Week 6

1
Week 6 Professional Ethics and audit acceptance

• Week 6 Professional Ethics and Codes of Conduct
  II
• Describe the requirements of professional ethics
  and other requirements in relation to the
  acceptance of audit and review assignments,
  including situations in which there is an imposed
  limitation in audit scope.
• Define the detailed requirements of, and
  illustrate and analyse the application of,
  professional ethics in the context of
  confidentiality and conflicts of interest.
• Describe the importance of engagement letters and
  describe their contents.

2
Week 6 Audit Acceptance

• Tendering and obtaining work.
• Appointment ethics.
• Client screening.
• The engagement letter.
• Confidentiality and conflicts of interest.

3
Tendering and obtaining work

• Code of Professional Conduct Section 3.10
• Advertising should not reflect adversely on the
  member, ACCA or the accountancy profession.
• Discrete and shouldnt
• Discredit ACCA or services offered by other
  accountants.
• Be misleading - directly or by implication.
• Fall short of local regulatory or legislative
  requirements.
• Fees to be quoted with due care
• Rewards/Introductory Fees disallowed
  (self-interest threat!)

4
Fee Negotiation

• Fees are to be charged as appropriate.
• Fees based on the time worked and the seniority
  of persons involved in the audit.
• Fees should not be charged on a or commission
  basis.
• Fees must not under cut an alternative auditors
  charge for the same work.

5
Low-balling

• As the revenue from non-audit services often
  exceeds that from audit services.
• It is alleged that practices offer to supply
  audits at a low cost.
• Thereby securing appointment as auditors.
• Referred to as low-balling.

6
Lowballing

• This low-balling raises a number of issues that
  potentially affect the audit
• After appointment the firm does not secure
  lucrative contracts for non-audit services.
• The audit service loses money.
• Attempts to reduce the amount of staff involved
  in the audit.
• Thus quality of the service drops.
• Also a reluctance to enter into disputes with
  management less it prejudices their position.

7
Appointment Ethics

• A member of the profession who is asked to accept
  nomination as auditor should
• Seek the clients permission to communicate with
  the present auditor.
• If permission is refused prospective auditor
  should decline.
• If existing auditor is not allowed to communicate
  prospective auditor should also decline.

8
Professional Etiquette Letter

• Purpose
• To inform the incumbent of the nomination as a
  matter of professional courtesy.
• To ascertain the circumstances concerning the
  change of auditor.
• Thereby allowing the proposed auditor to decide
  if they wish to accept the nomination.

9
Rejecting the nomination

• The classic example of this is
• Where the present auditor reveals that they have
  tried to act in the best interest of the
  shareholders
• But have had serious disagreements with the
  directors over e.g. accounting policies.

10
Client Screening

• When approached by a potential client the auditor
  must
• Decide whether to accept the client.
• This is known as client screening.
• In order to accept, knowledge of the business of
  the entity must be obtained.

11
ISA 315 Knowledge of the Business

• The auditor should obtain an understanding of
  the entity and its environment, including its
  internal control, sufficient to identify and
  assess the risks of material misstatement of the
  financial statements whether due to fraud or
  error and sufficient to design and perform
  further audit procedures.
• ISA 315

12
Knowledge of the Business

• The following area should be covered
• General economic factors.
• Industry conditions affecting the clients
  business.
• The entity itself.
• The entity's products, markets, suppliers,
  expenses and operations.
• The entity's financial performance.
• The reporting environment.

13
Using the Knowledge

• Assessing the risks and identifying problems.
• Planning and performing the audit effectively.
• Evaluating audit evidence.

14
Client Screening Procedures

• Designed to screen out potentially risky clients
  who may
• Result in a loss i.e. costs exceed audit fees.
• Litigation for negligence.
• Damage to reputation.

15
High Risk Clients

• Relevant factors in deciding if a client is high
  risk
• Evidence of fraud or illegal activities.
• Economic sector in which the client operates.
• The nature of the industry the product lines or
  services.
• Clients previous audit history.
• General abilities of client management.
• The understanding by the directors of their legal
  responsibilities.
• Managements refusal/permission to examine
  significant documents.
• Evidence of intentional failure to record of
  material transactions.

16
Non Risk Factors

• Other reasons for not accepting a client
• Strategic decision regarding type or size of
  client.
• Clients needs for specialised staff.
• Limited opportunities to provide non-audit
  services.

17
After accepting nomination

• Ensure outgoing auditors resignation has been
  properly conducted in accordance with
  legislation.
• Ensure new auditors appointment is valid.
• Issue letter of engagement (ISA 210 Terms of
  Audit Engagements).

18
The Engagement Letter

• This is a letter sent by the auditor
• Setting out the terms of the engagement.
• Forming the basis of a contract.
• Hence avoiding any misunderstandings.

