CHAPTER FIVE

PROFESSIONAL ETHICS AND

ACCEPTANCE
FUNDAMENTAL PRINCIPLES OF PROFESSIONAL
ETHICS

 These are guidelines and principles (a code of ethics) that all ACCA
members, affiliates or student must comply with as required by the
profession.
 A code of ethics is a guide of principles designed to help professionals
conduct business honestly and with integrity. A code of ethics encompass
areas such as business ethics, a code of professional practice, and an
employee code of conduct.
 The IFAC through IESBA has issued a code of ethics, as has ACCA to
regulate the conduct of all ACCA members, affiliates and students.
 The code follows a conceptual framework that provides the general
approach to regulating an activity i.e. principles of ethical behavior,
potential threats to compliance and safeguards to reduce threats
 Failure to comply may result in fines, suspension, reprimand or
expulsion from ACCA
FUNDAMENTAL PRINCIPLES OF PROFESSIONAL
ETHICS

• Ethical guidance can take either a principles-based approach or

rules-based approach.
• A conceptual framework relies on a principles-based approach and
both IESBA and ACCA adopt a principles-based approach.
• Guidance is in the form of fundamental principles (framework)
• ACCA’s code therefore contains fundamental principles and
illustrative examples on how to apply them instead of detailed
rules
FUNDAMENTAL PRINCIPLES OF PROFESSIONAL
ETHICS
Principles-based approach Rules-based approach
 Requires compliance with the  May be easier to follow because rules are
spirit of the guidance. clearly defined.
 Requires the accountant to use  Needs frequent updating to ensure the
professional judgment. guidance applies to new situations.
 Flexible, so can be applied to new,  May encourage accountants to interpret
unusual or rapidly changing requirements narrowly in order to get
situations. round the spirit of the requirements.
 

 Principles may be applied across  Virtually impossible to be able to deal with

national boundaries where laws every situation that may arise, particularly
may not. across various national boundaries and in
  a dynamic industry.

 Can still incorporate specific rules  

for ethical situations likely to
affect many firms.
FUNDAMENTAL PRINCIPLES OF PROFESSIONAL
ETHICS

• Auditors should consider whether they qualify ethically to accept

a new client, act for an existing client , or not act for a client if it
will affect the judgement during assignment
 FUNDAMENTAL PRINCIPLES OF PROFESSIONAL
ETHICS
The Fundamental principles are: (PICCO or OPPIC for remembering)

• Objectivity: Auditors should not allow bias, conflicts of interest or external influence to
override professional or business judgements.
• Professional behaviour: Auditors should comply with relevant laws & regulations and
avoid action that discredits the profession.
• Professional Competence: Members should maintain professional knowledge, due care
and skill at level rqd. to ensure that a client receives competent professional services
based on current developments in practice, legislation and techniques.
• Auditors should act diligently and in accordance with applicable technical and
professional stds.
• Integrity: Auditors should act truthfully, straightforward and honest in all professional,
personal and business relationships.
• Confidentiality: Auditors should respect the confidentiality of info acquired in there
professional work or business relations and should do not disclose or use such info to
third parties without express authority unless there is a legal or professional right or duty
to disclose.
 ETHICAL THREATS

•MAIN AREAS

•Threats to objectivity or independence

•Conflict of interest

•Breaking Confidentiality
 CONFIDENTIALITY
•A requirement of non-disclosure of information obtained during the course of an audit
assignment
•Exceptions to the principle;
• Client permission
• Part of normal audit process
• Professional clearance letter to previous auditors
• Other independent parties such as the bank
• Obligatory Disclosure - Compelled by law
• When the client is dealing in illegal activities e.g.,
• Treason, Money Laundering, Terrorism, Drug trafficking,
• Production of documents or other evidence in the course of legal proceedings
 CONFIDENTIALITY
Voluntary disclosure
Professional duty and Public interest
•Professional duty
• To comply with quality review of ACCA or another professional body.
• To respond to an inquiry or investigation by ACCA or a regulatory
body.
• To protect the professional interests of a professional accountant
• To comply with technical stds and ethical requirements
 CONFIDENTIALITY
Voluntary disclosure
•Public interest
• The auditor must use a combination of judgement and legal advise to determine
disclosure pertaining to public interest. The golden rule of thumb is that a member of the
public could incur physical or financial damage that the auditor could knowingly have
prevented, it is likely that the auditor has failed in their public duty.
• In determining the need to disclose matters in the public interest;
• Whether the TCWG have rectified the matter or are taking corrective action
• Whether the members of the public are likely to be affected
• the gravity of the matter
• The likelihood of repetition
 CONFIDENTIALITY
•NOCLAR (Non compliance with laws & regulations)
• Refers to acts of omission or commission, intentional or unintentional, committed by an
entity, TCWG, MAGT.
• NOCLAR does not include personal misconduct unrelated to the business activities of the
entity.
• Examples of NOCLAR covered by the Code:
• Fraud,
• Corruption,
• Tax laws evasion
• Health and Safety laws,
• Employment laws and
• Environmental laws.
 CONFIDENTIALITY

