CHAPTER TWO

2. PROFESSIONAL STANDARD AND ETHICS OF AUDITORS

2.1. Auditors code of professional Ethics

Auditing as a profession
The audit function is carried out in a complex environment composed of
interrelationships between governmental and professional organizations and
individual auditors and audit firms. These regular and enduring relationships form the
structure of a profession.
For cultural and historical reasons, individual statutory auditors have usually been
designated rather than firms. Increasingly, however, firms are being appointed as
statutory auditors, including French accounting companies and professional auditing
partnerships.
The function of auditors is to measure users of financial statements that the facts are
correct and to highlight any problems with the statements or with the financial
position, irrespective of compliance with standards. If the profession cannot regulate
itself, it shouldn't be a surprise that government agencies step in.
2.1.1. Professional Ethics
Ethics: represent a set of moral principles, rules of conduct or values. Each of us has
such a set of values. Examples of prescribed sets of moral principles or value include
laws and regulations, church doctrine, codes of business ethics, code of conduct with
individual, organizations, etc. Ethics apply when an individual has to make a decision
from various alternatives regarding moral principles.
All recognized professions have developed codes of professional ethics. By
establishing a code of ethics, a profession assumes self-discipline beyond the
requirements of the law. It constitutes self imposed rules to the practices.
The fundamental purpose of such codes is to provide members with guidelines for
maintaining a professional attitude and conducting themselves in a manner that will
enhance the professional stature of their discipline. To understand the importance of a
code of ethics to public accountants and other professionals, one must understand the
nature of a profession as opposed to other vocations. Public accounting is a relative
new comer to the ranks of the professions, but it has achieved a widespread
recognition in recent decades.
2.2 Characterstic of a profession
What is the difference between a job and a profession? Obviously, most people
identify doctors, lawyers, and the clergy as professionals? How about engineers,
librarians, architects, and accountants? How about internal auditors?
One can infer that being recognized, as a profession must be very important if so
many people want to attain it. Let us examine what a profession means and why it is
important for auditing to be recognized as one.
A profession is an organized group of people who possess a unique skill, which
benefits society. Once society recognizes a profession a special relationship develops
in which the profession is allowed a degree of self-regulation in exchange for serving
the public good. This self-regulation takes the form of entrance requirements for those
wishing to enter the profession; ethics and standards to guide practitioners in
discharging their professional duties, and a quality control system to ensure that
services performed are of the highest quality.
Do auditors meet this definition? For instance, auditors are organized and represented
by the professional associations.
Any recognized profession has characteristics to be shared with other professions. The
most important of these characteristics are:
 Responsibility to serve the public: Acceptance of social responsibility
 Complex body of knowledge
 Standard of qualification for admission
 Need for public confidence/level of status recognition
 Standard conduct of behavior

2.1.2. Fundamental Ethical principles and guidelines for the Audit Profession
To achieve the objectives of the auditing profession, professional auditors have to
observe a number of perquisites or fundamental principles. Such fundamental
principles are includes

1. Professional competence and technical standard

Professional competency is concerned with the quality of the auditor.
An auditor must be professionally qualified to understand the criteria used, to know the
type, and amount of evidence to accumulate and to reach the proper conclusion, while,
technical standard is concerned with the ability to act / perform audit activities based
on technical standards. That means the ability to identify the misstatements, in
consistency of accounting principles, etc.

2. Integrity
Integrity is the core value of a code of ethics. Auditors have a duty to adhere to high
standard of behavior in the course of their work and in their relationships with the staff
of auditor entity members is expected to be straight forward, honesty and sincere in his
approach to professional work . In order to maintain public confidence, auditor should
exercise a high level of integrity. Integrity can be measured in terms of what is right
and just.
3. Independence.
A certified public accountant in public practice shall be independent in the performance
of professional service. Independence in auditing is taking an unbiased viewpoint in the
performance of audit tests, evaluation of the results, and the issuance of the audit
report.
Independence must certainly be regarded as the auditor’s most critical characteristics.
The reason is that users are willing to rely up on the reports as to the fairness of
financial statement because of their expectation of unbiased view point / attitude.

4. Confidentiality

As a profession auditors should respect the confidentiality of information acquired in

the course of his work and should not disclose any such information to a third party
without any specific authority or unless there is a legal or professional duty to disclose.
 In performing an audit, the auditors have access to the details of the client’s most
confidential information. If the auditors disclose this information, they may damage the
clients business. Therefore auditors are required to maintain a strict confidentiality
relationship with their clients.
 Information confidential to a client or employer acquired in the course of
professional work should not be disclosed except where consent has been obtained
from the client, employer or other proper source, where there is a public duty to
disclose or where there is legal or professional right/duty to disclose confidentiality
information may include:
- Impending business combination
- Proposed financing
- Contract being negotiated
- Prospective stock split or dividend changed.
 A member acquiring information in the course of professional work should neither
use nor appear to use that information for his personal advantage or for advantage of
third party. Where a member is in any doubt the matter, if appropriate, should initially
disclose fully with in his firm. If not appropriate, or if it fails to resolve the problem, he
should consider taking legal advice and/or consult the association.
5. Ethical behavior

Ethical behavior is necessary for a society to function in an orderly manner. It can be

argued that ethical behavior is the glue that holds a society together. It is important to
understand what causes people to act in a manner that we decide is unethical.
Most people define unethical behavior as conduct which differs from what they
believe. There are two primary reasons why people act unethically, one the person’s
ethical standards are different than those of society as a whole, and second the person
chooses to act selfishly.

