CHAPTER 2
THE FINANCIAL STATEMENT
AUDITING ENVIORNMENT
LEARNING OBJECTIVES
Understand characteristics of the audit profession and
the requirements of professional ethics in the audit.
Name the VSAs and IASs.
Understand misstatement due to error or fraud
Contents
1 AUDITING ENVIRONMENT 2 AUDITING STANDARD
ETHICS, INDEPENDENCE, AND MISSTATEMENT DUE
3 THE CODE OF PROFESSIONAL 4 TO ERROR OR FRAUD
CONDUCT
AUDITING ENVIRONMENT
NATURE OF AUDITING PROFESSION
A responsibility to serve the public
A complex body of knowledge
Standards of Admission to the Profession
A need for Public Confidence
AUDITING ENVIRONMENT
An audit environment is a set of audit processes that
interact with the auditor's work
Requirements Enhance the quality of audits.
Therefore, auditors have to
•From society
comply with:
•From the gorvernment
- Auditing Standards
•From professional - Ethics codes
organizations - Laws, circulars, regulations ...
AUDITING STANDARD
DEFINITION
“ Auditing standards refer to the regulations and guidance
on the requirements, principles and procedures for
auditing and dealing with the relationships arising
from audit activities with which members of audit
engagement teams, audit firms, and branches of foreign
audit firms in Vietnam shall comply
’’
>> Law on Independent audit <<
AUDITING STANDARD
ROLES
- Based on the auditing
standards, I know what I
have to do?
- I understand that
everyone will use the
auditing standards in
order to assess my
audits.
AUDITING STANDARD
DEVELOPMENT OF AUDITING STANDARDS
IN THE WORLD
IN VIETNAM
PROFESSIONAL ETHICS
What Are Ethics?
Ethics can be defined broadly as a set
of moral principles or values. Is it legal?
What will others think?
Each of us has such a set of values. It is right?
We may or may not have considered them
explicitly
PROFESSIONAL ETHICS
CODE OF ETHICS
Code of ethics for professional accountants refers to the
requirements and guidance on the principles and how to apply
professional ethical standards for members of audit engagement
teams, audit firms, and branches of foreign audit firms in Vietnam.
Circular No. 70/2015/TT-BTC for new Ethical Standard for
accounting and auditing practices
PROFESSIONAL ETHICS
CODES OF ETHICS
PART A: General provisions and basic ethical
principles for all members
PART B: Provisions for Members in public practice
PART C: Provisions for members in business
PROFESSIONAL ETHICS
CODES OF ETHICS
Independence
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behavior
PROFESSIONAL ETHICS
CODES OF ETHICS
INTEGRITY
Auditors should be straightforward and honest in
all professional and business relationships.
Integrity also implies fair dealing and
truthfulness
OBJECTIVITY
An obligation on all auditors not to compromise
their professional or business judgment because
of bias, conflict of interest or the undue
influence of others.
Case 1:
An auditor working on the annual audit
of a large corporation is offered an
expensive watch by the CFO as a "token
of appreciation.
Declining Inappropriate Gifts: The auditor politely declines the gift,
explaining that accepting such items could compromise their
objectivity and the integrity of the audit process.
Case 2: Reporting Financial
Misconduct
During an audit, an auditor discovers
that the company’s accounting
department has been understating
expenses to inflate profits.
The auditor reports these findings to the appropriate level of
management and, if necessary, to the audit committee,
despite potential pressure from the company to overlook or
minimize these issues.
Case 3: Accurate
Representation of Qualifications
An auditor is asked by their firm to
lead an audit in a highly specialized
industry in which they have limited
experience.
The auditor informs their manager about their lack of experience and
suggests involving a more qualified auditor in the project, or they ask for
resources and support to get up to speed with the necessary industry
knowledge
Case 4: Conflict of Interest
An auditor is assigned to audit a
company where their close relative
is a senior manager
Case 5: Upholding Professional
Standards
Under time pressure to complete an audit, an
auditor finds several small discrepancies that
might not affect the financial statements
significantly.
Case 6: Transparency with Errors
An auditor realizes they made an error in a previous
audit report that could affect the audit conclusions .
