ACC210 Auditing 1 Course Guide PDF

NATIONAL OPEN UNIVERSITY OF NIGERIA FACULTY OF MANAGEMENT SCIENCES AUDITING 1 ACC210 Course Guide Course Developer/Writers: Nwaobia, AppolosNwabuisi, Ph.D, FCA, ACTI....

NATIONAL OPEN UNIVERSITY OF NIGERIA FACULTY OF MANAGEMENT SCIENCES AUDITING 1 ACC210 Course Guide Course Developer/Writers: Nwaobia, AppolosNwabuisi, Ph.D, FCA, ACTI. Umukoro, Olaolu, M.Sc. Department of Accounting Babcock University Course Editor: Dr Abuh Adah Department of Accounting Kogi State University Head of Department: Dr (Mrs) Ofe Inua Department of Financial Studies National Open University of Nigeria Programme Coordinator: Anthony I. Ehiagwina Department of Financial Studies National Open University of Nigeria 1 CONTENTS Introduction Course Aim Course Objectives Study Units Assignments Tutor Marked Assignment Final Examination and Grading Summary INTRODUCTION 2 You are holding in your hand the course guide for ACC210 (AUDITING I). The purpose of the course guide is to relate to you the basic structure of the course material you are expected to study as a student studying ACC210 in National Open University of Nigeria. Like the name ‘course guide’ implies, it is to guide you on what to expect from the course material at the end of studying the course material. COURSE CONTENT The course content consists basically of the required course outline students are expected to cover at this level. COURSE AIM The aim of the course is to equip you with the necessary information required in understanding auditing practice at this level. COURSE OBJECTIVES At the end of studying this course, among other objectives, you should be able to: 1. Understand the concept of auditing 2. List and explain the advantages and importance of auditing 3. Explain the types of audit 4. Give reasons why audit is regulated and explain the sources of regulation. 5. Discuss the Provisions of the Companies and Allied matters Act, 2004 regarding the appointment/re-appointment, qualification, duties and powers, remuneration, removal and report of the independent auditor. 6. Explain the elements of an assurance engagements 7. State and explain the objectives of an assurance engagement 8. Explain the concept “audit programme” and its usefulness in the audit process. 9. Discuss the different types of audit programmes and state the advantages and disadvantages. 10. Discuss the types of audit testing and their importance in the audit process. COURSE MATERIAL 3 The course material package is composed of: The Course Guide The study units Self-Assessment Exercises Tutor-Marked Assignment References/Further Reading THE STUDY UNITS The study units are as listed below: Unit 1: Introduction to Auditing Unit 2: Regulation of Audit and Assurance Services/Assurance Engagements Unit 3: Audit Planning and Strategy Unit 4: Professional Ethics Unit5: Corporate Governance Unit 6: Internal Control Unit 7: Audit Programmes and Audit Testing Unit 8 Internal Audit and Outsourcing Unit 9: Verification of Assets and Liabilities Unit 10: Audit Report 4 ASSIGNMENTS Each unit of the course has self-assessment exercises. You will be expected to attempt them as this will enable you understand the content of the unit. TUTOR-MARKED ASSIGNMENT The Tutor Marked Assignments (TMAs) at the end of each unit are designed to test your understanding and application of the concepts learned. Besides, you would be assessed electronically, as a continuous assessment during the period of studying the course. This would make up 30 percent of the total score for the course. The other 70% would be determined by examination of the course at the end of the course. SUMMARY It is very important that you commit adequate effort to the study of the course material for maximum benefit. Good luck. 5  AUDITING 1 ACC210 Main Content Course Developer/Writers: Nwaobia, AppolosNwabuisi, Ph.D, FCA, ACTI. Umukoro, Olaolu, M.Sc. Department of Accounting Babcock University Course Editor: Dr Abuh Adah Department of Accounting Kogi State University Head of Department: Dr (Mrs) Ofe Inua Department of Financial Studies National Open University of Nigeria Programme Coordinator: Anthony I. Ehiagwina Department of Financial Studies National Open University of Nigeria 6 TABLE OF CONTENTS UNIT 1: INTRODUCTION TO AUDITING UNIT 2: Regulation of Audit and Assurance Services/Assurance Engagements UNIT 3: AUDIT PLANNING AND STRATEGY UNIT 4: PROFESSIONAL ETHICS UNIT5: CORPORATE GOVERNANCE UNIT 6: INTERNAL CONTROL UNIT 7: AUDIT PROGRAMMES AND AUDIT TESTING UNIT 8 INTERNAL AUDIT AND OUTSOURCING UNIT 9: VERIFICATION OF ASSETS AND LIABILITIES UNIT 10: AUDIT REPORT 7 UNIT 1: INTRODUCTION TO AUDITING Content 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 Evolution of Auditing 3.2 Auditing Defined 3.3 Objectives of Audit 3.4 Advantages of an audit 3.5 Limitations/Disadvantages of Auditing 3.6 Types/Classification of Audits 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 References/further Reading 1.0 INTRODUCTION This unit introduces us to auditing, describes the importance of an audit, types of an audit, and the advantages of having an audit of financial statements. 2.0 OBJECTIVE By the end of this unit you should be able to: 1. Understand the concept of auditing 2. List and explain the advantages and importance of auditing 3. Explain the types of audit 8 3.0 Main Content 3.1 Evolution of Auditing Evidence of auditing existed during Babylonian times, around 3000 BC. Auditing activities was also found in ancient China, Greece and Rome. In Rome, auditors heard taxpayers such as farmers give public accounts of the results of their businesses and the taxes due. Thus, the word ‘audit’came from the latin word ‘audire’, meaning to hear. The Auditor was a hearer orlistener. In China and Egypt, auditors were supervisors of the accounts of Chinese Emperor andthe Egyptian Pharoah. The government accounting system of the Zhao dynasty in China included anelaborate budgetary process and audits of all government departments. The Egyptian dynasty (from about 3000 BC) made extensive use of scribes (accountants) who were held in veryhigh esteem. Over the centuries, the role of auditors as hearers and verifiers of reports evolved to include that of verifying written records. The discovery and documentation of double entry bookkeeping in Italy by a Catholic priest, Luca Pacioli in his Summa de Arithmetica dated 20 November 1494 gave more impetus to auditing as he recommended the verification of accounting records by auditors. The emergence of modern corporations following the industrial revolution saw the emergence of modern auditing. Britain passed the Joint Stock Companies Act in 1844 which among other provisions, required company directors to report to shareholders through audited financial statements. The Society of Accountants was founded in Edinburgh in 1853. In 1880 several other societies of Accountants that were formed within this period merged into the Institute of Chartered Accountants in England and Wales. The 1862 English Companies Act, contained provisions that required the use of trained and specialized professionals to conduct an independent review of company financial statements and the preparation of the corrected accounts and financial statements. As many Joint stock Companies were formed and ownership became increasingly divorced from management, there arose the greater need for an independent party – the auditor – to lend credibility to the information provided by the agent –managers. This is probably the reason why the English Companies Act, 1900, legally made it compulsory for every company to appoint independent auditors as we know them today. Since then, auditing has evolved from its primary objective of preventing and detecting fraud to its current state of attesting to the fair representation of audited financial statements through a very highly enhanced auditing procedures and techniques. 3.2 Auditing Defined Auditing is defined by the American Accounting Association (AAA) as a systematic process of 9 objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the result to intended users. This definition is widely accepted as it describes what auditing entails as well as what the auditor does. Auditing is a planned, logical and scientific activity (systematic process); it involves the auditor gathering and evaluating evidence on the representations made by management (assertions) with regard to elements of financial statements (economic actions and events). The auditor compares the evidences he has gathered and evaluated and the accepted accounting practices to know if they are in agreement to enable him express an opinion. The auditor then communicates the outcome of his examination, evidence gathering and evaluation and comparison to users through his audit report. R.K Moutz, defined auditing as an examination of the accounting books and the relative documentary evidence so that an auditor may be able to find out the accuracy of figures and may be able to make report on the balance sheet and other financial statements which have been prepared from there. We can therefore extract the facts listed below in connection to audit:  Checking of books of accounts and documents of evident on the basis of generally accepted principles and procedures.  Checking the books of accounts whether the results presented by the profit or loss account and financial position presented by balance sheet are true and fair or not.  Checking works performed by the staff whether they have been performed within lines of authority or not.  Preparation of report based on the fact found during the course of audit.  Checking the books of accounts to determine whether the financial statements and profit or loss statement are prepared in conformity with relevant accounting standards such as International Financial Reporting Standards (IFRSs). 3.3 Objectives of Audit This is divided into primary and secondary objectives. 10 A. Primary Objective: The primary objective of an audit of financial statements is to enable the auditor express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. Thus, the primary objective of an audit is the expression of professional opinion as to whether or not, the financial statements examined by the auditor, for a reporting period, give a true and fair view (that is, fairly presented in all material respects). This primary objective is achieved through, among other activities:  Proving true and fairness of operating results presented by statement of profit or loss and statement of financial position of the organization.  Examining the system of internal control  Checking arithmetical accuracy of books of accounts, verifying posting, costing, balancing etc.  Verifying the authenticity and validity of transactions.  