19
The Engagement Letter

• The contents should be
• Ideally agreed prior to the audit.
• Should be reviewed annually.

20
The Engagement Letter

• The letter addresses
• The responsibilities of the directors.
• The responsibilities of the auditors.
• The scope of the audit.
• Description of audit procedures.
• Other services potentially being offered.
• The billing method for fees.
• The applicable law.
• And agreement of terms.

21
Confidentiality

• Non disclosure of information acquired in the
  course of professional work except
• With client consent, or
• Public duty to disclosure, or
• Legal or professional duty to disclose.

Note All work should be undertaken with an
understanding that the client will make full
disclosure to the auditor. If there is no such
understanding then the assignment should be
declined.
22
The professional duty of confidence

• A member
• Acquiring information in the course of
  professional work should
• Neither use nor appear to use that information
  for their personal advantage
• Or for the advantage of a third party

23
The professional duty of confidence

• If a member is in doubt
• It should be firstly discussed within the firm or
  organisation.
• Or if appropriate consult with legal counsel or
  the Association.

24
Confidentiality

• Members have an obligation to disclose
• When they are ordered to do so by the courts
• Where terrorism is suspected
• Where drug trafficking or money laundering is
  suspected
• Under the banking, insurance, insolvency and
  financial services legislation when they believe
  the client is acting recklessly or is not a fit
  and proper person.
• If they are wrong they are protected under the
  legal principle of qualified privilege where
• They report to an appropriate authority
• Members of the public are likely to be affected
• The matter is serious, and
• The matter is likely to be repeated.

25
Whistle-blowing

• Legal advice should be sought.
• Non-compliance with law and regulations
• Statutory right to report immediately
• Public-interest matter
• Inform directors and ask them to disclose.
• If they dont report to appropriate authority.
• Money laundering
• Separate legislation.
• ACCA guidance.
• Must be reported as long as it is in good faith.

26
Public Interest

• Auditor to consider
• Extent fraud will effect the public.
• Are directors taking corrective action.
• Extent fraud is likely to recur without impunity.
• The gravity of the matter.
• The weight of the evidence.
• The degree of suspicion that fraud has occurred.

27
Whistle blowing

• Clearly a decision to blow the whistle is a
  serious issue
• Usually the employees position is untenable.
• Therefore is must be deemed to be the last
  resort.
• For an internal auditor the highest standards of
  professional conduct must apply.

28
Confidentiality and internal auditors

• Also required to maintain confidentiality.
• IIA position statement on whistle-blowing
• Need a balance between confidentiality and
  integrity.
• Access to audit committee should be reviewed.
• As a last resort and should be carried out in
  accordance with the UK Public Interest Disclosure
  Act 1998.

29
Working papers

• Own property of the accountant and requests for
  them should be refused.
• If the request is from a tax inspector then the
  response should be in the best interest of the
  client.

30
Ethical conflict resolution

• From ACCAs Rule book members need to consider
• Relevant facts
• Ethical issues involved
• Fundamental principles related to the matter in
  question
• Established internal procedures.
• Alternative courses of action.

31
Ethical conflict resolution

• Having considered the issues from the previous
  slide members need to
• Consider courses of action with consequences.
• Consultation with others within the firm may be
  required.
• Consultation with those charged with governance
  of the organisation involved.
• Documentation is important.
• If the issue remains unresolved, consider getting
  professional advice from ACCA.
• If still unresolved, members should , where
  possible, refuse to remain associated with the
  matter causing the conflict.

32
Conflicts of interest

• Members should place their clients interests
  before their own.
• Any fees or commissions received which arise from
  the engagement or advice given should be fully
  disclosed.
• Competing clients should be avoided where
  possible disengagement being the last resort.

33
Conflicts of interest

• Safeguards
• Use different partners and audit teams.
• Prevent information leakage through extensive
  instruction.
• Independent review by non involved partner.
• Get consent from all parties.
• Use engagement letter to highlight
  confidentiality etc.
• Chinese wall-physical separation with strict
  procedures and monitoring.

34
Conflicts of interest

• Avoidance
• Full and frank explanation to the persons
  involved by the audit firm.
• Dont accept any assignments where there is a
  conflict or potential conflict of interest.
• Larger firms can build a chinese wall.

35
Multiple Services

• No objection in principle for provision of other
  services
• Client should accept responsibility for the
  records as its own.
• The practice should not assume the role of
  management.
• The practice should make appropriate audit tests
  even when having processed or maintained certain
  records.

36
Opinion shopping

• Clients wishing to remove the auditor or force a
  change of opinion may attempt to
• Seek an alternative audit opinion from another
  firm - who dont have all the facts to hand.
• In doing so place the incumbent auditor under
  pressure to amend their report to suit the
  circumstances.
• Clearly if asked to offer an opinion,
  communication with the incumbent is necessary to
  establish the facts.