2.3. Auditors professional Responsibility and liability

2.3.1. Auditors Professional Responsibility

Auditors have primary responsibility to serve the society. To this end, auditors shall be
able to have responsibility;
 Better communication skill: - auditors should communicate to users the result
obtained and the character and limitations of an audit.
 Detection of errors and irregularities: - the auditor is required to design the audit to
provide reasonable assurance of detecting errors and irregularities that tare material to
the financial statement.
 The term error refers to unintentional misstatement or omissions in financial
statements, such as mistakes in gathering and processing of data, incorrect accounting
estimates and mistakes in the application of accounting principles. Errors classified as:
omission errors; errors occurred when any transaction omitted to be recorded in a book
of original entry. Commission or clerical errors; errors when transactions are
incorrectly recorded. E.g. Wrong posting of an item on debit and credit. Errors of
principle; is when any transaction is recorded in violation of fundamental principles of
account. Compensating errors; is when one or more errors being counter balanced by
one or more errors. Duplication errors; it arises when an entry in a book of original
entry transaction made twice and has also been posted twice.
 The term irregularities refer to intentional misstatements or omissions in financial
statement.
 Detection of illegal client acts: - the auditor should design the audit to detect the
illegal acts. An illegal act refers to such act at the payment of bribes, the making of the
illegal political contribution and the violation of other specific always and
governmental regulations. When irregularities or illegal acts having material effect on
financial statements are not properly accounted, the auditor should express a qualified
opinion or an adverse opinion because the financial statements are not inconformity
with GAAPS.
 Reporting doubts as to an entity’s ability to continue as a going concern:- the auditor
has a responsibility to evaluate and disclose whether there is substantial Doubt about
the entity’s ability to continue as a going concern for a reasonable period of time.

2.3. 2. Auditors Liability

1. Auditors’ liability to third party

The third party is an individual who is not in privities with the parties to a contract
privities refer the existence of direct relationship between parties through a contract.
Third parties can be classified as primary beneficiary and other or general third
beneficiaries. A primary beneficiary is one about whom the auditor was informed prior
to conducting the audit. Those third parties their existence is not known are referred to
as general third beneficiary. The auditor is liable to general third parties for gross
negligence and fraud.

2. Auditors’ liability to the public

The auditor is responsible for every aspect of his or her public accounting work
including auditing, taxes, mgt advisory services, and accounting and bookkeeping
services.

3. Liability for professional negligence

Negligence means breach of duty to take care. Auditor is required to exercise
reasonable care and skill in the performance of the auditing task.

2.4. Auditors’ Rights and Duties

The auditor has various detailed duties to perform in order to achieve the overall duty
to report on the true and fair view. In order to fulfill these duties, various legal rights
are given to the auditor.
2.4.1.Duties of the auditor:
The duties of the auditor under national legislation generally fall under the following
headings:
 To report to the shareholders or directors on whether financial statements of
the company show a true and fair view or present fairly and have been
properly prepared in accordance with legislation
 To consider whether the information in the Management report is consistent
with the financial statement
 To give various details required by legislation in his report, if not given in the
financial statements themselves.
 To form an opinion as to whether:
o Proper accounting records have been kept by the company
o The profit for the year and balance sheet totals are fairly stated
o Such information and explanations as the auditor thinks necessary for
the performance of his duties have been received from the company’s
officers
 To report on any violation of law or the company’s constitution
2.4.2. Rights of the auditor
The rights given to the auditor under national legislation are designed to ensure that
he is able to fulfill his duties and responsibilities to the members. These rights are
fundamental to his independence. In countries with a well-developed auditing
profession, auditors generally have unrestricted rights of access to books and records
of a company, subject only perhaps, to considerations of national security. In those
countries where there is no tradition of reporting in true and fair terms, it often comes
as a surprise to directors and employees to find auditors asking for documents that
previously, only the tax auditors had a right to see. The list of rights set out below
reflects the position in countries in which the profession is mature.

Legal rights:
 The rights of access t the books, records, documents and accounts of the
company
 The right to require from the officers of the company such information and
explanations as he thinks necessary for the performance of his duties.
 The rights to:
o Receive all notices relating to any general meetings of the company
o Attend any general meetings, and
o Be heard at any general meeting on any part of the business, which
concerns his as auditor.