Ethics in Auditing

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Abstract

Auditors play an important role in the financial world. Their knowledge and skills are crucial in the decision-making process of the government and business sectors alike. Even in simple household scenarios, there is no denying that sufficient financial intelligence is a necessity in the proper investment of hard-earned funds. In this way, more time and energy is saved rather than wasted and a better future is created for all the members of the family.

It is for this basic reason that auditors are required to maintain credibility at all times and must always prove to their audited entitys that they are focused and are properly guided with what they are doing primarily in providing a reliable opinion about the status of a certain entity (government or business).

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For many years now, several audit organizations have come up with and relied on their own Code of Ethics just like other professionals in the fields of law, medicine, etc. These principles have helped a great deal in establishing good foundation in the auditing realm particularly in the constant quest for the wisest options in financial decision making.

This reality has made auditors/accountants one of the most in-demand professionals up to this day in terms of analyzing the economic status of a certain organization, and making the Code of Ethics one of the most essential issues to consider in carrying on audit tasks.

Introduction

The purpose of this work is to provide better understanding on the composition and function of the Code of Ethics especially the values that it enumerates.

There will also be an overview of the Auditing Standards as it goes hand in hand with the former as among the current issues in auditing. These will be presented base on the strict adherence to the specifications of the Auditing Standards Committee. The concepts to follow are designed for auditors practicing under the public sector and the scopes are basic enough to be adapted to the policies of many countries worldwide. As basic as it is, several citations will be noted in the body of this work so as not to distort the main concepts or idea of the Code of Ethics issued by the ASC.

The student is expected to benefit from this research project by developing more awareness on this particular audit issue and enhance more of his analyzing skills. This way he can be more logical not only in terms of dealing with academic challenges but he can also apply this skill in real-life hurdles as this topic deals with issues that are part of the society’s daily concerns.

CODE OF ETHICS DEFINED

A Code of Ethics is “a set of wide-ranging standards and values abided by the auditors in performing their tasks” (Ahlenius, 1998, page 16). The rationale behind these ethics is to ensure the public that auditors can be trustworthy of any crucial data that they may need to disclose as part of the requirements in the assessment of financial statements and other documents. An auditor is selected based on the careful consideration of the independence, authority and responsibilities that he will assume as he proceeds with the examination of these financial statements.

Concept and Background

When it comes to public sector auditing, an auditor is assigned by a particular Supreme Audit Institution. The SAI is a “public organization of a particular nation which performs what is considered to be the utmost public auditing service of a certain country under its prevailing laws regardless of how it is created” (Ahlenius, 1998, page 80). When an auditor commits an error or his name tarnished, not only is that auditor’s credibility affected but as well as the SAI that he represents or works for. One of the basic requisites for an auditor’s behavior is that he “should be beyond reproach at all times and in all circumstances” (Ahlenius, 1998, page 17).

It is imperative therefore, that the SAI should make tremendous efforts in monitoring their auditors and making sure that these professionals are indeed properly guided by the Code of Ethics. The auditors on the other hand, are expected to follow the main values provided by the codes, namely Integrity, Independence and Objectivity, Confidentiality and Competence. One proof that these values are being promoted is the existence of support and fairness among fellow auditors. The results of these are very rewarding as exhibiting this kind of professionalism will earn the public’s respect as they are assured that their well-kept information are in good hands.

Integrity

This value is referred to as the foundation of the Code of Ethics since it shows in more ways than one how the public responds to the character of a certain auditor. This is where the satisfaction of the public is being measured as regards to the overall performance of an auditor.

Two of the key things to observe whether there is integrity in an auditor are how he balances or maintains harmony in the course of his work and how he properly treats the people he works with. In other words, he must be able to maintain that wholesome approach in spite all the pressures that could come his way. In this case, integrity is best defined by an auditor “whose conduct is beyond suspicion and reproach at all times” (Ahlenius, 1998, page 18). He must be free from all criticisms which the public may potentially throw at him.

Base on the ASC’s provisions, there are at least four requirements in promoting integrity of audit work. First, auditors should practice “independence and objectivity” (Ahlenius, 1998, page 18). Being independent and objective means that opinions created must be fair or not affected by third-party point of view. The auditor should formulate his own judgment basing on information gathered by him. Secondly, he must “maintain irreproachable standards of professional conduct” (Ahlenius, 1998, page 18).

Imagine yourself wearing a white shirt with no spots or flaws at all. This is how an auditor is expected to deliver his work. He must make sure that for whatever shortcomings in the audit process, he must be prepared to defend himself against any blame so as to make him faultless at all times. This will guarantee the public that he is capable of performing his work the way he is expected to and that he is indeed equipped with the necessary knowledge and skills of a good auditor.

Third, an auditor should know how to “make decisions with the public interest in mind” (Ahlenius, 1998, page 18). It means that his options are not affected by a chosen few but rather how the public is going to be affected by his findings. And last but not the least, auditors must “apply absolute honesty in carrying out their work and in handling the resources of the SAI” (Ahlenius, 1998, page 18). Truthfulness to the audited entity and the SAI must be practiced at all times.

