1. Independence, Integrity And Objectivity
2019/1/18
Topic 11 :
Independence, Integrity And Objectivity
2019/1/18
Week 1

2. 2019/1/18
Meaning of Auditing
Auditing (broadly defined): is an exercise whose objective is to enable the auditors to express an opinion whether the financial statement are prepared in all material respects, in accordance with an identified reporting framework (e.g. GAAP) or other criteria.
Auditing (narrowly defined): is a written report on the examination of financial statements for an entity
2019/1/18
Week 1

3. Meaning of Independence
2019/1/18
Independent: ‘not subject to control by others, self-governing’ (Webster’s Dictionary)
Accounting Independence: freedom from relationships which impair or appear to impair the ability of the accountant to exercise objectivity
Objectivity is a state of mind and imposes upon an individual the obligation to be impartial, intellectually honest, and free of conflicts of interest
Integrity is an element of character and is essential to the maintenance of public trust
2019/1/18
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4. Significance Of Audit Independence
Independence is an essential auditing standard: adding credibility to financial statements
Independence is vital to a successful audit practice
Judgment of the auditor must not only be impartial and unbiased, but it must also appear to be so to any outside observer
2019/1/18

5. Significance Of Audit Independence
2019/1/18
Significance Of Audit Independence
Independence is an essential auditing standard: adding credibility to financial statements
Independence is vital to a successful audit practice
Judgment of the auditor must not only be impartial and unbiased, but it must also appear to be so to any outside observer
A small manufacturing company has asked a CPA firm to perform an audit. The company’s controller is the engagement partner’s mother-in-law. Would the firm be considered independent for purposes of accepting the audit engagement?
2019/1/18
Week 1

6. Independence Both In Fact And In Appearance
2019/1/18
Independence Both In Fact And In Appearance
Independence in fact
Increasing the value of an audit report
Independence in appearance
Making the public believe
Mautz and Sharaf : Independence in appearance be extended to cover the whole profession
Unless the public has confidence, individual members will not have the maximum opportunities for services
2019/1/18
Week 1

7. Mautz and Sharaf’s Three Dimensions Of Audit Independence
2019/1/18
Programming independence
Freedom to develop audit programme
Selection of audit techniques and procedures, amount of work to be performed
Investigative independence
Freedom to carry out audit investigations
Selection of areas, activities, relationships and policies, and free access to all books, records, information
Reporting independence
Freedom to report audit findings
Free from any feeling of loyalty or obligation to report facts
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8. Relationships Among Independence, Integrity And Objectivity
Fact
Appearance
INTEGRITY
OBJECTIVITY
Mind
Behaviour
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9. Major Avenues For Ensuring Independence, Integrity And Objectivity
2019/1/18
Professional body e.g. HKSA
Providing standards, guidelines and statements
Quality review, disciplining and CPE programmes …
CPA firms
Audit procedures and compliance monitoring
Job rotation, performance appraisal and declaration
Corporate culture and code of conduct …
Individual members
2019/1/18
Week 1

10. Actual or threatened litigation
HKSA Statement 1.203
Fees : Undue dependence on a client
Actual or threatened litigation
Family and personal relationships with clients
2019/1/18

11. Actual or threatened litigation
Relative size: obtain no more than 15% of gross fees from a single client
Overdue fees: settle prior year’s fees before starting current year audit
Pricing: charge reasonable fees to audit client
Contingent fees: not allowed for an audit work
HKSA Statement 1.203
Fees : Undue dependence on a client
Actual or threatened litigation
Family and personal relationships with clients
2019/1/18

12. Actual or threatened litigation
Relationship: candor and full disclosure of all aspects of client’s business operations
Litigations: client suing negligence against the auditor; auditor suing his client for outstanding fees
Adversarial positions: client may be unwilling to disclose further information; auditor my be unable to continue the audit
Significant factors: materiality of the litigation; the nature of the audit; and whether relates to a prior audit
HKSA Statement 1.203
Fees : Undue dependence on a client
Actual or threatened litigation
Family and personal relationships with clients
2019/1/18

