Copyright 2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Chapter 3 Ethics, Independence and Corporat
Trang 1Copyright 2006 McGraw-Hill Australia Pty Ltd
Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Chapter 3 Ethics, Independence and Corporate Governance
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
The Nature and Importance of Professional
Ethics
• Ethics:
– Concerned with the requirements for the general
well-being, prosperity, health and happiness of people.
– Requires knowledge of moral principles, and skills in
applying them to problems and decisions.
Learning Objective 1:
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Ethical rules
• The establishment of ethical codes and disciplinary
rules does not necessarily create an ethical culture or ensure the moral integrity of employees
• A.1 of the Joint Code of Professional Conduct (CPC) of ICAA and CPA Australia (from 1 July 2006 reference is
to Section A of APES 110 “Code of Ethics for Profession Accountants” issued by the Accounting Professional
and Ethical Standards Board - APESB) indicates that members are expected to comply with the spirit as well
as the letter of the rules
• Failure to observe expected standards can result in
disciplinary procedures and sanctions
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
• Deontological ethics – based on duties and rights
– duties and rights set down in rules which must be
followed.
• Virtue ethics – focus on personal qualities, such as the integrity of the decision-maker
Learning Objective 2:
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Accounting Bodies’ Code of Ethics
pronouncements that relate to the undertaking of an audit
ethical rules
– Section B: Fundamental Principles of Professional
Conduct;
– Section F: Professional Statements, including F1
Professional Independence, and F7 Incompatible Business
(APES 110 covers similar issues to the CPC, but in a different structure)
Learning Objective 3:
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Purpose of the code of ethics
• Code of Ethics — formal, systematic statement of rules and principles developed by the community to promote its well-being and punish undermining behaviour
• The code therefore:
– makes explicit the values implicitly required;
– indicates how members should act toward one another;
– provides basis for sanctions.
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
CPC Section B (APES 110 Section 100): Fundamental Principles
Eight fundamental principles contained in the codes of
6 Compliance with technical and professional standards
7 Professional competence and due care
8 Ethical behaviour
(Part A of APES 110 includes integrity, objectivity, professional competence and due care, confidentiality and professional behaviour).
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Applying Ethics
• Sound ethical decision making is dependent on:
– knowledge of the basic principles on which moral values and rules are based;
– competence in decision making; and
– the ability to choose appropriate policies and decision procedures in different situations.
Learning Objective 4:
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Ethical decision models
• Three main models:
– American Accounting Association Model
– Mary Guy Model
– Laura Nash Model.
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Corporate Governance
• Corporate Governance — system by which companies are directed and controlled Concerned primarily with management and stewardship issues including:
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Parties in corporate governance
• Board of directors
• Management
• Auditors
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Groups advocating improved corporate
governance
• The business community
• Investors
• Australian Stock Exchange (ASX)
• Australian Securities and Investments Commission
(ASIC)
• CPA Australia and Institute of Chartered Accountants Australia (ICAA)
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
ASX Corporate Governance Council’s Principles of Good Corporate Governance
• Principle 1: Lay solid foundation for management and
oversight;
• Principle 2: Structure the board to add value;
• Principle 3: Promote ethical and responsible decision
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
ASX Corporate Governance Council’s Principles
of Good Corporate Governance (Cont.)
• Principle 6: Respect the rights of shareholders;
• Principle 7: Recognise and manage risks;
• Principle 8: Encourage enhanced performance;
• Principle 9: Remunerate fairly and responsibly; and
• Principle 10: Recognise the legitimate interests of
stakeholders
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Audit committees
• Sub-committee of board of directors, which should
consist mainly of non-executive directors;
• Auditor’s major dealings with the board of directors are normally through this sub-committee;
• Important component of corporate governance, with
most listed companies in Australia having an audit
committee;
• Top 500 companies on ASX now required to have an audit committee
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Functions of audit committees
• Assist the board of directors;
• Add to credibility and objectivity of financial reports;
• Enhance auditor independence and effectiveness;
• Consider appropriateness of accounting policies;
• Consider policies for unethical or illegal activities;
• Consider internal and management controls; and
• Communication link between management, board and auditors
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Whistleblowing in Australia
• s 311 of the Corporations Act imposes a responsibility
on auditors to inform the ASIC of any significant
contraventions of the Act discovered in the normal
course of their duties, and any other contraventions
which cannot be remedied by comment in the audit
report or by bringing the matter to the attention of
directors Arguably, this places an obligation on the
auditor to whistleblow
Learning Objective 6:
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Whistleblowing defined
• A person ‘who discloses information he (or she)
reasonably believes evidences a violation of any law, rule, or regulation, or mismanagement, a gross waste of public funds, an abuse of authority, or a substantial or specific danger to public health or safety’ is a
whistleblower.’
