Day: December 12, 2022

  • What are the Fundamental Principles of Professional Ethics?

    What are the Fundamental Principles of Professional Ethics?

    The ethical conduct of professional accountants and auditors is controlled by a set of criteria they must conform to.

    Auditors have a direct responsibility to the shareholders of a reporting entity (because auditors are appointed by the shareholders, not by management), but it is generally accepted that the fundamental principles of professional ethics do not just apply to auditors; rather, they apply to all professional accountants.

    The presence of a members’ code of ethics and the scrutiny within the profession on members’ eventual conformity with such a code is one of the trademarks of professional qualification, among several other hallmarks.

    The International Ethics Standards Board for Accountants (IESBA) is responsible for publishing the Code of Ethics for Professional Accountants, sometimes known as “the Code.”

    When this article was written, the most recent edition available was the 2021 Edition (readers are directed to IESBA’s website to check later versions published by IESBA).

    The Code lays forth the conditions that must be met by professional accountants, regardless of whether or not they are employed in auditing practices.

    Member bodies of the International Federation of Accountants (IFAC) must adhere to standards equivalent to or more severe than those outlined in the Code. There is a possibility that the IESBA Code of Ethics will not be followed in some countries due to different ethical constraints.

    Both the Malaysian Institute of Certified Public Accountants (MICPA) and the Malaysian Institute of Accountants (MIA) have agreed to uphold the compliance of their members with the international code of ethics for professional accountants [including those of the International Independence Standards] prescribed by the International Ethics Standards Board for Accountants [IESBA] of the International Federation of Accountants (IFAC).

    Professional accountants must be aware of the differences and comply with the more stringent requirements and guidance unless a law or regulation prohibits such compliance.

    The Code is split into the following component parts:

    • Part 1: establishes the Fundamental Principles of professional ethics for accountants, which provides a Professional Framework for applying those principles.
    • Part 2: applies to Professional Accountants in business.
    • Part 3: applies to Professional Accountants in practice

    International Independence Standards:

    • Part 4A: Independence for Audit and Review Engagements
    • Part 4B: Independence for assurance engagements other than audit and review engagements

    A professional accountant is required to observe compliance with five fundamental principles, which are:

    • Integrity;
    • Objectivity;
    • Professional Competence and Due Care;
    • Confidentiality; and
    • Professional Behaviour.

    Integrity

    Professional accountants are expected to be honest and straightforward in all their interactions with clients, colleagues, and other business community members throughout their careers.

    For professional accountants to demonstrate that they are adhering to the fundamental principles of integrity, they should not let their name be connected with any reports, returns, or other forms of communication if they believe that the information in question:

    1. contains a materially false or misleading statement;
    2. contains statements or information obtained recklessly; or
    3. omits or obscures information required to be included where such omission or obscurity would be misleading.

    Where auditors are concerned, it may be the case that an auditor’s opinion on the financial statements is modified

    Objectivity

    A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgements.

    In some circumstances, the auditor could be put in a position where they are exposed to circumstances that could impair their objectivity. In every circumstance, the auditor needs to ensure that the auditor’s objectivity is not compromised by putting measures that safeguard the auditor’s independence and objectivity.

    Professional Competence and Due Care

    A professional accountant has a duty to maintain professional knowledge and skill at the level required to ensure that their client receives a competent and professional service.

    Audit firms must not accept appointments as auditors unless they are competent and have sufficient resources available to undertake the required work.

    Professional accountants also should act diligently under appropriate technical and professional standards when providing professional services. Professional competence comprises:

    • Attaining professional competence; and
    • Maintaining professional competence.

    To achieve the latter, professional accountants must be up-to-date with technical developments.

    Continuing Professional Education (CPE) will assist in maintaining professional competence, providing the CPE undertaken is relevant to the professional accountant’s work.

    It will also serve to assist the professional accountant in performing work competently within their professional environment.

    Confidentiality

    Confidentiality is of paramount importance, and Section 114 Confidentiality of Part 1 of the By-Laws (on Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants contains the obligations of a professional accountant to maintain confidentiality as well as establishing the circumstances where the professional accountant’s duty of confidentiality can be overridden.

    In recognition of the professional accountant’s duty of confidentiality, the accountant should refrain from:

    • Disclosing, outside the audit/accountancy firm, confidential information acquired as a result of professional and business relationships without proper and specific authority or unless there is a legal or professional right or duty to disclose.
    • Using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of third parties.

    This duty of confidentiality extends to the outside of the business or practice environment where the professional accountant must observe confidentiality and not inadvertently or otherwise disclose information in a social environment.

