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Fundamental principles of professional ethics

All members of the professional accounting bodies are to comply with the fundamental ethical principles


All members of the professional accounting bodies are to comply with the fundamental ethical principles (APES 110, S. 100.4):

professional competence and due care
professional behaviour.



To the obligation that all members of the professional bodies be straightforward and honest.
A member shall not knowingly be associated with reports, returns, communications or other information where the Member believes that the information:

contains a materially false or misleading statement

contains statements or information furnished recklessly

omits or obscures information required to be included where such omission or obscurity would be misleading.



Not allow personal feelings or prejudices to influence professional judgement.
Be unbiased.
Not allow conflict of interest or influence of others to impair decision process.


Professional competence and due care

Maintain knowledge and skill at a level required by professional bodies.
Keep up-to-date with changes in regulations and standards.
Continue education and work experience.
Act diligently, taking care to complete each task thoroughly, document all work, finish on a timely basis.



Refrain from disclosing information to people outside the workplace that is learned as a result of employment.
Exception if legal requirement to disclose.
Not allowed to use confidential information to their advantage or advantage of another person.


Professional behaviour

Comply with rules and regulations and do not harm reputation of the profession.
Be honest in representations to current and prospective clients.
Do not claim to provide services they cannot provide, or qualifications they do not possess, or experience they do not have. Do not undermine reputation of, or quality of work produced by, others.



Independence is the ability to act with integrity, objectivity and with professional scepticism (questioning mind).
Lack of auditor independence impacts on credibility and reliability of the financial report.
The auditor must be, and be seen to be, independent.


Independence of mind:

ability to act independently
ability to make a decision free from bias
personal belief and client pressures.


Independence in appearance:

belief that independence of mind
has been achieved


Threats to independence:



Self-interest threat:

Can occur if the audit firm or its staff have financial interest in audit client.
Bank account held with the client.
Shares owned in the client.
A loan to or from the client.


Self-review threat:

Can occur when the assurance team need to form an opinion on their own work or work done by others in their firm.
Assurance team member has recently been an employee or director of the client.
Preparing information for the client that is then assured.


Advocacy threat:

Can occur when an audit firm or assurance staff act, or is believed to act, on behalf of assurance client.
Can lead to questioning of auditor’s objectivity.

Encouraging others to buy client’s shares or bonds.
Representing client in negotiations with third party.
Representing the client in a legal dispute.


Familiarity threat:

Can occur when close relationship exists or develops between assurance firm and client, or firm and client personnel.
Assurance staff can become too sensitive to needs of client and lose objectivity.
Long association between assurance firm and client.
Long association between assurance firm and client personnel.


Intimidation threat

Can occur when member of assurance team feels threatened by the client’s staff or directors.
Assurance team member unable to act objectively, fearing negative consequences

Threat that client will use different assurance firm next year.
Undue pressure to reduce audit hours to reduce fees paid.


Safeguards to independence:

Created by profession, legislation or regulation:
quality control standards
code of ethics
legislative requirement to be independent.

Created by clients:
corporate governance
policies and procedures.

Created by accounting firms:
quality control procedures
client acceptance and continuance.


The auditor’s relationship with others

Auditors and shareholders:

Audit report addressed to them.
Attendance at AGM.
Formal responsibility for auditor appointment.


Auditors and the board of directors:

Represents shareholders.
Executive and non-executive directors.
Large companies have committees made up of several directors to deal with specific issues.


Auditors and the audit committee:

A special committee of the board of directors.
Acts on behalf of board in financial reporting and audit matters.
Top 500 listed companies must have audit committee, top 300 must follow ASX guidelines.

Aid to auditor independence:
Non-executive directors, majority independent.
Financial accounting knowledge desirable.
Meets with external and internal auditors.


Auditors and internal auditors:

Viewed by external auditor as part of client.
External auditor can reduce scope of testing if effective internal audit function (ASA 610: ISA 610). Depends on internal auditor’s:
technical competence
due professional care
communication with external auditors.


Legal liability

External auditor must exercise due care, be diligent in applying standards and documenting work.
Auditor can be found negligent and liable for damages under tort law if it is established that:

A duty of care was owed by the auditor.
There was a breach of the duty of care.
A loss was suffered as a consequence of that breach.


Legal liability to clients:

Liability under either contract or tort law.
Negligence: failed in performance of audit by being careless and breaching duty of care.
Contract: failed duty of care implicit in acting as auditor and explicit in engagement letter.
Case law shows change in definition of ‘reasonable’ care and skill over time as standards change.


Contributory negligence:

If directors are also negligent, each party is held accountable in proportion to their guilt.


Legal liability to third parties:

No contract between auditor and third parties, they must rely on tort law and show duty of care.
Duty of care less likely with third parties.


Avoidance of litigation:

Hire competent staff, regular training.
Comply with ethical and auditor regulations.
Implement policies and procedures such as client acceptance and staff allocation


Auditor can take steps to avoid litigation:

Meet with client’s audit committee to discuss significant issues arising in audit.
Follow up any significant weaknesses in client’s internal control procedures from previous year audit.


The first stage in any audit is client acceptance or continuance decision.

Step 1: assess client integrity.
Step 2: assess audit firm’s ability to meet ethical requirements, service client.
Step 3: prepare client engagement letter.


Client integrity - auditor should consider:

Reputation of client, management, directors, key stakeholders.
Client’s reason for switching auditor.
Client’s attitude to risk exposure and management.
Client’s attitude to using internal controls to mitigate risk.
Appropriateness of the client’s interpretation of accounting rules.
Client’s willingness to allow auditor full access to information required to form an opinion.
Client’s attitude and willingness to pay fair amount for audit work.


Auditor can obtain information from:

Communication with prior auditor (with client’s permission, APES 110), client personnel, third parties, key competitors.
Review of press articles.