Audit Quality and Ethics: A Review of Literature

This assignment reviews the literature on audit quality and ethics, with a focus on the importance of IESBA (International Ethics Standards Board for Accountants) standards and principles in maintaining auditor integrity. It discusses the threats to audit quality, including fee pressure and time pressure, and highlights the role of professional behavior and ethics in ensuring audit quality.

Running head: AUDIT AND ASSURANCE
Audit and Assurance
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................2
Requirement [a]...............................................................................................................................2
Requirement [b]...............................................................................................................................3
Situation 1....................................................................................................................................3
Situation 2....................................................................................................................................4
Situation 3....................................................................................................................................4
Situation 4....................................................................................................................................5
Situation 5....................................................................................................................................5
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

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Introduction
Conducting the audit operations has become one of the major necessities for the business
organizations for the retention of their major stakeholders like investors, creditors and others.
Auditing refers to the process of conducting through inspection on the financial accounts of the
companies in order to find out whether there is any material misstatement or not (William Jr,
Glover and Prawitt 2016). It is the obligation of the auditors to follow all the ethical principles
and standards of the profession. In this process, International Ethics Standards Board for
Accountants (IESBA) plays an integral part as it contains all the required standards and
principles of audit ethics that the auditors are required to comply with. For this reason, IESBA is
regarded as an independent body organization responsible for setting audit ethics and standards
(ethicsboard.org 2018). This particular report aims at analyzing and evaluating the roles and
functions of IESBA. The next part of the report involves in the discussion of the violation of
ethical principles of five given situation.
Requirement [a]
From the above discussion, it can be understood that IESBA is a major part of the
auditing profession and for this reason, there are some major roles and factions of IESBA. As per
the main role of IESBA, IESBA is highly responsible for the development and issue of ethics
principles and standers for the users of the audit report; IESBA also issues different audit
pronouncements for the auditors all over the world (Gaynor et al. 2015). For this reason,
accounting professionals all over the world irrespective of the types and size of the organizations
can apply the standards and principles of IESBA due to the fact they work as the foundation of
the auditing and accounting ethics. Thus, all the business organizations under the International
Federation of Accountants (IFAC) is not allowed for the application of less stringent audit ethical
standards provided in IESBA (Apostolou, Dull and Schleifer 2013). It needs to be mentioned that
the task force of IESBA has the obligation to follow some major interconnected stages for the
preparation of ethical standards and principles. The first stage involves in the process of
Research and Consultation. For the development of the draft of ethical standards and principles,
it is required for IESBA to undertake some research and consultation process. Transparent

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Debate is the next stage in this process and in this process, the taskforce of IESBA invites
discussion and debate on the propose ethical draft from the users (Knechel and Salterio 2016).
The next stage is considered as the Exposure of the Public Comments. In this particular
process, the task force of IESBA invites comment in the proposed draft. In the next stage, the
task force of IESBA evaluates the invited comments from the users for bringing improvements in
the proposed ethical standards (Martinov-Bennie and Mladenovic 2015). The last stage of this
process involves in the approval of this prose draft. Moreover, IESBA also involves in the
process of issuing the periodical revised statements of ethical standards of auditing and
accounting. As an example, the issue of revised Code of Ethics for Professional Accountants in
2010, effective from 1 January 2011 by IESBA can be mentioned. Apart from this, IESBA
provides revised principle based definition of various auditing standards on a regular basis. It
needs to be mention that IESBA develops all these ethical standards for making the auditors
comply with major ethical principle like objectivity, integrity, confidential, professional behavior
and others (Huber 2013).
Requirement [b]
Situation 1
Type of Threat: The given case study indicates towards the presence of auditor’s undue financial
dependence on the audit client. Thus, it can be observed that the auditor has financial interest on
the property of the audit client. This particular situation indicated towards the creation of self-
interest threat of audit independence as there is financial dependency (Svanberg and Öhman
2013).
Consequences: In the presence of self-interest threat, the auditor may overlook any error, fraud
or material misstatements in the financial statements of the company. This aspect leads to the
threat of the preparation of biased or influenced audit opinion. Overall, this situation indicates
towards the violation of IESBA audit ethical principles (Ojo 2013).
Safeguards: The remedy of this situation demands some specific remedies. First of all, the audit
firm is required to make it sure that the auditor responsible for having financial interest does not
perform the audit operation of that client anymore. Apart from this, the audit firm is required to

