The Auditor and the Professional Ethics Notes

Auditing is usually carried out by qualified accountant who must be registered as accountants. Accountancy is a profession and as such must be guided by code of ethics and rules of conduct. The rules of conduct are usually found professional handbooks issued by member’s body and issued to all registered members. This chapter will attempt at explaining what a profession is, rules that guide professions among other matters.

Most dictionaries describe and define profession as a calling or vocation involving some branch of learning. Accountancy involves a body of knowledge. Accountants must tried in various areas .The idea of a profession rests on the following premises

  • A recognizable discrete body of knowledge
  • An educational process
  • A system of examinations
  • A system of licensing practitioners
  • A sense of responsibility to the society
  • A code of ethics
  • A set of technical standards

General Rules of Ethics
Professional accounts are required to observe proper standards of professional conduct whether or not the standards required are written in the rules or are unwritten. The professional accountants are specifically required to refrain from misconduct which is difficult to precisely but which includes any act or default which is likely to bring discredit on himself, his professional body or the
profession generally

Several general observations are worth mentioning. These include among others:

  • Professional independence – this is vitally important. This is much of the attitude or state of mind rather than a set of rules.
  • Integrity – Integrity is vital and is simply includes honesty, uprightness, probity rectitude and moral soundness
  • Accountants must not only be people of integrity and independence; they must also be seen to be so. Any interest such as owning shares in a clients company which might diminish the accountant’s objectivity must be avoided
  • When an accountant has difficult or is unsure of what course of conduct to follow, he should consult his professional body or take legal advice. If in doubt always seek advice

The rule of the thumb is that the accountant must approach his work with integrity and objectivity. He must approach his in a spirit of independence of mind.

Factors That Can Compromise The Auditor’s Independence

  1. Fees
    It is undesirable that the auditor derives a huge proportion of his income from one single client. If this happens the auditor is likely to be compromised by this client
  2. Personal Relationships
    It is desirable to avoid personal relationships with the client and his staff. Conflict of interest is likely to arise in cases where there exist such relationships
  3. Beneficial Shareholdings
    In general, partners, their spouses and minor children should avoid owning shareholding the clients companies. Staff members who own shareholding in companies should not be engaged in the audit of these companies.
  4. Loans to and from Clients
    The auditor should avoid granting or receiving loans and other such inducements from the companies for which they audit.
  5. Acceptances of goods/services from Clients
    Goods and service should only be accepted only to the extent that they do not threaten the independence of the auditor. Acceptance of undue hospitality may pose threats of independence.
  6. Commissions
    Many auditors receive commissions from financial institutions when they act for the clients. It should be seen that any advice should be in the best interest of the client and not vice versa. The client should be informed in writing that commission will be received and as far as possible on what terms.

Conflict of Interest
Conflict of interest is like to arise between the auditor and his client. Specific example conflict of interest may include among others:

  • Provision of other service to audit clients
  • Preparation of accounting records
  • Receivership, Liquidation and audits

The rules of professional conduct prohibit auditors from advertising for their services as a resort. If a company wishes to appoint an auditor, it is usually the director who approaches one and requests him to place a quotation for the provision of his services.

In the past, auditors and accountants were required to be anonymous in public matters. The rules are now less restrictive but there are still some prohibitions. A general prohibition is on any publicity which would bring the auditor, his professional body or the prohibition, into dispute. Presumably, an auditor appearing on talk show and introducing himself as an accountant is acceptable.

of acceptable publicity include:

  • Advertizing for staff, partners or sub – contract work
  • Advertizing on behalf of a client
  • Publicizing the opening of a new branch or premises
  • Publishing literature
  • Entries in a business directory

The normal way or basis of charging for professional work is on the basis of the time spent on the client premises or work.
It depends on the nature of the appointment.

  • Those appointed by the Board of Directors, it is the responsibility of the same Board to take care of their fees and other expenses.
  • Those appointed by the shareholders, it is the responsibility of the shareholders to determine the fee.
  • Those appointed by the Registrar of Companies – payment is fixed by the Registrar in consultation with the Directors.
  • In case of a retiring officer payment will be done as in previous years.
  • In case of extra work, they will get extra remuneration by the very employer.
  • In case of illegal removal of the auditor, he is entitled to a remuneration of one full year by the employer.

Insider Dealing
Insider dealing is illegal. It is also contrary to ethical rules. Individuals who during their course of work come across unpublished price sensitive data and information are prohibited to use such information for undue advantage. Auditors may have access to information that only them have. They are legally not allowed to use this information at the detriment of the other members of the public.

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