Checking the proper distinction of capital and revenue nature expenses (proper classification of transactions and events).  Confirming the existence, ownership and value of assets and ensuring each treatment represents what the relevant accounting standard has stipulated.  Verifying whether all statutory requirements are being adhered to as well as compliance with all regulatory frameworks. B. Secondary Objective Other objectives achievedin the course of the audit process include: i. Detection and Prevention of frauds ii. Detection and prevention of errors iii. Evaluation of the effectiveness and appropriateness of internal control system over financial reporting and submitting a report to management for needed improvements iv. Evaluating and reporting on the likelihood of the business continuing as a going concern 11  and v. Providing valuable advice to the entity audited on areas such as accounting systems, taxation matters, risk management practices and other incidental matters. Self- assessment questions 1. What is an audit? 2. State the objectives of an audit. 3.4 Advantages of an audit 1. Deterrent to Inefficiency and Fraud When employees know that an independent audit is to be made, they take care to make fewer errors in performing the accounting function and are less likely to misappropriate company assets 2. Audit Helps To Maintain Account Regularly An auditor raises questions if accounts are not maintained properly. So, audit gives moral pressure on maintaining accounts regularly. 3. Audit Helps To Get Compensation If there is any loss in the property of business, insurance company provides compensation on the basis of audited statement of valuation made my the auditor. So, it helps to get compensation. 4. Audit Helps To Obtain Loan Financial institutionsmost times, provide loan to organisations on the basis of audited statements. A lending banker may require for assessment 3 to 5 years’ audited financial statements of an organization as a basis for granting loans to the entity. 5. Audit Facilitates the Sale of Business 12 Audited financial statements provide basis for the valuation of businesses for the purpose of mergers and acquisitions. It helps to determine the price of businesses. 6. Audit Helps To Assess Tax Tax authorities assess taxes on the basis of profit reported on audited financial statements. 7. Audit Helps To Increase Goodwill Auditing provides legitimacy of an organization’sactivities and thus builds faith of the public on the business. Thus, auditing helps to increase goodwill of an organization. 8. Access to Capital Market Public limited companies must satisfy audit requirements under the Securities and Exchange Commission in order to register securities and have such traded in the securities markets. Without audits, companies would be denied access to these capital markets. 9. Lower Cost of Capital Because of the reduced information risk associated with audited financial statements, creditors may offer lower interest rates, and investors may be willing to accept a lower rate of return on their investment. 10. Control and Operational Improvements The independent auditor can often make suggestions to improve controls and achieve greater operating efficiencies within the client’s organization. 3.5 Limitations/Disadvantages of Auditing The primary objective of an audit is to express a professional opinion on the ‘Truth and Fairness’ of financial statements examined by the auditor. Giving this opinion involves judgments and materiality levels set by the auditor while designing his procedures and tests. 13 Based on the above, the following limitations of auditing could be noted: 1. Testing is used – the auditors do not oversee the process of building the financial statements from start to finish. Not all items in the financial statements are tested. Tests are based on samples with associated sampling risks. 2. The accounting systems on which assurance providers may place a degree of reliance also have inherent limitations.Some of the line items/figures are estimates and judgements made by the management. 3. Most audit evidence is persuasive rather than conclusive. 4. The client’s staff members may collude in fraud that can then be deliberately hidden from the auditor or misrepresent matters to them for the same purpose. Thus, the audited financial statements made be materially misstated. 5. Assurance provision can be subjective and professional judgments have to be made, for example, about what aspects of the subject matter are the most important, how much evidence to obtain etc. 6. Assurance providers rely on the responsible party and its staff to provide correct information, which in some cases may be impossible to verify by other means. 7. Some items in the subject matter may be estimates and are therefore uncertain. It is impossible to conclude absolutely that judgmental estimates are correct. 8. The nature of the assurance report might itself be limiting, as every judgment and conclusion the assurance provider has drawn cannot be included in it. 9. It does not take into account the productivity and the skills of the employees of the business. 10. For smaller companies, hiring a firm to carry out an audit can be costly. 11. Investment may be discouraged by a bad auditing. 12. Some non-routine transactions introduce significant risks; 14 13. Human errors in recording and testing exist; 14. There are possibilities of control overrides by those who exercise oversight function. 18. Audit evidence sometimes indicates what is probable and not certain in that they are based on intention, estimates and judgments. 19. The audit report has inherent limitations imposed by the standard format and layman’s lack of understanding of audit jargons. 3.6 TYPES/CLASSIFICATION OF AUDITS Audits may be classified according to the nature of work done by the auditor or according to approach to the audit. Classification according to nature of work done by Auditor The following types of audits exist under this category: Statutory audits – these are audits required by law. The companies Act in Nigeria makes it mandatory that companies incorporated under that Act must be audited every year. This statute also specifies the scope of the audit which cannot be restricted by the owners of the business or by their managers. Private audits – a private audit is not required by law; it is optional. The person who engaged the auditor will usually agree the scope of work to be done with the auditor. Examples of private audits include the audit of sole traders and partnerships. Internal audit – these are audits carried out by employees of an organization (called internal auditors) to ensure adherence and compliance to policies and controls established by the management. It is an independent appraisal function established by the management for the purpose of evaluating the organisation’s operations and improving the effectiveness of management controls and governance processes. The internal audit unit is increasingly involved in corporate risk management. 15 External audit – this is an audit carried out by an independent party (non-employee of the organization). It examines the operations and financial statements prepared by management and reports to owners of the organization. Examples are the statutory and private audits. Classification according to Approach Management Audit – an audit that enquires into the effectiveness and efficiency of management in executing the organization’s policies, programs and plans. The audit examines the organizational structure, or any component of it, its plans and objectives, its means of operation and how management deploys human resources and physical facilities. Management is usually carried out by the internal audit unit or a management consultant. The benefits of a management audit include:  Providing the board with access to constructive advice and report of their performance,  Providing meaningful feedback for managers at all levels; and  Discouraging unhealthy and fraudulent management practices and procedures Transaction audit (Vouching approach) – this audit approach tries to authenticate the validity and accuracy/correctness of accounting records and the source documents used in preparing the financial statements. It is a direct method of generating audit evidence to support the transactions and events that occurred in the organization within the reporting period. Balance Sheet (Statement of Financial Position) audit – this audit approach examines the balance sheet of the organization with the objective of verifying the assets, liabilities and equity (capital) by tracing the items back to the underlying records and source documents. The main objective of a balance sheet audit is to confirm that the financial statements presented agree with the underlying records and other books of account. The merits of Balance sheet audits lie on the fact that they help in confirming the existence, ownership and proper valuation and presentation of assets, liabilities and components of equity. Balance sheet audits also highlight the control measures over assets and liabilities. Continuous audit – This involves carrying out continuous reviews, tests and procedures on the 16 operations of an entity. Internal auditors mostly adopt this approach since they are always in the work environment. Where volume of transactions is big and there is a tight reporting deadline to meet, the external auditor also adopts this approach. Continuous audit, for the external auditor, ensures a timely conclusion of the audit and helps in effective deployment of audit staff, especially during slack periods. The disadvantages of this audit approach include:  Increasing the chances of over-auditing;  Interrupting the client’s daily routines;  It is generally expensive to carry out; and  The independence of the auditor may be impaired where there is too much familiarity. Final or completed audit – This is also known as periodic or annual audit and it is usually conducted by the financial year end after the books of account are closed. The auditor visits the client once in the year during which period the entire audit assignment is carried out. The advantages of this audit approach include:  Audit evidence obtained is more reliable;  Financial statements are finalized and published on time;  Figures cannot be altered after the audit; and  Work is carried to conclusion in one session without recourse to return visits. But where audit firm has many clients with common year end, there may be a challenge in getting adequate audit staff to meet the demand of clients and as a result, there may be delays in finalizing the audit. Interim audit – an audit carried out on the interim accounts up to a particular period within the year; it does not cover a full year. The auditor wants to ascertain the