Chapter 2: Professional

Relationships

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 Chapter 2 Objectives
• Explain the importance of ethics
• Learn how to work through an ethical dilemma
• Examine the difference between public accountants and
other professionals
• Discuss the role of a code of professional conduct for
public accountants
• Identify the facets of independence
• List the reasons for audit committee involvement in the
audit process
• Focus on key rules of professional conduct
• Identify rules of conduct enforcement processes

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 What Are Ethics?
• A set of moral principles or values
• Unique for each individual
• May or may not be considered explicitly
• Differences arise because of: life
experiences, successes and failures,
influences of parents, teachers, religious
organizations, friends
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 Why Do We Need Ethics?
• Helps society function in an orderly manner
• Some are incorporated into laws to help
prevent people from behaving unethically
(perhaps due to different standards or
selfishness)

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 Why Is Ethical Conduct
Important in Professions?
• The term “professional” carries a
responsibility to the public
• Public confidence is affected if a
professional (e.g. doctor, lawyer,
accountant, clergy) commit a crime
• This happens because the general public
cannot evaluate the competence of
professionals
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 How Are Accountants Different
From Other Professionals?
• Third parties are involved in the
accountability relationship: the accountant
is hired by management, yet reports to
shareholders
• Other professionals are normally hired by
the users of the service

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 Encouraging High Quality Work
Among PAs

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 Six Basic Principles Governing
Conduct
• Maintaining the good reputation of the profession
• Perform services with integrity, due care; sustain
professional competence
• Be and remain free of influence (independence)
• Duty of confidence (confidentiality)
• Develop practice based upon professional
excellence (advertising to be in good taste and
accurate)
• Professional courtesy should be maintained
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 Independence
• Independence in auditing means taking an
unbiased viewpoint in the performance of
audit tests, the evaluation of the results, and
the issuance of the auditor’s reports
• Three important concepts:
– Independence in fact
– Independence in appearance
– Threats to independence

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 Independence in Fact
• The auditor must be independent when
conducting an audit or review level
assurance engagement (independence is not
required for a compilation)
• Can you think of an example where the
auditor is NOT factually independent?

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 Independence in Appearance
• This aspect of independence is based upon
the unbiased viewpoint of others
• It is possible for you to believe that your are
independent, whereas an unbiased observer
might disagree with you

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 Threats to Independence
• The auditor is required to consider the five
facets of independence before accepting or
continuing an engagement
• The threats are to be documented
• If a situation exists that affects a threat, the
auditor must document the actions taken, or
decline the engagement

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 Self-interest Threat
• Definition:
– When the member has a financial interest in the
client or in the financial results of the client
• Example(s):
– The firm or member owns shares in or has a
loan to the client
– The client fees are significant in relation to the
total fee base of the PA or of the firm
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 Self-review Threat
• Definition:
– When the PA is placed in the position of having
to audit his or her own work during the audit.
• Example(s):
– PA prepared original data or records for the
client as part of a bookkeeping engagement. PA
designed and implemented an accounting
information system used to process client
records.
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 Advocacy Threat
• Definition:
– When the firm or member is perceived to promote (or
actually does promote) the client’s position.
• Example(s):
– PA is acting as an advocate in resolving a dispute with
a major creditor of the client.
– The firm or PA is promoting the sale of shares or other
securities for the client, or is receiving a commission
for such sales.

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 Familiarity Threat
• Definition:
– Occurs when it is difficult to behave with
professional skepticism during the engagement.
• Example(s):
– There is a long association of senior staff with
the client (e.g. being on the engagement for ten
years)
– A former partner of the firm is now the chief
financial officer of the client
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 Intimidation Threat
• Definition:
– The client intimidates the firm or staff with respect to
the content of the financial statements or with respect to
the conduct of the audit.
• Example(s):
– The client threatens to replace the audit firm over a
disclosure disagreement.
– The client places a maximum upon the audit fee that is
unrealistic with respect to the amount of work that
needs to be completed.

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 Importance of an Audit
Committee
• Consists of a sub-committee of the board of
directors
• Should be non-management and competent
• Auditor should report to them
• Adds significantly to external and internal
auditor’s independence

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Aids to Maintaining Independence
• Legal liability: you may be sued
• Rules of professional conduct: identify do’s and
don’t’s of financial and business relationships
• Generally accepted auditing standards: maintain
objectivity
• Public accounting firm quality control standards:
help provide reasonable assurance with respect to
independence
• Audit committee: helps maintain independence
from management
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Aids to Maintaining Independence
(Continued)
• Shopping for accounting principles: Section
7600 provides rules
• Approval of auditor by shareholders: helps
to provide more objectivity than
management
• Conclusion: Use a combination of all of the
above to help maintain an unbiased business
relationship
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 Confidentiality
• Members of all three accounting bodies
shall not disclose any confidential client or
employer information without the specific
consent of the client or employer.

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 Advertising and Solicitation
• All three accounting bodies prohibit
solicitation of another accountant’s client
and advertising which is not in keeping with
the profession’s high standards
• Advertising may include complimentary
material about the accounting firm but
should not claim any superior skills

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 Professional Courtesy to Other
Members
Fact

The ICAO rules of professional conduct require an

auditor to communicate with the predecessor
auditor and ask if there is any reason why the
auditor should not undertake the audit.
Question

What do you do if the predecessor auditor does

not co-operate with you and will not give you an
answer?
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