Members in public practice

Part C Members in business

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Fundamental Principles
Integrity
Objectivity
Professional competence & due
care
Confidentiality
Professional behaviour
Refer APES 110. para100.4

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Code of Ethics

Independence
Statutory provisions, CLERP
mind and appearance

Partner rotation
Familiarity
Non-assurance services
Accounting, valuation, taxation, internal audit, IT etc.

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Categories of threats
(APES 110 para. 100.12)
Self interest
Self review
Advocacy
Familiarity
Intimidation
Public practice behaviour
(Refer Tables 3.1 and 3.2 text)

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Safeguards
Education and experience
Continuing professional development
Governance regulations
Professional standards
Disciplinary procedures
External review
(refer APES110 para.100.12ff for further
details)

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Professional Independence
Cornerstone of the auditing
profession
Independence in mind and
appearance
Refer APES 110 para. 290.4-12

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Professional
Independence

The fact of independence (actual)

State of mind of the auditor
Forming an opinion without compromise

The appearance of independence

(perceived)

How others (a reasonable person) will view the

auditor
Third person test avoiding situations where a
reasonable person, knowing all the facts, would
conclude that integrity and objectivity is
compromised.
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Threats to independence

Financial interests
Loans and guarantees
Business/family/personal relationships
Employment relationships
Staff secondment of staff by audit firm
Long association with audit client

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Threats to independence

Non-assurance and services

Fees
Compensation and evaluation policies
Gifts and hospitality
Actual or threatened litigation

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Professional Independence

Statutory provisions (key provisions

covered in textbook in Table 3.3)

Right of access
Duty to report breaches of Corp Act
Appointment and terms
Audit fees disclosed in accounts

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Statutory provisions

Corporation Act

Opinion
Compliance with standards
true and fair
Declaration required by auditors

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ASIC Auditor monitoring

ASIC has responsibility for surveillance,

investigation and enforcement of regulatory
requirements for auditor independence

ASIC undertakes Audit Inspections

Programs

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Audit Inspection Program (ASIC)

Aim to improve financial reporting i.e.

To promote quality external audits
To review compliance and independence

Mostly carried out on firms auditing public

listed or public interest entities
Undertaken every 18 months

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CLERP (Corporate law economic

reform program)
Auditor appointment, independence and
rotation
AGMs (annual general meetings)
Expansion of auditors duties

Notify ASIC of any attempts of influence,

manipulation etc. in the conduct of the audit

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Audit Quality

Technical competence
Accounting concepts and standards
Auditing standards and guidance
statements
Standards for taxation, insolvency and
management consulting services
Compliance with standards

Ethical competence
Quality controls

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