•NOCLAR (Non-compliance with laws & regulations)

• Exercise;
• Objectives by the auditor when responding to
NOCLAR
• Audit procedures for the auditor when considering
NOCLAR
 CONFLICT OF INTEREST
• Auditors should always act in the best interest of the client.
• Where conflicts of interest exist:
• Such as acting for two competing clients
• Or acting for customer and supplier
• The auditor’s work should be arranged to (Threats)
• Avoid the interests of one being adversely affected by those of
another
• To prevent a breach of confidentiality.
 CONFLICT OF INTEREST
• In order to ensure that there is no conflict of interest the auditor
must first notify all affected clients and obtain their consent to act.
• The following additional safeguards should be considered when
consent has been granted:
• Use of separate engagement teams, use of passwords, clear guidelines to
members, confidentiality agreements, regular reviews, independent advise.
 If both reject - discontinue if safeguards are inadequate
 In a takeover situation (do not advise either assurance client)

• Conflict between auditor & client’s interest:

• Can arise due to competing or having joint venture with client
• Do not accept or continue engagement if conflict is significant
THREATS TO OBJECTIVITY - (INDEPENDENCE)
Ethical threats are events/situations which threaten an
accountant’s ability to comply with fundamental principles
resulting in say, loss of objectivity or confidentiality

Self Interest

Advocacy Threats Self Review

Intimidation Familiarity
 SAFEGURDS
A Safeguard is an action or measure that eliminates a threat, or reduces it
to an acceptable level.
If a threat cannot be eliminated or reduced to an acceptable level, the
assurance provider must decline or resign from the engagement.
The ACCA Code of ethics divides safeguards into Two:
Safeguards created by the profession, legislature or regulation. (requirements for
entry into the profession, CPD, Corp. Gov., professional stds., monitoring and discipline
procedures etc.)
Safeguards created by the work environment. (rotation/removal of relevant staff from
engagement team, independence quality control review, using of separate teams,
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

 SELF-INTEREST THREAT - Where the auditor has a financial or other interest in the client. A financial
interest may inappropriately influence the judgement or behavior of the assurance provider (auditor).
 Financial interest in client affairs; (SG – Disposing interest, removal of individual, audit committee informed
& using independent partner)
 Fee dependence on audit client : Auditor’s total fees should not exceed 15 % of its total income for public
listed clients for two consecutive years and should not exceed 10% of non-listed Cos. (SG - disclose to
TCWG, Pre-inssuance and post issuance reviews).
 Overdue fees: the overdue fees maybe regarded as a loan - Loans are not permitted to an audit client (SG do
not perform further work until arrears are paid or agreed pattern of repayment).
 Contingent fees: Fees based on particular outcome, e.g., level of profit of the co. are not allowed. ( SG – do
not accept other payment basis other than Hours worked x market rate)
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

Gifts and hospitality; indebtedness (SG – Only receive gifts which are trivial and
inconsequential and approved by partner)
Loans and guarantee; client consideration, materiality of loan, other situations
(SG – Get on commercial terms, Independent partner)
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

Close business relationships; joint venture, product combination & marketing, &
Distribution & Marketing ( SG – unless insignificant, auditor should not participate,
end engagement & removal of such individuals)
Potential Employment with an audit firm/recruitment; consider position,
involvement, length of time & former position. ( SG – Modifying audit plan,
assigning staff sufficient experience, independent professional accountant reviews
12 months rule for former partners)
Temporal staff assignments ( SG – staff must not assume mgt. roles, review work
of loaned officer, loaned officers should not participate in audits)
Partner on client board (SG – Partner or employee should not serve on the board
of the auditee)
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

Compensation & evaluation services ; Selling non-assurance

services, Consider proportion of compensation, role of officer,
influence ( SG – removal, professional review)
High % fees/lowballing: Matters to consider; Structure of firm,
Established or new and significance of client ( SF – reduce
dependence, external quality control reviews, third party
consultation, audit stds. Compliance, Hours worked x market rate)
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

