Have a discussion on the following questions:

1. What do we mean with the concept of professional skepticism and discuss how it
should be applied in practice? What threats to professional skepticism exist and how
can it be enhanced? Make use of the insights in the article by Glover and Prawitt
(2014).

Key Concept, learning questioning mind

2. One of the threats to professional skepticism are judgment traps and biases. Search the
internet to find common judgment traps and biases for auditors.

Ankering, overconfidence, availability, framing important by training enhanced this

3. Why is independence essential for auditing to be of value? Discuss the main actions
taken by regulators (in the US and Europe) to enhance auditor independence. What
controversial proposals to enhance auditor independence did the UK Competition and
Markets Authority make in December 2018, which hit the financial press worldwide?
Make use of the textbook and your own internet search.

Independence:

1. Learning and improving: Use results for improvements internally

2. Providing an accurate overview: Independent audits provide a clear picture of a
company’s worth.
3. Protection for investors and shareholders: Similarly, independent auditors protect
shareholders from a public company’s possible fraud
4. The auditors are expected to give an unbiased and honest professional opinion on
the financial statements to the shareholders. Independence is the main means by
which an auditor demonstrates that he can perform his task in an objective
manner.

SEC: SEC guidance provides a list of specifically prohibited nonaudit services and financial
relationships. (See “Which nonaudit services and financial relationships are taboo?”) AICPA
Interpretation No. 101-3, Performance of Nonattest Services, extends many of these
restrictions to auditors of private companies.

EU: New Rule: Introducing stronger requirements on independence, notably by improving the
organisational requirements of statutory auditors and audit firms, 8th eu directive, introduction
of public oversight bodies (2006), audit committee better role

[Link]
UK: Following the launch of its market study in October, the CMA has identified a number of
reasons why it believes audit quality is falling short:

 companies choose their own auditors, and as a result we have seen too much evidence
of them picking those with whom they have the best ‘cultural fit’ or ‘chemistry’ rather
than those who offer the toughest scrutiny
 choice is too limited, with the Big Four audit firms conducting 97% of the audits of
the biggest companies
 auditors’ focus on quality appears diluted by the fact that at least 75% of the revenue
of the Big Four comes from other services like consulting

Operational split
 Auditors should focus exclusively on producing the most challenging and objective
audits, rather than being influenced by their much larger consultancy businesses.

France is doing that. Knowledge spillover on the smaller firms.

CMA Chairman Andrew Tyrie said:

People’s livelihoods, savings and pensions all depend on the auditors’ job being done
to a high standard. But too many fall short – more than a quarter of big company
audits are considered sub-standard by the regulator. This cannot be allowed to
continue.

4. What is an ethical decision problem? Can a code of professional ethics be helpful

in dealing with such problems, or alternatively how can you best approach an
ethical decision problem?

In the earlier definition of ethics, one of the key elements was reflective choice. This involves engaging in
an important sequence of events beginning with the recognition of a decision problem. Collection of
evidence, in the ethics context, refers to thinking about rules of behaviour and outcomes of alternative
actions. The process ends with analysing the situation and taking an action. Ethical decision problems
almost always involve projecting yourself into the future to live with your decisions.

Zweiter part:

Of course, as a professional auditor, you are required to follow the code of professional conduct. So, in
that sense, professional auditors must always apply the imperative principle first and foremost. However,
because many decisions go beyond the code, the principle of utilitarianism and the generalization
argument are also considered. Finally, the decision must align with your own character (or virtue).

The principle of utilitarianism emphasizes examining the consequences of action rather than following
some rules.

An Ethical Decision Process

1. Define all facts and circumstances known at the time you need to make the decision
i. Who, what where, when and how
2. a. Identify the people involved in the situation or affected by it (= stakeholders)
b. Identify and describe the stakeholders’ rights and responsibilities in general and to each other
3. Specify the actor’s major alternative decision actions and their consequences (good, bad, SR, LR)
4. The actor must choose among the alternative actions
Code: a public declaration of principled conduct and a means of facilitating enforcement of standards
of conduct.

5. Consider the following scenario[1]:

a) What standards and principles of ethics did Johnny violate? Should Johnny be sanctioned
by the firm or the PCAOB? If so, how?