Independence, Objectivity and Impartiality

Auditors should generate judgment based on the information that they have gathered and in no way must be influenced by the company/entity or “other outside or external interest groups”(Ahlenius, 1998, page 19). Doing otherwise will result to a biased assessment and would violate the requisite of an honest opinion which could only benefit the few.

He must always stick with and remain true to his purpose of creating an honest opinion from the items presented to him by the audited entity as he carefully goes through the evaluation of issues and documents. This will also help him to stay in focus thus saving more time and resources in carrying out his task.

In order to guarantee that these three values (independence, objectivity and impartiality) are not violated, auditors must refrain from entertaining the pressures of those people who would want things to go their way (although they can also consider the viewpoints presented by the audited entity and other groups). This would otherwise lead him to go against the objective of an independent and accurate opinion. Auditors must also not rely on whatever personal opinion he has about individuals, entities or any ventures which he may encounter as this would lead to being biased.

Previous employment or personal and financial dealings with the company being audited could also greatly affect the independence of an auditor since most likely, he will consider first how the audit process will affect him personally or his former colleagues will be using emotional blackmail against him so that he would be forced to formulate his findings on their favor.

In relation to the values of independence, objectivity and impartiality, two subjects are further sub-categorized namely, political neutrality and conflicts of interest. Auditors should always consider these two factors in maintaining ethical standards. As mentioned earlier, the SAIs of a particular country is governed by the laws of the State. Thus, auditors can be exposed to the pressures of individuals in the political field from which they are strongly advised not to yield so they can remain independent in their audit work. They are, therefore, prohibited from taking part in political activities which could force them to take sides in the end.

Another thing to consider is conflicts of interest. These conflicts may occur when an auditor provides advice or services related to management responsibilities or powers of the entity being audited. Another example is when an auditor accepts gifts or any forms of privileges being offered by the entity being audited. This is against professional ethics as it creates the impression that there is always a catch or bribery in this gift giving act. The same also goes in cases where auditors create dealings or affairs with managers and other employees of the company being audited which is deemed to produce vested interest. This may lead to skepticisms of dishonesty and conspiracy with the auditee.

Information received from data gathering process must be used for audit purposes alone. Auditors must respect the confidentiality of this information and they are strictly prohibited from using them as a means of gaining profits for themselves or other favored individuals. Nor are they allowed to use or reveal this information as a means of causing damage to people whom they have issues with.

Professional Secrecy

In general, auditors are not allowed to reveal to third party individuals the details of their audit. However there is an exception when the SAI itself requires the said disclosure as part of the usual process of their operations or as a means of conforming to the requirements of laws.

Competence

Auditors are regarded as highly trained professionals and they are required to uphold this image in order to preserve the public’s respect and confidence. Therefore they are advised not to accept a particular job if they are not equipped with the necessary skills to accomplish it.

The items with which an auditor is expected to be competent are “applicable auditing, accounting, and financial management standards, policies, procedures and practices” (Ahlenius, 1998, page 21). It is also important that they are well aware of the background and procedures going on inside the entity for which they are performing the audit, particularly its “constitutional, legal and institutional principles and standards” (Ahlenius, 1998, page 22).

Many aspects in the financial world constantly evolve in the passing of time. It is for this reason that auditors do not stop in simply passing the board examination but rather they continue acquiring continuous professional development. They must also keep themselves up to date with the existing trend in the economy which is essential in acquiring competence.

Furthermore, being competent also demands that auditors perform due professional care in auditing and preparing the reports of their audited entity. There must always be excellence in work performed and the audit process must be in accordance with the provisions of generally accepted auditing standards.

Simply put, in the complex world of accounting, a competent auditor knows and understands what he should do and how he should do it.

AUDITING STANDARDS WITH ETHICAL IMPORTANCE

In this area, four of the items already mentioned earlier are once again given more emphasis as part of the general auditing standards. These include independence, conflict of interest, competence and due care.

According to the standards, both the auditor and the SAI must practice independence. This rule is further distinguished according to the three groups being dealt with during the audit. These are the legislature of the State or country, the executive division, and the entity being audited.

The legislature and the SAI have a closer working connection compared to the other two. The SAI coordinates directly to the legislature as the latter authorizes the reports of the former whose accomplishments are being monitored at the same time. Some of the important roles of the SAI associated with government function include the audit of the utilization of the budget of the State and the audited administration. Any reported disagreement which may occur as a result of the audit is automatically communicated to the legislature.

Because of these mandatory meetings, extra caution against any political influence is advised to the SAI who then must always appear passive when it comes to certain requests of political individuals, which may affect the independence of the audit process. In addition, although the laws governing the SAI’s actions are being approved by the legislature, and the legislature can meddle with matters like identifying or limiting the coverage and time table of the audit report, generally the preparation and handling of the whole audit setup must be done objectively by the SAI and strictly in accordance with the Code of Ethics.

The SAI is also held responsible in properly utilizing the supplies or resources which the legislature will be handing over to them in successfully carrying out their audit responsibilities.