accuracy, reliability and validity of the interim accounts prepared. It may be done to enable the management pay interim dividends. It assists the auditor in the timely completion of the final audit and in timely identification and correction of errors and misstatements. Interim audits impose some moral checks 17 on client staff. Regulatory (Compliance) Audit This is aimed at ensuring that expenditures have been incurred on approved services and in accordance with the enabling statutory provisions and regulations governing the particular expenditure. It seeks to determine if an organization is following specific procedures, rules or regulations set by itself or by regulatory authorities. Procedural Audit This is an examination and review of the internal procedures and records of an organization, in order to ascertain their reliability as a basis for compiling the final accounts. The objectives of a procedural audit usually include: 1. To assess the adequacy of the internal control system; 2. To establish whether the records are sufficiently reliable for the preparation of the final accounts; 3. To ascertain whether the procedures laid down by management are being followed. Value for Money Audit Value-for- money audit, also referred to as Performance or efficiency audit, seeks the maximization of the use of resources for the welfare of the public by ensuring that activities and programmes are carried out at low cost and to high standard. In addition to ensuring that financial statements faithfully represent the affairs of the establishment in relevant cases, the audit objective includes an ascertainment of whether the establishment being audited is achieving the purposes for which its programmes are authorized and whether it is doing so efficiently, effectively and economically. Forensic audit - is the specific use of audit procedures within a forensic investigation to find facts and gather evidence, usually focused on the quantification of a financial loss. It is applied in the 18 detection of different types of fraud, employee fraud, criminal investigations etc. SELF ASSESSMENT 1. What is the difference between a continuous audit and an interim audit? 2. Define Procedural audit. State the objectives of a procedural audit. 4.0 Conclusion Auditing has evolved from its earliest state when auditors sat to listen to the stewardship reports of tax payers to the industrial revolution era when the primary objective was the detection of fraud and finally to its present dynamic stage when auditing is technology - and knowledge-driven. Over this period the techniques and procedures for carrying out an audit have greatly improved and the public’s need for an audit has also increased. The primary objective of an audit is currently attesting to the fair representation of audited financial statements through these very highly enhanced auditing procedures and techniques. 5.0 Summary This unit discussed the historical development of auditing, gave some definitions and highlighted the advantages and limitations/disadvantages of carrying out an audit of financial statements. The unit also dealt with the different classifications and types of audit. The primary objective of an audit of financial statements, which is to enable the auditor express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework, was underscored. 6.0 TUTOR MARKED ASSIGNMENT 1. Define Auditing and state the advantages of carrying out an audit of financial statements. 2. Briefly discuss the following types of adit: a) Value for money audit 19  b) Interim audit c) Internal audit d) Management audit. 7.0 References/further Reading 1. Adeniji, A.A (2012). Auditing and Assurance Services. Lagos: Value Analysis Consults. 2. ICAN (2011). Accounting technicians scheme of West Africa (ATSWA) Study pack Auditing. ACCA (2015). Study Text on Audit and Assurance. London: BPP Learning Media. Soyemi, K.A (2014). Auditing and Assurance Services. Abeokuta: LekSilicon Publishing Company Ltd. UNIT 2 Regulation of Audit and Assurance Services/Assurance Engagements Content 1.0 Introduction 2.0 Objectives 20 3.0 Main Content 3.1 Need for Regulation of Audit and Assurance services. 3.2 Sources of Regulation 3.3 CAMA and the Auditor 3.4 Assurance Engagements 3.5 Elements of Assurance Engagements 3.6 Other Assurance Engagements 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 References/further Reading 1.0 INTRODUCTION In this unit, we discuss the regulation of audit and assurance services and the legal provisions on the appointment, work and report of the external auditor. The unit will also explain what assurance engagement is, the objectives and types of assurance engagements as well as the elements of assurance engagements. 2.0 Objectives By the end of this unit, you should be able to: 1. Give reasons why audit is regulated and explain the sources of regulation. 2. Discuss the Provisions of the Companies and Allied matters Act, 2004 regarding the appointment/re-appointment, qualification, duties and powers, remuneration, removal and report of the independent auditor. 3. Explain the elements of an assurance engagements 21 4. State and explain the objectives of an assurance engagement 3.0 Main Content 3.1 Need for Regulation of Audit and Assurance services. Audit and Assurance services are regulated primarily for the Public interest. Investors take economic decisions on the basis of the credibility auditors lend to financial statements whenever they audit and certify the financial statements true and fair. Thus, it can be said that auditors give an impartial, professional view on issues that matter to users of financial and other information. It is important therefore that this view can be trusted. Auditors therefore need to operate within ethical boundaries and in compliance with standards, laws and regulations. 3.2 Sources of Regulation: Regulation of Audit and Assurance services is effected through: Legal Regulation – Most countries, including Nigeria, have legal requirements associated with some assurance providers, particularly auditors. Examples of these legal requirements are found in CAMA (Companies and Allied Matters Act), 2004, ICAN Act 1965, Banks and other Financial Institutions Act 1991, Insurance Act 2003, Securities and Exchange Commission (SEC) Act 2007, EFCC Act, the Audit Act, Financial Reporting Council of Nigeria (FRCN) Act 2011 etc. Ethical Regulation – Auditors are given ethical guidance by the professional Bodies e.g. ICAN, law and IFAC (International Federation of Accountants). Professional Regulation – Auditors are required to carry out audits according to professional standards (International Standards on Auditing –ISAs and Nigerian Standards on Auditing- NSAs). As assurance provision goes ‘global’ the harmonization of such professional guidance has become necessary. 3.3 CAMA and the Auditor Sections 357 – 369 of CAMA relate to the Auditor and his work. 22 1 Appointment of an Auditor – s.357 Every company shall at each Annual General meeting (AGM) appoint an auditor or auditors to audit its financial statements. The auditor’s tenure shall run from the conclusion of the AGM where he was appointed till the next AGM. The directors may appoint an auditor in the following circumstances: a. Where at an AGM, no auditors are appointed or re-appointed; b. The appointment of the first auditors of the company before the company is entitled to commence business; c. To fill any casual vacancy in the office of the auditor, but while any such vacancy continues, the surviving or continuing auditor (s) may act. d. A retiring auditor however appointed, shall be re-appointed without any resolution being passed unless – He is not qualified for re-appointment; a. A resolution has been passed at the meeting appointing another auditor or providing expressly that he shall not be re-appointed; or b. He has given the company notice in writing of his unwillingness to be re-appointed. 2 Qualification of the Auditor – s. 358 A person shall not be qualified for appointment as an auditor of a company, unless he is a member of a body of Accountants in Nigeria. The following persons however are disqualified from serving as an auditor of a company: a. An officer or servants of the company; 23 b. A person who is a partner of or in the employment of an officer or servant of the company; c. A person or firm who or which offer to the company professional advice in a consultancy capacity in respect of secretarial, taxation or financial management. d. A body corporate. 3 Reports of the Auditor – S. 359 The auditors of a company are required to make a report to the members of the company on the accounts examined by them, and on every Balance Sheet (Statement of financial position) and statement of Profit or loss, and all group financial statements, copies of which are laid before the company in a general meeting during the auditors’ tenure of office. In the case of a public company, the auditor also makes a report to the audit committee which shall be established by the company. By the provisions of this section (s.359), the committee shall consist of an equal number of directors and representatives of the shareholders of the company (subject to a maximum of number of six members). The committee examines the independent auditor’s report (including the management letter or letter of weakness) and makes recommendations thereon to the annual general meeting as it thinks fit. The objectives and functions of the committee as specified by the Act, are to: a. Ascertain whether the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices; b. Review the scope and planning of audit requirements; c. Review the findings on management matters in conjunction with the external auditor and departmental responses thereon; d. Keep under review the effectiveness of the company's system of accounting and internal control; 24 e. Make recommendations to the Board in regard to the appointment, removal and remuneration of the external auditors of the company; and f. Authorise the internal auditor to carry out investigations into any activities of the company which may be of interest or concern to the committee. 4 Duties and Powers of the Auditor – S. 360 The auditor, in preparing his report has as his duty, to carry out such investigations as may enable him form an opinion as to whether: a. Proper accounting records have been kept by the company and proper returns adequate for his audit have been received from branches not visited by him; b. The company’s Balance sheet and (if not consolidated) its profit or loss account are in agreement with the accounting records and returns. c. If the auditor is of the opinion that proper accounting records have not been kept or that adequate returns have not been received from branches not visited by him or that the balance sheet and the profit or loss account are not in agreement with the accounting records and returns, the auditor shall state that fact in his report. To ensure effective discharge of his duties, the Act confers the following powers on the auditor: a. Every auditor of a copy shall have unrestricted access at all times to the company’s books, accounts and vouchers; b. Every auditor of a company shall be entitled to require from the company’s office such information and explanations as he thinks necessary. 