Topic professional ethics in auditing module f8 acca

Topic professional ethics in auditing module f8 acca Topic professional ethics in auditing module f8 acca Topic professional ethics in auditing module f8 acca Topic professional ethics in auditing module f8 acca

Professional Ethics in Auditing

ACCA F8/AA Lectures

Prepared by Admin

Updated: July 2025

Introduction to Professional Ethics

Context

Professional ethics underpin the auditing profession, ensuringtrust andreliability in financial reporting, as highlighted by high-profile scandals likeEnron (2001) andCarillion (2018)

ACCAsCode of Ethics and Conduct mandates ethical behavior for allmembers, affiliates, and students

Key F8/AA topics: Fundamental principles, threats and safeguards,conflicts of interest

Objective: Uphold public confidence and protect the professions

reputation

Why Ethics Matter in Auditing

Lessons from Scandals

Enron (2001): Arthur Andersens destruction of evidence violated

integrity, leading to its collapse and loss of its license

Carillion (2018): KPMGs failure to exerciseprofessional due careresulted in a č21M fine and reputational damage

Ethics ensure auditors maintainindependence,objectivity, and

professionalism

Critical across ACCA modules: F7/FR, F8/AA, SBL, SBR

ACCA Code of Ethics and Conduct

Definition

The Code of Ethics and Conduct, part of ACCAs Rulebook, sets

mandatory ethical standards for auditors

Components:

Fundamental Principles : Core ethical standards.

Conceptual Framework : Guides evaluation of ethical issues.

Applies to all ACCA members, affiliates, and students globally

Ensures audits are conducted with integrityand public interest

Exam Focus for F8/AA

Key Areas

1 Fundamental Principles: Understand and apply the five core principles

2 Threats and Safeguards: Identify risks to ethical compliance andpropose mitigations

3 Conflicts of Interest: Address situations compromising independence

or objectivity

Common question types: Scenario-based (e.g., identify threats,

suggest safeguards, evaluate conflicts)

Marks: Typically 48 marks per question, requiring specific and

practical answers

Fundamental Principles Overview

Five Principles

Auditors must adhere to:

1 Professional Competence and Due Care

2 Integrity

3 Professional Behavior

4 Confidentiality

5 Objectivity

Foundation for ethical decision-making in audits

Violations (e.g., Enron, Carillion) lead to severe consequences

Exam Tip: Memorize principles and their definitions for quick recall

Professional Competence and Due Care

Practical Scenario: Failing to update knowledge on IFRS 15

(Revenue) risks audit errors

Exam Tip: Link to scenarios involving poor audit quality or lack oftraining

Definition

Be straightforward and honestin all professional and business

relationships, avoiding misrepresentation

Example: Arthur Andersens destruction of Enron evidence breachedintegrity

Involves rejecting unethical client requests (e.g., falsifying records).Practical Scenario: Refusing to overlook unrecorded sales to boostclient profits

Exam Tip: Identify scenarios where auditors conceal or manipulatefindings

Includes transparency and ethical conduct in all dealings.

Practical Scenario: Avoiding involvement in client fraud to protectACCAs reputation

Exam Tip: Link to scenarios involving regulatory breaches or

reputational risks

Definition

Respect theconfidentiality of client information, not disclosing it withoutclient permission or legal obligation, nor using it for personal gain

Example: Not sharing clients pricing strategy with competitors

Exceptions: Reporting crimes (e.g., money laundering) to authorities.Practical Scenario: Protecting sensitive client data during an audit of

a listed company

Confidentiality: Disclosure Rules

Types of Disclosure

Obligatory Disclosure: Report crimes like money laundering,

terrorism,drug trafficking, orfraud to authorities

Voluntary Disclosure: Permitted for:

Protecting auditors interests in legal disputes.

Compliance with legal requirements.

Public interest (e.g., whistleblowing on fraud).

Considerations: Harm to parties, completeness of information,

appropriate recipients

Critical for ensuring unbiased audit opinions.

