Analysis of Ethics and the Fundamental Ethical Principles Applicable in Auditing

Introduction

In 1st May 2006, the Forum for Audit Quality approved to explore an extensive agenda which purposed to examine the association between auditors, boards, stakeholders, regulators and other shareholders in the audit (Knechel and Salterio, 2016). All of these stakeholders share a common interest in excellent quality-audit which is exercised by a steady audit profession that amongst other aspects, symbolizes objectivity and integrity, skepticism, professional judgment, and expertise. One of the fundamental matters discussed in the meeting was concern about the differing perceptions between stakeholders of the audit aims as well as the effect this hence has on the establishment of the value-based universal auditing principles on the audit reporters. In respect to these concerns, leaders of the forum established working teams and charged them with the task to manage projects that would broaden the comprehension of and state the audit purpose as well as other closely linked projects on auditing reports and standards (Sonnerfeldt and Loft, 2017). This article examines the perceptions of the nature objective oriented and value-based auditing standards and the manner by which they differ in practice from the rule-based principles. It also explores the need for audit independence, the ethical conflicts which auditors face and the impact of the code of ethics on the auditor's judgment.

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Principles, Accountability, and Judgment

Numerous efforts exist trying to define terms such as rules, policies and objectives, however, no clear, even common understanding or a general agreement of dissimilarities between these terms in the auditing field. While there exists a general agreement between a majority of the stakeholders that excessive rules are unnecessary, little consensus exists as to the limits of this excessiveness (Knechel and Salterio, 2016). Individuals denote different features when conversing about regulations, principles, and objectives an there are unique types of rules, policies, and goals. Consequently, a certain level of false agreement emerges on this topic. This problem is not new since references to the challenge subsist, although in the perspective of accounting principles traced back to the 1939 (Knechel and Salterio, 2016).

A considerable amount of principles appear to have no exceptions and absolute. The description such as "all leases are either finance or operating leases," or as standards of conduct such as 'organize as you would be prepared by" better defines the standards (Ferrell and Fraedrichm, 2015). The former relates more often in accounting principles while the conduct standards links with the definitions as objectives or aspirations that depends on auditing principles. The generalizations impacting on conduct such as "auditors must acquire adequate audit proof to support their audit judgment" might approve to exceptions in situations where satisfactory proper evidence is not obtainable. In such circumstances, such standards might require further guidance to handle the exceptions reliant on the extent to which auditors consider them necessary to regulate the preciseness of categorizations as well as to guide and control auditors conduct.

It is the conduct standards or objectives and aspirations that result in a significant number of the difficulties. Some individuals trust that through definition, no exemption to standards should occur while other people believe that there should not be any omissions to the rules of auditing (Sonnerfeldt and Loft, 2017). Hence, some group of persons maintains the ideology that "one should organize you as for being prepared by" is not an audit standard and instead is an audit rule since it relates to no exceptions (Ferrell and Fraedrichm, 2015). To others, the fact that there might be exclusions to the necessity for auditors to acquire adequate audit proof denotes that the statement that auditors should obtain is not a standard either. While the description-type standards, behavioral principles, and generalizations are needed some level of audit judgment in their application, the commonality between exclusions and judgment is not clear-cut. For some individuals, the element that satisfactory audit proof is not often obtainable signifies that auditors must apply their judgment to decide what is adequate and what measure to take when the evidence is absent. Hence, there exists no room for the standards. For other people, further guidance or principles must always be considered to direct the application of judgment during the determination of what is enough (Ma'Ayan and Carmeli, 2016). The aspect that proof may not be obtainable signifies that there is no exclusion to be also handled through the means of further guidance or standards.

Under these circumstance, the matter at stake can be considered as the extent to which audit conduct should or can be managed or influenced by the auditor principles, the degree to which it is essential to give auditors a purpose and leave them to attain it or the extent to which the auditors need guidance on the manner by which they can achieve their goals (Ferrell and Fraedrichm, 2015). The dissimilarities between rules, principles' and objectives are not precise because of the differing perceptions as to the auditor's responsibilities, the degree to which they must be allowed as to apply their judgment in steering audits, the aim of the auditing principles as well as the criteria for proper audit principles such as if they should be about outputs or processes or even both. It is significant that persons debating on this topic acknowledge that superficial correspondence in semantic can conceal essential distinctions in understanding, hence the need for several jurisdictions to at least subscribe to the idea of standards-based principles (Ferrell and Fraedrichm, 2015).

