BLOCK 1–2: FOUNDATIONS OF AUDITING
CHAPTER 4
Ethics and Professional Conduct
The Foundation of Public Trust
“Technical knowledge may make someone an accountant, but integrity makes someone a professional.”
Real-Life Scenario
A registered auditor has audited the same client for many years. During the current year’s audit,
management discovers a material error that will significantly reduce the company’s reported profit.
The Finance Director privately approaches the auditor and says: “If you ignore this adjustment for one
year, we will appoint your firm for another five years.”
The auditor now faces an ethical dilemma. Should the auditor protect the client relationship or protect the
public interest?
A truly professional auditor understands that independence and integrity can never be compromised.
The auditing profession depends on public confidence, and that confidence exists only when auditors
consistently place ethical principles above personal or commercial interests.
Learning Outcomes
After studying this chapter, you should be able to:
✓ Explain why ethics are fundamental to auditing.
✓ Describe the fundamental ethical principles.
✓ Explain auditor independence.
✓ Identify threats to independence.
✓ Recommend appropriate safeguards.
✓ Apply ethical principles to practical scenarios.
✓ Answer examination questions on professional ethics.
4.1 What Are Professional Ethics?
Professional ethics are the moral principles and standards that guide the behaviour of professional
accountants and auditors.
Every audit opinion issued by an auditor carries significant weight. Investors, banks, shareholders,
regulators and other stakeholders make important decisions based on that opinion.
If society loses confidence in the honesty and integrity of auditors, the value of an audit opinion is greatly
diminished. Ethics therefore form the foundation upon which the auditing profession is built.
Technical competence alone is not enough. An auditor must also demonstrate honesty, fairness,
objectivity and professional responsibility.
4.2 Why Ethics Matter
Ethical conduct benefits both the profession and society. It:
• promotes confidence in financial reporting;
• protects investors and creditors;
• strengthens corporate governance;
• improves organisational accountability;
• enhances the reputation of the auditing profession; and
, • supports economic stability.
History has shown that many corporate failures were not caused by a lack of accounting knowledge, but
by ethical failures. Integrity remains the profession’s greatest asset.
CONCEPT MADE EASY
Imagine visiting a doctor. The doctor possesses excellent medical knowledge but deliberately gives incorrect
advice because a pharmaceutical company has offered financial incentives. Would you trust that doctor?
Probably not.
The doctor’s technical knowledge has become meaningless because ethical behaviour has been compromised.
The same principle applies to auditing. An auditor may possess exceptional technical ability, but without
integrity and independence the audit opinion loses credibility.
4.3 The Fundamental Ethical Principles
Professional accountants and auditors are expected to comply with five fundamental ethical principles.
✓ Integrity — requires auditors to be honest, truthful and straightforward in all professional and business
relationships. It means doing the right thing even when no one is watching, and never knowingly
associating with misleading or materially false information.
✓ Objectivity — requires auditors to make decisions based on evidence rather than personal feelings or
external pressure. Bias, conflicts of interest and undue influence must never affect professional
judgement.
✓ Professional Competence and Due Care — requires auditors to maintain the knowledge and skills
necessary to perform engagements effectively, and to perform their work diligently and in accordance
with professional standards. Learning continues throughout a career.
✓ Confidentiality — auditors obtain access to highly sensitive information and must respect its
confidentiality, not disclosing it without proper authority unless there is a legal or professional duty to do
so. Confidentiality continues even after the relationship ends.
✓ Professional Behaviour — requires auditors to comply with applicable laws and regulations and to
avoid conduct that discredits the profession. Every action taken reflects on the profession as a whole.
4.4 Auditor Independence
Independence distinguishes auditing from many other professional services. Users place confidence in the
auditor’s opinion because they believe the auditor has acted independently and objectively. Independence
has two dimensions.
✓ Independence of Mind — the auditor must be able to make professional judgements free from bias or
undue influence.
✓ Independence in Appearance — the auditor must also avoid situations that could cause a reasonable
observer to question the auditor’s independence.
Even if an auditor remains objective, public confidence may be damaged if independence merely appears
to have been compromised.
4.5 Threats to Independence
The ethical framework identifies five common threats.
✓ Self-Interest Threat — occurs when an auditor has a financial or personal interest that could influence
professional judgement. Example: owning shares in an audit client.
✓ Self-Review Threat — occurs when auditors evaluate work that they previously performed. Example:
preparing accounting records and then auditing those same records.
✓ Advocacy Threat — occurs when the auditor promotes or defends a client’s position to the extent that
objectivity may be impaired. Example: representing the client during legal proceedings.
