Professional Ethics - Auditor Independence and embedded conflicts Flashcards
(11 cards)
The importance of auditor independence - ‘a true and fair view’
- The auditor exercises ______________ ____________________ and maintains _______________ ________________
- The auditor must act with ____________, exercise _______________
- These behaviours support each other, and support the auditor maintaining _______________ ….. and being ________________ supports the ____________ of _______________
Auditor responsibility to form an opinion; essential behaviours:
- The auditor exercises professional judgement and maintains professional scepticism
- The auditor must act with integrity, exercise objectivity
- These behaviours support each other, and support the auditor maintaining independence ….. and being independent supports the exercise of behaviours!
The importance of auditor independence - Independence: FRC (UK) Code of Ethics
What is the FRC Ethical Standard?
“Integrity or objectivity (and therefore independence) would be compromised if it is probable that: (5 parts of a long sentence)
FRC Ethical Standard: “Freedom from conditions and relationships which, in the context of an engagement, would compromise the integrity or objectivity of the firm or covered persons”.
“Integrity or objectivity (and therefore independence) would be compromised if it is probable that:
- an objective, reasonable and informed third party would conclude that
- the threats, arising from any conditions or relationships that exist
- (….having regard to any safeguards implemented),
- would impair integrity or objectivity to such an extent that it would be inappropriate for the firm to accept or continue to perform the audit unless
- the threats were eliminated or further reduced or unless more, or more effective, safeguards were implemented”
(reference: FRC Ethical Standard and FRC Glossary of Terms)
The importance of auditor independence - Practitioner independence
What are the three key categories of independence in auditing?
What are the built-in anti-independence factors in auditing? (2)
General Observation:
Here’s the refined version with the last point separated:
What are the three key categories of independence in auditing?
- Programming independence: The ability for auditors to design their own audit programmes without external influence.
- Investigative independence: The freedom to examine any information that auditors consider relevant to their work.
- Reporting independence: Ensures that the contents of an audit report are driven solely by the audit’s scope and findings, free from outside pressure.
What are the built-in anti-independence factors in auditing?
- Close relationship with business: Auditors often face conflicts due to their financial dependence on clients, the need to maintain confidentiality, and their role in serving management.
- Organisation of the profession: The audit profession is dominated by a few large firms. Inter-firm competition and the focus on “salesmanship” can potentially undermine objectivity.
General Observation:
- Understanding these conflicts is important to fully grasp the challenges auditors face in maintaining independence.
Auditors as commercial agents and guardians of society - Guardian vs commercial function
Auditors operate at the cusp between the __________ and _____________ function – ____________ ___________; remember audit is a ____________ ______________ for ___________ ___________ _____________.
Guardian function (2)
Commercial function (3)
- Auditors operate at the cusp between the guardian and commerce function – embedded conflict; remember audit is a statutory requirement for limited liability companies.
Guardian function
- Skill and competence and judgement to issue an audit opinion
- Acting for shareholders and acting in the public interest
Commerce function
- Reliance of fees from the client – audit and non-audit fees
- Reliance on repeat business
- Need to sustain a professional working relationship (with shareholders, directors, stakeholders)
Auditors as commercial agents and guardians of society - Auditing in the public interest
Why is defining “public interest” in auditing considered complex?
How do corporate audits benefit the public interest economically? (3)
What is the primary focus of audits in relation to public interest?
Why is defining “public interest” in auditing considered complex?
- Defining public interest is complex because it involves ideological nuances and varying perspectives on what constitutes the public good.
How do corporate audits benefit the public interest economically?
- Protection from corporate collapse, which helps stabilise the economy and protects stakeholders.
- Credibility of capital markets, ensuring that investors and participants trust the system.
- Reliability of financial statements from Limited and Plc companies, enabling sound economic decision-making.
What is the primary focus of audits in relation to public interest?
- The primary focus of audits in public interest has been on economic aspects, such as supporting financial stability and market credibility.
Auditors as commercial agents and guardians of society - Professional bodies acknowledging their ‘Public Interest’ role
What is the role of ICAEW in acting in the public interest?
How does ICAEW draw on its members’ experience to serve the public interest?
What broader benefits does ICAEW aim to achieve by protecting the public interest?
What is the role of ICAEW in acting in the public interest?