1. There is a violation of ethical standard of integrity in the part of johnny. Integrity,

due care, responsibilities, involves adhering firmly to a code of values. A person who
refuses to make compromises in matters of principle has integrity. As per the integrity
standard one must:

(a) mitigate actual conflicts of interest. Regularly communicate with business

associates to avoid apparent conflicts of interest. Advice all parties of any potential
conflicts of interest.

(b) Refrain from engaging in any conduct that would prejudice carrying out duties
ethically.

(c) Abstain from engaging in or supporting any activity that might discredit the
profession.

(d) Contribute to a positive ethical culture and place integrity of the profession above
personal interests. Johnny also violated ethical principle of honesty. Honesty means
fairness and straightforwardness of conduct, It is the quality of being upright, having
integrity, truthfulness, sincerity, frankness, and freedom from deceit or fraud.

2. The auditor should prepare and maintain working papers, the form and content of
which should be designed to meet the circumstances of a particular engagement. The
information contained in working papers constitutes the principal record of the work
that the auditor has done and the conclusions that he has reached concerning
significant matters. Johnny who undertook the audit work manipulates and
misrepresented the audit work papers and engagement letter prior to the PCAOB audit.
As the original documents were found to be missing, they inserted new work papers
and engagement letter without showing the true date of insertion and the reason for
doing it. The auditor should adopt reasonable procedures for safe custody of his
working papers and should retain them for a period sufficient to meet the needs of his
practice and to satisfy any pertinent legal requirements of records retention. After
discovering the missing documents, they could comply with AS 1215 either by not
adding missing documents or adding them with proper notations. Their actions of
manipulating the missing documents are against the professional ethics and will not be
sanctioned by the PCAOB.
 b) Who are the main stakeholders in this situation aside from Johnny? How might each of
these stakeholders be affected by Johnny's choices?

His manager, the company, employees, profession,

c) How might Johnny rationalize his behavior as acceptable? Pressure from boss, company, pcaob.

d) What alternative actions would you recommend for Johnny?

e) Johnny failed to speak up when confronted with this ethical dilemma. What factors contributed
to his silence? Assume that Johnny wanted to act ethically. How could he have given voice to his
concerns?

punishment would be higher.

Lets be transparent abt this. Lose license instead hiding this

 
 1. What do we mean with the concept of professional skepticism and discuss how it should be
applied in practice? What threats to professional skepticism exist and how can it be
enhanced? Make use of the insights in the article by Glover and Prawitt (2014).

Professional skepticism is a state of mind which has to be exercised by the auditor at all times. This
means that the auditor has to question everything what management presents to him. Especially
when the relationship is good. Auditors must not take the assertions made for granted but be
sceptical in a positive way to find out if assertions are true by evaluating evidence an exercising that.

According to the article by Glover and Prawitt PS is a continuum and should be applied throughout an
audit with more or less intensity. If the risk assessment indicates to have a high risk then more
skepiticsm must be used by practically using more evidence.

Threats to PS are divided to 3 areas.

1. Individual auditor – he could be bribed and have judgement traps and biases. Also
deadline pressure and want to wrap it up quickly.
2. Engagement team – limited resources. Inadequate time management , limited resources
3. Profession audit firm - conflict of interest. Audit committee do not understand oversight
role

2. One of the threats to professional skepticism are judgment traps and biases. Search the
internet to find common judgment traps and biases for auditors.

- Groupthink -gruppenzwang

3. Why is independence essential for auditing to be of value? Discuss the main actions taken by
regulators (in the US and Europe) to enhance auditor independence. What controversial
proposals to enhance auditor independence did the UK Competition and Markets Authority
make in December 2018, which hit the financial press worldwide? Make use of the textbook
and your own internet search.

Without independence an audit would not have the purpose of objectively issuing an opinion. Audit
lives off being an independent third party which gives reasonable assurance to FS of a client in order
to enhance the reliability of these statements. UK said that consultancy and audit has to be divided
because they are not biased then. SEC in US oversees the auditor and client with laws.

4. What is an ethical decision problem? Can a code of professional ethics be helpful in dealing
with such problems, or alternatively how can you best approach an ethical decision problem?

An ethical decision problem is where the outcome of one’s choice might negatively affect people.

Yes a code can help because it gives guidance to the individuals using them so that they know how to
behave in specific situations. Alternatively, you can approach a problem by first, identifying the the
problem and the people who are affected. These people are the stakeholders. Then identify their
rights and responsibilities. As a second the step specify the decisions you can make and their
consequences. Then as third decide.