College of Business and Economics

School of Accounting

Department of Accountancy
Unit 1: Module
Professional Ethics
Auditing 32
26D4AUD2CC3 - (26D4AUD2CP3)

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 Unit 1: Professional Ethics
Lesson 1: Introduction

1.1 - Professional Ethics

Ethics refers to the moral principles that determine right and wrong conduct and guide how a person
or group behaves. Professional ethics is the application of these principles within a specific
occupation, expressed as a formal code of conduct that members of that profession (such as
accountants) must follow. Three overlapping spheres of ethics are usually distinguished and
compared:
• Personal ethics – an individual’s own values and moral standards, shaped by upbringing,
culture, and religion; guides everyday behaviour regardless of occupation.
• Business ethics – the principles applied within an organisation, governing how it treats
employees, customers, shareholders and society; often guided by governance codes such
as King V in South Africa.
• Professional ethics – formal, codified rules of conduct prescribed by a profession (e.g.
accountants adhering to the IFAC Code of Ethics), enforced through disciplinary processes
and binding on all members.
The three spheres overlap and reinforce one another: strong personal ethics make it easier to act
professionally, and an ethical organisational culture supports professional compliance. However,
professional ethics is distinguished by being formal, profession-specific and enforceable, whereas
personal and business ethics are more individual or organisational and not always codified or
sanctioned. Professional accountants are expected to uphold ethical behaviour not only in their
professional duties but also in ways that maintain public trust in the profession.

1.2 - International Federation of Accountants (IFAC)

The International Federation of Accountants (IFAC) is the global organisation that represents the
accounting profession. It aims to strengthen the profession and contribute to the development of strong
international economies by promoting high quality standards and ethical conduct.
Key Roles of IFAC
• Promotes the public interest globally.
• Supports the development of a strong accounting profession.
• Encourages consistency in accounting, auditing, and ethical practices worldwide.
• Enhances confidence in financial reporting and assurance services.
IFAC supports four independent standard-setting boards that issue international standards:
• IAASB – International Standards on Auditing (ISAs) and other assurance/quality
management standards.
• IESBA – the International Code of Ethics for Professional Accountants (“the Code”).
• IAESB – International Education Standards for entry into and continued development within
the profession.
• IPSASB – International Public Sector Accounting Standards (IPSAS).
IFAC does not regulate individual accountants directly; implementation and enforcement happen
through member bodies such as SAICA and statutory regulators such as the IRBA in South Africa.
1.3 - IFAC’s Code of Ethics
Purpose and Scope
The International Code of Ethics for Professional Accountants (including International Independence
Standards), issued by the IESBA, sets out fundamental ethical principles and a conceptual framework
that professional accountants must apply to identify, evaluate and address threats to compliance.
The code aims to:
• Promote ethical behaviour.
• Protect the public interest.
• Maintain confidence in the accounting profession.
• Provide guidance on resolving ethical dilemmas.
The Code applies globally to all professional accountants and is structured into four parts:
- Part 1: Fundamental Principles (integrity, objectivity, professional competence and due care,
confidentiality, professional behaviour) and the Conceptual Framework. Applicable to all
professional accountants, in every role, always and cannot be set aside;
- Part 2: Applicable to accountants in business;
- Part 3: Applicable to accountants in public practice; and
- Parts 4A/4B: Independence standards for audit and assurance engagements (only those
performing audit, review or other assurance engagements must additionally apply the
independence requirements of Part 4A/4B)
The critical conclusion is that no single accountant applies the whole Code – the Code is modular and
role-specific – yet the foundational ethical principles in Part 1 bind every member without exception,
thereby preserving a consistent ethical floor across the profession.
Connection Between a CA(SA)/RA and the Code in South Africa
SAICA, an IFAC member body, has adopted the IESBA Code in its entirety as the SAICA Code of
Professional Conduct, binding on all CA(SA)s and other SAICA members, with limited South African
amendments that do not lower IESBA’s requirements. Separately, the IRBA – the statutory regulator of
Registered Auditors (RAs) under the Auditing Profession Act – has adopted the same IESBA Code as
its Code of Professional Conduct for Registered Auditors. Since RA registration requires the CA(SA)
designation, a CA(SA) who is also an RA is bound by both Codes at once; SAICA confirms the two are
aligned, so compliance with one generally satisfies the other. Non-compliance may be investigated and
sanctioned by SAICA and/or the IRBA.

Lesson 2: Fundamental Principles and Independence

2.1 - Fundamental Principles

The International Code of Ethics for Professional Accountants (the Code) is built on five fundamental
principles that guide the behaviour and decision-making of professional accountants.
The five fundamental principles are:
• Integrity
• Objectivity
• Professional Competence and Due Care
• Confidentiality
• Professional Behaviour
Integrity
Integrity requires professional accountants to be honest, straightforward, and truthful in all professional
and business relationships.