- ICAEW works to protect the public interest by ensuring its firms, members, students, and affiliates maintain the highest standards of professional competency and conduct.
How does ICAEW draw on its members’ experience to serve the public interest?
- ICAEW uses the experience of its members and technical expertise to develop policies that serve the public interest.
What broader benefits does ICAEW aim to achieve by protecting the public interest?
- ICAEW’s actions are aimed at benefiting the economy and protecting the integrity of the accountancy profession.
Auditors as commercial agents and guardians of society - Public Interest Entities (PIEs)
PIEs defined by law to have a significant public impact. It categorizes PIEs into three types:
The disastrous effects that can occur if a PIE fails—particularly after _____________ _________ or _____________ _____________. In such cases, ___________ often bears the ____________ of these failures, showing why public interest is a ____ ___________.
- Entities with transferable securities traded on a UK regulated market.
- Credit institutions like banks or financial institutions.
- A person who would be an insurance undertaking
The disastrous effects that can occur if a PIE fails—particularly after financial crises or corporate collapses. In such cases, society often bears the burden of these failures, showing why public interest is a key priority.
Auditors as commercial agents and guardians of society - Public Interest Entities (PIEs)
What is the expanded definition on PIEs (2)
Audit Proposal Changes (2)
Expanded Definition of PIEs: The scope of PIEs will now include entities with:
- £750 million+ turnover.
- 750 (global) employees or more.
Audit Changes:
- All auditors and responsible individuals wishing to audit PIE entities must register with the FRC’s PIE Auditor Register (Financial Reporting Council).
- Proposed reforms aim to restore public trust through increased scrutiny and improved oversight.
Auditor Independence and embedded conflicts - Embedded conflicts 2
What are Management Advisory Services (non-audit services), and how do they affect auditor independence?
How does inter-firm competition threaten auditor independence?
Why does the length of an auditor’s tenure pose a risk?
How does the relative size of an audit firm influence independence?
What are Management Advisory Services (non-audit services), and how do they affect auditor independence?
While these services can add value to the client, they may negatively impact the actual or perceived independence of the auditor. This reliance on the client could reduce the auditor’s scepticism or ability to withstand pressure.
How does inter-firm competition threaten auditor independence?
Intense competition, such as lowering fees to retain clients, can have a negative impact on both the actual and perceived independence of auditors.
Why does the length of an auditor’s tenure pose a risk?
Long tenures may lead to auditors identifying too closely with the client’s mindset, which could compromise their independence.
How does the relative size of an audit firm influence independence?
Larger firms may be less dependent on individual client fees, which can help maintain independence. On the other hand, smaller firms might have closer, more personal relationships with clients but could face challenges due to limited resources or skills.
Auditor Independence and embedded conflicts - Embedded conflicts 3
How can accounting flexibility in accounting standards impact auditor independence?
Why might auditors fear losing clients and reputation impact auditor independence?
How do professional sanctions or discipline influence perceptions of auditor independence?
How can accounting flexibility in accounting standards impact auditor independence?
- Flexibility may lead to disagreements between management and auditors over accounting policies. This can make auditors more dependent on their clients.
Why might auditors fear losing clients and reputation impact auditor independence?
- Such fear can affect their professional scepticism and reduce their ability to withstand pressure during the audit process.
How do professional sanctions or discipline influence perceptions of auditor independence?
- The extent and enforcement of professional sanctions can undermine how auditor independence is perceived if they are weak or inconsistent.
Auditor Independence and embedded conflicts - IFAC Code of Ethics and FRC Ethical Standard
- What are the fundamental principles emphasized in the IFAC Code of Ethics and FRC Ethical Standard for audit engagements?
- How can independence be achieved in audit engagements?
- Who must comply with the ethical code outlined in these standards?
- What is the definition of a ‘covered person’?
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What are the fundamental principles emphasized in the IFAC Code of Ethics and FRC Ethical Standard for audit engagements?
- The fundamental principles are Integrity, Objectivity, and Independence.
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How can independence be achieved in audit engagements?
- Independence is achieved through strict compliance with both Integrity and Objectivity.
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Who must comply with the ethical code outlined in these standards?
- Both the audit firm and the ‘covered person’ are required to comply with the ethical code.
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What is the definition of a ‘covered person’?
- A ‘covered person’ is someone who holds a position that can influence the conduct or outcome of the audit engagement.
