Professional Ethics, Independence and Legal Liability
Ethics questions test the APES 110 Code of Ethics for Professional Accountants (based on the IESBA Code) and its New Zealand equivalent. Know the five fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Apply the conceptual framework: identify threats, evaluate their significance, and address them through safeguards or elimination of the circumstance. Memorise the threat categories: self-interest, self-review, advocacy, familiarity, and intimidation.
Independence has two dimensions: independence of mind (state of mind) and independence in appearance (avoiding facts a reasonable observer would perceive as compromising). Know the prohibitions: financial interests in the client, loans to or from the client, close family in a key audit position, and long association rotation requirements for engagement partners. Understand fee dependence, contingent fees, and the danger of non-assurance services (e.g. preparing financial statements the firm audits, internal audit outsourcing that creates self-review).
Legal liability: auditors owe a duty of care to the company and, in limited circumstances, to third parties (negligence requires duty, breach, causation, loss). Understand contributory negligence, proportionate liability regimes, and the role of engagement letters and disclaimers.
Traps: assuming a safeguard always exists; confusing advocacy (promoting client shares) with self-interest; overlooking that familiarity threats arise from long tenure; and assuming an engagement letter eliminates liability to third parties.
Rule of thumb: if a reasonable, informed third party would question the auditor's objectivity, independence in appearance is breached regardless of actual state of mind.