Professional Ethics, Governance and Compliance
This domain tests the IESBA conceptual framework, auditor independence, and Indian governance rules under the Companies Act 2013 and SEBI LODR.
Core rules
- Five fundamental principles: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.
- Threats are self-interest, self-review, advocacy, familiarity and intimidation. Safeguards must eliminate or reduce threats to an acceptable level; otherwise decline or withdraw.
- Independence: an audit firm may not provide management functions, accounting and bookkeeping, internal audit for listed clients, or actuarial services to an audit client.
- Companies Act 2013: independent directors require data bank registration; the audit committee must have two-thirds independent members and an independent chair; related party transactions need audit committee approval and arm's-length pricing.
- NOCLAR requires the accountant to address non-compliance, escalate to those charged with governance and, where required, report to the regulator.
Worked example
An audit partner has audited a listed client for eight years and is offered the CFO role. Accepting creates self-interest and familiarity threats. The partner must decline the CFO role while on the engagement; the firm must rotate the engagement partner under Indian rotation norms and apply safeguards such as independent quality review. Reasoning: a threat that cannot be reduced to an acceptable level requires withdrawal from the engagement or the relationship.
Traps
Treating safeguards as a substitute for refusing a prohibited service; confusing management advisory with management function; ignoring related party approvals because the transaction is at market price; assuming CSR is voluntary, although section 135 applies at prescribed profit thresholds.