Question
1. Introduction The primary purpose of this report is to understand the fundamental principles of the Code of Professional Conduct and Ethics as well as
1.Introduction
The primary purpose of this report is to understand the fundamental principles of the Code of Professional Conduct and Ethics as well as the characteristics of professional scepticism to understand the importance of external auditors' independence. This report will go over five basic ethical principles as well as five ethical threats. We will also investigate the potential ethical threats that Ernst & Young's auditors faced, which could have harmed their objectivity and professional skepticism, resulting in the audit failure of New Medical Health Plc
2.Five Fundamental Principles of Professional Ethics
There are five fundamental principles of professional ethics established by the International Federation of Accountant, providing a conceptual framework to apply those principles. The five fundamental principles a professional accountant is required to comply are Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, and Professional Behaviour.
Integrity implies fair dealing and truthfulness. The principle of integrity requires all licensed auditors to be forthright and truthful in their professional and business dealings. This concept means that a licensed accountant should not be involved in any records, returns, emails, or other details where they feel the information is inaccurate.
The principle of objectivity imposes an obligation on all professional auditors to refrain from compromising their professional or business judgment due to prejudice, conflict of interest, or undue influence from others. A competent auditor can be confronted with circumstances that may impair objectivity. It is impossible to describe and prescribe all such situations. Therefore, professional auditors should avoid relationships that are likely to prejudice or affect the professional decision to reduce the risk of straying from objectivity.
The principle of professional competence and due care imposes that all professional auditors maintain professional knowledge and expertise at the appropriate level to ensure that clients or employees obtain qualified professional service. When delivering professional services, act diligently in compliance with relevant technical and professional standards.
Auditors are bound by the principle of professional behaviour to follow all applicable laws and regulations and to avoid any actions that could bring discredit to the profession. This involves conduct that a fair and knowledgeable third party with all relevant information would conclude has a negative impact on the profession's good reputation.
The principle of confidentiality forbidsprofessional auditors from revealing confidential information obtained as a result of professional and business relationships outside the company or employing entity without sufficient and clear authority or unless there is a legal or professional right or duty to do so. The concept also indicate that the knowledge obtained should not be used for personal gain.
3.Five Threats to Auditor's Independence
There are five major threats that could jeopardize an auditor's independence in the auditing profession. Before an audit engagement, it is crucial that each member of the audit team review each threat, self-interest threats, self-review threats, advocacy threats, familiarity threats, and intimidation threats. When faced with a threat, an auditor can either devise safeguards to mitigate the threat or withdraw from the audit engagement.
Self-interested threats arise when auditors act in their own best interests. Auditors' emotional, financial, and other personal interests are examples of self-interests. Auditors may favour those self-interests over their interest in performing a quality audit, whether consciously or subconsciously. For example, when there is a financial interest in a client, undue reliance on total fees, or contingent fees relating to an assurance engagement, auditor may choose to prioritize their own interest over professionalism.
Self-review threat occurs when a previous judgement needs to be re-evaluated by members responsible for that judgement. They may not notice any errors in the material they have previously prepared or may not want to report them. Therefore, auditors are prohibited to prepare financial statements except for an emergency.
Advocacy threats may arise when a professional auditor promotes, or may be perceived to promote, the client's position or opinion rather than serving as unbiased attestators of the auditee's financial information, causing the objectivity to be jeopardized. Auditors are required to decline to maintain professional independence
Familiarity threat may arise which can arise when a professional accountant becomes overly sympathetic and trusting of the interests of their clients as a result of a close relationship. Due to their familiarity with or trust in the auditee, auditors are not sceptical enough of the auditee's claims and, as a result, accept the auditee's point of view too readily.
Threats of intimidation arise when auditors are overtly or covertly coerced by auditees or other interested parties, or believe they are being coerced. For example, if an auditing firm is threatened with being replaced because of a disagreement about an auditee's application of an accounting principle, or if an auditor believes that an auditee's expression of client dissatisfaction will jeopardize his or her career at the firm.
5.Possible threats faced by Ernst and Young
There are several familiarity threats to the independence of Ernst & Young. For starters, the client-auditor partnership is at risk as the Big Four accounting firm has been managing NMC's finances since the business went public in London in 2012, and the two companies may have formed a tight relationship over time. "The company's relationship with its auditor, Ernst & Young, raises flags," Muddy Waters commented. This close relationship can contribute to a desire to achieve a favourable result, jeopardizing EY's objectivity.
Muddy Waters stated. "We do not see the independent board members as being truly independent." and questioned the relationship between EY and NMC, pointing out that the board included former partners of the Big Four firm. It said NMC's margins were "too good to be true" and that it believed a "cosy relationship" between EY and its client meant there was a "lack of rigor" in its audits. Having a former official at the audit firm who later became a member of the NMC Board of Directors presents yet another familiarity threat, as anyone who might have worked with this former partner may be more likely to take his word for it on complicated audit matters, rather than gathering enough evidence to reach their own professional conclusion based on professional scepticism.
In addition to the familiarity threat due to the former partners of EY being a part of the board of NMC, self-interest threat is also present. According to news reports, EY earned approximately 14 million in audit fees from NMC for seven years. NMC Healthcare became the UAE's largest private healthcare provider and was recognized as one of the UAE's strongest brands by members of the Superbrands Council since 2015. The company's high profile may have resulted in EY being tempted to issue favourable reports/opinions on the financial statement or overlook audit issues to retain the client to have them be able to pay them continuously. Thus, since EY holds a financial interest in NMC related to the audit fees, a self-interest threat exists.
help, I don't know how to write the conclusion.
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