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Auditing and assurance

Auditing and assurance. Lecture 5c Independence. ‘Operational independence’. To audit properly, the auditor must have… Programming independence Decides what activities will be necessary Investigative independence Ability to undertake the plan unfettered Reporting independence

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Auditing and assurance

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  1. Auditing and assurance Lecture 5c Independence

  2. ‘Operational independence’ • To audit properly, the auditor must have… • Programming independence • Decides what activities will be necessary • Investigative independence • Ability to undertake the plan unfettered • Reporting independence • Is able to report the results fully and clearly

  3. Statutory protection of auditor independence(UK – CA 06) • Members appoint auditors • Auditors can raise issues to members on resignation or removal • Auditors allowed freedom of access to audit evidence • Misleading statements by officers (recklessly or knowingly) is a criminal offence • Associated parties are excluded as auditors

  4. Ethical Codes • International (generic) • IFAC’s ‘Code of Ethics for Accountants’ • ACCA’s rules are similar to IFAC • National (specific) • UK – APB’s ‘Ethical Standards’ • Note for UK students – In the UK the APB has responsibility for ethics – The Companies (Audit, Investigation and Community Enterprises) Act 2004 • HK – ‘Statements of Professional Ethics’ (HKICPA)

  5. RSB (CA06 – UK) rulesUsing the ACCA as an example (ACCA Rules 2008 - Section 3) • The Fundamental Principles of Professional Ethics(of the Code of Ethics and Conduct - para 3.2) requires (ACCA) members to: • have INTEGRITY (para 3.2.5)and • be OBJECTIVE (para 3.2.6) • No bias, conflicts of interest, undue influence • Thus to be objective the auditor must be INDEPENDENT

  6. ACCA rules (cont.) • The ‘Conceptual Framework’ (of the Code of Ethics and Conduct - para 3.3) identifies various ‘threats’ to maintenance of the ‘Fundamental Principles’ • Self-interest • Self-review • Advocacy • Familiarity • Intimidation

  7. ACCA rules(cont.) • Self-interest • Financial or other interests, including • Loans, • Guarantees, • Security of employment • Commercial pressure…

  8. ACCA rules (cont.) • Self-review threats include • Provision of ‘other service’ to the audit client • Errors by audit firm uncovered upon review…

  9. ACCA rules (cont.) • Advocacy • The danger that the auditor will lose objectivity when acting for a client, includes: • Commenting publicly • Promoting share issues. • Acting for client in disputes…

  10. ACCA rules (cont.) • Familiarity threats include: • Long association • Family links • Gifts • Former partners having moved to role with the client…

  11. ACCA rules (cont.) • Intimidation threats relate to threats including: • Dominant personalities • Threats of litigation • Threats of replacement • Pressure to reduce fees (= audit work)…

  12. ACCA rules (cont.)Section 3.4 • Thesub-section ‘Integrity, objectivity and independence’(of the Code of Ethics and Conduct - para 3.4) identifies threats specifically relating to independence(para 3.4.43a) in several practical specific situations: • Financial situations (para 58) • Loans and guarantees (para 83) • Close relationships with clients (para 89)

  13. ACCA rules (cont.)Section 3.4 • Family and personal relationships (para 93) • Employment with clients (para 101) • Recent service with a client (para 106) • Serving as a director of a client (para 109 ) • Long association with a client’s senior staff (para 113) • Non-assurance services (para 118) • Preparing accounting records and, or accounts (para 126) • Valuation, taxation, internal audit and IT services (paras 134, 140, 141, 147)

  14. ACCA rules (cont.)Section 3.4 • Provision of temporary staff to a client (para 152) • Litigation support and legal services (para 153, 156) • Recruitment for client (para 163) • Finance activities (para 164) • Fees and pricing (para 166) • Gift and hospitality (para 176) • Actual or threatened litigation (para 178)

  15. Audit Committees and independence • Role of audit committees • Further the independence of audit • Coordinate audit (Internal and Statutory) • Review all externally issued financial documents • Act as an independent check over executive and operational management, part of the 'Corporate Governance' of an entity

  16. Other ways to enhance independence • AUDITOR ROTATION • Internal • UK and RoI recommendation for listed companies: • 5 yr - Engagement partner • 7 yr. any other partners involved with the client • External • FEE recommendations (2005)

  17. Other ways to enhance independence (cont.) • PEER REVIEW • Internal • External • SINGLE STATUTORY BODY • European experience negative

  18. Further reading • ACCA (2009) Code of Ethics and Conduct http://rulebook.accaglobal.com/ • IFAC (2006) Code of Ethics for Accountants http://www.ifac.org/Members/DownLoads/2005_Code_of_Ethics.pdf • UK - APB (2009) Ethical Standards http://www.frc.org.uk/apb/publications/ethical.cfm • HK - (2009) Ethical Standards http://www.hkicpa.org.hk/en/standards-and-regulations/technical-resources/members-handbook/

  19. Homework • Read set text Chapter 4 (sections 1.4 to 1.6) • Do questions 5 and 6 in set text • Prepare the following question for next week’s tutorial: • Explain (i) auditor rotation and (ii) peer review, and consider the benefits and disadvantages of each • Attempt handout question Q1 - Philip

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