3 The Auditing Profession Flashcards
(40 cards)
1
Q
What are the 5 characteristics of a profession?
A
- A systematic body of knowledge
- Authority
- Community sanctioned
- Ethical codes and self regulation
- Culture
2
Q
- A systematic body of knowledge (Characteristics of a profession)
A
This is knowledge that is unique to the group and must be formally demonstrated to gain entry (exams)
3
Q
- Authority (Characteristics of a profession)
A
- Legally recognised (in statue law) in which all practicing persons must belong
- It is illegal for anyone else to practice
- The body has a monopoly on the profession
- Have to show
o Expertise on the body of knowledge
o Practical experience and competence
4
Q
- Community sanctioned (Characteristics of a profession)
A
- Must be recognised and valued by the community as a whole and not just in a legal sense
- This creates the credibility and reputation that they rely on
5
Q
- Ethical codes and self regulation (Characteristics of a profession)
A
- Professional body must prescribe and police a formal code of conduct
- All members must comply in the course of work
- If not they should meet disciplinary procedures or disbarment
6
Q
- Culture (Characteristics of a profession)
A
- How the profession is seen by society
- It looks to overlap with 4 and enhance 3
- This is the esteem, training and discipline that a person of the profession meets
7
Q
Why are there few true professions?
A
- Based on these criteria there are very few true professions, mostly due to 2 as few have statute laws in place
- Interestingly this means auditing is a profession and accounting is not
8
Q
What are the fundamental principles of professional conduct?
A
- Integrity
- Objectivity
- Professional competence and care
- Confidentiality
- Professional behaviour
9
Q
Integrity
A
- Should act with integrity in all profession, business and personal financial relationships
- A professional accountant was disbarred for shoplifting as it does not fit the standards of the professional bodies
10
Q
Objectivity
A
- Strive for objectivity in all professional and business judgements
- Only regard the relevant facts and none other
- There should be no prejudice or bias
11
Q
Professional competence and care
A
- Should not take on what they are not competent to carry out
- Unless they obtain the necessary assistance
12
Q
Confidentiality
A
Should not make disclosures to third parties
13
Q
Professional behaviour
A
- Comply with all relevant law and regulation and avoid any action that could discredit the body
- To behave with professional courtesy and consideration towards all they come into contact within the course of their work
14
Q
Why are there ethical rules?
A
- These are to protect the profession against its members
- Also help to protect the public
15
Q
How are the ethical rules self serving?
A
- While the expressed objectives of the ethical rules are two boxes up they also give other benefits to the bodies
- They help them maximise profits and income which are not in the publics best interests and allow them to have a cartel on power
16
Q
What are the defined professional rules (11)
A
- Professional expertise and competence
- Integrity in client dealings
- Objectivity and independence
- Professional duty of confidence
- Advertising, publicity and obtaining work
- Description of members and firms
- Changes in professional appointments
- Ownership and access to documentation
- Charing of fees
- Matters relating to professional liability
- Disciplinary provisions
17
Q
- Professional expertise and competence
A
Only do work you or your staff can complete it with reasonable skill and care (this is outlined as by the courts as the opposite of negligence)
18
Q
- Integrity in client dealings
A
Treat people with honesty
19
Q
- Objectivity and independence
A
Make all judgements on the evidence being presented and not any personal prejudices
20
Q
- Professional duty of confidence
A
- Must maintain confidentiality
- Unless they are compelled by a legal investigation
21
Q
- Advertising, publicity and obtaining work
A
- There are a lot of strict rules around how an auditor can advertise
- They are not allowed to advertise their price
- This is a very self-serving rule as it prevents competition on price and allow auditors to get away with higher fees when comparisons are obscured
22
Q
- Description of members and firms
A
Only allowed to have a small sign by their door and no glossy posters or light up signs
23
Q
- Changes in professional appointments
A
- There are protections so that a director cannot just remove the auditors
- They can have a meeting with the shareholders to explain why they feel the auditor should be removed
24
Q
- Ownership and access to documentation
A
- Audit papers are the property of the audit firm despite them being about the company
- This is so that their processes remain confidential
- They reach an outcome and then share the conclusion with the company
25
9. Charing of fees
* As there is no price transparency (5) they often charge the most they think they can get away with
* Often unrelated to staff rates x hours worked
* There is no obligation to disclose how they reached the figure
26
10. Matters relating to professional liability
* Must have professional indemnity insurance
* However they rarely pay out
27
11. Disciplinary provisions
* Rules must be enforced
* This is to maintain public trust
28
What is consistency
The firm must have established audit procedures and programmes, comprehensively documented (in the firm’s “audit manual”), with which all staff are familiar and consistently adhere.
29
Why is recruiting important?
* The quality of audit work ultimately depends on the quality/proficiency of the staff of the audit firm.
* The audit firm will devote considerable resources to the recruitment and training of the “best” graduates
30
How does length of tenure affect independence?
The concern about tenure arises because if a company and an auditing firm have been in close association for a long time, this may lead to auditors identifying with their client’s management, with a consequent detrimental effect on independence.
31
How does the size of the audit firm affect independence?
There are many arguments supporting the assertion that larger auditing firms are more likely to be independent
* A large firm is less dependent on a particular client because the client’s fees represent a smaller proportion of total fees.
* Certain characteristics of smaller audit practices may be inherently dangerous to independence because, for instance, their relationship to clients is closer.
32
What is the insurance dilemma?
In auditing, because auditors carry professional indemnity insurance, this ensures that they are always likely to be at least one of the parties a plaintiff sues.
33
What is professional independence?
* Independence is a major indicator of the perceived and actual utility of audits
* Independence and its associated conditions of objectivity, integrity and impartiality are of central importance to the work and reputation of auditors
34
What is actual independence?
Relates to the auditors actual state of mind throughout the planning and performance of the audit and the formation of the auditors opinion
35
What is perceived independence?
Relates to the perceived level of independence of the auditor by the users of the financial statements
36
What is fee dependence?
* Large payments to relatively small number of partners in the big firms or small firms without diverse income can impair audit
o Will they be willing to lose the income if the income if they rock the boat by looking to hard into activities
37
Fees from non-audit services
* It is at the directors discretion to spend the companies money
* Then can therefore give lucrative consultancy contracts for non-audit services
* Based on this relationship the directors can use the contracts to hold the audit partner under duress to not publish their true findings
38
Self review threat
* This links to companies that take consultancy work
* Would they be willing to call out management advice given by the firm that has either not been implemented correctly or other partners have provided but they believe doesn’t create a true and fair view
39
Mandatory rotation
* There are guidelines that audit partners should be rotated after a certain amount of time and reviews carried out to see if a relationship has developed
* But there are no requirements
40
Internal audit
The self-review threat arises from the fact that external auditors often use the conclusions of internal audit work in forming their own view on the efficacy of company systems and the accuracy and completeness of figures in the accounting records. If staff on the external engagement team also provided internal audit services, there would be a real danger that they would review their own work and thus accept it without examining it in any detail.