Scenario 1: Investment in Client
Company
An auditor discovers they inadvertently own shares in a
client company they are assigned to audit.
Upon realizing the conflict of interest, the auditor
immediately discloses the shareholding to their firm and
refrains from participating in the audit until they have
divested the shares or are reassigned to another client.
Scenario 2: Peer Pressure
An auditor discovers they inadvertently own shares in a
client company they are assigned to audit.
The auditor insists on fully investigating the discrepancies
and includes the findings in the audit report, ensuring that
professional judgments are based on audit evidence and
not influenced by team dynamics or the desire to appease
the client.
Scenario 3: Previous Association
An auditor is assigned to audit a company where
they were previously employed
The auditor informs their firm of their previous
employment and requests reassignment to avoid any bias
that may arise from past loyalties or inside knowledge of
the company.
Scenario 4: Accepting Professional Advice
An auditor is unsure about the
accounting treatment of a complex
transaction during an audit.
Instead of making an unsupported judgment, the auditor
consults with independent experts and uses their
guidance to inform the audit opinion, thereby ensuring
that the decision is based on expert knowledge and not
personal interpretation.
Scenario 5: Familiarity Threat
An auditor has been auditing the same client
for several years and has developed a
friendly relationship with the management.
The auditor recognizes the potential for a familiarity
threat and discusses this with their firm, which decides to
rotate the audit assignment to another auditor to
safeguard the objectivity of the audit process.
Scenario 6: Negative Findings
An auditor finds significant issues that could
lead to a qualified audit opinion, which might
upset the client and jeopardize future
business.
The auditor remains unbiased in their duty and reports
the findings transparently in the audit report, prioritizing
ethical responsibility and the integrity of the financial
statements over potential business interests.
Key similarities and differences
Similarity: Both integrity and objectivity are about
adhering to ethical principles.
They are essential for trust and credibility in the auditing
process.
Difference: Integrity focuses more on honesty and moral
principles in actions and decisions,
whereas objectivity specifically addresses the auditor’s
impartial stance in making professional judgments
and decisions.
PROFESSIONAL ETHICS
CODES OF ETHICS
PROFESSIONAL COMPETENCE AND DUE CARE
Auditors have to maintain professional knowledge and skill at the level
required to ensure that a client or employer receives competent
professional services based on current developments in practice, act
diligently in accordance with applicable technical and professional
standards when providing professional services. Auditors have to plan and
perform his or her work with due professional care.
PROFESSIONAL ETHICS
CODES OF ETHICS
PROFESSIONAL COMPETENCE
Attainment of professional competence: Professional competence requires
a high standard of general education followed by specific education,
training, examination in relevant subjects, and work experience.
Maintenance of professional competence: requires a continuing awareness
and an understanding of relevant technical, professional and business
developments.
PROFESSIONAL ETHICS
CODES OF ETHICS
DUE CARE
Due care?
• Due care imposes a responsibility upon each
professional within an independent auditor’s
organization to observe the standards of
field work and reporting
• It also requires the auditor to exercise
professional skepticism.
PROFESSIONAL ETHICS
CODES OF ETHICS
CONFIDENTIALITY
• This principle requires auditors to respect the confidentiality of
information acquired as a result of professional and business relationships
• Not disclose any such information to third parties without proper and
specific authority, unless there is a legal or professional right or duty to
disclose
• Not use the information for the personal advantage of the professional
accountant or third parties.
PROFESSIONAL ETHICS
CODES OF ETHICS
PROFESSIONAL BEHAVIOR
• To comply with relevant laws and regulations and
avoid any action that the auditor knows or should
know may discredit the profession.
PROFESSIONAL ETHICS
CODES OF ETHICS
INDEPENDENCE
• Independent of mind: The state of mind that permits the expression of a conclusion
without being affected by influences that compromise professional judgment,
thereby allowing an individual to act with integrity and exercise objectivity and
professional skepticism.
• Independent in appearance: The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party would be likely to conclude,
weighing all the specific facts and circumstances, that a firm's, or a member of the
audit team's, integrity, objectivity or professional skepticism has been compromised.