    In addition to this need, a professional accountant is obligated to protect the confidentiality of any information a potential client or employer provides.

    A professional accountant has to be aware of the need to safeguard the confidentiality of information inside a company or other organisation in which they are employed.

    A professional accountant must maintain client confidentiality and take all reasonable steps to accomplish this goal.

    These steps should include ensuring that staff under the professional accountant’s control and persons from whom the professional accountant seeks advice and assistance also maintain client confidentiality.

    Even though auditors and professional accountants have a professional duty of confidentiality, there may be occasions where the professional accountant is required by law, or considers it to be in the public interest to disclose details of clients’ affairs to third parties.

    The duty of confidentiality is required to be applied at all times by the professional accountant during the course of their work, except where:

    1. Disclosure is permitted by law and is authorised by the client or the employer.
    2. Disclosure is required by law.
      1. Production of documents or other provision of evidence in the course of legal proceedings; or
      2. Disclosure to the appropriate public authorities of infringements of the law that came to light;
    3. There is a professional duty or right to disclose when not required by law, for example:
    • when professional bodies are carrying out reviews of work done by professional accountants, and the bodies require sight of the firm’s files to review this audit work;
      • to respond to an enquiry or investigation by a professional body or regulatory body;
      • to protect the professional interests of a professional accountant in legal proceedings; or
      • to comply with technical standards and ethical requirements.

    There are two types of disclosure where the duty of confidentiality is to be overridden:

    • Obligatory disclosure; and
    • Voluntary disclosure

    Obligatory disclosure

    Where the professional accountant knows or suspects the client to have committed money laundering, treason, drug trafficking or terrorist offences, the professional accountant must disclose all the information at his disposal to a regulatory authority.

    Voluntary disclosure

    Voluntary disclosure may be required in the following situations:

    • Disclosure is required by law;
    • Where it is in the public interest to disclose (such as where a criminal offence against the public has been committed);
    • Disclosure is required to protect the professional accountant’s interests (for example, defending the professional accountant in a legal case).
    Example
During the course of the audit of ABC Berhad, the audit senior saw that recurring quantities of money were being deposited into the bank account of one of the company's directors in the form of round sums. 

When added up over the course of the year, the amounts had reached a point where they were considered significant (material); hence, the audit senior questioned the director about the purposes of these transactions. 

The director refused to provide the audit senior with any reasonable reasons and said, in an aggressive and threatening way, that the information in question was confidential and must not be released to any third party. 

The audit senior's suspicions were piqued by how the director responded, which led them to believe that the director was engaged in money laundering. 

Within a professional practice, the suspicion or knowledge of money laundering actions must be reported to a Money Laundering Reporting Officer (MLRO) under the legislation that govern the prevention of money laundering in many different countries. 

In this situation, the audit senior would be compelled to report his concerns to the MLRO to comply with the scenario. After then, it would be up to the discretion of the MLRO to decide whether or not the suspicions merited a referral to the regulatory authorities who are tasked with conducting investigations into such concerns. 

In situations like this, it is extremely important for neither the audit senior nor the MLRO to make the client aware of any such findings. Doing so would constitute "tipping off" the client and might potentially compromise any inquiry being conducted.

    Professional Behaviour

    At all times, professional accountants must comply with relevant laws and regulations and avoid all actions which would bring the profession into disrepute.

    Accountants need to be seen to behave professionally at all times, and this behaviour extends to the professional accountant’s marketing and advertising.

    [It is recommended that a professional accountant seek advice from the appropriate professional organisation if there is any uncertainty regarding the appropriateness of a certain kind of advertising or marketing.]

    Professional accountants must not mislead clients or employers by stating that they have professional qualifications when they have not.

    Nor should they offer themselves as available for work which they are not professionally competent to undertake.

    Professional accountants also should ensure that they do not make disparaging references or unsubstantiated comparisons to the work of others.

    The profession’s ongoing efforts to uphold ethical standards in Malaysia

    The Malaysian Institute of Certified Public Accountants (MICPA) and the MIA are constantly engaged with their members to provide the required revisions to the code regularly.

    These are made possible through continual continuing education programmes or workshops and yearly member outreach, particularly in the year when significant revisions to the code have been implemented.

    Both the MICPA’s exam and the MIA’s qualifying examination place a significant emphasis on the concept of the code of ethics. This will guarantee that newly graduated accountants have a solid understanding of the Code of Professional Conduct.