5 Remuneration of the Auditor – S. 361. In the case of auditors appointed by the directors, their remuneration may be fixed by the directors; or the remuneration may be fixed by the company in a general meeting or in such 25 manner as the company in general meeting may determine. 6 Removal of the Auditor – S.362 A company may, by ordinary resolution, remove an auditor before the expiration of his term of office, notwithstanding anything in the agreement between the company and the auditor. A special notice of 28 days is required for this purpose. Within 14 days of passing the resolution removing an auditor, the company shall give notice of that fact the Corporate Affairs Commission (CAC) 7 Rights of the Auditor – S. 363 A company’s auditor shall be entitled to attend any general meeting of the company and to receive all notices of, and other communications relating to any general meeting which a member of the company is entitled to receive. He is also to be heard on any part of the meeting which concerns him as auditor. In addition, an auditor who has been removed from office has the right to attend: 1. The general meeting at which the term of his office would otherwise has expired; 2. Any general meeting at which it is proposed to fill the vacancy caused by his removal; 8 Special Notice – S.364 Special notices are required for a resolution at an annual general meeting of a company to transact the following business relating to the auditor: 1. Appointing as auditor a person other than a retiring auditor; 2. Filling a casual vacancy in the office of auditor; 3. Re-appointing as auditor a retiring auditor who was appointed by the directors to fill a casual vacancy; or 26 4. Removing an auditor before the expiration of his term of office. 9 Resignation of the Auditor – S.365 An auditor of a company may resign his office by depositing a notice in writing to that effect at the company’s registered office. Such notice of resignation by the auditor shall not be effective unless it contains either – 1. A statement to the effect that there are no circumstances connected with his resignation which he considers should be brought to the notice of thee members or creditors of the company; or 2. A statement of any such circumstances as mentioned above. Where a notice of resignation is deposited at the company’s registered office, the company shall within 14 days, send a copy of the notice to CAC. 10 Power of Auditors in respect of Subsidiary companies - S367 If the subsidiary is incorporated in Nigeria, it is the duty of the subsidiary and its auditors to give the auditor of the holding company, such information and explanations as those auditor may reasonably require. 11 Liability of Auditors for negligence - S368 A company’s auditor shall in the performance of his duties, exercise all such care, diligence and skill as is reasonably necessary; Where the company suffers loss or damage due to the failure of the auditor to discharge his duties, in such manner, the auditor shall be liable for negligence and the director may institute an action for negligence against him in the court. If the directors fail to institute an action against the auditor under subsection (2) of this section, any member may do so after the expiration of 30 days’ notice to the company of his intention to 27 institute such an action. 12 False statement to the auditors - S369 Any officer or director of the company who gives misleading, false or deceptive information on which the auditors acted upon, shall be liable to one year imprisonment or fine of N500 or both. 3.4 Assurance Engagements Assurance Engagements, performed by professional Accountants, are intended to enhance the credibility of information about the subject matter. The subject matter of an assurance engagement is the topic about which the assurance engagement is conducted. As defined by the Assurance Engagement Framework, Assurance engagement means an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. An audit is a specific form of assurance engagement. Other examples include:  Report on internal controls;  Value for money reviews;  Environmental and CSR audits;  Risk evaluations;  Compliance reviews etc 3.5 Elements of Assurance Engagements There are five elements of Assurance Engagements namely 1. A three party relationship involving a practitioner, a responsible party and the intended users; 2. A subject matter; 3. Suitable criteria; 4. Evidence; and 5. an assurance report. 28 1. Three- Party relationship – the practitioner, a responsible party and intended users. The practitioner is the professional (e.g. auditor, accountant or an expert) who gathers evidence to provide a conclusion to the intended users about whether a subject matter (e.g. financial statement) conforms, in all material respects to identified criteria. The Practitioner, in brief, is the individual providing professional services that will review the subject matter and provide assurance. The responsible party (e.g. the management of Board of directors) is the one responsible for the subject matter or subject matter information and chooses the criteria and may or may not engage the practitioner. The intended users are the addressees of the assurance report and may be identified by the responsible party or by law. 2. Subject Matter - This is the data to be evaluated, that have been prepared by the responsible party. The subject matter of an assurance engagement can take many forms, such as  Financial performance or conditions e.g. historical or prospective financial performance;  Non-financial performance indicators  Physical characteristics e.g. capacity of a facility;  Systems and processes e.g. internal controls, IT systems etc  Behaviour (e.g. corporate governance, compliance with laws and regulations, human resource practices) The auditor accepts an assurance engagement only if the subject matter is the responsibility of a party other than the intended user or the auditor. That is, the intended user is not management or the auditor. The subject matter must be:  identifiable and capable of consistent evaluation or measurement against identified, suitable criteria e.g.IFRS  in a form that can be subjected to procedures for gathering evidences to support that evaluation or measurement. 3. Suitable criteria - Are the benchmarks used to evaluate evidence or measure the subject 29  matter of an assurance engagement. For example, in the preparation of Financial statements, the suitable criteria may be IFRS; for internal controls , it may be established framework such as COSO or any other control objectives specifically designed for the engagement. Suitable criteria, thus are relevant to the circumstances of the engagement. The characteristics for assessing whether criteria are suitable are: i. Relevance – relevant criteria contribute to conclusions that meet the objectives of the engagement and assist decision making by intended users. ii. Completeness – criteria are complete when there are no omission of factors that could affect the conclusions in the context of the engagement circumstances. iii. Reliability - reliable criteria result in consistent evaluation or measurement , including where relevant, presentation and disclosure of the subject matter, when used in similar circumstances by similarly qualified practitioners. iv. Neutrality – neutral criteria are free from bias. v. Understandability – understandable criteria are clear and comprehensive and are not subject to significantly different interpretations. 4. Evidence – Sufficient appropriate evidence is needed for every assurance engagement. The quantity (sufficiency) and quality (appropriateness) of evidence available will be affected by:  The characteristics of the subject matter. For example, when he subject matter is future oriented, less objective evidence might be expected to exist than when the subject matter is historical.  Other non-subject matter characteristics. For example, when expected evidence is not available to the practitioner, probably due to the timing of his appointment, an entity’s document retention policy or some other restriction imposed by the responsible party. 5. Assurance Report – The practitioner gives a written report containing a conclusion that conveys the assurance obtained as to whether the subject matter conforms, in all material respects, to the identified criteria. For example, an audit of financial statements provides an opinion on conformity with standards (IFRS) and other regulatory framework. 30 2.3.2 Objectives of an Assurance Engagement The objective of an assurance engagement depends on the level of assurance given. ISAE 3000 Assurance engagements other than audits or reviews of historical financial information distinguishes between two forms of assurance engagements:  Reasonable assurance engagements  Limited assurance engagements The objective of a reasonable assurance engagementis a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for the assurance practitioner’s conclusion. The report (conclusion)would usually be expressed in a positive form, giving a “reasonable assurance” that the subject matter conforms in all material respects, with criteria. This indicates that given the evidence gathering procedure and the characteristics of the subject matter, the practitioner has obtained sufficient appropriate evidence to reduce assurance engagement risk to an acceptably low level. Thus, for this type of opinion, a significant amount of testing and evaluation is required to support the conclusion. The opinion on audit of financial statements is an example of reasonable assurance report. Limited assurance is a lower level of assurance. The nature, timing and extent of procedures carried out by the practitioner would be limited compared with what is required in a reasonable assurance engagement. The report/conclusion could be expressed in negative form of words. For example, “nothing has come to our attention that causes us to believe that subject matter (e.g. historical financial statements) does not conform, in all material respects, to criteria (e.g IFRS).” This form of report conveys a “limited assurance”, indicating that the practitioner has obtained sufficient appropriate evidence to reduce assurance engagement risk to a moderate level. 