CHAPTER 2: PROFESSIONAL ETHICS AND LEGAL

RESPONSIBILITIES OF AUDITORS
 Profession is a specialized body of knowledge that provides
intellectual services to the best interest of the public and
which has gained public confidence and trust.
 The term ethics refers to the system of moral principles and rules
of conduct applied to audit.
 The discipline is dealing with what is good and bad with moral
and obligation.
 Ethics as moral principles guiding a person's behavior or
industry practices.
 Professional ethics provides guidance to practitioners for maintaining
professional attitude and it encourages high level of performance.
Auditing Principles
Auditing principles are generally, guidelines that help direct or chart
goals and aims.
The AICPA code of professional conduct considers the following to be
followed by auditors (accountants) in the conduct of professional
relations with others.
 Integrity: - An accountant should be open, honest and truthful in his
approach to his professional work.
 Responsibilities to colleagues: - The auditor should promote
cooperation and good relations with other members of the profession.
 Objectivity: - An accountant should be fair and should not allow
bias to take priority over his objectivity.
• When reporting on financial statements, which come his evaluation,
he should sustain an neutral attitude.
 Independence: - When in public practice, an accountant should
both be and appear to be free of any interest
 Confidentiality: - A professional accountant 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
specific authority or unless there is a legal or professional duty to
disclose.
 Professional competence: - An accountant has a duty to maintain
his level of skill throughout his professional career.
• He should only undertake works, which he or his firm can expect to
complete with professional competence.
 Ethical behavior: - An accountant should conduct himself with a
good character of the profession and refrain from any conduct,
which might bring disgrace to the profession.
 Contingent fess: - The AICPA code of professional conduct
excludes a CPA firm from rendering any professional services on a
contingent fee basis.
 Technical standards: - An accountant should carry out his
professional work in accordance with the technical and professional
standards relevant to that work.
 Competency: Continual professional development ensure auditors
remain current and knowledgeable.
2.1. Professional ethics and rules of professional conduct
The American Institute of Certified Accountant’s code of ethics
consists of two parts: the principles and the rules.
 The principles are basic frames of references for the rules.
 The rules govern the performances of professional services by
members and are enforceable applications of the principles.
Principles: There Are Six Principles of Professional Ethics
1. Responsibilities: In carrying out their services as professional,
members should exercise sensitive professional and moral
judgments in all their activities.
 Auditors play significant role in the society by rendering different
types of services that are essential to make various decisions, which
involves usage of scarce resources.
 Therefore, all members have responsibilities to those who use their
professional services.
 Besides, auditor has responsibility to corporate which each other to:
Improve their profession
 Maintain the public confidence and
 Carryout the profession’s self-governance responsibilities
 Application of this principle increases the quality of professional
services rendered by auditors.
 The public interest: Members should accept the obligation to act in
a way that will serve the public trust and demonstrate
commitment to professionalism.
 The public interest of an auditor is the collective well being of the
community of people and institutions that use its services.
 These include clients, creditors, governments, employers, investors,
and the public at large, who rely on the objectivity and integrity of
auditors. This reliance imposes high reliance of responsibility on the
auditors.
 In discharging their responsibilities, members of the profession
may encounter conflicting pressures between information
providers and users.
 This conflict would be resolved when auditors carryout their
responsibilities with integrity.
 Auditors should show their commitment to honor the public
trusts to those who rely on their services
 they expected to provide quality services within integrity,
objectivity, and due professional care.
 Integrity: To maintain and broaden public confidence members
should perform all professional services with the highest form of
integrity.
 In order to maintain the public trust and confidence members
should act in an honest manner.
 Integrity is measured by what is right and just in the
circumstances.
 Integrity means in this case, acting according to the code of
professional conduct (ethical standards).
Due Care: Due professional care applies to the exercise of professional
judgment in the conduct of the work performed.
Auditors shall:
 Follow high standards of honesty, fairness, integrity and ethical
conduct;
 Respect and act with dedication to the program goals and vision;
Conduct business in an honest and fair manner, without actual or
apparent conflict of interest;
 Not be associated with any report, statement or representation known
to be false or misleading;
 Respect the integrity of other auditors, recognizing their different
experiences and areas of expertise;
 Meet the terms with Workers Compensation Act and the
Occupational Health and Safety Regulations, as well as all other
applicable laws and regulations;
 Not represent themselves as employees or contractors for the
clients at any time.
 Objectivity and independence: A member should maintain
objectivity and be free of conflicts of interest in discharging
professional responsibility.
 A member in public practice should be independent in fact and
appearance when providing auditing and other attestation services..
 Auditors must show the highest level of professional objectivity in
gathering, evaluating and communicating information about the
audit activities.
Auditors shall:
 Conduct the audit as instructed by the Audit Protocol without bias,
prejudice, variance or compromise;
 Remain free of any influence, interest or relationship that impairs
professional judgment, independence or objectivity while
providing auditing services.
 Auditors must avoid conflicts of interest at all times.
 Auditors must not conduct two consecutive audits for a company.
 Protect their independence and not accept any gifts of gratuities
which could influence, compromise or threaten the ability of the
auditor to act and be seen to be acting independently.
 Maintain both the actual and perceived political neutrality in
order to discharge their duties and responsibilities in an impartial
way.
The independence rule applies to:
 All parents or shareholders of the audit firm.
 All managerial employees assigned to an office that significantly
participates in the engagement.
 All professional staff personally participating in the engagement.
 Period: an auditor is required to be independent of the client during
the following time period:-
• During the period of examination(auditing) process
• During the period covered by the financial statements.
• At the time of expressing the auditor’s opinion(the date of the
report).
Legal Responsibility and Liability Of Auditors
 The auditor is responsible for his report.
 The auditor then has certain duties to fulfill to the users of the
financial statements that he reports on.
2.2.1 Liability
The CPA can be sued under the following legal concepts
Judicious man concept: - The auditor is responsible for exercising
due professional care, and he is subject to lawsuit if he fails to do so.
A. Auditors’ liability to their clients
Thus, CPAS are liable to their clients for any losses proximately
caused by the CPA’S failure to exercise due professional care.
 That is to recover its losses, an injured client need only prove that
the auditors were guilty of negligence and that the auditors’
negligence was the proximate cause of the client’s losses.
B. Auditors’ liability to third parties
 Bankers and other creditors or investors who utilize financial
statements covered by an audit report can recover damages from
the auditors if it can be shown that the auditors were guilty of fraud
or negligence in the performance of their professional duties.
 Moreover, the auditors can be held liable for negligence to a
limited class of third parties if the auditors have actual
knowledge of such third parties or if there exists a special
Auditors’ responsibility for the detection of fraud and error
 The detection and prevention of error and fraud is the
management’s responsibility by designing and implementing
appropriate internal control systems.
 The auditor is responsible to design audit procedures to reduce
the risk of not detecting a material error or fraud, to an
appropriate level to provide reasonable assurance.
 Accordingly, the auditor must exercise due care in planning,
performing, and evaluating the results of audit procedures.