Lesson 2: Professional Ethics and Audit Responsibilities

Fundamental Ethical Principles

1. Professional behaviour

2. Integrity and due care

3. Objectivity

4. Professional competence

5. Confidentiality

Approach to Resolving an Ethical Dilemma

1. Obtain facts

2. Identify ethical issues from facts

3. Determine who is affected by the outcome of the dilemma and how they are affected

4. Identify alternatives available to the person who must resolve the dilemma

5. Decide appropriate action

Independence

• Ensures the auditor is unbiased

• Is the most important characteristic of auditor

• 5 facets

• Maintained by:

  • Regulations

  • Corporate governance policies, competent staff and audit committee

  • Quality controls

  • Application of accounting principles

Self-Interest

When there is a financial interest

Advocacy

When the firm or PA seems to be promoting the client or acting as its representative

Self-Review

When any of the audit staff are auditing their own work

Familiarity

When audit staff conduct a company’s audit for many years, they might take some aspects of the company for granted

Intimidation

When the client is trying to impose some conditions on the audit

Audit Committee

• Reviews financial statements before they are issued

• Must comprise of 3 members from the BOD

• Advises shareholders about which firm to appoint as auditors

• Meeting with the auditors on a periodic basis

• Resolving any disputes that auditors may have with management

• Monitoring the findings and audit work performed by the external and internal auditors

Major Causes of Lawsuits against PA’s

• Business failure - the business cannot pay its liabilities

• Audit failure - the auditors failed to discover material misstatements from not following GAAS

• Audit risk - risk that the audit does not uncover any material financial statement misstatement, even with following GAAS

Management Responsibilities

• Responsible for decisions involving selection of accounting principles, maintaining

Overall Objectives of the Audit

• To obtain reasonable assurance about whether the financials as a whole are free from material misstatement

• to report on the financials

Auditor Responsibilities

• Provide reasonable assurance

• Get written representation of noncompliance that would affect the financials

• Obtain sufficient audit evidence

• Exercise professional judgement and maintain professional skepticism

• If error is material, must request client to adjust financials. If client refuses, must consider financials are not prepared in accordance with GAAP

• If immaterial, no adjustment

Cycles

• Revenue and collection

• Acquisition and Payment

• Human Resources and Payroll

• Inventory and Distribution

Assertions

• Occurence/Existence

• Completeness

• Accuracy (valuation)

• Accuracy (posting and summarization)

• Classification

• Cutoff/Timing

Client Acceptance

• Assess risks, including external reliance on financials, going concern, management integrity

• Assess firm’s competence to conduct audit

• Complete independence threat analysis

• Identify purpose of financials

• Obtain engagement letter if accepting client

Audit Planning

• Obtain knowledge of industry

• Obtain knowledge of client’s business

• Obtain understanding of client’s system of internal control

• Determine materiality

Assess Risk of Material Misstatement (RMM)

• Identify and assess RMM at overall financial statement level

• Identify and assess RMM at assertion level

• Identify significant risks

Develop Risk Response

• Develop audit strategy to address everything in the RMM assessment

• Determine audit approach for each cycle

• Finalize audit plan

• Develop audit programs to list the testing procedures for each cycle

Perform Risk Reponses

• Determine testing samples

• Perform tests of controls

• Perform substantive analytical procedures

• Perform substantive tests of details

Conclusion

• Perform additional tests for presentation and disclosure

• Review sufficiency of audit evidence

• Reach overall conclusion as to whether the financial statements are fairly presented

• Communicate with the audit committee and management about the important audit findings and other matters

Reporting

• Conclusion about the financial statements taken as a whole