3.6 Other Assurance Engagements Review Engagements Assurance engagements include a range of assignments, from external audit to review engagements. The objective of a review engagement is to obtain limited assurance about whether the subject matter information is free from material misstatements. Thus, a review can provide a cost- efficient alternative to an audit where an audit is not required by law. 31 Types of review engagements: There are two types of review engagements, namely, an attestation engagement and a direct engagement. An attestation engagement: This is a form of engagementin which the practitioner issues a report/conclusionabout the reliability of an assertion made by another party. Though the subject matter is not measured by the practitioner, he concludes whether or not the subject matter is free from material misstatement. For example, in a review of CSR or sustainability report prepared by management, management measures and evaluates the extent to which the company has achieved its targets, and the practitioner provides a conclusion as to whether the measurement and evaluation is free from material misstatements. A direct engagement: Here, the underlying subject matteris measured and evaluatedby the practitioner, who presents a conclusion on the reported outcome in the assurance report. For example, an engagement where the practitioner is engaged to carry out a review of the effectiveness of a company’s system of internal controls; the practitioner would evaluate the internal controls and then issue an assurance report explaining the outcome of the review.. SELF ASSESSMENT QUESTION 1. What is an assurance engagement? 2. What qualification does a person need to possess before he/she can be qualified to be an auditor? 4.0 CONCLUSION Audit and Assurance services are regulated to protect the interest of the user public. Sources of regulation include the Company law, Auditing standards and ethical guidance given by the professional accountancy bodies. Relevant provisions of the Companies and Allied Matters Act, 2004 govern the appointment, qualification, duties/powers as well as the remuneration, report and removal of the independent auditor in Nigeria. An Assurance engagement is any engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. An audit is 32 a form of an assurance engagement. 5.0 Summary In this unit, the purpose of regulating audit and assurance services and the sources of regulation were discussed. The unit also explained the legal provisions relating to the external auditor. Types and elements of Assurance engagements were also discusse 6.0 TUTOR-MARKED ASSIGNMENT 1) What is an assurance engagement? List and briefly discuss the elements of an assurance engagement. 2) Audit and Assurance services are regulated primarily for the public interest. One of the sources of regulation is guidance given by the Companies and Allied Matters Act CAP C.20 LFN, 2004. Required: Describe the provisions of the Companies and Allied Matters Act CAP C.20 LFN, 2004 regarding: i. The appointment of the auditor (3 marks) ii. The remuneration of the auditor (2 marks) iii. Rights of the auditor (3 marks) iv. Liability of auditors for negligence (2 marks) (Total 10 marks) 7.0 References/further reading Ige, B (2008). Introduction to Auditing. FGN (2004). Companies and Allied Matters Act. Lagos: Government Press. Soyemi, K.A (2014). Auditing and Assurance Services. Abeokuta: LekSilicon Publishing Company Ltd 33 UNIT 3: AUDIT PLANNING AND STRATEGY Content 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 Nature of and need for panning an Audit engagement 3.2 Planning an Audit of Financial Statements 3.3 Summary of ISA 300, Planning an Audit of Financial Statements 3.4 Audit Plan 3.5 Changes to the audit strategy and the audit plan 3.6 Documentation 3.7 Direction, supervision and review 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 References/further Reading 1.0 Introduction Audit planning plays a key role in ensuring a successful audit. This unit takes you through the background work that has to be done before an audit is embarked upon. Various audit planning methods are available and could be use depending on the audit assignment the organisation is presented with. 2.0 Objectives By the end of this unit, you should be able to: 1. discuss the benefits of planning an audit 34  2. understand the requirements of ISA 300 for planning an audit of a financial statement. 3. Discuss the matters to be considered when establishing an audit strategy. 3.0 Main Content 3.1 Nature of and need for panning an Audit engagement Audit planning involves the formulation of the general strategy for an audit and sets the direction for the audit, describes the expected scope and conduct of the audit and provides guidance for the development of the audit programme.Audit planning is a vital area of the audit primarily conducted at the beginning of audit process to ensure that appropriate attention is devoted to important areas, potential problems are promptly identified, work is completed expeditiously and work is properly coordinated. The nature and extent of planning activities will vary according to the size and complexity of the entity, the auditor’s previous experience with the entity, and changes in circumstances that occur during the audit engagement. Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement. However, in planning an audit, the auditor considers the timing of certain planning activities and audit procedures that need to be completed prior to the performance of further audit procedures. Adequate planning of audit work aims at: 1. Establishing the intended means of achieving the objectives of the audit 2. Assisting in the direction and control of the work 3. Helping to ensure that attention is devoted to critical aspects of the audit 4. ensuringpotential problems are identified and resolved on a timely basis and that the audit engagement is properly organized and managed. 5. assisting in the proper assignment of work to engagement team members, facilitating the direction and supervision of engagement team members and the review of their work, and assisting, where applicable, in coordination of work done by auditors of components and experts. 35 6. Ensuring that the work is completed expeditiously 7. Facilitating review of the audit work. 3.2 Planning an Audit of Financial Statements The auditor should plan the audit so that the engagement will be performed in an effective manner. Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan, in order to reduce audit risk to an acceptably low level. At the planning stage, the engagement partner holds a meeting with members of the engagement team where experiences are shared for the benefit of all and for the purpose of enhancing the effectiveness and efficiency of the planning process. During this meeting, the engagement partner will discuss the audit and its associated risks with the team members, and inform them of:  Their responsibilities  The objectives of the work to be performed  The nature of the client’s business  Risk-related issues and other problems that may arise and  The detailed approach to the audit assignment. The planning activities will include:  the analytical procedures to be applied as part of risk assessment procedures,  obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework,  the determination of materiality levels,  the involvement of experts, if need be, and  the performance of other risk assessment procedures prior to performing further audit procedures at the assertion level for classes of transactions, account balances, and disclosures. As audit procedures are performed, the auditor considers how the conclusions drawn affect the risk assessment and resulting nature, timing and extent of further planned audit procedures. 36 3.3 Summary of ISA 300, Planning an Audit of Financial Statements. When does audit planning take place? Naturally, it is reasonable to assume that planning occurs towards the start of an audit engagement. However, according to ISA 300, planning should not be seen as a discrete and separate part of the overall audit. Planning often begins shortly after, or in connection with, the completion of the previous audit, for example, with a review of issues that were discussed with management, such as control deficiencies or unadjusted errors. Such matters are relevant to the next year’s audit and need to be considered when planning. Similarly, the audit plan may be revised as the audit progresses, and should not be viewed as being fixed in place once the main planning phase has ended. For example, a significant event may take place as the audit is in progress, meaning that the audit plan needs to be reviewed. As earlier noted, the nature and extent of planning activities depends on the size and complexity of the audit client, previous experience of the audit firm with the client, and any changes in circumstance that may occur during the audit. Preliminary activities ISA 300 contains a requirement that the auditor shall undertake the following activities at the beginning of the current audit engagement  Performing procedures regarding the continuance of the client relationship and thespecific audit engagement.  Evaluating compliance with relevant ethical requirements, including independence  Establishing an understanding of the terms of the engagement. These requirements are also contained in ISA 220, Quality Control for an Audit of Financial Statements and ISA 210, Agreeing the Terms of Audit Engagements and remind us that planning is a wider activity than just obtaining understanding of the business and performing risk assessment. 37 Audit strategy and audit plan ISA 300 states that audit planning activities should:  establish the overall audit strategy for the engagement  develop an audit plan. Audit strategy The audit strategy sets out in general terms how the audit is to be conducted and sets the scope, timing and direction of the audit. The audit strategy then guides the development of the audit plan, which contains the detailed responses to the auditor’s risk assessment. An underpinning principle of audit planning under the clarified ISAs is that the audit plan should contain detailed responses to the specific risks identified from obtaining an understanding of the audited entity. Matters to consider when establishing the audit strategy ISA300 requires the auditor to consider specific matters when establishing the audit strategy, and provides a list of typical matters to be considered in its appendix. These matters include: a. Identify the characteristics of the engagement that define its scope Some audit engagements have specific characteristics that widen the scope than the audit of other entities. For example, a group audit engagement or the audit of a multinational company will both have wider scopes than an audit of a small, owner-managed entity. Matters such as the ability to use the work of internal auditors, the need to liaise with external service organisations, and the effect of IT on audit procedures are also relevant. The scope is also affected by the applicable financial reporting framework, the nature of the audited entity’s business and whether it operates business segments, the business activities conducted, and the availability of client personnel and data. b. Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required Reporting requirements will vary from audit to audit. For example, some entities have additional 38 reporting requirements to comply with corporate governance regulations or industry requirements, and the auditor must understand these requirements from the start of the audit. The nature of other communications that may be necessary during the audit should be considered, such as liaison with component auditors, and communications to management and to those charged with governance. c. Consider the factors that are significant in directing the audit team’s efforts in the auditor’s professional judgment The strategy must consider issues to do with quality control, such as how resources are managed, how the audit is directed and supervised, when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place (for example, on-site or off-site), and whether to complete engagement quality control reviews. d. Consider the results of preliminary engagement activities and knowledge gained on other engagements This includes the initial assessments of materiality, risks identified from preliminary activities such as fraud risks, significant events that have occurred at the entity or in the industry in which it operates since the last audit, and the results of previous audits that involved evaluating the operating effectiveness of internal control, including the nature of identified deficiencies and action taken to address them. The audit firm may also have performed other services for the client that may be relevant in determining the audit strategy, for example, reviews of business plans or cash flow forecasts. e. Ascertain the nature, timing and extent of resources necessary to perform the engagement One of the main objectives of developing the audit strategy is to effectively allocate resources to the audit team, for example, the use of specialists on particular areas of the audit, or building a team of highly experienced auditors for a potentially high-risk audit engagement. If the audit is time pressured due a tight deadline, then more resources will need to be allocated to ensure that all necessary audit work is completed, and can be reviewed in time to meet the deadline. 39 3.4 Audit plan ISA 300 states that once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy, taking in to account the need to achieve the audit objectives through the efficient use of the auditor’s resources. The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely interrelated since changes in one may result in consequential changes to the other. Therefore it is not necessarily the case that the audit strategy is prepared and completed before the audit plan is devised, and in practice it is typical for the two to be developed together. The audit plan is a detailed programme giving instructions as to how each area of the audit will be conducted. In other words, the audit plan details the specific procedures to be carried out to implement the strategy and complete the audit. ISA 300 provides guidance on what should be included in the audit plan, stating that the audit plan should describe: 1. the nature, timing and extent of planned risk assessment procedures 2. the nature, timing and extent of planned further audit procedures at the assertion level 3. other planned audit procedures that are required to be carried out so that the engagement complies with ISAs. Typically an audit plan will include sections dealing with business understanding, risk assessment procedures, planned audit procedures i.e. the responses to the risks identified and other mandatory audit procedures. 3.5 Changes to the audit strategy and the audit plan The audit strategy and audit plan are not fixed once the planning stage of the audit is complete. It is important that both are updated and changed as necessary as the audit progresses. For example, as a result of unexpected events, or changes in conditions, the auditor may need to modify the 40 overall audit strategy and audit plan and thereby the resulting planned nature, timing and extent of further audit procedures, based on the revised consideration of assessed risks. This may be the case when information comes to the auditor’s attention that differs significantly from the information available when the auditor planned the audit procedures, for example, an event may take place after audit planning has been initially completed which creates doubt over going concern. Or, as a result of performing planned audit procedures additional information may come to light which may lead the auditor to amend initial risk assessment, or level of performance materiality, for all, or part, of the audit. 3.6 Documentation ISA 300 requires that the audit strategy and audit plan be thoroughly documented. A record of significant changes made to the audit strategy and audit plan is needed. Documentation is crucial, because key decisions about how the audit will be performed are contained in the audit strategy and audit plan. The documentation should therefore include the response made by the auditor to any significant changes that occurred during the audit. The audit strategy and audit plan do not need to be documented in a particular way. Some audit firms use memoranda, others checklists. Some use standardised documentation such as standardised audit programmes while others tailor the specific form of the documentation to each audit engagement. The form of the documentation does not matter as long as it provides a clear record of how the audit was planned. 3.7 Direction, supervision and review ISA 300 requires that the auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. In order to perform a high quality audit,it is crucial that the audit plan includes the detail as to how supervision and review should be conducted during the audit. Inadequate supervision and review can lead to the audit team making errors, for example, selecting inappropriate items for sampling, or failing to properly conclude on audit procedures performed. 41 The amount of detail included in the audit plan in relation to supervision and review will depend on factors such as the size and complexity of the entity being audited, the assessed risk of material misstatement, and the capabilities and competence of the audit team members. Additional considerations in initial audit engagements The final section of ISA 300 relates to initial audit engagements, and requires the auditor to perform client and engagement acceptance procedures (as also required by ISA 220), and also to communicate with the predecessor auditor, where there has been a change of auditors, in compliance with relevant ethical requirements. The ISA recognises that for an initial audit engagement, the auditor may need to expand the planning activities because the auditor does not ordinarily have the previous experience with the entity that is considered when planning recurring engagements. 4.0 Conclusion This chapter discussed audit planning and its importance and the standards relevant to audit planning. Without proper planning, the direction, supervision and review of the audit work will black cohesion and the quality of the audit is likely to be in doubt. 5.0 Summary Audit planning is a vital area of the audit primarily conducted at the beginning of the audit process to ensure that appropriate attention is devoted to important areas, potential problems are promptly identified, work is completed expeditiously and work is properly coordinated. 6.0 TUTOR MARKED ASSIGNMENTS 1. Discuss the benefits of audit planning. 2. List and explain the matters to be considered in establishing an audit strategy. 3. Why is documentation important in the audit planning process? 42 7.0 References/Further reading 1. Ige. B (2008). Introduction to Auditing 2. Millichamp, A.H & Taylor, J.R (2011). Auditing, 11th Edition, London: BookPower/ELST 3. ACCA Study Text on Advanced Audit and Assurance.London: BPP Learning Media. 4. International standards on Auditing 200, 300 and 315. 43 UNIT 4: PROFESSIONAL ETHICS Content 1.0 Introduction 2.0 Objectives 3.0 Main Content 3.1 Ethical Standards and Professional Responsibilities 3.2 Consequences of Unethical Behaviour 3.3 Auditor Independence 4.0 Conclusion 5.0 Summary 6.0 Tutor Marked Assignment 7.0 References/further Reading 1.0 INTRODUCTION This unit discusses the ethical guidelines for accountancy practice issued by the International Federation of Accountants (IFAC) and adopted by member bodies such as ICAN. The unit highlights the fundamental ethical principles applicable to all members of the accounting profession and the Statements that have varying applications to different member groups. Finally, the possible threats to the accountants’ independence/objectivity and possible safeguards are explored. 2.0 Objectives By the end of this unit you should be able to: 1. Discuss the fundamental ethical principles as stipulated by the IFAC code of ethics/ICAN 44  Rules of professional conduct for members. 2. Explain the concept of independence and discuss the possible ethical threats to auditor’s objectivity and independence 3. State the possible safeguards to any identified ethical threat to objectivity and independence. 4. Discuss the consequences of unethical behaviours by the accountant. 3.0 Main Content 3.1 Ethical Standards and Professional Responsibilities The standards as contained in both the IFAC and ICAN codes are in two categories namely: 1. Fundamental Principles and 2. Statements. 