The Necessity for Auditor's Autonomy

Independence is an essential auditing principle since the auditor adds credibility and justification to financial statement even if in the absence of omissions or material proofs associated with the financial statements organized by the management. However, according to Knechel and Salterio, 2016, argues that auditor is not autonomous of the management board, his belief signifies nothing to bankers, prospective investors, government agencies, and shareholders who share a common interest for the company's financial statements. Ferrell and Friedrich, 2015, on the other hand, define the notion of audit's independence in various dimensions which includes:

Program individuality: more often the client manager might have the intention to modify or restrict the procedures which the auditor needs to exercise thus auditors must always be free from the intrusion of the customer managers (Ferrell and Fraedrichm, 2015).

Inspective Independence: the auditor must access all the required materials in the context of an audit operation. For instance, the auditor must access the entire records as well as books and get support from the management staffs during audit exploration practice (Ferrell and Fraedrichm, 2015).

Reporting freedom: the auditor should not let any customer loyalty sentiments influence his or her duty. He or she must fairly and entirely disclose their mandates (Anwar et al. 2018). The management is also not permitted to coerce the auditor.

The Threat to Auditor Autonomy

The auditor's independence threat prevents or limits auditors from fully acting with professional conduct. Anwar et al. 2018, identifies that some of these threats comprise of issuance of extra services to audit customers, acceptance of services and goods as hospitality and gifts, beneficial, exciting shares as well as other investments, threatened or actions litigations, overdue fees or undue dependence on a customer (Anwar et al. 2018).

The Mauritius Framework, European Commission, Australia and the United Kingdom, however, identify other threats through the approach of "safeguards and threats" technique (Ma'Ayan and Carmeli, 2016). Rendering to this technique, there exist five elementary categories of threats to auditor's autonomy which consist of:

• Self-evaluation threat: denotes the challenge of upholding objectivity in circumstances in which judgment of previous non-audit or audit assignment requires to be re-evaluated or confronted to realize audit summary.
• Intimidation from customer threats: this regards the probability that auditors might be intimidated by manager or director of their customer and the dominating personality as well as other forms of pressures originating from the interested parties in the audit procedures (Anwar et al. 2018).
• Personal interest: this concerns the threats to auditor's autonomy due to self-interest or financial conflicts.
• Familiarity or trust threats: this form of threat ascends from auditors become over-driven by the qualities and personalities of their customer's directors and senior executives hence consequently being too sympathetic to their welfare. Alternatively, the auditors may become too gullible of organization representations and thus become inadequately severe in their audit exercise.
• Advocacy for customer threat: this signifies the danger to auditor's impartiality as a result of auditors becoming advocates for or against their customer's position in any confrontational situations or proceedings.

The comparative significance of each of the above auditor's independence threats varies depending on the detail of particular audit company-customer association. However, most of the threats appear in each auditor-customer setting.

The Ethical Conflicts Auditors Encounter

IESBA's (IFAC's) Code of Ethics for Professional Accountants provides a conceptual framework that requires a professional accountant to identify, evaluate, and address threats to compliance with the fundamental principles.The IESBA's (IFAC) Professional Accountants Ethics Codes issues a conceptual outline that needs professional accountants to categorize, analyze and address compliance threats with the vital standards of auditing. The conceptual structure approach assists the professional accountants to conform to the ethical obligations according to the IESBA Code as well as to serve the interest of the public (Anwar et al. 2018). There is the provision of guidance to several sectors which involve the examination of the threat's significance, the threats recognition and the application of safeguards which might serve to minimize the level of auditor's risks. The IESBA Code declares that risks might be built by an extensive range of circumstance and relationships. For instance, the relationship and situation may construct a single danger which may influence the conformance with more than one underlying standard.

Anwar et al. 2018, state that the auditors may receive actual monetary benefits or direct incentives, for instance, investments in the customers which result in the influence of the auditors financial concern to incline with the management interests, probably to the detriment of other creditor's or investor's interest (Anwar et al. 2018). Client payments to auditors which are liable for specific views, if permitted to happen, lead to the auditor's fiscal concerns becoming relied upon whether the audit rulings coincide with the preferences of the management. Hence the financial reliance presents incentives which threaten the auditor's credibility to repel the management pressure due to the apprehension that the monetary relationship might be concluded.

The Impacts of a Code of a Code of Ethics on Auditors Judgments

The external auditors must oblige to ethical conduct which relates to the characteristics of accountability, reliability, honesty, and integrity. According to the Code of Professional Conduct of AICPA...