    Ethics In The Accounting Profession

    Ethics-In-The-Accounting-Profession-1Download
    Our website's articles, templates, and material are solely for reference. Although we make every effort to keep the information up to date and accurate, we make no representations or warranties of any kind, either express or implied, regarding the website or the information, articles, templates, or related graphics that are contained on the website in terms of its completeness, accuracy, reliability, suitability, or availability. Therefore, any reliance on such information is strictly at your own risk.

    Keep in touch with us so that you can receive timely updates |

    要获得即时更新，请与我们保持联系

    1. Website ✍️ https://www.ccs-co.com/ 2. Telegram ✍️ http://bit.ly/YourAuditor 3. Facebook ✍

    4. Blog ✍ https://lnkd.in/e-Pu8_G 5. Google ✍ https://lnkd.in/ehZE6mxy

    6. LinkedIn ✍ https://www.linkedin.com/company/74734209/admin/

    17
  • What gives rise to a threat to an Auditor’s Independence and Objectivity, and how to deal with it?

    What gives rise to a threat to an Auditor’s Independence and Objectivity, and how to deal with it?

    Professional accountants and auditors must comply with a Code of Ethics (such as the IESBA’s Code of Ethics for Professional Accountants) (the Code).

    Many professional bodies worldwide have adopted the IESBA’s Code and made certain amendments to it to be country-specific.

    But, for the most part, the IESBA Code applies to most professional bodies and their members.

    The overarching principle of an auditor is to act independently and with objectivity.

    There are two critical aspects to independence:

    • Independence of mind; and Independence in appearance.

    Independence of Mind

    This state of mind permits the provision of an opinion without being affected by influences that compromise professional judgement, allowing an individual to act with integrity and exercise objectivity and professional scepticism.

    Independence in Appearance

    This is the avoidance of facts and circumstances that are so significant that a reasonable and informed third party, knowing all relevant information, including safeguards applied, would reasonably conclude that the integrity, objectivity or professional scepticism of a firm, or a member of the assurance team, had been compromised.

    Consequently, the audit of a set of financial statements ought to be able to provide objective assurance regarding whether or not the financial statements give a true and fair view (or present fairly in all material respects).

    This is something that the directors of a reporting entity will never be able to provide.

    It is commercially unreasonable to expect auditors to resign from every audit where there was even the slightest threat to their independence and objectivity. Yet, there are numerous instances in which there are at least some threats to an auditor’s independence and objectivity.

    Where threats to independence and objectivity exist, the key is to put adequate safeguards in place to eliminate or reduce the threats to acceptable levels.

    Where threats to independence and objectivity are concerned, there are generally five such threats:

    • Self-interest threat
    • Self-review threat
    • Advocacy threat
    • Familiarity threat
    • Intimidation threat.

    Self-Interest Threat

    A self-interest threat occurs when a financial or other interest in the entity may unduly affect the judgement or behaviour of the professional accountant.

    This could happen, for instance, if the professional accountant or auditor has interests in the company being audited (for example, where the professional accountant or auditor holds shares in the reporting entity) or if the auditing firm has an excessive dependency on the fees from the company being audited.

    Other self-interest threats can include:

    • Loans and guarantees to the client;
    • Overdue fees from the client;
    • Family and personal relationships;
    • Close business relationships;
    • Gifts and hospitality from the client; and
    • Contingent fees.

    Self-Review Threat

    When a professional accountant relies on information that was prepared by either the professional accountant or another individual working in the professional accountant’s firm, this poses a risk of self-review.

    An example of a threat posed by self-review is when a professional accountant generates a set of financial statements for a reporting entity and then audits those very same financial statements.

    In addition, when a member of the audit or assurance team has joined the audit firm from the audit client, this will also give rise to a self-review threat if that person is engaged on the audit of his/her previous employer.

    Advocacy Threat

    An advocacy threat occurs when the professional accountant promotes a client’s or employer’s position to the point that the professional accountant’s objectivity is compromised.

    Such an example would be where the professional accountant represents the client in legal proceedings.

    Familiarity Threat

    A familiarity threat emerges when a professional accountant becomes unduly close or familiar with the client to the point that they may be too sympathetic to the customer’s interests.

    Intimidation Threat

    When a customer or company puts pressure on a professional accountant to the point that there is a possibility that the professional accountant would be dissuaded from behaving objectively, this is an example of an intimidation threat.

    Safeguards to Reduce Threats to an Acceptable Level

    The phrase “safeguards” refers to the steps that a professional accountant takes to either eliminate the threats to objectivity and independence in totality or reduce those threats to an acceptable level.

