The ethical issues surrounding the operation of auditors term paper sample

The basic purpose of auditing is to provide an assurance to users of financial statements that the statements are free from any material misrepresentation made to intentionally or unintentionally. Auditing therefore requires the auditor to determine credibility of financial statement and this means that an auditor should also be credible. The credibility is enhanced by being, a person of integrity so that the publican have trust on the audit work, he should be competent meaning he should posses professional skills and qualifications so that he can carry out his work with due care, he should be secretive and should only reveal client information in matters of public interest only and he should be independent therefore he should not be manipulated by the client. The independency of auditor is seen as compromised if he accepts some loans and incentives from the clients, he audits in a firm where he has some financial interests or he carries out audit work despite having conflicting interests.
The professional ethics of auditors refers to the rules that govern auditors when carrying out their duties. The basic duty of an auditor is to give credibility to company’s financial statements he should determine whether the financial statements are free of any material misstatement. The auditor should therefore be credible so as carry out his duties well. The credibility of an auditor is exhibited through various qualities.
First the auditor must be a person of integrity. This refers to being straightforward and sincere in approach to professional duties. An auditor must be aware of the depth of his role not only to the company but also to the society at large therefore he must maintain high standards of conduct and he should never certify what he knows to be untrue as true. In addition, he should take caution caution so as to avoid misleading intentionally or unintentionally those who rely on his report. Therefore, integrity ensures auditors remain independence and objectivity in course of duty while keeping public interest in mind. Integrity is clearly compromised in several cases for example, when an auditor permits the management to make misleading entries in books of account or permit financial information containing false information to be issued to the public.
Second is competency, an auditor should carry out his duties with skill and due care as prescribed by the rules and regulations of institute of public accountants or the rules of the country. An auditor should not undertake or carry out professional work, which he is not competent to carry out unless he obtains the advice and assistance which can fully facilitate carrying out the work. Caring out such work without the necessary competency is clear example of failing to adhere to the requirement of excising due care in auditing. Therefore, an accountant should first consider extend and scope of auditing work and then reevaluate himself whether he has the necessary competency.
Third is confidentiality, according to professional ethics an auditor should not disclose any of the client’s information. However, can disclose such information if consent has been obtained from the client or where it is a matter of public interest or where there is professional or legal right or duty to disclose the information. In addition, any information obtained in course of audit work should neither be used nor appear to be used for personal benefit of the auditor or any third party.
Fourth is independence, this is the fundamental concept in auditing and generally in accounting profession. Independence is professionally defined as an attitude of the mind which is characterized by integrity and objectivity. Every auditor should appear and should be free in every professional assignment he undertakes of any interest which may in any way distract him from being objective. This ensures that he is impartial and makes it impossible for him to allow bias to affect his judgment.
The professional independence of an auditor is the base line of a professional accountant for it touches and gives examples on matters of scope of audit work, due care, public interest and duties and responsibilities of auditors. It is therefore in interest of this paper to provide the stipulated guidance on the code of conduct in situations where auditor’s independence may impair.


It is undesirable practice for an auditor to receive significant proportion of his fee income from either a client or a group of connected clients. This is because they may easily influence the auditor’s independency by blackmailing him. Therefore, an auditor should always try as much as possible diversify his operations.
When charging the fees for auditing services the basis should not be percentage of client’s profit. However, this can be contravened if such basis is generally acceptable or it is authorized by a statue. This restriction is made to avoid impairing the independency of the auditor by hope of a financial benefit. In addition, the public may have suspicion the auditor impartiality was compromised in making judgment due to foreseen financial benefits. Therefore, it is advisable to base fees charged on the skill and knowledge required to carry out the auditing work, seniority of staff members to be engaged in the audit, time required to complete the audit and the extend of responsibility which the work entails.
The scope and nature of services should therefore be understood before starting the audit work so that the firm can have strong basing of determining the fess to be charged. For example, if a business has poor internal controls the nature of work carried out is more profound than where a company has no internal controls also if a company has an internal auditor then the external auditor may rely on him however, the extend of such reliance should be limited.

Personal and family relationships

This relationship definitely impairs auditor’s independency. An auditor should take all steps necessary to ensure that personal and family relationships do not interfere with objective approach to auditing duties. It has been previously noted that public interest should be considered in auditing therefore, accepting to audit a family business gives an indication that the auditor does not keep public interest in heart.

Financial involvement with a client

This mainly comes in two perspectives i. e. obtaining loans from or to a client and through beneficial shareholding. In regard to loans obtained or offered to clients it is ethical that an accountancy firm should nether offer or accept any form of loans from its clients. This also includes guarantees. However, an accountancy firm is allowed to accept a loan if offering loans falls within the client’s ordinary course of business. Despite this provision, it is advisable for the firm to decline any loan offered in better terms than it is available to others ordinary customers. On the aspect of beneficial shareholding, it is unlawful for a partnering an accountancy firm or her spouse to have beneficial shares in clients business. If the appointment of an auditor is made when one has such share it is advisable to dispose the shares in the earliest opportunity. In other cases however, company’s’ article of association may require an auditor have some shares in the company therefore it because impossible for accountancy firm to avoid beneficial shareholding. In this case the auditor is advised to obtain the minimum number of shares allowed and he should exempt himself from voting in general meetings in matters regarding auditor’s appointment and remuneration.

Goods and services

Accepting of goods and services in better services that ordinary clients is not acceptable. This is because it might lead to undue hospitality which may threaten the auditor’s independency. Acceptation of such goods and services in better terms provides a clear example to the public that the auditors judgment is compromised. And the auditor will have contravened the provision of keeping public interest at heart.

Conflict of interests

A conflict of interest may arise in several cases. First and foremost, if the accountancy firm provides other services to clients he should be aware of the extent to which such action threatens the auditor’s independency. To avoid this threat, the accountancy firm should use different staff to carry out the extra services from those who are providing auditing duties. This is an aspect of provision of due care in auditing.
Secondly, it’s when the auditor is serving two competing clients in conflict. In this case the accountancy firm should disclose to the clients and provide to them advice on resolving the conflict. If it becomes apparent that the conflict cannot be resolved it is advisable for the auditor to disengage one of the appointments.
Thirdly, a conflict may occur when the company being audited goes into receivership. It is advisable for the auditor to decline the appointment of becoming receiver manager. However, if two years have elapsed since being an auditor in the company the auditor can accept the appointment. On the other hand, if one was acting as a receiver manager he should not accept the role of an auditor unless two years has elapsed.
Lastly, is the case of previous appointment; any member who has been an employee of a company should not audit for the company unless two years have elapsed since leaving the employment. This time provision is important in eliminating any previous relationships which may influence auditor’s independency or a case where one goes back to audit his actions.


Auditing is the process of determining the credibility of financial information provided to users of such statements. To carry out audit work effectively an auditor should posses several traits which make the public to trust audit judgment as impartial. They include integrity, competency, confidentiality and independency. Integrity refers to caring out audit work sincerely , competency requires the auditor to posses required skills which can facilitate auditing to be with the necessary due care, confidentiality calls for maintaining client information secretly however, the secrecy can be compromised in case of public interest finally, independency refers to being free from any form of manipulation. Manipulation is exhibited in case where auditor accepts loans and goods from clients at better terms than ordinary clients, auditing in a family business, auditing fee being pegged on client’s net profit or even auditing in a firm where one has conflicting interests.


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