DPA 50153
AUDIT 2
TOPIC FIVE
CODE OF ETHICS FOR
AUDITORS
MOHD FAUZI BIN ABU BAKAR
Lecturer
Commerce Department
Politeknik Melaka
COURSE LEARNING OUTCOME
AUDIT REPORT
NATURE TYPES RESPONSIBILITY
SUB TOPIC
Determine the fundamental principles of Ethics and
5.1 Professional Conduct in accordance with MIA By-Law
5.2 Explore the importance of professional
ethics
5.3 Review the concept of independence and
its importance
5.4 Resolve the situations that can influence
independence in appearance and in fact
SUB TOPIC
5.5 Discover the important of quality control
system
5.6 Discover the advertising and other
methods to attract customers
5.7 Discover the services that can impair
independence
5.8 Discover the safeguards to protect
threats to independence
PRINCIPLES OF ETHICS AND PROFESSIONAL
CONDUCT IN ACCORDANCE WITH MIA BY-
LAW
SECTION 110 THE FUNDAMENTAL PRINCIPLES
111 INTEGRITY
5 112
113
114
OBJECTIVITY
PROFESSIONAL COMPETENCE & DUE CARE
CONFIDENTIALITY
115 PROFESSIONAL BEHAVIOUR
PRINCIPLES OF ETHICS AND PROFESSIONAL
CONDUCT IN ACCORDANCE WITH MIA BY-LAW
SUBSECTION
111 INTEGRITY
To be straightforward and honest in all professional and business relationship
112 OBJECTIVITY
To exercise professional or business judgement without being compromised by bias, conflict of interest
or undue influence of/reliance on individuals, organizations, technology or other factors.
113 PROFESSIONAL COMPETENCE & DUE CARE
(i) Attain and maintain professional knowledge and skill at the level required to ensure that a client
or employing organization receives competent professional service, based on current technical
and professional standards and relevant legislation; and
(ii) Act diligently and in accordance with applicable technical and professional standards
SUBSECTION
114 CONFIDENTIALITY
To respect the confidentiality of information acquired as a result of professional and business
relationships.
115 PROFESSIONAL BEHAVIOR
(i) Comply with relevant laws and regulations;
(ii) Behave in a manner consistent with the profession’s responsibility to act in the public interest in
all professional activities and business relationships; and
(iii) Avoid any conduct that the professional accountant knows or should know might discredit the
profession
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FACTORS IMPAIRING THE INDEPENDENCE OF AUDITORS
Factors Impairing Independence Type of Threat Created
Business relationships Self-interest threats and intimidation
threats
Employment with audit client Self interest threat, familiarity threat and
intimidation threat
Prior work with audit client Self interest threat, familiarity threat and
self-review threat
Gift and hospitality Self interest threat and familiarity threat
Family and personal relationships Self interest threat, familiarity threat and
intimidation threat
Appointment of temporary staffs Self-review threat
Non-audit services to audit clients Self-review threats and advocacy threats
THE IMPORTANCE OF PROFESSIONAL ETHICS
The ethical conduct of a profession
• Assist in availing representation to all in the society. It guides and reminds
the person as to how to act, in any given situation.
• It set out the minimum standards of practice. It creates an environment in a
profession, where ethical behavior is the basic criterion.
• Enhances public confidence in the legal profession. It provides support to the
individual to maintain awareness of ethical issues, establish and nurture a
strong corporate ethical culture.
• It builds loyalty between the advocate and his client. It develop trust and
satisfaction for both parties.
THE CONCEPT OF INDEPENDENCE AND ITS IMPORTANCE
Independence is linked to the fundamental principles of objectivity
and integrity. It comprises:
INDEPENDENCE IN
INDEPENDENCE OF MIND
APPEARANCE
the state of mind that permits the the avoidance of facts and
expression of a conclusion without circumstances that are so significant
being affected by influences that that a reasonable and informed third
compromise professional judgment, party would be likely to conclude that
thereby allowing an individual to act a firm’s or an audit or assurance team
with integrity, and exercise objectivity member’s integrity, objectivity or
and professional skepticism. professional skepticism has been
compromised.
INDEPENDENT AUDITORS are certified public accountants or
chartered accountants, who examine the financial records of
IMPORTANCE OF INDEPENDENCE
companies with which they are not affiliated. This means they
have no financial interest in the business being audited.
They are also not linked to any parties who may have an
interest in or might be harmed by the results of an audit or its
CONCEPT
publication. By being independent, an auditor is more qualified
to approach the audit process objectively and perform the
task with integrity. An independent audit offers company
shareholders an expert, unbiased opinion. The audit will
determine the accuracy of the company’s annual accounts as
a fair reflection of its financial position. Independent auditors
are often used to avoid conflicts of interest and to protect
shareholders and potential investors in public companies.
THE SITUATIONS THAT CAN INFLUENCE
INDEPENDENCE IN APPEARANCE AND IN FACT
are created if a non-assurance service Which example could impair
was provided to an audit client during, or independence in appearance?
after the period covered by the financial • You provide paid services on your
statements, but before the audit team time off to a company customer.
• You accept expensive gifts from a
begins to perform the audit, and the client.
service would not be permitted during the • One of your family members is
engagement period. connected to a client of your
organization.
What is the meaning of impair independence in appearance?
Independence in appearance means an auditor is free from financial interests; is not employed;
does not have close personal ties; nor has any relationship that a third party would consider an
impairment of the auditor's judgment.
