Ethical requirements

ISQC 1 ISA 220

Ethical requirements ordinarily

comprise Parts A and B of the
IFAC Code together with national
requirements that are more
restrictive.

Meta Duhovnik, Ph.D.

 Ethical requirements

The fundamental principles of professional

ethics, which include:

Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behavior
ISQC 1: Ethical requirements
The firm shall establish policies and procedures
designed to provide it with reasonable assurance
that the firm and its personnel comply with
relevant ethical requirements.

ISA 220: Ethical requirements

Throughout the audit engagement, the engagement
partner shall remain alert, through observation and
making inquiries as necessary, for evidence of non-
compliance with relevant ethical requirements by
members of the engagement team.
 ISQC 1: Ethical requirements –
independence
 The firm establishes policies and procedures designed to provide it with
reasonable assurance that the firm, its personnel and, where applicable,
others subject to independence requirements (including network firm
personnel) maintain independence where required by relevant ethical
requirements.
 Such policies and procedures shall enable the firm to:
– communicate its independence requirements to its personnel and, where
applicable, others subject to them;
– identify and evaluate circumstances and relationships that create threats to
independence, and to take appropriate action to eliminate those threats or reduce
them to an acceptable level by applying safeguards, or, if considered appropriate, to
withdraw from the engagement, where withdrawal is permitted by law or
regulation.
 ISQC 1: Ethical requirements –
independence
 At least annually, the firm obtains written confirmation of compliance
with its policies and procedures on independence from all firm
personnel required to be independent by relevant ethical requirements.
 Relevant policies and procedures to assure independence are:
– setting out criteria for determining the need for safeguards to reduce the
familiarity threat to an acceptable level when using the same senior personnel
on an assurance engagement over a long period of time; and
– requiring, for audits of financial statements of listed entities, the rotation of the
engagement partner and the individuals responsible for engagement quality
control review, and where applicable, others subject to rotation requirements,
after a specified period in compliance with relevant ethical requirements.
 ISA 220: Ethical requirements –
independence
 The engagement partner has to:
 obtain relevant information from the firm and, where applicable, network
firms, to identify and evaluate circumstances and relationships that create
threats to independence;
 evaluate information on identified breaches, if any, of the firm’s
independence policies and procedures to determine whether they create a
threat to independence for the audit engagement;
 take appropriate action to eliminate such threats or reduce them to an
acceptable level by applying safeguards, or, if considered appropriate, to
withdraw from the audit engagement, where withdrawal is possible under
applicable law or regulation.
 The engagement partner shall promptly report to the firm any
inability to resolve the matter for appropriate action.
IFAC Code
Independence requires :
 independence of mind
 The state of mind that permits the expression of a
conclusion without being affected by influences that
compromise professional judgment.

 independence of appearance
 The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party ,
having knowledge of all relevant information, including
safeguards applied, would reasonably conclude a firm’s or
auditor’s independence had been compromised.
IFAC Code

Possible threats to
independence
 Self-interest threat
 Self-review threat
 Advocacy threat
 Familiarity threat
 Intimidation threat
IFAC Code

Self-interest threat

 Self-interest threat may occur as a result of the

financial or other interests of a professional
accountant or of an immediate or close family
member.
IFAC Code

Self-review threat

 Self-review threat may occur when a previous

judgment needs to be re-evaluated by the
professional accountant responsible for that
judgment.
IFAC Code

Advocacy threat

 Advocacy threat may occur when a professional

accountant promotes a position or opinion to
the point that subsequent objectivity may be
compromised.
IFAC Code

Familiarity threat

 Familiarity threats may occur when, because of a

close relationship, a professional accountant
becomes too sympathetic to the interests of
others.
IFAC Code

Intimidation threat

 Intimidation threat may occur when a

professional accountant may be deterred from
acting objectively by threats, actual or
perceived.
IFAC Code

S afeguards

Two broad categories:

Safeguards created by the profession,

legislation or regulation.
Safeguards in the work environment.
IFAC Code

Safeguards created by the profession,

legislation or regulation include

 Educational, training and experience requirements for entry into the

profession.
 Continuing professional development requirements.
 Corporate governance regulations.
 Professional standards.
 Professional or regulatory monitoring and disciplinary procedures.
 External review by a legally empowered third party of the reports,
returns, communications and information produced by a professional
accountant.
IFAC Code

Safeguards in the work environment

include

Depending on the circumstances

Firm – wide safeguards
Engagement specific safeguards
IFAC Code

Firm-wide safeguards in the work

environment may include:

 Leadership of the firm that stresses the importance of

compliance with the fundamental principles;
 Leadership of the firm that establishes the expectation
that members of an assurance team will act in the
public interest;
 Policies and procedures to implement and monitor
quality control of engagements;
IFAC Code
Firm-wide safeguards (continuation 1)
 Documented policies regarding:
 the identification of threats to compliance with the fundamental
principles,
 the evaluation of the significance of these threats and
 the identification and the application of safeguards to eliminate or
reduce the threats to an acceptable level;
 For firms that perform assurance engagements,
documented independence policies regarding:
 the identification of threats to independence,
 the evaluation of the significance of these threats and
 the evaluation and application of safeguards to eliminate or reduce
the threats to an acceptable level;
IFAC Code
Firm-wide safeguards (continuation 2)
 Documented internal policies and procedures requiring
compliance with the fundamental principles;
 Policies and procedures that will enable the
identification of interests or relationships between the
firm or members of engagement teams and clients;
 Policies and procedures to monitor and, if necessary,
manage the reliance on revenue received from a single
client;
 Using different partners and engagement teams with
separate reporting lines for the provision of non-
assurance services to an assurance client;
IFAC Code
Firm-wide safeguards (continuation 3)
 Policies and procedures to prohibit individuals who are
not members of an engagement team from
inappropriately influencing the outcome of the
engagement;
 Timely communication of a firm’s policies and
procedures, including any changes to them, to all
partners and professional staff, and appropriate training
and education on such policies and procedures;
 Designating a member of senior management to be
responsible for overseeing the adequate functioning of
the firm’s quality control system;
2009.04.01 Meta Duhovnik, Ph.D.
IFAC Code
Firm-wide safeguards (continuation 4)

 Advising partners and professional staff of those

assurance clients and related entities from which they
must be independent;
 A disciplinary mechanism to promote compliance with
policies and procedures;
 Published policies and procedures to encourage and
empower staff to communicate to senior levels within
the firm any issue relating to compliance with the
fundamental principles that concerns them.
IFAC Code

Engagement-specific safeguards in the

work environment may include:

 Involving an additional professional accountant to

review the work done or otherwise advise as
necessary;
 Consulting an independent third party, such as a
committee of independent directors, a professional
regulatory body or another professional accountant;
 Discussing ethical issues with those charged with
governance of the client;
IFAC Code

Engagement-specific safeguards
(continuation 1)

 Disclosing to those charged with governance of the

client the nature of services provided and extent of
fees charged;
 Involving another firm to perform or re-perform part of
the engagement;
 Rotating senior assurance team personnel.