Practical Scenario: Declining a clients offer to join their board topreserve objectivity

Exam Tip: Identify scenarios with personal, financial, or relational ties

to clients

Independence in Assurance Engagements

Requirement

Auditors providing assurance services (e.g., audits, reviews) must be

independent from clients, both in mindandappearance

Independence of Mind: Unbiased, objective judgment free from

Threats to Ethical Principles

Close business relationships (e.g., joint ventures with clients).

Acting as a temporary employee for a client.

Overdue fees or contingency fees

Fees exceeding 15% of firms revenue for two years.

Affects Objectivity,Integrity,Professional Behavior

Practical Scenario: Accepting a low-ball fee to secure a client contract

Affects Objectivity,Professional Competence.

Practical Scenario: Auditing a tax computation prepared by the auditfirm

Providing legal or corporate finance services alongside audits.

Contingency fees tied to audit outcomes.

Affects Objectivity,Professional Behavior

Practical Scenario: Defending a clients tax position in a dispute withauthorities

Family or personal ties with client personnel.

Affects Objectivity,Professional Competence

Practical Scenario: Auditing a company owned by a close friend

Client pressure to rush audits.

Litigation threats or overdue fees

Personal relationships with client management.

Affects Objectivity,Professional Behavior,Integrity

Practical Scenario: Client threatens to switch auditors unless

favorable opinion is issued

Created by profession, legislation, or regulation

Established within the audit firms work environment

Exam Tip: Propose specific, practical safeguards for each identifiedthreat

Safeguards by Profession and Regulation

Examples

Licensing requirements: Training and experience standards

Continuous Professional Development (CPD) mandates

Corporate governancerules (e.g., audit committee oversight)

Professional standards(e.g., ISAs, ACCA Code)

Third-party reviewsof audit reports or processes

Example: Mandatory CPD ensures auditors stay updated on IFRS

Safeguards in the Work Environment

Examples

Firm policies requiring independence declarations

Rotation of key audit partners(e.g., every 7 years for listed clients).Quality control reviewsby independent staff

Confidentiality agreements for audit team members

Ethics training and internal monitoring

Example: Rotating partners to mitigate familiarity threats

Exam Example: H Co (June 2017)

Scenario

H Co, a listed company (year-end 31.3.2019), faces:

CFO pressure to complete audit early for dividend announcements.Request for C Co to assist in recruiting a non-executive director(NED)

Engagement quality control reviewer (EQCR) was prior audit partner.Tax services provided alongside audit, with fees potentially exceeding15% of firm revenue

Contingent fee proposed based on profit before tax

20% of last years fees overdue by 3 months

H Co: Threats and Affected Principles

Threats and Principles

Early Audit Pressure:Intimidation threat (Objectivity, ProfessionalCompetence)

NED Recruitment: Self-interest threat(Objectivity, ProfessionalBehavior)

Prior Partner as EQCR: Familiarity threat(Objectivity, ProfessionalCompetence)

Tax Services/High Fees: Self-interest threat(Objectivity,

H Co: Safeguards Proposed

Safeguards

Early Audit: Negotiate feasible timeline; refuse if ISAs cannot be

met; consider withdrawal if pressure persists

NED Recruitment: Limit role to reviewing candidate qualifications;

avoid decision-making

Prior Partner: Replace EQCR with an independent partner; enforce

2-year cooling-off period

High Fees: Assess fee dependency (<15%); arrange external

pre/post-issuance review if exceeded

Contingent Fee: Reject and base fees on time, skills, and experience Overdue Fees: Agree on payment schedule before starting

current-year audit

Conflicts of Interest and Exam Tips

Conflicts of Interest

Arise when auditors compete with clients or audit competing clients(e.g., C Co and N Co, rival retailers)

Risks: Breaches ofConfidentiality,Objectivity

Safeguards: Notify clients, use separate teams, enforce confidentialityagreements, appoint independent oversight

Exam Tips

Memorize five principlesand five threatswith examples

Structure answers: Threat Principle Safeguard

Use specific terms (e.g., independence of mind, contingent fees).Practice with past papers (e.g., June 2017) to master scenario

analysis