Key requirements
A professional accountant should:
• Not knowingly provide false or misleading information.
• Not be associated with reports containing materially false statements.
• Be truthful when communicating with clients, employers, regulators, and stakeholders.

Objectivity
Objectivity requires professional accountants not to allow bias, conflicts of interest, or undue influence
from others to affect professional judgement.

Key requirements
A professional accountant should:
• Remain impartial.
• Make decisions based on facts and evidence.
• Avoid situations where personal relationships influence professional decisions.

Professional Competence and Due Care

Professional accountants must maintain professional knowledge and skill at the level required to provide
competent professional services.

Key requirements
A professional accountant should:
• Keep their knowledge up to date (e.g. by attending Continuing Professional Development
(CPD) training)
• Understand applicable standards and regulations.
• Perform work diligently and carefully.
• Seek assistance when work falls outside their expertise.

Confidentiality
Professional accountants must respect the confidentiality of information acquired through professional
relationships.

Key requirements
A professional accountant should:
• Not disclose confidential information without proper authority.
• Not use confidential information for personal advantage.
• Continue respecting confidentiality even after leaving employment.

Professional Behaviour
Professional accountants must comply with laws and regulations and avoid conduct that discredits the
profession.
Key requirements
A professional accountant should:
• Behave professionally at all times.
• Comply with legal and regulatory requirements.
• Avoid misleading advertising or exaggerated claims.
2.2 – Independence

Independence is the ability of an auditor to perform an audit objectively and without being influenced by
relationships, interests, or pressures. Independence is essential because users of financial statements
rely on the auditor's opinion. Independence is linked to the fundamental principles of objectivity and
integrity.

The Code explicitly defines independence as comprising two distinct but interrelated components:
independence of mind and independence in appearance.

Independence of mind is 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 scepticism.

This is the internal, personal state of the auditor. It is about actually being unbiased. For example, an
auditor who feels pressured by management to approve a questionable transaction but refuses on
professional grounds is demonstrating independence of mind.

Independence in appearance is the avoidance of facts and circumstances so significant that a

reasonable and informed third party would likely conclude that a firm's or an audit team member's
integrity, objectivity, or professional scepticism has been compromised.

This is the external, public perception of the auditor. It is about being seen as unbiased. For instance,
an auditor who owns shares in the client company might be completely objective in their work, but the
public perception of their independence is damaged. This is why such financial involvement is strictly
prohibited.

Without independence, audit credibility is lost

Lesson 3: Conceptual Framework

Introduction

Rather than providing a rulebook of "dos and don'ts," Section 120 of the Code offers a conceptual
framework that outlines a systematic approach to help professional accountants identify, evaluate, and
address threats to compliance with the fundamental principles of ethics. The framework recognises that
it is impossible for the Code to address every ethical situation that an accountant may encounter.
Therefore, rather than relying solely on specific rules, accountants must apply professional judgement
when faced with ethical dilemmas.

The Three-Step Approach

The conceptual framework is a three-step process:

1. Identify threats to compliance with the fundamental principles.
2. Evaluate the significance of those threats.
3. Address the threats by eliminating them or reducing them to an acceptable level.

1 – Identify Threats
The first step is to understand the specific facts and circumstances, including professional activities,
interests, and relationships, that could potentially compromise compliance with the fundamental
principles. The framework ensures that ethical principles are applied consistently by identifying five
categories of threat:
Threat Description
Self-interest The threat that a financial or other interest will inappropriately influence
the accountant's judgment or behaviour.
Self-review The threat that a professional accountant will not appropriately evaluate
the results of a previous judgment or service performed by the
accountant or their firm/organisation.
Advocacy The threat that a professional accountant will promote a client's or
employer's position to the point that their objectivity is compromised
Familiarity The threat that, due to a long or close relationship, a professional
accountant will be too sympathetic to a client's or employer's interests
Intimidation The threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures

2 – Evaluate Threats

Once identified, the professional accountant must assess the significance of each threat. This is
defined as the level at which an objective, reasonable, and informed third party would likely conclude
that the professional accountant complies with the fundamental principles.

� The "Reasonable & Informed Third Party" Test: Would a reasonable, objective outsider,
aware of all relevant facts, conclude that the accountant's actions are appropriate?

This evaluation involves a holistic and thoughtful assessment that considers qualitative and quantitative
factors, as well as the combined effects of multiple threats. It is a dynamic process; if new information
or changes in circumstances arise, the evaluation must be revisited.

