Question

Ethics and Professional Judgment in Accounting.

Accounting professionals will use judgement often to make ethical decisions. Integrity, objectivity and professional judgement are the core values of GAAP. Professional judgement are based on the information gathered and probing question to make a audit judgment. Professional judgment is what makes an accountant a professional and it underlies the fundamental obligation to protect the public interest. The profession’s codes of ethics call for independent judgments and to not subordinate professional judgment to a supervisor or client.

Public Interest Principle in the AICPA Code recognizes that conflicts may exist between stakeholder interests, and it calls for fulfilling responsibilities to the public as a way of also serving clients’ and employers’ interests. These rules are designed to ensure competencies within accounting professionals and fair administration of the rules through consistent standards. Professional judgment is what makes an accountant a professional and it underlies the fundamental obligation to protect the public interest.

The International Federation of Accountants (IFAC) addresses the public interest dimension in its Policy Position Paper #4, entitled A Public Interest Framework for the Accountancy Profession. The framework is designed to enable IFAC and other professional bodies to better evaluate whether the public interest is being served through actions of the profession and its institutions. IFAC considers the “public interest” to represent the common benefits derived by stakeholders of the accounting profession through sound financial reporting.

For Discussion purposes answer 1, 2 or all 3 questions below:

Do you believe the internal audit activity should be independent? Explain.

Explain the threats to professional skepticism that might influence audit judgment.

Explain the safeguards that can be used to reduce or eliminate threats to audit independence.

Answer 1

Internal audit activity should be independent:

The internal audit activity must be independent, and internal auditors must be objective in performing their work. To comply with the standard, internal auditors must understand what independence and objectivity are and what is required in practice. In short, independence and objectivity means that internal auditors and the internal audit activity have, and maintain, the ability to make unbiased judgement and decisions based on the audit activities and facts and that they are free from any internal or external interference or obstruction with functional accountability being to the board, either directly or through an audit committee.

Internal audit activities need suitably experienced, qualified and trained staff to produce the best advice and judgments for boards and management. Boards should ensure the internal audit work is sufficiently resourced to allow it to fulfill its mandate, that staff in key positions have a recognised skill set appropriate to their activities, and that staff receive the training and development they need to deal with the increasing challenges organisations are facing.

I conclude that internal audit activity and internal auditors maintain independence and objectivity at all times.

Threats to professional skepticism that might influence audit judgment:

Professional skepticism is necessary for high-quality professional judgment, but it is only one component of what is necessary for the auditor to exercise sound professional judgment. For example, skepticism without requisite accounting and auditing industry expertise is not sufficient to obtain high-quality judgment.

Some of the potential threats to professional skepticism that might influence audit judgment:

• Judgment traps and biases, lack of knowledge and expertise
• Deadline pressure, inherited preferences and expectations
• Auditor character, and personal and cultural attributes
• Performance and compensation metrics and incentives that do not appropriately encourage professional skepticism
• Overconfidence is the tendency of individuals to overestimate their own abilities to perform tasks or to make accurate assessments of risks or other judgments and decisions
• Comfirmation, Anchoring, Availability and a lack of knowledge can also affect the approriate level of professional skepticism.

Safeguards that can be used to reduce or eliminate threats to audit independence:

Safeguards that may eliminate or reduce such threats to an acceptable level fall into two broad categories:

(a) Safeguards created by the profession, legislation or regulation:

• Educational, training and experience requirements for entry into the profession.
• Continuing professional development requirements
• Corporate governance regulations
• Professional standards
• Professional or regulatory monitoring and disciplinary procedures
• External review by a legally empowered thrid party of the reports, returns, communications or information produced by a professional accountant

(b) Safeguards in the work environment:

• Rotating senior assurance team personnel
• Using different teams for non-assurance work
• Policies and procedures to manage reliance on revenue from a single client
• Prohibiting individuals who are not team members from influencing the outcome of the engagment
• Advising staff of independence requirements in relation to specific clients
• Disciplinary measures