Audit 3

Question 1

Why is professional ethics important in the accounting profession?

Answer 1

Professional ethics protect the public interest, increase trust in the profession, assist accountants in addressing ethical issues, and help establish robust standards of professional conduct.

Question 2

What are the general principles of professional ethics for auditors?

Answer 2

The general principles include:

1. Integrity: Being honest and straightforward.
2. Objectivity: Avoiding bias and undue influence.
3. Professional competence and due care: Maintaining required professional skills.
4. Confidentiality: Respecting and protecting confidential information.
5. Professional behavior: Complying with laws and avoiding actions that damage the profession’s reputation.

Question 3

What does objectivity mean in the context of auditing?

Answer 3

Objectivity refers to the auditor’s freedom from conditions or relationships that could compromise their integrity and judgment. It involves both independence of mind and independence in appearance.

Question 4

What are some reasons to question an auditor’s independence?

Answer 4

Independence may be questioned due to:

1. Close relationships between auditors and businesses.
2. Financial dependence and the confidentiality of business relationships.
3. The dominance of a few firms in the profession, which may reduce objectivity.

Question 5

What are the potential threats to an auditor’s objectivity?

Answer 5

Potential threats include:

• Self-interest threat
• Self-review threat
• Advocacy threat
• Familiarity threat
• Intimidation threat
• Management threat (specific to the UK Ethical Code)

Question 6

What actions are prohibited under the FRC ethical rules for auditors?

Answer 6

Prohibited actions include:

1. Holding material financial interests in audit clients.
2. Making loans or guarantees to clients.
3. Engaging in business relationships with clients.
4. Providing non-audit services to listed audit clients (e.g., tax, accounting).
5. Audit partners serving longer than 5 years for listed companies or 10 years for non-listed companies without careful consideration.

Question 7

What are some specific FRC rules regarding fees for audit services?

Answer 7

Specific rules include:

1. Contingent fees for audit services are prohibited.
2. Fees for non-audit services must not exceed 70% of the audit fee.
3. Auditors should not receive more than 10% of total practice income from a listed audit client.

Question 8

What is professional scepticism in auditing?

Answer 8

Professional scepticism is an attitude that involves maintaining a questioning mind, being alert to signs of misstatement due to error or fraud, and critically assessing evidence. It is essential for audit quality, particularly in times of economic uncertainty and when financial reporting becomes more complex.