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implement some specific policies and regulations related to effective corporate governance so
that the misconducts of the audit operations can be monitored (Ojo 2013).
Situation 2
Type of Threat: The standards and regulations of IESBA put the ethical obligation on the
auditors that they cannot have any financial interest on the audit clients as it creates influence on
the development of correct audit opinion. Apart from this, this aspect can create the self-interest
threat of audit independence. As per the given situation, there is financial interest of the audit
staffs in the audit client. Thus, there are enough reasons for development of self-interest threat
(Johnstone, Gramling and Rittenberg 2013).
Consequences: There is large possibility that the auditor may outlook the aspects of material
missstements in the financial statements due to self-interest threat. For this reason, it will not be
possible to produce error free audit judgment from the auditor’s side and the investors will not be
able to know the correct financial position of the companies. Moreover, there is a breach of
IESBA principles (Johnstone, Gramling and Rittenberg 2013).
Safeguards: As an action of audit safeguard, the audit firm is required to make it sure that the
auditor responsible for having financial interest does not perform the audit operation of that
client anymore. Apart from this, it is required for the audit firms to implement effective
governing strategies for monitoring these types of activities so that quality can be brought in the
whole audit operations (Duncan and Whittington 2014).
Situation 3
Type of Threat: From the given situation, it can be observed that there is a presence of family tie
or close relationships between the audit clients, auditors and partners. The principles of IESBA
put the obligation on the auditors that the auditors cannot have close relationships with the audit
clients as it can lead to the development of biased audit report. Thus, it needs to be mention that
this aspect can develop the familiarly threat of audit independence (DeFond and Zhang 2014).
Consequences: In the presence of this particular threat, the auditors may overlook the major
material misstatements caused by fraud and errors and due to this; it will not be possible to
provide the error free audit opinion. Apart from this, this particular aspect violates the principles
and standards of IESBA (Tepalagul and Lin 2015).

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Safeguards: It is required for the audit firm to remove the particular audit staff having close
relationship with the audit client. After that, the audit form needs to assign expedience and
trustworthy audit staff for the audit operation of the company. Most importantly, the audit client
is required to assign a chartered accountant so that he/she can review the tasks of the audit
members. The chartered accountant is required to report to the audit firm in case he/she finds any
suspicious aspects in the audit process (Tepalagul and Lin 2015).
Situation 4
Type of Threat: According to the principles and standards of IESBA, it is the prohibition on the
auditors to deliver any non-audit services to the audit clients. Some examples of the non-audit
services are tax consultation, bookkeeping services and others. The provided case indicates that
the firm provides non-audit services to the audit client. Thus, the firm violates the principles of
IESBA related to the delivery of non-audit services. Thus, this particular action of the auditor
creates the threat of violation of professional behavior of the auditors (Johnson and May 2015).
Consequences: It needs to be mentioned that the main consequence of this action will be the
breach of ethical standards and principles of IESBA. In the presence of this aspect, it will be not
possible for the development of biasfree of influence free audit opinion (Hurst 2013).
Safeguards: In this case, the main safeguard will be the removal of the audit staff responsible for
providing non-audit services to the audit client. Apart from this, it is required for the audit firms
to implement the strategies of effective corporate governance for the avoidance of these types of
incidents further. In this context, it needs to be mentioned that the auditors must follow the
ethical standards and principles of IESBA (Hurst 2013).
Situation 5
Type of Threat: The provided situation indicates that the firm has been providing the audit
services to the audit client for many years and this particular aspect is a major threat towards the
audit independence. As per the principles of IESBA, an audit staff cannot do the audit operations
for a audit client for many years. Due to this, there can be loss of professional skepticism and
objectivity of the audit operations. This particular aspect can lead to the threat of audit failure
and reduction in audit quality (Gul, Wu and Yang 2013).