SELF-REVIEW THREATS; Where non-audit work is provided to an audit client and is then subject to
audit, the auditor will be unlikely to admit to errors in their own work, or may not identify the
errors in their own work
Preparing accounting records and FS: An auditor can only provide accounting (including payroll)
services for non public Cos. As long as adequate safeguards are provided. (SG - Using different
personnel, independent partner, client (managerial decisions to be borne by mgt) approval).
Internal audit services; an auditor can not provide internal audit services for Public listed Cos. ( SG -
must not be mgt. role e.g. services related to ICs, FR and others that have material effect on the FS )
Tax services; Completion of tax returns not a threat, BUT tax calculations for inclusion in FS, Tax
planning advise & tax disputes resolution are self-review threat. ( SG – No mgt. role, ‘NO’ to public
entities, tax authorities approval & materiality and use of separate teams)
Valuation services; assumption with future dev. Valuation of material effect on the FS and highly
subjective should not be provided. (SG - ‘NO’ to public entities, 2 nd Partner review, client
confirmation, client responsible, & use of diff personnel)
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

Client staff joins audit firm: former employees, Consider previous

influence, effect on FS (SG – Two years elapse, QC review, discussion
with audit committee)
Corporate finance; Advise on the adoption of accounting stds., policies
and disclosures etc. (SG - advise should not be provided if inappropriate)
Provision of non audit service in general (SG – should not
be mgt. roles, routine & Admin.)
IT systems Services & other Services; consider if significant
part of ICs, Litigation support, & Legal support)
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

 FAMILIARITY THREATS - THE AUDITOR BECOMES TOO SYMPATHETIC TO OR TOO TRUSTING OF A CLIENT
AND LOSSES PROFESSIONAL SCEPTICISM
Long- association of senior personnel: Using the same senior personnel in an engagement team over a
long period, long period associations – less sceptical (SG - Rotate personnel, audit team review, internal &
external reviews)
 Note that it is a requirement to rotate key audit partners for Public listed clients after no more than 8 years
(with a minimum break of 2 years break).
Family and other personal relations with client: where a member of the engagement team has a
family or personal relationship with someone at the client who is able to exert significant
influence on the FS (or subject matter of another assurance engagement).
( SG – Remove the individual from the engagement team, structure the engagement team so that
the individual does not deal with matters that are responsibility of the close family member)
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

Recruitment services: Familiarity threat may also occur if the firm is involved in recruiting senior
personnel for the client.
The Audit firm may be considered to be assuming management responsibilities. – however
reviewing qualifications and interviewing applicants to advise on Financial competence is allowed
(SG – listed Cos do not provide recruitment services).
Audit staff leave the firm to join the client: Familiarity threat may also arise where an employee
of the audit firm becomes a director or employee of an assurance client (in a position to exert
significant influence over the FS or subject matter of another assurance engagement). Consider
position, length of time and involvement.
(SG- Assign individuals with sufficient experience, perform quality reviews of the engagement).
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

ADVOCACY THREATS – PROMOTING THE POSITION OR OPINION OF A CLIENT OR

REPRESENTING THEM IN SOME WAY WOULD MEAN THE AUDITOR IS SEEN TO BE
TAKING SIDES WITH THE CLIENT.
Examples include:
Promoting a share issues of an audit client
Representing the client in court or in a dispute where the matter is
material to FS
Negotiating on the client’s behalf for finance
The auditor must politely decline any request that involves them to act in the
above examples
 SPECIFIC ETHICAL THREATS TO COMPLIANCE WITH ETHICAL
PRINCIPLES

Actual or Perceived Intimidation from client – e.g. actual or threatened

litigation between the auditor and the audit client ( in which case it may
be necessary to resign from the engagement).
Intimidation can arise from some of the same situations mentioned above
( i.e. deterred from acting objectively by threats actual & perceived) e.g.:
• Fee dependency
• Personal relationships
• Audit partner joining the client
• Litigation between the audit firm and client
 ACCEPTING AUDIT APPOINTMENTS

Obtaining Engagements

Direct client
Advertising Tendering
request
 ACCEPTING AUDIT APPOINTMENTS

Advertising, Publicity And Obtaining Professional Work

Audit firms are allowed to market their services by advertising

and other form s of communication subject to the following
restrictions below

Firms ‘s adverts should not :

Bringing ACCA Fees negotiating

Harass client
into disrepute (No Lowballing)

Discredit other Disobey national

Be misleading
members regulations on advertising
 MATTERS TO CONSIDER AT TENDER (AUDIT PROPOSAL)
STAGE