13. Actual or threatened litigation
2019/1/18
Including: serving for the same client for a number of years; close friendship; relationship by blood or marriage; and joint venture, partnership…
Avoid existence of family and personal relationships between a member of the audit team and a director, an officer or certain employees, depending on their role, of the audit client
Significant factors: the individual’s responsibilities on the audit team and the closeness of the relationship
Safeguards: removing the individual from the audit team; structuring the responsibilities that auditors do not deal matters with their family members or close friends….
HKSA Statement 1.203
Fees : Undue dependence on a client
Actual or threatened litigation
Family and personal relationships with clients
2019/1/18
Week 1

14. Financial involvement with clients’ affairs Loans to and from clients
HKSA Statement 1.203
Financial involvement with clients’ affairs
Loans to and from clients
Goods, services and hospitality
2019/1/18

15. Financial involvement with clients’ affairs Loans to and from clients
Avoid direct or indirect financial/beneficial interests in audit clients by the partners, staff on the audit team and their family
Interests include: shareholdings, beneficial interests in trusts, and trustee investments, but not an insurance or pension policy with a client insurance Co.
Safeguards: dispose of the direct/indirect interest by the member or family members; or remove the member from the audit engagement
HKSA Statement 1.203
Financial involvement with clients’ affairs
Loans to and from clients
Goods, services and hospitality
2019/1/18

16. Financial involvement with clients’ affairs Loans to and from clients
2019/1/18
HKSA Statement 1.203
Not acceptable: make a loan; accept a loan; or have borrowings guaranteed by a client unless the loan or guarantee is immaterial to both the firm or the member and the audit client
Acceptable: the audit client is a bank or a similar institution and the loan is made under normal lending procedures, terms and requirements and the loan is immaterial to both the firm and the audit client
Financial involvement with clients’ affairs
Loans to and from clients
Goods, services and hospitality
2019/1/18
Week 1

17. Provision of non-audit services to audit clients
HKSA Statement 1.203
Provision of non-audit services to audit clients
Other non-audit functions
Conflicts of interests
2019/1/18
Members not in practice

18. Provision of non-audit services to audit clients
Benefit: the greater the knowledge of the audit client’s business, the better the audit team will understand the client’s procedures and controls, and the business and financial risks that it faces
However, providing non-audit services may create threats to the independence of the firm
The following activities should be avoided:
Authorizing, executing or consummating a transaction on behalf of the audit client
Determining which recommendation of the firm should be implemented
Reporting, in a management role, to those charged with governance
HKSA Statement 1.203
Provision of non-audit services to audit clients
Other non-audit functions
Conflicts of interests
2019/1/18
Members not in practice

19. Provision of non-audit services to audit clients
Not accept or continue a service in which there are conflicts of interests with the audit clients
Avoid any material financial gain which accrues or likely to accrue to the practice other than in the form of fees, i.e., commission or other benefit from a third party by advising a client to pursue one course rather than another.
Not serve two or more audit clients whose interests may be in conflict unless appropriate steps are taken
Safeguards: different audit teams for different clients; policies to avoid leakage of confidential information between teams; regular review by a partner not involved with either client; or advise clients to seek independent advice
HKSA Statement 1.203
Provision of non-audit services to audit clients
Other non-audit functions
Conflicts of interests
2019/1/18
Members not in practice

20. Provision of non-audit services to audit clients
2019/1/18
HKSA Statement 1.203
Litigation support: should be and be seen to be independent in giving evidence in a court of law
Specialist valuation: not audit a client where specialist valuation of a product was carried out by the member or its associates
Arbitration: act independently of the parties and issues involved
Insolvency appointments: guidance on insolvency appointments
Provision of non-audit services to audit clients
Other non-audit functions
Conflicts of interests
Members not in practice
Week 1