Independence must also exist between the SAI and the government’s executive branch. The duty of auditors is to make the executive aware of the existing shortcomings in the administration so that points for improvement can be quickly determined. They also provide counsels when it comes to accounting standards, policies and financial statements. However the SAI must make sure that their actions are not being dictated by and in accordance with the executive branch’s will which may affect the audit findings, conclusions and recommendations.

Basic rule dictates that the final resolve of the audit is the SAI’s privilege. The executive branch is also obliged to provide boundless access when it comes to information about the government’s “financial situation and general expenditure policies” (Ahlenius, 1998, page 50). Any refusal by the executive which may hinder the SAI’s objective for a fair audit presentation will be made known to the legislature.

The stipulation, when it comes to the term or occupancy of the SAI’s officer-in-charge, is also free from the executive’s interference, particularly the period of term or age of retirement. This rule intends to avoid the existence of pressure from the executive branch which may lead to impartiality. An SAI head’s removal from his job therefore, should only be done through a “special process handled by, for example, those in the court position” (Ahlenius, 1998, page 50).

The auditing standards also provide that the SAI’s independence from the executive branch will only be made certain if its authority and independence will be made known and comprehended by the community. In relation to this, the SAI should take the initiative in promoting community awareness if needed.

The third kind of independence which the auditing standards mandate is the independence from audited entities. The SAI however, must make sure that these entities are provided with sufficient knowledge regarding the scope of their audit work, and at the same time be able to establish harmonious relationship with them in order to gain smooth and truthful access to the information needed. There is a difference between the government audit and private sector audit. With regards to the former, the unit being audited is not considered a client and does not make use of an engagement letter the way a private sector audit does.

Instead, the SAI exercises more freedom in carrying out its task with regards to the scope and nature of their work, although they also take into account the outlook of the management in formulating their audit opinion. SAI personnel are prohibited to take part in the management process of the entity being audited nor become part of their committees. They are also not allowed to give directions or clarifications as to the responsibilities of the staff of the auditee. That is why any auditor with close or personal identification with the management being audited is excluded from the job. Any advice given by the SAI should strictly and only be referred to as an audit advice.

Next to independence is the concept of competence. The standards provide that SAI personnel must observe and preserve excellence in the quality of their work as the auditing job is prone to critical matters. The efficiency of an audit work is greatly dependent on the procedures being used in conducting the audit. That is why only personnel with excellent education, highly-trained skills and experience are being considered to perform such crucial tasks of audit. This requires the continuous updating of one’s knowledge and skills on the evolutions in audit approach. Some of the basic approaches are “systems-based techniques, analytical review methods, statistical sampling, and audit of automated information systems” (Ahlenius, 1998, page 53).

The final concept being given importance to by audit standards is due care. This kind of practice should be applied in terms of “enumerating, collecting and assessing audit evidence, and in reporting findings, conclusions and recommendations” (Ahlenius, 1998, page 53).

Auditors must always prove that they are objective in their work and should maintain fairness in evaluating and reporting their audit opinion. There should be proper understanding of the extent expertise required and auditors should always be on the lookout of certain instances which could affect the quality of their audit. Some of these instances include, “weaknesses in the audit’s control systems, lack of organized or poor maintenance of records, errors and unusual transactions or results which could be indicative of fraud, improper or unlawful expenditure, unauthorized operations, waste, inefficiency or lack of integrity” (Ahlenius, 1998, page 53).

In cases where the SAI must utilize the expertise of a consultant or other experts, they must ensure first that these outsiders are also competent and will contribute to the high quality of audit work. Above all, auditors must always practice confidentiality in order to safeguard crucial information being provided by the audited entity. They can only divulge information if they are found to be violating any laws and the reporting should be done to appropriate personnel.

Conclusion

Auditing is considered to be one of the most important jobs in the society. It is very rewarding both financially and emotionally to a person who is capable of keeping up with the demands of such a prestigious job. But perhaps the most important lesson that the Code of Ethics is trying to bring any aspiring accountant is that the job of auditing is not for everybody.

Only people who are able to keep up with the title “professional” are the ones who are likely to survive auditing. For it is a job where one has to have the real passion and patience to endure the meticulous task involved and the unforgiving community who will not tolerate any mistakes from the auditor who is expected to be an expert.

On the other hand, the Code of Ethics brings good news to those who are determined to be part of the auditing practice. Because of its existence, many are guided and protected from any possible fraud which is very common in the business world. The Code of Ethics allows everyone to hope on more successful business ventures with the belief that they can at least cling to these principles which they can definitely use to protect their investments. And that is the very purpose of these ethical provisions, to be able to contribute to the betterment of living in every community and make sure that this privilege can be availed by those people living in it.

Reference

Ahlenius, I. 2001. Code of Ethics and Auditing Standards. Retrieved 28 December 2008 at

http://intosai.connexcc-hosting.net/blueline/upload/1codethaudstande.pdf. or

http://209.85.175.132/search?q=cache:6drlyX1dahsJ:intosai.connexcc-hosting.net/blueline/upload/1codethaudstande.pdf+ethics+in+auditing&hl=en&ct=clnk&cd=1&gl=ph