Professional ethics, independence and the auditor's responsibilities
Ethical principles
Auditors must comply with the IESBA Code: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Independence is required for audit engagements (both in mind and appearance).
Independence
Independence of mind and independence in appearance. Threats include self-interest, self-review, advocacy, familiarity, and intimidation. Safeguards must be applied or threats eliminated. Examples: financial interests, close family relationships, long association, provision of non-audit services.
Auditor's responsibilities
Auditors are responsible for forming an opinion, maintaining professional scepticism, and complying with ISAs. They are not responsible for preparing financial statements (management) or for preventing fraud (those charged with governance). However, they must consider laws and regulations and report to those charged with governance.
Traps in questions
- Confusing independence with objectivity.
- Assuming all non-audit services impair independence (only some do).
- Forgetting that safeguards can reduce threats to acceptable level.
- Overlooking that confidentiality continues after engagement ends.
- Mixing up responsibilities of auditor vs management.
Worked example / rule of thumb
If an auditor has a direct financial interest in a client, independence is impaired and must be disposed of before accepting engagement. Rule: any direct financial interest = no safeguards, must be eliminated. For indirect interests, materiality matters.
Key points
- Five fundamental principles: integrity, objectivity, competence, confidentiality, behaviour.
- Independence required for audits: mind and appearance.
- Threats: self-interest, self-review, advocacy, familiarity, intimidation.
- Safeguards can reduce threats to acceptable level.
- Management prepares financial statements; auditors opine on them.