Matters to consider:
• Fees:
• Amount of work involved
• Grade of staff to be used
• Reasonableness of estimates of time and cost
• Need for lowballing (undercharging to win client)
• Practical issues:
• Conflict of proposed work with current work plan
• Availability of suitable personnel
• Location and accessibility of work to be done
 MATTERS TO CONSIDER BEFORE ACCEPTING
NOMINATION
• Ensure professionally qualified (legal & ethical)
• Ensure existing resources adequate (time, staff & expertise)
• Reference Checks (directors)
• Communication with present Auditor( reasons to disagree)
 PROCEDURES AFTER ACCEPTING
NOMINATION
• Ensure outgoing auditor resignation/removal properly conducted
• Ensure new auditors appointment is valid
• Submit a letter of engagement to the directors of company
• Ensure outstanding fees are paid to the outgoing auditor
• Obtaining of books & papers (client’s) from the outgoing auditor
 AGREEING THE TERMS OF THE
ENGAGEMENT
• Preconditions for the Audit:
• Whether preconditions for the audit exist. These are:
• Whether the financial reporting framework applied in preparing the FS to be audited is
acceptable.
• Whether mgt. acknowledges responsibility for preparation of Financial Statements.
• Whether mgt. acknowledges responsibility for the design and implementation of
Internal Controls Systems.
• Provision of access to info & personnel to auditors etc.
 ENGAGEMENT LETTER
• ISA210:
• The letter is a contract between auditor and client
• Must be signed by both parties before audit work
commences
• Purpose:
• Documents and confirms the auditors' acceptance of
appointment
• Minimizes the risk of any misunderstanding btwn.
auditor & client
• Sets out the terms and conditions of the engagement
• Can be used as reference in future disputes
 ENGAGEMENT LETTER - CONTENTS
• Objective and scope of the audit
• Responsibilities of the auditor
• Responsibilities of management
• Identification of an applicable financial reporting framework
• Reference to the expected form and content of any reports to be issued by auditors
• Fees computation and billing
• Legal framework
• Use of auditor experts
• Involvement of IA and other staff
• Acceptance and acknowledgement of terms of the engagement
 ENGAGEMENT LETTER –
RECURRING AUDITS
• Letter remains effective from one assignment to another until
replaced
• Should be reviewed annually but not reissued
• A new letter should be agreed or amended if:
• Client misunderstands audit purpose
• Scope or context of the engagement changes
• Board, mgt. changes
• Nature or size of business changes
• Legal requirements changes
 ENGAGEMENT LETTER –
PRACTICAL ISSUES
If client refuses to sign letter:
• Explain normal business practice of auditors drafting the letter
• Discuss contents of letter & amend if necessary e.g. to remove
contentious issues
• Do not commence audit work until letter is signed
• Decline engagement if all else fails
QUALITY MANAGEMENT
• Quality management at a firm level
• ISA 220 Requires audit firms to establish a system of
quality control to ensure the firm complies with
professional standards and issues reports that are
appropriate in the circumstances.
• Quality Policies and procedures (management) at a firm
level should be established which address:
• The firm’s risk assessment process
• Leadership responsibilities for quality within the firm
• Relevant ethical requirements
• Acceptance and continuance of client relationships and specific
engagements
• Human resources
• Engagement performance
• Monitoring and remediation process
 QUALITY MANAGEMENT
• Quality management of an individual audit
• The quality magt. Of individual audits is governed by ISA 220
• Auditors must implement quality magt. Procedures for each audit
assignment in order to provide assurance that:
• The auditor has fulfilled the auditor’s responsibilities, conducted the
audit, in accordance with professional stds and applicable legal reqs
• The auditors report issued is appropriate in the circumstances
• Leadership responsibilities for quality within the firm
• Relevant ethical requirements
• Acceptance and continuance of client relationships and specific
engagements
• Engagement resources
• Human resources
• Engagement performance
• Monitoring and remediation process
• Taking overall responsibility for managing and achieving quality
• Documentation
QUALITY MANAGEMENT
• Engagement performance
• The firm should take steps to ensure that
engagements are performed correctly – with
standards and guidance
• Good engagement performance involves:
• Direction
• Supervision
• Review
• Consultation
• Resolution of disputes
QUALITY MANAGEMENT

• Peer review: A review of the audit file carried out by

another partner in the assurance firm.
• Hot/Pre-issuance review: A peer review carried out before
the auditor’s report is signed. This is also known as an
engagement quality review (EQR).
• Cold/Post issuance review: A peer review carried out after
the auditor’s report is signed.
QUALITY MANAGEMENT
• Engagement quality reviews
• Engagement quality reviews are required for all listed
entities and any other engagements where the audit
firm has determined a quality review is required.
• The engagement partner should :
• Appoint an engagement quality reviewer
• Cooperate with the reviewer, and inform the
team that they should cooperate with them
too
• Discuss significant matters and judgments with
the reviewer
• Only date the auditor’s report after the review
 CHAPTER FOUR

TUTORIAL,CLASS EXCERCISE AND

ASSIGNMENTS
SUMMARY – PROFESSIONAL ETHICS
MAIN POINTS:
• Fundamental principles
• Ethical threats and safeguards
• Conflict of interest
• Firms' adverts
• Acceptance procedures
• ISA 210 Agreeing the terms of audit engagements (engagement letter)
• Quality Management