THE IMPORTANT OF QUALITY CONTROL SYSTEM
Quality control is important to
safeguard the company's reputation,
prevent services from being unreliable,
and increase trust on the side of
consumers. It ensures that the company
looks at evidence-based data and
research rather than anecdotal
ISA 220
observations to ensure that the services
live up to the standards
Elements of a firm's system of QUALITY CONTROL addressed in ISQC
1 comprise:
• Leadership responsibilities for quality within the firm; The firm should
establish policies and procedures designed to promote an
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• internal culture based on the recognition that quality is essential in performing
engagements. Such policies and procedures should require the firm’s chief
executive officer (or equivalent) or, if appropriate, the firm’s managing board of
partners (or equivalent), to assume ultimate responsibility for the firm’s system
of quality control.
• Ethical requirements (including independence); The firm should establish
policies and procedures designed to provide it with reasonable assurance that
the firm and its personnel comply with relevant ethical requirements. Ethical
requirements relating to audits and reviews of historical financial information,
and other assurance and related services engagements included; Integrity,
Objectivity, Professional competence and due care, Confidentiality and
Professional behavior.
Elements of a firm's system of QUALITY CONTROL addressed in ISQC
1 comprise:
• Acceptance and continuance of client relationships and specific engagements;
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designed to provide it with reasonable assurance that it will only undertake or
continue relationships and engagements where it: (a) Has considered the
integrity of the client and does not have information that would lead it to
conclude that the client lacks integrity; (b) Is competent to perform the
engagement and has the capabilities, time and resources to do so; and (c) Can
comply with ethical requirements.
• Human resources (including assignment of engagement teams); to provide it
with reasonable assurance that it has sufficient personnel with the capabilities,
competence, and commitment to ethical principles necessary to perform its
engagements in accordance with professional standards and regulatory and
legal requirements, and to enable the firm or engagement partners to issue
reports that are appropriate in the circumstances.
Elements of a firm's system of QUALITY CONTROL addressed in ISQC
1 comprise:
• Engagement performance (including consultation, resolution of differences of
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opinion and engagement quality control review); The firm should assign
responsibility for each engagement to an engagement partner. The firm should
establish policies and procedures requiring that: (a) The identity and role of the
engagement partner are communicated to key members of client management
and those charged with governance; (b) The engagement partner has the
appropriate capabilities, competence, authority and time to perform the role;
and (c) The responsibilities of the engagement partner are clearly defined and
communicated to that partner. assurance that engagements are performed in
accordance with professional standards and regulatory and legal requirements,
and that the firm or the engagement partner issue reports that are appropriate
in the circumstances.
Elements of a firm's system of QUALITY CONTROL addressed in ISQC
1 comprise: 5
• Monitoring (including dealing with complaints and allegations).The firm
should establish policies and procedures designed to provide it with
reasonable assurance that the policies and procedures relating to the
system of quality control are relevant, adequate, operating effectively
and complied with in practice. Such policies and procedures should
include an ongoing consideration and evaluation of the firm’s system of
quality control, including a periodic inspection of a selection of
completed engagements
• Documentation The firm should establish policies and procedures
requiring appropriate documentation to provide evidence of the
operation of each element of its system of quality control.
THE ADVERTISING AND OTHER METHODS TO ATTRACT
CUSTOMERS
When undertaking marketing or promotional activities, a professional
accountant shall not bring the profession into disrepute. A professional
accountant shall be honest and truthful and shall not make:
(a) Exaggerated claims for the services offered by, or the qualifications or
experience of, the accountant; or
(b) Disparaging references or unsubstantiated comparisons to the work of
others.
THE SERVICES THAT CAN IMPAIR INDEPENDENCE
Independence will be considered to be impaired if, during the period of a professional
engagement, a member or his or her firm had any cooperative arrangement with the client
that was material to the member's firm or to the client.
Cooperative Arrangement—A cooperative arrangement exists when a member's firm and a
client jointly participate in a business activity. The following are examples, which are not all
inclusive, of cooperative arrangements:
1. Prime/subcontractor arrangements to provide services or products to a third party
2. Joint ventures to develop or market products or services
3. Arrangements to combine one or more services or products of the firm with one or more
services or products of the client and market the package with references to both parties
4. Distribution or marketing arrangements under which the firm acts as a distributor or
marketer of the client's products or services, or the client acts as the distributor or
marketer of the products or services of the firm
The following are examples of activities that, if performed as part of an extended
audit service, would be considered to impair independence:
• Performing ongoing monitoring activities or control activities (for example,
reviewing loan originations as part of the client's approval process or reviewing
customer credit information as part of the customer's sales authorization process)
that affect the execution of transactions or ensure that transactions are properly
executed, accounted for, or both, and performing routine activities in connection
with the client's operating or production processes that are equivalent to those of
an ongoing compliance or quality control function
• Determining which, if any, recommendations for improving the internal control
system should be implemented
• Reporting to the board of directors or audit committee on behalf of management
or the individual responsible for the internal audit function
• Authorizing, executing, or consummating transactions or otherwise exercising
authority on behalf of the client
• Preparing source documents on transactions
• Having custody of assets
• Approving or being responsible for the overall internal audit work plan including
the determination of the internal audit risk and scope, project priorities and
frequency of performance of audit procedures
• Being connected with the client as an employee or in any capacity equivalent to
a member of client management (for example, being listed as an employee in
client directories or other client publications, permitting himself or herself to be
referred to by title or description as supervising or being in charge of the client's
internal audit function, or using the client's letterhead or internal
correspondence forms in communications)
THE SAFEGUARDS TO PROTECT THREATS TO
INDEPENDENCE
Examples of actions that might be safeguards to address such threats
include:
• Using professionals who are not audit team members to perform the service.
• Having an appropriate reviewer review the audit and non-assurance work as
appropriate.
• Engaging another firm outside of the network to evaluate the results of the
non-assurance service or having another firm outside of the network re-
perform the non-assurance service to the extent necessary to enable the
other firm to take responsibility for the service.
