Audit Chapter 2 - Ethics, Legal Liability, and Client Acceptance

Professional behaviour

Professional behaviour

The obligation that all members maintain the reputation of the profession and its ability to serve the public interest.

Integrity

The obligation that all members of the accounting profession be straightforward and honest.

Due care

The obligation to act diligently and comply with both technical and professional standards.

Professional competence

The obligation that all members of the accounting profession maintain their knowledge and skill at a required level.

Confidentiality

The obligation that all members of the profession refrain from disclosing information that is learned as a result of their employment to people outside of their workplace.

Objectivity

The obligation that all members of the profession not allow their personal feelings or prejudices to influence their professional judgement.

Availability bias

Bias that involves considering information that is easy to remember as being more likely, more relevant, and more important. This bias may impact an audit if the auditor focuses on the most recent information, evidence, or explanation by management, preventing the auditor from considering possible alternatives.

Confirmation bias

Bias that occurs when the auditor favours evidence that confirms his or her beliefs or expectations. When this occurs, the auditor may downplay or ignore evidence that contradicts these beliefs.

Overconfidence bias

This bias involves the auditor overestimating his or her ability or believing his or her judgement is better than it is.

Anchoring bias

This bias involves making assessments by starting to form an initial numerical value and then adjusting insufficiently away from that initial value in forming a final judgement.

Independence

The ability to act with integrity and objectivity.

Board of directors

The group that represents the shareholders and oversees the activities of a company and its management.

Independence in fact

The ability to act with integrity, objectivity, and professional scepticism. It is the ability to make a decision that is free from bias, personal beliefs, and client pressures.

Independence in appearance

The belief that independence in fact has been achieved. It is not enough for an auditor to be independent; they must also be seen as independent.

Self-interest threat

The threat that can occur when an accounting firm or its staff has a financial interest in an assurance client.

Self-review threat

The threat that can occur when the assurance team needs to form an opinion on their own work or work performed by others in their firm.

Advocacy threat

The threat that can occur when a firm or its staff acts on behalf of its assurance client.

Familiarity threat

The threat that can occur when a close relationship exists or develops between the assurance firm (staff) and the client (staff).

Intimidation threat

The threat that can occur when a member of the assurance team feels threatened by client staff or directors.

Reporting issuer

A public company with a market capitalization and a book value of total assets greater than $10 million.

Corporate governance

The rules, systems, and processes within companies used to guide and control.

Independent directors

Non-executive directors without any business or other ties to the company.

Shareholders

Owners of the company

Executive directors

Employees of the company who also hold a position on the board of directors.

Non-executive directors

Board members who are not employees of the company. Their involvement on the board is limited to preparing for and attending board meetings and relevant board committee meetings.

Audit committee

A subcommittee of the board of directors. This committee enhances auditor independence and ensures that the financial statements are fairly presented and that the external auditor has access to all records and other evidence required to form their opinion.

Internal auditors

Employees of the company who evaluate and make recommendations to improve risk management, internal control procedures, and elements of the governance process.

Technical competence

The skills, training, and ability of the internal audit team.

Neglience

Failure to exercise due care.

Third parties

Anyone other than the client and its shareholders who uses the financial statements to make a decision.

Engagement letter

Letter that sets out the terms of the audit engagement, to avoid any misunderstandings between the auditor and their client.