    There are two distinct categories into which safeguards might be placed:

    • Safeguards created by the professional, legislation or regulation; and
    • Safeguards in the actual working environment.

    Safeguards created by profession include compliance with professional standards, including those laid down by the professional body of which the accountant/auditor is a member.

    There are also additional safeguards, including:

    • Training and development;
    • Corporate governance regulations;
    • Regulatory monitoring by professional bodies; and
    • External reviews.

    Training and development include training and experience requirements for entry into the profession and maintenance of those skills by undertaking Continuing Professional Education (CPE).

    CPE requirements apply to all professionals regardless of the sector or size of the business in which they operate.

    Regulatory monitoring includes reviews of professional accountants’ work by professional bodies to ensure that professional standards, independence and objectivity are always maintained.

    External reviews can take various forms, but in terms of auditing, they are usually split into two types of review:

    1. Hot file review; and
    2. Cold file review.

    Hot File Review

    Before the auditor’s report is released, a hot file review is performed by an external file reviewer.

    These reviews look at the audit work carried out and determine whether the audit evidence acquired is enough and pertinent to back up the auditor’s suggested opinion in the report.

    Cold File Review

    An external file reviewer undertakes a cold File Review after the auditor’s report has been issued.

    Suppose various professional organisations decide, as a result of their inspections, that the audit work was inadequate. In that case, they may require such evaluations to be carried out as a condition of continuing to practise.

    Such activities may sometimes be required as part of a regulatory monitoring visit. Although this is the case, most firms nevertheless demand cold file reviews voluntarily to ensure that their quality assurance procedures are up to the very minimal requirements set out by the relevant authorities and professional bodies.

    An audit firm should make it a priority to implement company-wide safeguards. These safeguards should make it possible for the firm to comply, in every possible way, with the fundamental principles and ensure that its employees will, at all times, act in the general public’s best interests.

    There are many different approaches that firms may take to ensure that they have enough safeguards in place to cope with potential threats, such as the following:

    • Published policies to identify various threats and the procedures to be adopted to evaluate those threats’ significance. The firm should resign or decline the engagement if the threats cannot be eradicated or mitigated to an acceptable level.
    • Engaging different partners on audit and non-audit assignments.
    • Engaging different staff on audit engagements where non-audit services have been provided to an audit client.
    • Discussing difficult or contentious issues arising during the course of an audit with specially trained staff, for example, complicated taxation matters, should be referred to the firm’s tax department or tax partner.
    • Ensuring staff are kept technically up-to-date through the use of CPE.
    • Formulating a disciplinary mechanism to promote the firm’s policies and procedures.
    • Ensuring regular and independent file reviews are undertaken to ensure the firm is undertaking audit work in compliance with the ISAs.
    • Rotating senior personnel.

    The aforementioned list is not complete; nonetheless, it offers examples of the concerns that audit firms need to consider to ensure that proper safeguards are put into place.

    Our website's articles, templates, and material are solely for reference. Although we make every effort to keep the information up to date and accurate, we make no representations or warranties of any kind, either express or implied, regarding the website or the information, articles, templates, or related graphics that are contained on the website in terms of its completeness, accuracy, reliability, suitability, or availability. Therefore, any reliance on such information is strictly at your own risk.

    Keep in touch with us so that you can receive timely updates |

    要获得即时更新，请与我们保持联系

    1. Website ✍️ https://www.ccs-co.com/ 2. Telegram ✍️ http://bit.ly/YourAuditor 3. Facebook ✍

    4. Blog ✍ https://lnkd.in/e-Pu8_G 5. Google ✍ https://lnkd.in/ehZE6mxy

    6. LinkedIn ✍ https://www.linkedin.com/company/74734209/admin/

    17
  • What does an Auditor have to think about before accepting an appointment as Auditor

    What does an Auditor have to think about before accepting an appointment as Auditor

    One of the most critical components of professional competence is ensuring that a Professional Accountant, including an auditor, does not agree to function in a capacity they do not have the necessary level of professional competence to carry out.

    This principle should be adhered to by all professional accountants, regardless of whether they perform their duties as auditors; it is of the utmost significance.

    When a prospective client inquires about engaging the services of a professional accountant, that professional accountant has a responsibility to ensure that they have the necessary resources at their disposal and that they are technically and professionally competent to carry out the work on behalf of the prospective client.

    When deciding whether or not to accept an engagement, a professional accountant has an additional responsibility to examine whether or not doing so would pose a risk to the accountant’s ability to comply with fundamental principles.

