Accounting Ethics and Audit Quality

The assignment is based on various research papers and articles that discuss the importance of accounting ethics and audit quality. It highlights the need for ethical frameworks and education in accounting to promote professional behavior change and improve audit quality. The assignment also touches upon the role of audit committees, engagement and review partner tenure, and auditor rotation in enhancing 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....................................................................................................................................5
Situation 4....................................................................................................................................5
Situation 5....................................................................................................................................6
Conclusion.......................................................................................................................................6
References........................................................................................................................................8

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Introduction
In today’s business world, auditing is regarded as an important factor for both the
companies and the investors of those companies. Auditing is considered as the process to inspect
all the financial statements of the companies in order to make sure that they are free from
material misstatements (William Jr, Glover and Prawitt 2016). Ethics is considered as important
factors in the auditing process. Thus, while conducting the audit operations, it is the
responsibility of the auditors to follow all the standards and principles of auditing ethics. In this
process, International Ethics Standards Board for Accountants (IESBA) is a major body for the
auditors to comply with the auditing principles (Leung et al. 2014). IESBA is an independent
body, the main responsibility of this is to set different ethical principles for the auditors, and
accountants thus, the auditors are highly responsible for complying with the ethical guidelines of
IESBA. IESBA states that the auditors are not only reasonable for fulfill the needs of the audit
clients, the auditors are also responsible to work for the interest of the public (Arens, Elder and
Mark 2012). This report aims at the analysis and evaluation of the roles and functions of IESBA
in order to maintain the audit quality.
Requirement [a]
From the above discussion, a short overview of IESBA can be obtained. In this context, it
is required to mention the specific roles and responsibilities of IESBA in the audit profession.
The major role of IESBA lies in the preparation and issue of all the required ethical standards for
the interest of public; at the same time, IESBA is also responsible for the development and
announcements of necessary ethical pronouncements for the accountants all over the world
(Sadowski and Thomas 2012). Different codes of IESBA work as the foundation of ethics for the
auditors and accountants all over the world. For this reason, the application of different codes
and standards of IESBA can be seen in the companies of all over the world irrespective of type,
size and industry. This particular aspect imposes regulatory obligation on the companies under
International Federation of Accountants (IFAC) to comply with all the standards and regulations
of IESBA (Apostolou, Dull and Schleifer 2013).

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It can be observed that IESBA follows an extremely through and careful process at the
time of the development of ethical principles and standards for the auditors. In this process, the
first step is Research and Consultation. In this step, the responsible task force of IESBA
undertakes different types of research and consolation processes in order to propose the draft
standards (Martinov-Bennie and Mladenovic 2015). The next step is known as Transparent
Debate. In this particular step, the task force of IESBA is responsible for presenting the proposed
agenda in the form of debate and discussion. In the next, the IESBA task force presents the
prosper draft to get the exposure for public comment. In this process, different parties having
interest in these drafts can make comments on these drafts to make them more appropriate. In the
last step, the task force of IESBA considers the comments of public on the proposed drafts. The
main aim of this step is to develop the final ethical standards by considering the comments and
suggestions of public. The last step involves in the final approval of the expose draft of ethical
standards (Mügge 2014).
In addition of the above, another major faction of IESBA is to issue periodic revised
ethical standards and principle of auditing. For example, the issue of revised Code of Ethics for
Professional Accountants in the year 2010 can be presented. This code would be effective from 1
January 2011 (Al Hosban 2014). Moreover, IESBA committee also issued a revised principle
based definition of constitution of various responsibilities of the auditors and accountants can be
presented as one of this major function. In this context, it needs to be mentioned that the
convergence of national and international ethical standards is one of the highest priorities of
IESBA (Martinov-Bennie and Mladenovic 2015). There are five major ethical principles of
IESBA; they are Integrity, Objectivity, Professional Competence and Due Care, Confidentiality
and Professional Behavior. Thus, based on the above discussion, it can be observed that on the
overall basis, the main roe of IESBA is to make the accountants and auditors to comply with the
ethical standards and principles (Martinov-Bennie and Mladenovic 2015).
Requirement [b]
Situation 1
 In the given case, it can be observed that there is a presence of undue financial
dependency of the auditor on the audit client. Thus, from the situation, it can be observed

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that the auditor has financial interest on the client’s property. Thus, this occurred
situation raises the Self-interest threat of auditor independence as there is a presence of
financial dependency (Svanberg and Öhman 2013).
 Due to the presence of financial interest, the auditor may overlook the material
misstatements in the financial statements. Thus, this particular situation leads to the
generation of incorrect audit report in the favor of the audit client. Moreover, it will also
breach the ethical principles of IESBA (Wiles et al. 2012).
 As an action of the major safeguard, it is required for the audit firm to remove the auditor
having financial interest from the audit operation of the company. It will reduce the level
to audit threat to an acceptable level. Moreover, it is needed for the audit company to
implement proper rules and regulations related to the ethical aspects so that the auditors
do not get ant scope to make any major management assumptions. These are the major
safeguards in this situation (Wiles et al. 2012).
Situation 2
 According to the standards of IESBA, it is the regulatory obligation on the companies all
over the world not to have any kind of financial or non-financial interest on the properties
of the audit clients. This particular aspect contributes towards the development of Self-
interest threat of audit independence. The provided case shows the presence of financial
interest of the auditor on the property of the audit client and leads to the creation of audit
self-interest threat (Ojo 2013).
 The main consequence will be the conduct of audit procedures in the presence, financial
influence and conflict of interest. Moreover, there is a fare possibility that the auditor will
overlook the presence of material missstements in the financial statements due to the
presence of financial interest. All these aspects will leads to the delivery of incorrect
audit opinion (Council 2012).
 In this regard, the main safeguard will be the removal of the particular audit client having
financial interest from the audit operation. At the same time, it is required for the audit
firm to implement the standards and principles related with effective corporate
governance. All these aspects will be majorly helpful in reducing the audit threats to an
expected level (Ojo 2013).

