Professional Ethics, Independence and Quality Control

1. Chapter Nineteen Professional Ethics, Independence and Quality Control

2. Refers to a system or code of conduct based on moral duties and obligations that indicate how an individual should behave in society. Refers to the conduct, aims, or qualities that characterize or mark a profession or professional person. Ethics and Professional Behaviour Ethics Professionalism

3. Recognizes that decision-making involves trade-offs between the benefits and burdens of alternative actions and focuses on the consequences and individuals affected. Assumes that individuals have certain rights and other individuals have a duty to respect those rights when making decisions. Is concerned with issues such as equity, fairness and impartiality. Theories of Ethical Behaviour Utilitarianism Rights-Based Approach Justice-Based Approach

4. IFAC Code of Ethics for Professional Accountants

5. IFAC Code Part A: Fundamental Principles and Conceptual Framework Part A of the Code establishes the fundamental principles for professional accountants’ behaviour and the conceptual framework for applying those principles.

6. A professional accountant in business: A professional accountant employed or engaged in an executive or non-executive capacity in such areas as commerce, industry, service, the public sector, education, the not for profit sector, regulatory bodies or professional bodies, or a professional accountant contracted by such entities. IFAC Code of Ethics for Professional Accountants A professional accountant in public practice: A professional accountant, irrespective of functional classification (e.g. audit, tax or consulting) in a firm that provides professional services. Professional services:Services requiring accountancy or related skills performed by a professional accountant including accounting, auditing, taxation, management consulting and financial management services.

7. Integrity Objectivity Fundamental Principles Professional Competence & Due Care Professional Behaviour Confidentiality

8. Fundamental Principles

9. Conceptual Framework Approach Threats are created by circumstances and relationships that could compromise an accountant’s ability to comply with the fundamental principles. Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. Identify threats to compliance with the fundamental principles. Evaluate the significance of the threats identified. Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level.

10. Conceptual Framework Approach • Establishes fundamental principles. • Requires active consideration of issues. • Requires judgement rather than literal interpretations encouraged by a pure rules approach. • Can be applied to differing circumstances. • Responsive to change.

11. Categories of Threats

12. Safeguards Safeguards created by the profession, legislation or regulation Professional accountants in public practice Safeguards in the work environment Professional accountants in business Prohibitions: When safeguards are not adequate

13. Safeguards created by the profession, legislation or regulation • Educational, training and experience. requirements for entry into the profession. • Continuing professional development requirements. • Corporate governance regulations. • Professional standards. • Professional or regulatory monitoring and disciplinary procedures. • External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant.

14. IFAC Code Part B: Professional Accountants in Public Practice Part BProfessional Accountants in Public Practice illustrates how the conceptual framework contained in Part A is to be applied in specific situations by professional accountants in public practice.

15. Second Opinions Part B: Situations Fees & Other Types of Remuneration Professional Appointment Gifts & Hospitality Conflicts of Interest Marketing Professional Services Custody of Client’s Assets Objectivity – All Services Independence – Other Assurance Engagements Independence – Audit and Review Engagements

16. Part B: Examples of Circumstances and Relationships That May Create Threats

17. Part B: Examples of Circumstances and Relationships That May Create Threats

18. Part B: Examples of Safeguards in Work Environment

19. Part B: Examples of Safeguards in Work Environment (continued)

20. Part B: Independence – Audit and Review Engagements The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity and exercise objectivity and professional scepticism. Independence of Mind The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm’s, or a member of the audit team’s, integrity, objectivity or professional scepticism has been compromised. Independence in Appearance

21. Part B: Independence and the Conceptual Framework Approach Identify threats to independence. Evaluate the significance of the threats identified. Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level. When the practitioner determines that appropriate safeguards are not available or cannot be applied to eliminate the threats or reduce them to an acceptable level, he or she shall eliminate the circumstance or relationship creating the threats, or decline or terminate the audit engagement.

22. Part B: Independence – Audit and Review Engagements • Firm includes network firm, except where otherwise stated. • A network firm is a firm or entity that belongs to a network. A network is a larger structure that is aimed at cooperation; and that is clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources. • Public interest entities: Additional provisions for public interest entities. • A public interest entity is a listed entity, and an entity defined by regulation or legislation as a public interest entity or for which the audit is required by regulation or legislation to be conducted in compliance with the same independence requirements that apply to the audit or listed entities. • Documentation: Conclusions regarding compliance with independence requirements, and substance of any relevant discussions that support those conclusions.

23. Part B: Independence – Audit and Review Engagements • Financial interests. • Loans and guarantees. • Business relationships. • Family and personal relationships. • Employment with an audit client. • Temporary staff assignments. • Recent service with an audit client. • Serving as a director or officer of an audit. • Long association of senior personnel with an audit client, including partner rotation. • Provision of non-assurance services to audit clients.

24. Part B: Provisions of Non-Assurance Services – Types of Services and Circumstances • Preparing accounting records and financial statements. • Valuation services. • Taxation services. • Internal audit services. • IT systems services. • Litigation support services. • Legal services. • Recruiting services. • Corporate finance services. • Fees: Relative size of fees, overdue fees and contingent fees. • Compensation and evaluation policies. • Gifts and hospitality. • Actual or threatened litigation.

25. Part B: Examples of Safeguards Related to Provision of Non-Assurance Services

26. Preparing Accounting Records and Financial Statements Originating or changing journal entries, or determining the account classifications of transactions. Activities considered a normal part of the audit process that generally do not threaten independence. Technical assistance and advice on accounting issues that generally do not threaten independence Services related to the preparation of accounting records and financial statements of a routine or mechanical nature that may create self-review threats. Preparing or changing source documents or originating data, in electronic or other form, evidencing the occurrence of a transaction.