• United States Civil Service Reform Act of 1978
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Auditor’s responsibilities regarding
whistleblowing
• Auditor does not have to actively look for contraventions
of the Corporations Act;
• Decision to blow the whistle is not easy for an auditor;
• AUS 210/ASA 240 (ISA 240) also provide guidance
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The Importance of Audit Independence
• Independence is a very key characteristic of an audit or assurance service provider;
• In order that auditors can add credibility to financial
report or other subject matter, they needs to remain
independent;
• One of the eight fundamental ethical requirements of CPC (APES 110); and
• Test for independence is a reasonable person test –
would a reasonable person having access to all facts consider that the auditor was independent?
Learning Objective 7:
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Independence – Corporations Act 2001
• s 307C – Independence declaration
– Auditors must give directors a written declaration of their independence, and this is to be included in the directors’ report.
• s 324CA – Conflict of interest
– Auditor must take reasonable steps to ensure conflict of interest situation ceases to exist Conflict of interest is where members of audit team are not capable of
exercising objective and impartial judgment, as judged by
a reasonable person.
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Independence – Corporations Act 2001
(Cont.)
include names of each officer of client who was a
former partner or director of current auditor
company secretary or senior management of a client until two years after ceasing to be with audit firm
partner for five successive years cannot play a
significant role in the audit of that entity for at least
another two successive years
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Independence – Corporations Act 2001
(Cont.)
companies are required to provide a statement in their annual report identifying all non-audit services provided
by an audit firm, fee, and explanation why provision of service did not impair independence
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Auditor’s appointment
• S 327B - shareholders are responsible for the
appointment of auditor:
auditing at a time that a s 324CH(1) relationship exists, auditor is aware of relationship and does not take all reasonable steps to discontinue audit.
• S 324CH(1) relationships include:
audit-critical member (influencing financial report) of client
employee for acting as consultant
housing loan on normal terms).
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Auditors removal and resignation
• Removal – Difficult to remove auditor
• S 329 – Requires a resolution of company at a general meeting of which special notice is given Auditor entitled
to make written representation and speak at general
meeting A copy of notice must be sent to ASIC
• Resignation – Auditor can resign Must have written
consent from ASIC Application outlines reason, and
ASIC must approve the reason Designed to ensure
independence and integrity of audit function is
maintained
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Right of access to records and reasonable
fees
• Section 310 provides further protection to the auditor by giving the right of access at all reasonable times to the accounting and other records and registers, and an
entitlement to require from any officer of the company such information and explanations as required for the purposes of audit
• Section 331 states that the auditor is entitled to receive reasonable fees and expenses for the work carried out
• Collectively, these provisions assist an auditor to
maintain actual and perceived independence, and
attempt to create, as far as possible a suitable
environment for an audit process that is free from
undue influence and obstruction
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Independence – ethical requirements
Emphasises both:
– perceived independence – how others will view the
auditor; and
– actual independence – state of mind of the auditor
Whether the auditor can actually eliminate bias and
personal interest from their decisions, and not succumb to any pressures or influences.
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
Recent Developments in Auditor
Independence
• Ramsay Report (Aust) – issued October 2001
• IFAC independence rules – adopted in Australia in CPC F.1 – 2002
• Sarbanes-Oxley Act (USA) – 2002
• Joint Committee of Public Accounts and Auditors
(Australia) – 2002
• HIH Royal Commission – 2003
• Corporate Law Economic Reform Program (CLERP 9) (Australia) – 2002-4
Learning Objective 8:
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CPC F1/ APES 110 Section 290: Threats to
Independence
• Self-interest threats – auditor could benefit from a
financial interest in the client
• Self-review threats – auditor could have to re-evaluate their own work
• Advocacy threats – auditor could promote the audit
client’s point of view and compromise objectivity
• Familiarity threats – auditor may become too
sympathetic to the client’s interests
• Intimidation threats –auditor may be deterred from
acting objectively by actual or perceived threats from client
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Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett
CPC F1 /APES 110 Section 290: Safeguards
Safeguards fall into three broad categories For an auditor these are:
– Safeguards created by the profession, legislation or
regulation – education, professional standards,
monitoring and disciplinary processes, and inspections and reviews.
– Safeguards within the audit client – competent
employees, corporate governance structures.
– Safeguards within the audit firm – quality control, policies and procedures.
– The safeguards are aimed at reducing or resolving
circumstances that pose threats.
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Major Threats to Auditor Independence
• Auditor employment relationships
• Financial and business relationships
• Provision of non-audit services, including:
– preparing financial reports