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Situation 3
 According to the provided situation, it can be observed that there is close relationship or
family ties between the audit firm, audit client and its partners. According to the
standards of IESBA, it is the regulatory obligation of the auditors not to have any kind of
long or close relationships with the client organizations as there is a possibility of
affecting the audit judgment. This particular situation is the potential of the creation of
audit Familiarity threat (Gold et al. 2012).
 This particular situation leads to the violation of the major ethical principles of IESBA.
The main reason is that the auditor has not complied with the required ethical principle of
auditing. Moreover, in the presence of familiarity threat, there is a possibility that the
audit will overlook the aspect of material misstatements in the financial statements
(Salleh and Jasmani 2014).
 In the way to develop safeguard, the audit firm is required to remove the specific audit
member having long-term relations with the audit client. At the same time, there is a
requirement of the appointment of a separate chartered accountant in order to review the
work of the auditors. In case the chartered accountant finds anything suspicious, he/she is
required to report it to the audit firm (Gold et al. 2012).
Situation 4
 As per the regulations of IESBA, it is the prohibition on the auditors to provide any non-
audit services to the audit client. The example of some non-audit services are
bookkeeping services, tax consultation, design as well as implementation of accounting
information system and others. The provided situation states the delivery of non-audit
services by the auditors to the audit client and it leads to the non-compliance of audit
ethical principles. Thus, based on the above discussion, it can be said that this action of
the auditor has breached the principle of professional behavior (Ivers et al. 2012).
 It needs to be mentioned that there is a breach of ethical principle of IESBA due to this
action of the auditor. It also contributes towards the breach of audit reporting standards.
Thus, all these aspects lead to the delivery of biased and influenced audit opinion
(Johnson and May 2015).
 In this context, the main safeguarded will be not to provide any kind of non-audit services
to the audit client as it leads to the breach of IESBA ethical principle. Apart from this, it

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is necessary for the audit firm to implement effective corporate governance strategy so
that this types of incidents can be avoided in future (Johnson and May 2015).
Situation 5
 The provided case situation states that the audit client has been getting audit services
from the audit client for many years. This long year relationship between the auditors and
the audit client can lead to the creating of audit independence threats as a result of this
longstanding relation. In this process, there is a fair possibility of not applying
professional skepticism and audit objectivity in the presence of longstanding relationship
with the audit client. Thus, it can lead to the failure of the audit procedures (Bowlin,
Hobson and Piercey 2015).
 In the presence of long relationship between the audit client and the auditors, there is a
strong possibility of overlooking the material missstements in the financial statements.
This particular aspect leads to the preparation of incorrect audit opinion by the auditors.
On the overall basis, this aspect will affect the overall quality of audit opinion (Grenier
2015).
 In this case, the main safeguard will be the rotation of audit staffs in the client company
on a regular basis so that there is not scope for the development of any longstanding
relationship between the audit client and auditors. Another major safeguard will be
complying with the standards and principles of IESBA to reduce the thetas to a minimum
level (Grenier 2015).
Conclusion
The above study indicates towards the importance of ethical principles and standards for
maintaining the overall audit quality. At the same time, it is majorly helpful in finding the major
material misstatements in the financial statements for the preparation of correct audit opinions.
The above study illustrates the importance of the principles and standards of IESBA in the audit
profession. The main role of IESBA can be seen in the development and implementation of
required ethical standards. From the above discussion, it can be seen that IESBA needs to follow
certain steps for the development of required ethical standards. The above discussion also
mentions about different kinds of audit threats that have major negative effects on the overall

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audit quality. The example of some of the threats is self-interest threat, familiarity threat and
others. At the same time, the above discussion also mentions about some of the major safeguards
of the above-mentioned audit threats. One of the major safeguards is the removal of the audit
staff in case there is occurrence of any audit threat. After that, the auditors can implement the
strategies of effective corporate governance in order to monitor the activities of the audit staffs
so that there is nit any scope of the happening of the audit threats.

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References
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technology governance from point view internal auditors. International Journal of Economics
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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.
Arens, A.A., Elder, R.J. and Mark, B., 2012. Auditing and assurance services: an integrated
approach. Boston: Prentice Hall.
Bowlin, K.O., Hobson, J.L. and Piercey, M.D., 2015. The effects of auditor rotation, professional
skepticism, and interactions with managers on audit quality. The Accounting Review, 90(4),
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Council, F.R., 2012. Guidance on audit committees. London: FRC. Available at: http://www. frc.
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