3.1.1 Fundamental Principles. These are drawn from the duties owed by all members of the profession, whether in practice or not. They constitute basic advice on professional behaviour. A professional accountant shall comply with the following fundamental principles (a) Integrity: A professional accountant should be straightforward and honest in performing professional services. The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in all professional and business relationships. Integrity also implies fair dealing and truthfulness. A professional accountant shall not knowingly be associated with reports, returns, communications or other information where the professional accountant believes that the information: (a) Contains a materially false or misleading statement; 45 (b) Contains statements or information furnished recklessly; or (c) Omits or obscures information required to be included where such omission or obscurity would be misleading. Where such issues as above have arisen, a professional accountant shall take steps to be disassociated from that information and is advised to issue a modified report. (b) Objectivity – A professional accountant should be fair and should not allow prejudice or bias, conflict of interest or influence of others to override objectivity. A professional Accountant not allow bias, conflict of interest or undue influence of others to override professional or business judgments. A professional accountant may be exposed to situations that may impair objectivity. A professional accountant shall not perform a professional service if a circumstance or relationship biases or unduly influences the accountant’s professional judgment with respect to that service (c) Professional Competence and Due Care – A professional accountant should perform professional services with due care, competence and diligence and has a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives the advantage of competent professional service based on up-to-date developments in practice, legislation and techniques. The Accountant has the obligation to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional services based on current developments in practice, legislation and techniques and act diligently and in accordance with applicable technical and professional standards. Competent professional service requires the exercise of sound judgment in applying professional knowledge and skill in the performance of such service. Professional competence may be divided into two separate phases: (a) Attainment of professional competence; and (b) Maintenance of professional competence. The maintenance of professional competence requires a continuing awareness and an understanding of relevant technical, professional and business developments. Continuing 46 professional development enables a professional accountant to develop and maintain the capabilities to perform competently within the professional environment. Diligence encompasses the responsibility to act in accordance with the requirements of an assignment, carefully, thoroughly and on a timely basis. (d) Confidentiality – A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose. The Accountant has the obligation to respect the confidentiality of information acquired as a result of professional and business relationships. He should therefore, neither disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclose, nor use the information for his personal advantage or that of third parties. The need to comply with the principle of confidentiality continues even after the end of relationships between a professional accountant and a client or employer. However, when a professional accountant changes employment or acquires a new client, the professional accountant is entitled to use prior experience. A professional accountant shall maintain confidentiality, including in a social environment, being alert to the possibility of inadvertent disclosure, particularly to a close business associate or a close or immediate family member. A professional accountant shall maintain confidentiality of information disclosed by a prospective client or employer. A professional accountant shall maintain confidentiality of information within the firm or employing organization. A professional accountant shall take reasonable steps to ensure that staff under the professional accountant’s control and persons from whom advice and assistance is obtained respect the professional accountant’s duty of confidentiality. The professional accountant shall not, however, use or disclose any confidential information either acquired or received as a result of a professional 47 or business relationship. Circumstances where professional accountants may disclose Confidential Information The following are circumstances where professional accountants are or may be required to disclose confidential information or when such disclosure may be appropriate: (a) Disclosure is permitted by law and is authorized by the client or the employer; (b) Disclosure is required by law, for example: (i) Production of documents or other provision of evidence in the course of legal proceedings; or (ii) Disclosure to the appropriate public authorities of infringements of the law that come to light; and (c) There is a professional duty or right to disclose, when not prohibited by law: (i) To comply with the quality review of a member body or professional body; (ii) To respond to an inquiry or investigation by a member body or regulatory body; (iii) To protect the professional interests of a professional accountant in legal proceedings; or (iv) To comply with technical standards and ethics requirements. (d) When disclosure is required for the public interest. In deciding whether to disclose confidential information, relevant factors to consider include:  Whether the interests of all parties, including third parties whose interests may be affected, could be harmed if the client or employer consents to the disclosure of information by the professional accountant;  Whether all the relevant information is known and substantiated, to the extent it is practicable; when the situation involves unsubstantiated facts, incomplete information or 48  unsubstantiated conclusions, professional judgment shall be used in determining the type of disclosure to be made, if any;  The type of communication that is expected and to whom it is addressed; and  Whether the parties to whom the communication is addressed are appropriate recipients. (e) Professional Behaviour – A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from any conduct which might bring discredit to the profession. A professional accountant should carry out professional services in accordance with the relevant technical and professional standards and to comply with relevant laws and regulations and avoid any action that discredits the profession. The principle of professional behaviour imposes an obligation on all professional accountants to comply with relevant laws and regulations and avoid any action that the professional accountant knows or should know may discredit the profession. This includes actions that a reasonable and informed third party, weighing all the specific facts and circumstances available to the professional accountant at that time, would be likely to conclude adversely affects the good reputation of the profession. In marketing and promoting themselves and their work, professional accountants shall not bring the profession into disrepute. Professional accountants shall be honest and truthful and not: (a) Make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; or (b) Make disparaging references or unsubstantiated comparisons to the work of others. 3.1.2 Statements Statements provide more elaborate discussions on what is expected of members in certain circumstances. Most of the statements are relevant to members in practice and where appropriate, to employees of practicing firms but not to other members. The statements as stated in ICAN code are as given in the table below. 49 Table 3.1.1 ANALYSIS OF THE STATEMENTS OF ETHICAL STANDARDS S/NO SUBJECT MATTER THOSE TO WHOM APPLICABLE 1. Integrity, Objectivity and Independence Preface – integrity, objectivity, All Members framework, etc. Introduction – Safeguarding Objectivity All Members, Practicing Members, Affiliates and Section A – Objectivity and employees of practicing Firms. Independence and the Audit. Section B – Objectivity and Practicing Members, affiliates and employee of independence in financial reporting practicing firms. and similar non-audit roles. Section C – Objectivity and Practicing Members, Affiliates and employees of independence in professional roles Practicing firms. other than covered in sections A& B. Section D – Definitions All Members 2. Conflicts of Interest Practicing Members, Affiliates and Employees of practicing firms. 3. Confidentiality All members 4. Changes in a professional Practicing Members, Affiliates and Employees of appointment practicing firms. 5. Consultancy Practicing Members, Affiliates and Employees of practicing firms. 6. Associations with non-members Practicing Members, Affiliates and Employees of practicing firms. 50  7. Fees Practicing Members, Affiliates and Employees of practicing firms. 8. Obtaining Professional work Practicing Members, Affiliates and Employees of practicing firms. 9. Names and Letterheads of practicing Practicing Members, Affiliates and Employees of firms practicing firms. 10. Second and other opinions All members 11. Members in business Members in business 12. Enforcement of ethical standards. All members. These Statements more or less highlight ‘rules’ for ethical conduct, and the section of the code on enforcement of ethical standards and enforcement procedures define the powers of the Institute of Chartered Accountants of Nigeria in ensuring compliance to the rules by its members. The said section states: 1. The power of the Institute to enforce ethical standards is derived from the ICAN Act 1965 and this power is conferred on the Disciplinary Tribunal, which is independent of the Council. 2. The investigating panel considers complaints against the conduct of members and initiates disciplinary action by referring appropriate cases to the Disciplinary Tribunal. 3. Where the complaint is against a member of a firm having more than one partner, all partners in the firm as at the time of complaint will be jointly and severally held. 4. Where a complaint of misconduct is brought against a member, such a member is required to furnish his defence to the Investigating panel within 14 days of notification by the panel. 5. Where the member fails to respond within this specified time, a first reminder is sent requesting that he sends his defence or reaction within 7 days from the date of receipt of the reminder. 51 6. If the member fails to respond after the first reminder, a formal charge of contempt will be preferred against the member before the Disciplinary tribunal. 7. If the members address cannot be readily obtained, the Panel shall publish the invitation on a National Newspaper after which if there is no response within a reasonable time, it shall be treated as contempt of the Institute and is sanctionable by the Disciplinary Tribunal. 8. The Disciplinary Tribunal is the only body that can determine, subject to the right of appeal, if a complaint of misconduct is proved. 9. From the Accountants’ Disciplinary Tribunal, a member has a right of appeal to the Court of Appeal. 