CHAPTER 4
Ethics and Professional Conduct
The Foundation of Public Trust
“Technical knowledge may make someone an accountant, but integrity makes someone a professional.”
Real-Life Scenario
A registered auditor has audited the same client for many years. During the current year’s audit,
management discovers a material error that will significantly reduce the company’s reported profit.
The Finance Director privately approaches the auditor and says: “If you ignore this adjustment for one
year, we will appoint your firm for another five years.”
The auditor now faces an ethical dilemma. Should the auditor protect the client relationship or protect the
public interest?
A truly professional auditor understands that independence and integrity can never be compromised.
The auditing profession depends on public confidence, and that confidence exists only when auditors
consistently place ethical principles above personal or commercial interests.
Learning Outcomes
After studying this chapter, you should be able to:
✓ Explain why ethics are fundamental to auditing.
✓ Describe the fundamental ethical principles.
✓ Explain auditor independence.
✓ Identify threats to independence.
✓ Recommend appropriate safeguards.
✓ Apply ethical principles to practical scenarios.
✓ Answer examination questions on professional ethics.
4.1 What Are Professional Ethics?
Professional ethics are the moral principles and standards that guide the behaviour of professional
accountants and auditors.
Every audit opinion issued by an auditor carries significant weight. Investors, banks, shareholders,
regulators and other stakeholders make important decisions based on that opinion.
If society loses confidence in the honesty and integrity of auditors, the value of an audit opinion is greatly
diminished. Ethics therefore form the foundation upon which the auditing profession is built.
Technical competence alone is not enough. An auditor must also demonstrate honesty, fairness,
objectivity and professional responsibility.
4.2 Why Ethics Matter
Ethical conduct benefits both the profession and society. It:
• promotes confidence in financial reporting;
• protects investors and creditors;
• strengthens corporate governance;
• improves organisational accountability;
• enhances the reputation of the auditing profession; and
, • supports economic stability.
History has shown that many corporate failures were not caused by a lack of accounting knowledge, but
by ethical failures. Integrity remains the profession’s greatest asset.
CONCEPT MADE EASY
Imagine visiting a doctor. The doctor possesses excellent medical knowledge but deliberately gives incorrect
advice because a pharmaceutical company has offered financial incentives. Would you trust that doctor?
Probably not.
The doctor’s technical knowledge has become meaningless because ethical behaviour has been compromised.
The same principle applies to auditing. An auditor may possess exceptional technical ability, but without
integrity and independence the audit opinion loses credibility.
4.3 The Fundamental Ethical Principles
Professional accountants and auditors are expected to comply with five fundamental ethical principles.
✓ Integrity — requires auditors to be honest, truthful and straightforward in all professional and business
relationships. It means doing the right thing even when no one is watching, and never knowingly
associating with misleading or materially false information.
✓ Objectivity — requires auditors to make decisions based on evidence rather than personal feelings or
external pressure. Bias, conflicts of interest and undue influence must never affect professional
judgement.
✓ Professional Competence and Due Care — requires auditors to maintain the knowledge and skills
necessary to perform engagements effectively, and to perform their work diligently and in accordance
with professional standards. Learning continues throughout a career.
✓ Confidentiality — auditors obtain access to highly sensitive information and must respect its
confidentiality, not disclosing it without proper authority unless there is a legal or professional duty to do
so. Confidentiality continues even after the relationship ends.
✓ Professional Behaviour — requires auditors to comply with applicable laws and regulations and to
avoid conduct that discredits the profession. Every action taken reflects on the profession as a whole.
4.4 Auditor Independence
Independence distinguishes auditing from many other professional services. Users place confidence in the
auditor’s opinion because they believe the auditor has acted independently and objectively. Independence
has two dimensions.
✓ Independence of Mind — the auditor must be able to make professional judgements free from bias or
undue influence.
✓ Independence in Appearance — the auditor must also avoid situations that could cause a reasonable
observer to question the auditor’s independence.
Even if an auditor remains objective, public confidence may be damaged if independence merely appears
to have been compromised.
4.5 Threats to Independence
The ethical framework identifies five common threats.
✓ Self-Interest Threat — occurs when an auditor has a financial or personal interest that could influence
professional judgement. Example: owning shares in an audit client.
✓ Self-Review Threat — occurs when auditors evaluate work that they previously performed. Example:
preparing accounting records and then auditing those same records.
✓ Advocacy Threat — occurs when the auditor promotes or defends a client’s position to the extent that
objectivity may be impaired. Example: representing the client during legal proceedings.
