Learning Outcomes
After reading this article, you will be able to explain the significance of professional ethics in audit, outline the core ACCA fundamental principles relevant to integrity, objectivity, and independence, and identify common threats and safeguards. You will also understand how to recognise and address situations that could undermine auditor ethics or independence.
ACCA Foundations in Audit (FAU) Syllabus
For ACCA Foundations in Audit (FAU), you are required to understand the ethical framework and code of conduct which applies to auditors. In particular, this article helps you meet the following syllabus requirements:
- The role and importance of professional ethics in audit practice
- The ACCA’s Code of Ethics and Conduct, especially the principles of integrity, objectivity, and independence
- Recognition and application of requirements for integrity and objectivity in audit work
- Identification of potential threats to independence and methods to address them
- Implementation of safeguards to maintain auditor independence
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
-
Which of the following is NOT one of the ACCA’s fundamental ethical principles?
- Integrity
- Professional behaviour
- Advocacy
- Objectivity
-
Which of these scenarios most clearly creates a self-interest threat to auditor independence?
- Auditing a relative's company
- Accepting an insignificant gift from a client
- The audit fee represents 18% of total firm revenue
- Performing audit and bookkeeping services for the same client
-
What is the difference between independence of mind and independence in appearance?
-
Explain how accepting a significant gift from a client could threaten auditor objectivity.
Introduction
External auditors must act in a manner that ensures their work can be trusted by shareholders, clients, and the wider public. This is only possible if the auditor conducts work in line with high professional and ethical standards. The ACCA Code of Ethics and Conduct provides a framework of fundamental principles, with particular emphasis on integrity, objectivity, and independence. These core elements are not only mandatory for ACCA members but are essential for maintaining the credibility of audit opinions.
Key Term: professional ethics
The moral principles and standards of behaviour governing an individual or profession.
ACCA CODE OF ETHICS: THE FUNDAMENTAL PRINCIPLES
The ACCA Code of Ethics and Conduct is based on five fundamental principles that guide professional accountants and auditors:
- Integrity
- Objectivity
- Professional competence and due care
- Confidentiality
- Professional behaviour
This article focuses on the first two, and especially their role in preserving independence during audit work.
Integrity
Auditors are required to be straightforward and honest in professional and business relationships. This includes not only avoiding false or misleading statements but also acting with fairness and truthfulness.
Key Term: integrity
Being honest and straightforward, avoiding false or misleading statements or conduct in all professional and business relationships.
Objectivity
Objectivity means that auditors must make judgments free from bias, conflicts of interest, or undue influence from others. An auditor should never allow personal relationships or external pressure to override their professional judgment.
Key Term: objectivity
The obligation to not allow bias, conflict of interest, or undue influence of others to override professional or business judgements.Key Term: independence
Freedom from conditions or influences that compromise, or may be perceived to compromise, the auditor’s ability to act with integrity and objectivity.
REQUIREMENTS FOR INTEGRITY, OBJECTIVITY AND INDEPENDENCE
Auditors must not only act independently but also be seen to be independent. Maintaining both independence of mind and appearance is critical, as even the perception of lack of independence can damage public trust.
Types of Auditor Independence
- Independence of mind: The auditor's ability to express a conclusion without being influenced by personal interests or external pressures.
- Independence in appearance: Ensuring that a reasonable, informed third party would perceive the auditor as independent.
Maintaining this independence is a legal, professional, and ethical requirement.
THREATS TO INTEGRITY, OBJECTIVITY AND INDEPENDENCE
The ACCA Code identifies several categories of ethical threats, with the main ones affecting integrity, objectivity, and independence set out below:
- Self-interest threats: Auditor’s judgment is improperly influenced by financial or personal interests, such as depending on a single client for a large proportion of fees.
- Self-review threats: Occur when auditors must review their own previous work, such as providing non-assurance services to an audit client.
- Familiarity threats: Arise from long or close personal relationships, for example, auditing the same client for many years or auditing relatives.
- Advocacy threats: Involve promoting a client’s position, such as representing them in disputes, which may bias the auditor’s objectivity.
- Intimidation threats: When auditors are deterred from acting objectively due to actual or perceived pressure from management or clients.
If any of these threats are identified, they must be either eliminated or reduced to an acceptable level through safeguards.
Worked Example 1.1
Scenario:
An audit manager has provided bookkeeping services to a client and is now asked to also lead the client’s financial audit engagement.
Answer:
This situation creates a self-review threat because the audit manager would be required to review their own work during the audit. The firm should avoid assigning the same person to both engagements or implement safeguards, such as using separate teams.
Worked Example 1.2
Scenario:
An auditor is offered expensive theatre tickets by the finance director of a client during the audit.
Answer:
Accepting significant gifts from a client creates a self-interest threat and could compromise objectivity. The auditor must decline gifts of more than trivial value and record all offers, even if refused, as part of firm policy.
SAFEGUARDS TO MAINTAIN INDEPENDENCE
Where a threat is identified, the auditor must apply procedures to mitigate it. Safeguards may include:
- Removing the source of the threat (e.g., declining gifts or withdrawing from an engagement)
- Assigning different staff to assurance and non-assurance services
- Rotating key audit partners
- Subjecting work to an independent external review
- Disclosing the matter to those charged with governance
In some cases, if threats cannot be reduced to an acceptable level, the auditor must refuse or discontinue the engagement.
Exam Warning
A common mistake is to assume any threat can be managed. If appropriate safeguards cannot reduce a threat to a clearly acceptable level, ACCA’s Code requires that the audit appointment is declined or resigned, regardless of potential fee loss.
Summary
Integrity, objectivity, and independence are non-negotiable for external auditors. The ACCA Code of Ethics requires auditors to be—and be seen to be—independent, unbiased, and honest. Recognising typical threats and applying proper safeguards ensures compliance with both law and professional standards, and protects the credibility of the audit process.
Key Point Checklist
This article has covered the following key knowledge points:
- The importance of professional ethics and ACCA’s Code of Ethics for auditors
- The role and requirements of integrity, objectivity, and independence in audit practice
- The distinction between independence of mind and independence in appearance
- Main types of threats to independence (self-interest, self-review, familiarity, advocacy, intimidation)
- Safeguards and required actions where threats to ethics or independence arise
Key Terms and Concepts
- professional ethics
- integrity
- objectivity
- independence