27. Valuation Services A valuation comprises the making of assumptions with regard to future developments, the application of appropriate methodologies and techniques, and the combination of both to compute a certain value, or range of values, for an asset, a liability or for a business as a whole. A self-review threatmay be created when a firm performs a valuation that is to be incorporated into the client’s financial statements. The firm shall not provide a valuation service (or withdraw from the audit engagement) if the valuation service has a material effect on the financial statements and the valuation involves a significant degree of subjectivity. For public interest entity audit clients the firm shall not provide valuation services to an audit client if the valuations would have a material effect, separately or in the aggregate, on the financial statements.

28. Taxation Services Tax return preparation. Tax calculations for the purpose of preparing the accounting entries. Tax planning and other tax advisory services. Assistance in the resolution of tax disputes. For public interest entity audit clients the firm shall ordinary not prepare such tax calculations of entries that are material to the financial statements. A firm is not permitted to provide tax advice when the tax advice depends on a particular accounting treatment or presentation in the financial statements, and (a) the audit team has reasonable doubt as to the appropriateness of the related accounting treatment or presentation under the relevant financial reporting framework; and (b) the outcome or consequences of the tax advice will have a material effect on the financial statements.

29. Internal Audit Services Internal audit services involve assisting the audit client in the performance of its internal audit activities. In providing such services the firm shall not assume management responsibility. Provision of internal audit services creates a self-review threatto independence if the firm uses the internal audit work in the course of a subsequent external audit. For public interest entity audit clients the firm shall not provide internal audit services that relate to a significant part of the internal controls over financial reporting; financial accounting systems that generate information that is, separately or in the aggregate, significant to the client’s accounting records or financial statements; or amounts or disclosures that are, separately or in the aggregate, material to the financial statements.

30. IT System Services IT system services related to information technology (IT) systems include the design or implementation of hardware or software systems. Provision of IT systems services may create a self-review threatto independence when the system generate information that affects the accounting records or financial statements. For public interest entity audit clients the firm shall not provide services involving the design or implementation of IT systems that form a significant part of the internal control over financial reporting or generate information that is significant to the client’s accounting records or financial statements.

31. Litigation Support Services Litigation support services include activities such as acting as an expert witness, calculating estimated damages or other amounts that might become receivable or payable as the result of litigation or other legal dispute, and assistance with document management and retrieval. Litigation support services to an audit client may create may create a self-review or advocacy threat. Where the result of a valuation for litigation support will have a direct effect on the financial statements, the requirements in the Code relating to valuation services are applicable.

32. Recruiting Services Recruiting services include services such as reviewing the professional qualifications of applicants, interviewing candidates and providing advice on their suitability for the post. Providing recruiting services to an audit client may create self-interest, familiarity or intimidation threats. The significance of the threats will depend on factors such as the nature of the requested assistance and the role of the person to be recruited. Safeguards shall be applied when necessary to reduce the threats to an acceptable level.

33. Corporate Finance Services Corporate finance services comprise a broad range of services including assisting in developing corporate strategies, identifying possible targets for the client to acquire, advising on disposal transactions, assisting finance-raising transactions and providing structuring advice. Providing corporate finance services to an audit client may create services may create advocacy or self-review threats. Certain corporate finance services are not permitted, such as services involving promoting, dealing in or underwriting an audit client’s shares.

34. Independence for Other Assurance Engagements An assurance engagement is an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. Many of the same circumstances and relationships discussed previously related to independence requirements for audits and reviews are also relevant for other assurance engagements. Threats to independence typically arise more frequently and are of greater significance when a non-assurance service is provided to an audit client. Thus, the provision of non-assurance services to audit clients is more restricted than to non-audit assurance clients.

35. IFAC Code Part C: Professional Accountants in Business Aprofessional accountantin business is an accountant holding membership in an IFAC body and is employed or engaged in an executive or non-executive capacity in an organization other than an audit firm. Threats: • Potential conflicts. • Preparation and reporting of information. • Acting with sufficient expertise. • Financial interests. • Inducements. Professional accountants in business must comply with the IFAC Code’s fundamental principlesand apply the conceptual framework when threats to the principles exist.

36. Auditor Independence in the EU From European Commission, Recommendation on Statutory Auditors’ Independence in the EU: A Set of Fundamental Principles (2002): ‘A principles-based approach to statutory auditors' independence is preferable to one based on detailed rules because it creates a robust structure within which statutory auditors have to justify their actions. It also provides the audit profession and its regulators with the flexibility to react promptly and effectively to new developments in business and in the audit environment. At the same time, it avoids the highly legalistic and rigid approach to what is and is not permitted which can arise in a rules-based regime. A principles-based approach can cater for the almost infinite variations in individual circumstances that arise in practice and in the different legal environments throughout the EU. Consequently, a principles-based approach will better serve the needs of European capital markets, as well as those of SMEs (small and medium sized enterprises).’

37. Systems of Quality Control ISQC 1 Quality Control for Firms That Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements Elements of systems of quality control: • Leadership responsibilities for quality within the firm. • Relevant ethical requirements. • Acceptance and continuance of client relationships and specific engagements. • Human resources. • Engagement performance. • Monitoring.

38. Elements of Systems of Quality Control

39. Selected Quality Control Policies and Procedures

40. IFAC SMO 1 Quality Assurance EU 8th Directive. European Commission, Recommendation on Quality Assurance for the Statutory Audit in the EU: Minimum Requirements Quality Control Programmes

41. Quality Control Programmes The objective of a quality assurance review is to: Determine whether the member is subject to an adequate system of quality control. The system of quality control is in compliance with such system. The system of quality control has adhered to professional standards and applicable legal and regulatory requirements in performing engagements. A member body shall choose either a cycle or risk-based approach for selecting members for review.

42. End of Chapter 19