3 – Address Threats

If a threat is not at an acceptable or significant level, the accountant must address it. The framework
emphasises that threats are addressed by:

• Eliminate the circumstances: Remove the interests or relationships that are creating the
threat.
• Apply safeguards: Implement actions that effectively reduce the threat to an acceptable level.
• Decline or end the activity: If threats cannot be eliminated or reduced to an acceptable level,
the accountant must decline or end the specific professional activity.

To conclude, this learning unit has established that the IFAC Code of Ethics is not merely a static set
of rules to be memorised, but a dynamic, principles-based framework designed to underpin the entire
accounting profession's social contract with the public. The five fundamental principles, Integrity,
Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Behaviour, serve
as the ethical bedrock, while the critical concept of independence, encompassing both independence
of mind (actual impartiality) and independence in appearance (perceived impartiality), ensures that
assurance services retain their credibility and value. The true strength of this ethical structure, however,
lies in the conceptual framework of Section 120, which empowers accountants to move beyond rote
compliance by proactively identifying, evaluating, and managing threats to their ethical duties. By
applying professional judgment and the "reasonable and informed third-party" test, accountants can
navigate complex and unforeseen circumstances, thereby upholding the public trust and reinforcing the
profession's essential role in the integrity of global financial markets.
💡💡EXAM TECHNIQUE💡💡

Answering professional ethics questions

When you encounter a professional ethics scenario question, resist the urge to jump straight into
identifying threats. Examiners reward structured, methodical answers that follow a clear logical flow.
The 5-step approach below is your answer template.

Step-by-Step Breakdown

� Applicability of the IFAC Code (Do this first, before anything else)

Always open your answer by establishing why the IFAC Code applies and which part is relevant.
Ask yourself:

• Is this person a professional accountant?

• Are they working in public practice (Part 3) or business (Part 2)?
• Does the scenario involve audit or assurance? (Part 4A/4B, independence provisions apply)

Example: The IFAC Code of Ethics applies because Mr XXX is a professional accountant in public
practice. Therefore, Parts 1 and 3 of the Code apply, and given that Mr XXX performs audit work, the
independence provisions in Part 4A are also relevant.

� Step 1 - Identify the problem in the scenario

Read the scenario carefully and pinpoint what exactly the ethical concern is. Be specific, name the
situation, the parties involved, and why it raises an ethical question.

Example: The issue is that the audit partner holds a personal loan from the audit client, raising
concerns about the partner's ability to remain independent.

� Tip: Don't be vague. E.g. “There is an ethical issue” scores no marks. Name the specific problem
clearly.

� Step 2 - Identify the threats to fundamental principles per scenario

This is a two-part step; you must identify both the threat and the fundamental principle(s) threatened.
Many students identify one and forget the other, losing easy marks.

Example: A self-interest threat arises, which compromises the principle of objectivity, as the partner's
personal financial relationship with the client may influence their professional judgement.

� Tip: More than one threat or principle can apply — identify all that are relevant to the scenario.

� Step 3 - Explain why/how the fundamental principle is compromised

Do not just label the threat, explain it in the context of the scenario. Connect the facts of the question
to the threat and principle you identified.
Example: "Because the partner owes money to the client, they may be reluctant to challenge
management's accounting judgements for fear of jeopardising the loan arrangement, thereby
compromising their objectivity."

� Tip: Use the facts from the scenario. Generic answers that could apply to any question score
poorly. Markers want to see that you have read and applied the specific details given.

� Step 4 - Assess the significance of the threat

Before jumping to safeguards, assess the severity of the threat. Apply the reasonable and informed
third-party test: would an objective outsider view this threat as significant?

Consider factors such as:

• The nature of the relationship or interest

• The seniority of the person involved
• The size or materiality of the financial interest
• Whether the threat is direct or indirect

Example: "The threat is significant. A reasonable and informed third party would likely conclude that a
personal loan from an audit client creates a direct financial interest that could materially impair the
partner's independence and objectivity."

� Step 5 - Apply Safeguards

Propose specific, realistic safeguards to reduce the threat to an acceptable level. Then consider
whether those safeguards are sufficient.

Common safeguards include:

• Removing the individual from the engagement

• Disclosing the relationship to those charged with governance
• Having an independent partner review the work
• Consulting with the professional body
• Terminating the financial relationship

Example: "The partner should be removed from the audit engagement immediately and the matter
disclosed to the firm's ethics partner. If the loan cannot be repaid or terminated, the firm should
consider resigning from the engagement, as no safeguard may be sufficient to eliminate the threat."

� Tip: Remember, not all threats can be safeguarded against. If the threat is too severe, state
clearly that the only option is to decline or withdraw from the engagement.