    For instance, the professional accountant would assess if the possible customer is participating in any unlawful or unethical activities and whether the potential client has complex financial reporting procedures (which may give rise to unorthodox practices).

    When a professional accountant finds such threats to the essential principles, that professional accountant has a responsibility to investigate whether or not such threats may be mitigated to an acceptable degree.

    When such threats cannot be eliminated or mitigated to an acceptable degree, a professional accountant must turn down the opportunity to perform the work.

    Suppose such threats do not exist or threats to the fundamental principles have been reduced to an acceptable level. In that case, the professional accountant must ensure that the services they have been asked to perform by the client can be performed competently by the firm.

    If the practice is a firm, the engagement partner is responsible for ensuring that the firm has the required employees to service the client, which means that the staff have the technical knowledge and capacities to handle the client’s business expertly.

    In addition, the firm needs to ensure that its employees have an adequate awareness of the nature of the client’s business and the environment in which the client operates.

    The professional accountant should also examine issues, such as the complexity of the entity’s operations and establish a knowledge of the nature and extent of the job to be completed.

    This is another responsibility that falls on the professional accountant.

    Clients involved in specialist entities may expect the audit firm to ensure that they have the people available (or source such staff) to deal with such specialisms professionally.

    This may require the assistance of specialised personnel (for example, where the reporting entity has complex financial instruments which require annual fair value assessments to be carried out, such as derivative financial instruments).

    In situations like this, the audit engagement partner is responsible for ensuring that they have the resources available to handle any issues that may arise due to the audit.

    When the client has asked the professional accountant to act for them concerning their financial reporting (accounting) requirements, the professional accountant should ensure that both the accountant and the client have a realistic timeframe to undertake the work.

    The professional accountant must consider any deadlines placed on the client they are auditing.

    For instance, the client may be required to submit their financial statements to a regulatory body by a specific date following the end of the financial year.

    In these circumstances, the professional accountant should examine if they can meet such deadlines to prevent the client from being subjected to any penalty levied against them by regulatory agencies for missing deadlines.

    Following the acceptance of the engagement, the incoming professional accountant will often need to start conversations with the outgoing firm of accountants to get some facts (the client has permitted to enter into the such dialogue).

    The incoming professional accountant will typically inquire of the outgoing professional accountant as to whether there is anything, be it professional or otherwise, that needs to be brought to the attention of the incoming professional accountant to assist them in deciding whether or not to accept the engagement.

    Other pertinent legal and regulatory criteria may vary from country to jurisdiction that regulates such requests.

    How does the Auditor deal with Conflicts of Interest?

    A professional accountant needs to be aware that there is always the potential for a conflict of interest between different clients.

    This is something that they need to be aware of at all times.

    The firm should ensure that they have procedures that deal with conflicts of interest, which will generally involve notifying the client of a conflict of interest and seeking their consent to act for the other client in such circumstances.

    The firm should also ensure procedures for employees having conflicts of interest. If the professional accountant is not given consent, they have a duty not to act for the party or parties that caused the conflict of interest in the first place, nor do they have the right to continue acting for those parties.

    Some precautions need to be taken when there is a potential conflict of interest.

    The construction of so-called “Chinese walls,” which requires employing different engagement teams, maybe one method of implementing such precautions.

    When utilising different engagement teams, each team is obligated to maintain confidentiality.

    The firm should also regularly review the safeguards employed at the firm level.

    A senior official not associated with the relevant client engagements should look over these measures to ensure they are adequate.

    In certain circumstances, conflicts of interest can threaten one or more guiding principles. In situations where this threat cannot be eliminated or reduced to a level deemed acceptable, the professional accountant has a responsibility not to accept the assignment.

    Our website's articles, templates, and material are solely for reference. Although we make every effort to keep the information up to date and accurate, we make no representations or warranties of any kind, either express or implied, regarding the website or the information, articles, templates, or related graphics that are contained on the website in terms of its completeness, accuracy, reliability, suitability, or availability. Therefore, any reliance on such information is strictly at your own risk.

    Keep in touch with us so that you can receive timely updates |

    要获得即时更新，请与我们保持联系

    1. Website ✍️ https://www.ccs-co.com/ 2. Telegram ✍️ http://bit.ly/YourAuditor 3. Facebook ✍

    4. Blog ✍ https://lnkd.in/e-Pu8_G 5. Google ✍ https://lnkd.in/ehZE6mxy

    6. LinkedIn ✍ https://www.linkedin.com/company/74734209/admin/

    16