Auditor Independence And The APES 110 Code Of Ethics: Threats And Safeguards

The Five Fundamental Principles of APES 110 Code of Ethics

The responsibility to act is public interest is what differentiate the auditing profession from other profession. APES 110 Code of Ethics for Professional Accountant has five fundamental principles:

1. Integrity;
2. Objectivity;
3. Professional competence and due care;
4. Confidentiality; and
5. Professional Behavious

Independency requires Members to act with integrity and to exercise objectivity and professional doubtfulness. Members are obliged to be honest in professional and business relationship and not to allow their opinion or judgment get biased, avoid conflict of interest or subdue under undue influence of others. 

Independency comprises both:

• Independence of mind; and
• Independence in appearance 

Independency threats may be created by a broad range of relationship and circumstances. When a relationship or any circumstances create a threat, such a threat could compromise, auditor compliance with the fundamental principles as discussed above. The circumstances may create more than one threat, and a threat may affect compliance with more than one fundamental principle as mentioned above. Threats can be like: 

1. Self Interest Threat – The threat that the financial or other interest will inappropriately influence the auditor’s judgment or behavior.
2. Self Review Threat – The threat that the Member will not evaluate the previous judgment made or services performed by the member or by another individual within the Members firm on which the auditor will rely when forming a judgment as part of providing current service.
3. Advocacy Threat – The threat that the Member will promote a clients position to the point that the members objectivity is compromised.
4. Familiarity Threat- The threat due to long or close relationship with client, member will be too sympathetic to their interest to accept their work.
5. Intimidation Threat-The threat that the Member will be deterred from acting because of actual pressure, including attempts to exercise undue influence over the Member.

The Auditor should know the effects of threats on auditor independence and should abide with the rules of Professional behavior and should exercise the suitable safeguard procedure against these procedures. 

Solution to Situation 1:

Situation:

Enid Blyton has been working as an auditor for the Anthony Don Chartered Accounting firm for the past four years and has just started an audit on the Green Thumbs environmental company, a small newly listed public company which has just listed as a public company one month ago. The Green Thumbs environmental company has just started using a new contractor to dispose of its toxic waste .You know that this new contractor has won tenders in the past and there have been several unfavorable articles about this contractor in the local press.

Your Audit Manager, Peter Don, has stated that it is your responsibility just to provide an opinion
on the financial statements with the emphasis being on providing an opinion on whether the financial statements are true and fair and whether there are any material misstatements.

Solution:

The threat member posses in above cases are as follows:

1. Advocacy Threat – The threat that the Member will promote a clients position to the point that the members objectivity is compromised. In this case Peter Don has knowingly taken a stand to ignore the Enid information about the contractor unfavorable articles and supported client position to the extent the objectivity is compromised and thus posses an advocacy threat.
2. Intimidation Threat – The threat that the Member will be deterred from acting because of actual pressure, including attempts to exercise undue influence over the Member. Peter don has also asked Enid Blyton to just restrict himself to providing an opinion on the finiancial statement and exercise undue influence to ignore the clients stand on the Contractor.

Solution to Situation 2:

Situation:

Jean Douglas has just started to do the audit on the latest financial statements and has just made the following notes from your opening interview with John Dooley, CEO of Dooley’s. John has apologized for not making the final payment of 30% of the prior year’s audit fee but has explained that he will ensure the cheque is written once he is happy with the progress on the current audit.  At this stage John Dooley has advised that the firm will be able to start deliberations about the selection of Auditor for the following year. The Dooley’s audit comprises forty percent of the annual audit fees for the firm.
John has advised that they will be providing a free trip to Europe for an Auditor from the Audit firm and his partner once the audit is successfully completed.

Jean is concerned with several aspects of the current audit as Dooley’s do not appear to be following the accounting standards in their valuation of inventory as they are not taking into account the reductions in fair value of inventory and the impact on the financial statements is material.  

Solution:

The threat member posses in above cases are as follows:

1. Self Interest Threat – The threat that the financial or other interest will inappropriately influence the auditor’s judgment or behavior. Firstly, the firm has undue dependence on total fee from Dooley’s since it comprises 40% of the total fees. Secondly, the firm has a contingent consideration of John advising that he will be providing a free trip to Europe for an Auditor from the Audit firm and his partner once the audit is successfully completed is itself a threat to the independence. Thirdly, 30% of the fees is due from last year which has been promised basis the progress made in audit is itself depleting the independence of the member since before start of audit, Jean should have ensured recovery of old dues.
2. Familiarity Threat- The threat due to long or close relationship with client, member will be too sympathetic to their interest to accept their work. Since John has advised that they will be providing a free trip to Europe for an Auditor from the Audit firm and his partner once the audit is successfully completed imposes a familiarity threat since it is available to only selected group of team imparting audit services and may have a threat on independence concern specially when Jean was concerned with several aspect of the current audit.