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Consequences: It needs to be mentioned that the presence of this longstanding relationships
between the audit client and the auditor can be a major barrier for the presentation of unbiased
audit opinion. Moreover, this particular aspect can be a major factor for the reduction of the
quality of audit operations (Ettredge, Fuerherm and Li 2014).
Safeguards: The main safeguard of this audit threat will be the rotation of audit staffs in the
companies of the audit clients. The rotation of audit staffs reduces the threat of the development
of audit threat from the longstanding relationship with the audit clients. It will lead to the
development of unbiased audit opinion for the investors of the companies. Most importantly, it is
required for the audit staffs to comply with the principle and standards of IESBA (Ettredge,
Fuerherm and Li 2014).
Conclusion
From the above discussion, it can be seen that IESBA has some major roles and functions
towards the development of standards and principles of auditing. It can be observed that IESBA
has to follow five steps for the development of new standards and regulations. It can also be seen
that IESBA is also responsible for the procurement of different ethical standards. From the
discussion of the provide situation, it can be observed that there are different kinds of threats in
the audit profession due to non-compliance with the IESBA ethical principles. They are self-
interest threat, familiarity threat, threat of degradation of the quality of audit operations, threat of
not complying with the ethical principles of IESBA, threat related to the violation of the
standards of professional behavior and others. The major safeguard of these threats is to comply
with the standards and principles of IESBA, rotation of audit staffs, removal of audit employees
and others.

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References
Apostolou, B., Dull, R.B. and Schleifer, L.L., 2013. A framework for the pedagogy of
accounting ethics. Accounting Education, 22(1), pp.1-17.
DeFond, M. and Zhang, J., 2014. A review of archival auditing research. Journal of Accounting
and Economics, 58(2-3), pp.275-326.
Duncan, B. and Whittington, M., 2014, September. Compliance with standards, assurance and
audit: does this equal security?. In Proceedings of the 7th International Conference on Security
of Information and Networks (p. 77). ACM.
Ethicsboard.org. (2018). About IESBA | IFAC. [online] Available at:
https://www.ethicsboard.org/about-iesba [Accessed 3 Apr. 2018].
Ettredge, M., Fuerherm, E.E. and Li, C., 2014. Fee pressure and audit quality. Accounting,
Organizations and Society, 39(4), pp.247-263.
Gaynor, G., Janvrin, D.J., Pittman, M., Pevzner, M. and White, L., 2015. Comments of the
Standards Committee of the Auditing Section of the American Accounting Association on
IESBA Consultation Paper Improving the Structure of the Code of Ethics for Professional
Accountants.
Gul, F.A., Wu, D. and Yang, Z., 2013. Do individual auditors affect audit quality? Evidence
from archival data. The Accounting Review, 88(6), pp.1993-2023.
Huber, W.D., 2013. Forensic accounting corporations’ codes of ethics and standards of practice–
a comparison. International Journal of Accounting, Auditing and Performance Evaluation, 9(2),
pp.126-152.
Hurst, D., 2013. Audit and feedback had small but potentially important improvements in
professional practice. Evidence-based dentistry, 14(1), p.8.
Johnson, M.J. and May, C.R., 2015. Promoting professional behaviour change in healthcare:
what interventions work, and why? A theory-led overview of systematic reviews. BMJ
open, 5(9), p.e008592.

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Johnstone, K., Gramling, A. and Rittenberg, L.E., 2013. Auditing: a risk-based approach to
conducting a quality audit. Cengage learning.
Knechel, W.R. and Salterio, S.E., 2016. Auditing: Assurance and risk. Taylor & Francis.
Martinov-Bennie, N. and Mladenovic, R., 2015. Investigation of the impact of an ethical
framework and an integrated ethics education on accounting students’ ethical sensitivity and
judgment. Journal of Business Ethics, 127(1), pp.189-203.
Ojo, M., 2013. Audits, audit quality and signalling mechanisms: concentrated ownership
structures.
Svanberg, J. and Öhman, P., 2013. Auditors' time pressure: does ethical culture support audit
quality?. Managerial Auditing Journal, 28(7), pp.572-591.
Tepalagul, N. and Lin, L., 2015. Auditor independence and audit quality: A literature
review. Journal of Accounting, Auditing & Finance, 30(1), pp.101-121.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic
approach. McGraw-Hill Education.