Chapter 3 –Auditors’Ethical and Legal Responsibilities
• Three types of responsibility
1. Moral – Character and ‘doing the right thing’. Responsibility to conform to broad social
norms of behavior.
2. Professional – The rules and principles for the proper conduct of an auditor in her work;
necessary to obtain the respect and confidence of the public, achieve order within the
profession, and provide a means of self-policing the profession.
3. Legal – The risks auditors accept in a court of law while practicing public accounting.
• The Spirit / Principles
• Ethics – That branch of philosophy which is the systematic study of reflective choice, of the
standards of right and wrong by which it is to be guided, and of the goods toward which it may
ultimately be directed.
1. Involves questions requiring reflective choice.
2. Involves guides of right and wrong (moral principles).
3. Concerned with the consequences of decisions.
• Ethical dilemma –Aproblem that arises when a reason to act in a certain way is offset by a reason
to not act that way.
• Critical thinking – The process of justifying one’s conclusion or decision by providing good or
• What is ethical behaviour?
1. That which produces the greatest good.
2. That which conforms to moral rules and principles.
Philosophical Principles in Ethics
• Two types of ethical theories:
1. Monistic theories –Assume universal principles apply regardless of the specific facts of a
Deontological (Kantian) ethics –An action is right if it is based on a sense of
Consequentialism – Base the decision on the consequences of that action; that is,
that it maximizes utility. (ex: economics/business)
2. Pluralistic theories –Assume that there are no universal principles and that the best
approach is to use the principles that are most relevant in a particular case.
• Moral imagination – Part of ethical reasoning where one has the ability to imagine others’feelings
about the consequences of a decision.
Professional Skepticism and Critical Thinking
• Professional skepticism –An auditor’s tendency to question management representations and look
for corroborating evidence before accepting them.
• Due audit care calls for a degree of skepticism; but must be balanced by a willingness to
respect the integrity of management.
• Critical thinking considers how the financial statements will be used in a particular engagement.
• Critical thinking framework – Principles and concepts to help structure your thinking so that your
conclusions will be better justified.
• Goal is to do the right thing and learn the truth. • Ethics of virtue/character – What a person should be or become, rather than what a person should
Framework of Critical-Thinking Principles
Goal: To do the right thing or learn the truth.
1. Clarify the auditor’s role in the engagement.
a. Learn the views of others on the situation (Ethics plays a major role here)
b. Contextual factors, accountability relationships, conflicts of interest.
2. Identify what issues need to be resolved in the engagement.
a. Identify the claims at issue.
b. The controversies
3. Using moral imagination to make sure all moral and ethical issues have been taken into
a. Explain the reasons for the competing claims.
b. Understand others’perspectives
4. Evaluate the argument supporting the claim. For true critical thinking, the evaluation should
consider reasons that do not support your conclusion.
a. Assess the reasons (Assumptions, evidence) and their relationship to the claim.
b. Logic, rhetoric and ethics play important roles here.
5. Reach a conclusion about the claim that is most likely to be true.
a. This will be the basis for an action or decision.
Codes of Professional Ethics
• IFAC = International Federation ofAccountants
• IFAC Framework for a code of conduct for professional accountants:
• Objective – To serve the public interest.
• Principles necessary to attain objective – Integrity, objectivity, professional competence and
due care, confidentiality, professional behaviour.
• Identify, evaluate, and control threats to an acceptable level.
• Each of the PAbodies (CA, CGA, CMA) has its own rules of professional conduct. Typical
• Introduction and purpose
• Fundamental principles and standards
• General rules
• Specific rules
• Interpretations of the rules
• The forward is the most important part of the ICAO member’s handbook because it contains
principles that provide guidance in the absence of specific rules. It has defined sections:
1. Sets out the purpose of the rules.
2. Reviews the key characteristics that mark a profession and professional.
3. Identifies the 6 fundamental statements of accepted conduct.
1) The member should act to maintain the profession’s reputation.
2) The member should use due care and maintain his professional competence.
3) The member should maintain the appearance of independence as well as the
fact of independence of his profession