10. If a member of the Institute has been declared guilty of professional misconduct by the Tribunal, the member shall not be eligible to serve on the Institute’s council or any of the Institute’s committees for a period of 5 years from the date of re-admission into membership or studentship. 3.2 CONSEQUENCES OF UNETHICAL BEHAVIOUR Unethical behaviour of the professional Accountant refers to failure to comply with the expected normal moral standards of a profession. It is in other words, termed professional misconduct. As stated above, the power of ICAN to enforce ethical standards is conferred on the Accountants Disciplinary Tribunal, with powers equivalent to those of a High Court. Any appeal against its verdict goes to the Appeal court. The investigating panel considers complaints against the conduct of members and is empowered to initiate disciplinary action by referring appropriate cases to the Disciplinary Tribunal for adjudication. Sanctions commonly imposed for professional misconduct include: 1. Reprimand 52 2. Payment of costs 3. Fine 4. Withdrawal of practicing rights 5. Suspension from membership for a period of time 6. Expulsion from membership. 3.3 Auditor Independence Independence of the auditor adds credibility to the audit report on which users of the financial information depend to make economic decisions about a company. Thus, auditor independence is one of the basic requirements to keep public confidence in the reliability of the audit report. The benefits of safeguarding the independence of the auditor therefore extend so far as to the overall efficiency of the capital market. Independence is described by the IFAC (2009) Code as: 1. Having a position to take an unbiased view point in the performance of audit tests, analysis of results and attestation in the audit report; 2. Independent in fact: accountant’s ability to maintain an unbiased attitude throughout the audit, so being objective and impartial; 3. Independent in appearance: the result of others’ interpretations of this independence. In this regard, the IFAC ethics guideline states that independence requires: i. Independence of mind: The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and profession scepticism. ii. Independence in appearance: The avoidance of facts and circumstances that are so significant that a reasonable and informed third party, having knowledge of all relevant 53  information, including safeguards applied, would reasonably conclude a firm’s or a member of the assurance team’s integrity, objectivity and professional scepticism had been compromised. 3.3.1 Potential threats to independence and Objectivity There are five general sources of potential threats to independence and objectivity identified by the revised Code. (a) Self-interest threat This occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other self-interest with, an assurance client e.g. a direct financial interest or material indirect financial interest in an assurance client.According to the Code examples which create self-interest threats for a professional accountant in public practice include: (i) A firm entering into a contingent fee arrangement (i.e. fees are contingent upon the findings or results of services) that relates to an assurance engagement; (ii) A firm which is concerned about the chance happening of losing a significant client; (iii) A member of the audit team entering into employment deals with the audit client; (iv) A firm having undue dependence on total fees receivable from a client; (v) A member of the assurance team having a direct financial interest (e.g. ownership of client equities or financial instruments) in the assurance client; and (vi) A member of the assurance team having a significant close business relationship with an assurance client. (b) Self-review threat This occurs when any product or judgment of a previous assurance engagement orr non-assurance engagement needs to be re-valuated in reaching conclusions on the assurance engagement or when 54 a member of the assurance team was previously a director or officer of the assurance client, or was an employee in a position to exert direct and significant influence over the subject matter of the assurance engagement. Examples of circumstances which create self-review threat for a professional accountant in public practice include: i). A firm issuing an assurance report on the effectiveness of the operation of a financial system after designing or implementing it. ii). A firm, having prepared the original data used to generate records that are the subject matter of the assurance engagement. iii). A member of the assurance team being or having recently been a director or officer of the client. iv). A member of the assurance team being or having recently been employed in a position to exert significant influence over the subject matter of the engagement. v). The firm performing a service for a client that directly affects the subject matter information of the assurance engagement. (e) Advocacy threat This occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an assurance client’s position or opinion to the point that objectivity may, or may be perceived to be, compromised. Such may be the case if a firm or a member of the assurance team were to subordinate their judgement to that of the client. Examples include dealing in, or being a promoter of, shares or other securities inan assurance client and acting as an advocate on behalf of an assurance client in litigation. (f) Familiarity threat This is the threat that due to a long or close relationship with a client or employer, a professional accountant will be too sympathetic to their interests or too accepting of their work. Examples of circumstances which may create familiarity threats include: 55 i). a member of the assurance team having a close or immediate family member who is a director or officer of the assurance client; ii). a member of the assurance team having a close or immediate family member who is an employee of the client and in a position to significantly influence the subject matter of the assurance engagement; iii). A former partner of the firm being a director, officer of the assurance client or an employee in a position of significant influence; iv). Acceptance of gifts or hospitality, unless the value is clearly insignificant, from the client, its directors or employees; and v). long association of a senior member of the assurance team with the assurance client. (g) Intimidation threat (for example, threats of replacement due to disagreement). This occurs when a member of the assurance team may be deterred from acting objectively and exercising professional scepticism by threats, actual or perceived, from the directors, officers or employees of an assurance client e.g threat of replacement over a disagreement with the application of an accounting principle. Examples of circumstances which may create intimidation threats for a professional accountant who is in public service include: (i) A firm being threatened with dismissal from a client engagement; (ii) A firm being threatened with litigation by the client; (iii) A firm being pressurized to reduce inappropriately the extent of work performed so as to reduce fees; 56 (iv) An audit client indicating that it will not award a planned non-assurance contract to the firm if the firm continues to disagree with the client’s accounting treatment for a particular transaction; and (v) A professional accountant being informed by a partner of the firm that a planned promotion will not take place except the accountant agrees with an audit client’s inappropriate accounting treatment. 3.3.2 Possible Safeguards There are two general categories of safeguards identified by the Code: (i) Safeguards created by the profession, legislation or regulation (ii) Safeguards within the work environment. Examples of safeguards created by the profession, legislation or regulation: (i) Educational training and experience requirements for entry into the profession; (ii) Continuing professional development requirements; (iii) Corporate governance regulations; (iv) Professional standards; (v) Professional or regulatory monitoring and disciplinary procedures; (vi) (External review by a legally empowered third party of the reports, returns, communication or information produced by a professional accountant. Examples of safeguards in the work environment (that is, within the Audit firm): (i) Involving an additional professional accountant to review the work done or otherwise advise as 57 necessary; (ii) Consulting an independent third party, such as a committee of independent auditors, a professional regulatory body or another professional accountant; (iii) Rotating senior personnel; (iv) Discussing ethical issues with those in charge of client governance; (v) Disclosing to those charged with governance (through the audit committee) the nature of services provided and extent of fees charged. (vi) Involving another firm to perform or re-perform part of the engagement. vii) Leadership stressing the importance of independence, having written independence policies and designating a member of senior management to oversee the adequate functioning of the safeguarding system. Hayes, Dassen, Schilder and Wallage posit a third category of safeguard, that is, safeguard within the Assurance Client. Examples of such safeguard include: i). Ratification by the audit committee of the appointment of the audit firm ( the trend is towards appointment of the auditor by the Audit committee); ii). Competent personnel in the employment of client; iii). Client is committed to fair financial reporting; iv). The client has internal procedures that ensure objective choices in commissioning non- assurance engagements; v). client has a corporate governance structure such as audit committee, that provides oversight of 58 the audit firm’s services. 4.0 CONCLUSION The Accountant should strive to adher to ethical principles as it is fundamental to his professional practice as an auditor. Compliance with ethical principles is central to the the credibility of the audit report issued by the accountant. The public’s acceptance of and reliance on the auditor’s work is by extension its acceptance of and reliance on the accounting profession. The auditor should therefore be careful of situations that create threats to his objectivity and independence. 5.0 SUMMARY This unit discussed the fundamental ethical principles based on IFAC’s Code of Ethics as well as ICAN’s Rules of Professional Conduct and Guide for Members. It also examined threats to the accountant’s independence and objectivity and possible safeguards to the identified threats are also suggested. 6.0 TUTOR MARKED ASSIGNMENT 1. Independence is a trait all external auditors must imbibe.What are the factors that can impair audit independence? 2. Discuss the fundamental ethical princ