PROFESSIONAL ETHICS
THREATS TO INDEPENDENCE
• Self-interest Threat:This occurs when auditors
have a financial or other personal interest in
the audit outcome.
• Examples include owning shares in the client
company or having a close personal
relationship with someone at the client
organization. Such interests can
subconsciously or overtly influence an
auditor’s objectivity.
•Self-review Threat: Auditors face this
threat when they review work they have
previously performed themselves or by
their colleagues. The natural human
tendency to avoid finding faults in one’s
own work can compromise independence
and may prevent auditors from reporting
errors or irregularities discovered during
the audit.
•Advocacy Threat:This arises when an
auditor promotes a client’s position or
opinion to the point that their objectivity
is compromised. This can happen when an
auditor acts as an advocate for the client
in any negotiation or dispute with third
parties.
• Familiarity Threat: This threat emerges
when an auditor becomes too sympathetic
to the client’s interests due to a close
relationship, either personal or
professional, that develops over time. This
can make the auditor less critical and more
accepting of the client’s practices and
assertions, regardless of the evidence.
• Intimidation Threat: This occurs when an
auditor is deterred from acting objectively
out of fear. This fear could arise from
threats, whether real or perceived, of
replacement or from undue aggressive
behavior by management during the audit
process.
PROFESSIONAL ETHICS
SAFEGUARDS
Safeguards created by the profession, legislation
or regulation;
Safeguards within the assurance client; and
Safeguards within the audit firm’s own systems
and procedures
MISSTATEMENTS DUE TO ERRORS OR FRAUD
1. Types and Causes of Misstatements
2. Management’s liability to the Misstatements
3. Auditor’s liability to the Misstatements
4. Legal liabilities of Auditors
MISSTATEMENTS DUE TO ERRORS OR FRAUD
TYPES AND CAUSES OF MISSTATEMENTS
Intentional act by one or more
individuals among
Fraud management, employees, or
third parties, involving the use
Misstatements of deception to obtain an unjust
or illegal advantage.
Error
Unintentional misstatement
occurred in financial
statements, including the
Noncompliance with Any act of omission or commission by the
omission of an amount or
entity, either intentional or unintentional,
laws and regulations disclosure
which are contrary to the prevailing laws or
regulations.
MISSTATEMENTS DUE TO ERRORS OR FRAUD
TYPES AND CAUSES OF MISSTATEMENTS
FRAUDS
Fraudulent
financial Misappropriation
reporting of assets
an intentional
misstatement or fraud that involves
omission of amounts or theft of an entity’s
disclosures with the assets
intent to deceive users.
MISSTATEMENTS DUE TO ERRORS OR FRAUD
TYPES AND CAUSES OF MISSTATEMENTS
Fraudulent financial reporting
• Manipulation, falsification (including forgery), or alteration of accounting records or
supporting documentation from which the financial statements are prepared
• Misrepresentation in, or intentional omission from, the financial statements of events,
transactions or other significant information
• Intentional misapplication of accounting principles relating to amounts, classification,
manner of presentation, or disclosure.
Misappropriation of assets:
• Embezzling receipts
• Stealing physical assets or intellectual property
• Causing an entity to pay for goods and services not received
• Using an entity’s assets for personal use
MISSTATEMENTS DUE TO ERRORS OR FRAUD
THE FRAUD TRIANGLE
Incentives/Pressures
Opportunities Attitudes/Rationalization
MISSTATEMENTS DUE TO ERRORS OR FRAUD
MISSTATEMENTS DUE TO ERRORS OR FRAUD
MANAGEMENT’S RESPONSIBILITIES
The responsibility for adopting sound accounting
policies, maintaining adequate internal control,
and making fair representations in the financial
statements rests with management
MISSTATEMENTS DUE TO ERRORS OR FRAUD
AUDITOR’S RESPONSIBILITIES
obtain reasonable assurance about whether the
financial statements as a whole are free from material
misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on
whether the financial statements are presented fairly,
in all material respects, in accordance with an
applicable financial reporting framework; and
(b) report on the financial statements, and communicate as
required by auditing standards, in accordance with the
auditor’s findings.
Thank you!
