Professional Ethics in Auditing

Professional Ethics in Auditing
Introduction
The general public demand professional accountants1 maintain a high ethical standard in order to maintain
public confidence in the accountancy profession. Professional accountants are required to comply with the
Code of Ethics for Professional Accountants issued by the Hong Kong Institute of CPAs. Any member that
fails to comply is liable to be investigated by the Institute, resulting in possible disciplinary action such as an
order to remove the name of the member from the Institute’s membership register.
Fundamental Principles
The fundamental ethical principles that apply to all members as well as guidance on the threats and
safeguards relating to those fundamental principles. Professional accountants are required to abide by the
following five fundamental principles:
(a) Integrity
professional accountant should be straightforward and honest in all professional and business
relationships.
(b) Objectivity
professional accountant should not allow bias, conflict of interest or undue influence of others to
override professional or business judgments.
(c) Professional Competence and Due Care

professional accountant has a continuing duty to maintain professional knowledge and skill at the
level required to ensure that a client or employer receives competent professional service based on
current developments in practice, legislation and techniques.
(d) Confidentiality
professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to third
parties without proper and specific authority unless there is a legal or professional right or duty to
disclose.
(e) Professional Behaviour

professional accountant should comply with relevant laws and regulations and should avoid any
action that discredits the profession.
A professional accountant has an obligation to evaluate any threats to compliance with the
fundamental principles when the professional accountant knows, or could reasonably be expected
to know, of circumstances or relationships that may compromise compliance with the fundamental
principles. Many threats fall into one of the following five categories:
(a) Self-interest threat, when a professional accountant, or an immediate or close family member, has
a financial or other interests
(b) Self-review threat, when a professional accountant re-evaluates his own judgement
(c) Advocacy threat, when a professional accountant promotes an opinion that compromises his own
objectivity
(d) Familiarity threat, when a professional accountant, due to a close relationship, becomes too
sympathetic to the interests of others
(e) Intimidation threat, when a professional accountant is threatened from acting objectively
Other than clearly insignificant threats, a professional accountant should apply safeguards to either
eliminate or reduce the threat to an acceptable level so that the fundamental principles are not
compromised. Safeguards fall into two categories:
(a) Safeguards created by the profession, legislation or regulation, such as professional standards,
continuing professional development, and education and training (b) Safeguards in the work
environment
(b) The purpose of safeguards is to increase the likelihood of identifying or deterring unethical
dilemmas. However, if a professional has violated the Code without knowing he or she has done so,
once discovered the professional accountant must make immediate remedial action, including
setting up further safeguards. The violation may or may not compromise compliance dependent on
the nature and significance of the matter.
Professional Accountants in Public Practice
(a) Professional Appointment

1. Client acceptance
An auditor should consider whether acceptance of a new client would create any threats to
compliance with the fundamental principles. Where it is not possible to reduce the threats to
an acceptable level, an auditor should not enter into the client relationship.
Examples of potential threats include:

- The client is suspected of being involved in illegal activities
- The auditor has unresolved questionable issues with the client
2. Engagement acceptance after client has been accepted

Before accepting an engagement, the auditor should consider whether acceptance would
create any threats to compliance with the fundamental principles.
- The auditor does not possess the competencies necessary to properly carry out his or her
duties
- The auditor prepared the original data used to generate records that are the subject matter
of the engagement
3. Changes in a professional appointment

An auditor who is to replace an existing auditor should determine whether there are any
professional reasons for not accepting the engagement.

- Whether the auditor has received professional clearance from the existing auditor
- Whether an auditor accepts an engagement before knowing all the pertinent facts
(b) Conflicts of Interest

An auditor should be alert to any circumstances that could pose a conflict of interest.

- When an auditor competes directly with a client
- When an auditor audits two clients, say Pepsi and Coca-Cola, whose interests are in conflict
(c) Second Opinions

An auditor may be asked to give a second opinion on an entity that is not an existing client.
Examples of potential threats include circumstances where the second opinion is:
- not based on the same set of facts that were made available to the existing auditor
- based on inadequate evidence
(d) Fees and Other Types of Remuneration

There may be threats to compliance with the fundamental principles arising from the level of fees
quoted.

- The audit fee is too low so that a proper audit cannot be conducted - Undue dependence
on total fees from a single client
(e) Marketing Professional Services

When an auditor solicits new work through marketing, there may be potential threats to compliance
with the fundamental principles.

- An exaggerated claim for services offered, qualifications possessed or experience gained
- Improper use of the CPA logo
(f) Gifts and Hospitality

An auditor, or an immediate or close family member, is offered gifts or hospitality from a client, and
the value of these gifts or hospitality is not insignificant.

- If the gift from a client is accepted
- If the gift or hospitality becomes a form of bribery in return for favours (this is also a criminal
offence)
(g) Custody of Client Assets

An auditor should not keep custody of client monies or any other assets unless permitted by law.

- The auditor intermingles client and firm monies
- The auditor has not complied with the law regarding the holding of client assets
(h) Objectivity – All Services

An auditor should consider whether there are interests in, or relationships with, a client or directors,
officers or employees.

- A close family friend is an employee of the client
- The auditor went to school with the client managing director
(i) Independence – Assurance Engagements

On assurance engagements, the intended users of the financial statements require the auditor to
be independent from the assurance client. The auditor must be both independent in mind and
independent in appearance.

- Members of the audit engagement team are not independent of the client
- The client is able to exert some influence over an audit engagement team member

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Professional Ethics in Auditing

(c) Professional Competence and Due Care

(e) Professional Behaviour

Professional Accountants in Public Practice

(a) Professional Appointment

Examples of potential threats include:

2. Engagement acceptance after client has been accepted

3. Changes in a professional appointment

Examples of potential threats include:

(b) Conflicts of Interest

Examples of potential threats include:

(c) Second Opinions

(d) Fees and Other Types of Remuneration

Examples of potential threats include:

(e) Marketing Professional Services

Examples of potential threats include:

(f) Gifts and Hospitality

Examples of potential threats include:

(g) Custody of Client Assets

Examples of potential threats include:

(h) Objectivity – All Services

Examples of potential threats include:

(i) Independence – Assurance Engagements

Examples of potential threats include:

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