Financial Accounting · Key principles and concepts of accounting

Audit, Governance and Ethical Principles for ACCA Financial Accounting

Updated 11 October 2026 · Fact-checked

External audit is an independent check that financial statements give a true and fair view. Directors are responsible for preparing them. Accountants follow five fundamental ethical principles: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. To answer questions, identify who is acting and match their role or the principle.

Understand Audit, Governance and Ethical Principles

Financial statements are prepared by a company's directors. Shareholders own the company but usually do not run it. They need to trust the numbers. That trust comes from three things: clear responsibilities for directors, an independent audit, and ethical behaviour by accountants.

Directors are responsible for keeping proper accounting records, preparing financial statements that give a true and fair view (a fair presentation under IFRS), choosing suitable accounting policies, safeguarding the company's assets and taking reasonable steps to prevent and detect fraud. Directors also decide how the company is run. They cannot hand these responsibilities to the auditor.

External audit is an independent examination of the financial statements by an auditor who is not part of the company. The auditor gathers evidence and gives an opinion on whether the statements give a true and fair view and are prepared in line with the applicable framework, such as IFRS Accounting Standards. The auditor does not prepare the statements, and an audit does not guarantee that no error or fraud exists. It gives reasonable assurance, not absolute assurance.

Internal audit is different. It is carried out by employees or contractors appointed by management. It looks at risk management, controls and efficiency, and reports to management or the audit committee. It is not required by law and its scope is set by the company. External audit is usually required by law for larger companies, reports to the shareholders, and is independent of management.

Accountants must also behave ethically. The five fundamental principles are:

Integrity: be straightforward and honest in all professional and business relationships.
Objectivity: do not let bias, conflict of interest or the influence of others override your professional judgement.
Professional competence and due care: keep your knowledge up to date and act diligently in line with technical standards.
Confidentiality: do not disclose information gained through work unless you have permission or a legal or professional duty to do so, and never use it for personal advantage.
Professional behaviour: comply with relevant laws and avoid conduct that discredits the profession.

Threats to these principles include self-interest, self-review, advocacy, familiarity and intimidation. You reduce threats with safeguards, or you decline the work if they cannot be reduced to an acceptable level.

Key formulas to remember

Five fundamental ethical principles: Integrity, Objectivity, Professional competence and due care, Confidentiality, Professional behaviour; Memory aid: I-O-P-C-P. Learn the meaning of each, not just the names.
Directors' responsibility: Directors prepare the financial statements; auditors give an opinion on them; The auditor does not prepare the statements and does not take over the directors' responsibility.
Audit opinion test: True and fair view (or fair presentation) in accordance with the applicable framework; Audit gives reasonable assurance, not a guarantee or certification of accuracy.
Five threats to the principles: Self-interest, Self-review, Advocacy, Familiarity, Intimidation; Each threat is dealt with by safeguards or by refusing the engagement.
External vs internal audit: External: independent, reports to shareholders, opinion on financial statements. Internal: appointed by management, reviews controls and risk.; Use this contrast for any compare question.

How to solve Audit, Governance and Ethical Principles questions

Questions on this topic are usually short scenarios or definitions. Use the same routine each time.

1Read the last line first to see whether it asks about audit, directors or ethics.
2Underline who is acting in the scenario: director, external auditor, internal auditor or accountant.
3For audit questions, ask: is this about an opinion on the statements (external) or about controls and efficiency (internal)?
4For director questions, ask: is this preparing, recording or safeguarding? If yes, it is the directors' duty.
5For ethics questions, find the behaviour described and match it to one principle, such as honesty (integrity) or bias (objectivity).
6Check each option against the exact wording. Look for absolute words such as 'guarantees', 'certifies' or 'prepares'.
7Eliminate options that put the wrong party in charge, then choose the best remaining answer.

Quickest way: Who, what, which principle

When to use it: Use this for any one- or two-mark objective test question on audit, governance or ethics when time is short.

Who: name the person or body in the scenario.
What: decide what they are doing (preparing, checking, disclosing, being influenced).
Match: preparing means directors; independent opinion means external audit; bias means objectivity; dishonesty means integrity; sharing client information means confidentiality.
Reject any option claiming the audit guarantees accuracy or that the auditor prepares the accounts.

Common mistakes in Audit, Governance and Ethical Principles

Saying the auditor is responsible for preparing the financial statements.
Students see auditors working with the accounts and assume they produce them.
Fix: Remember: directors prepare, auditors opine. The auditor only expresses an opinion on what the directors prepare.
Claiming an audit guarantees the accounts are free from error or fraud.
The words 'true and fair' sound like 'perfectly correct'.
Fix: Audit provides reasonable assurance. Statements can still contain undetected misstatements, so reject options with 'guarantees' or 'certifies'.
Confusing integrity with objectivity.
Both relate to honest, fair behaviour.
Fix: Integrity is being honest and straightforward. Objectivity is not letting bias, conflicts of interest or pressure affect judgement.
Treating internal audit as the same as external audit.
Both have 'audit' in the name and both check things.
Fix: Internal audit is set up by management and reviews controls and efficiency. External audit is independent and gives an opinion to shareholders.
Believing confidentiality can never be broken.
Students learn the principle as an absolute ban on disclosure.
Fix: Disclosure is allowed with proper authority from the client or where there is a legal or professional duty or right to disclose.
Mixing up professional competence with professional behaviour.
Both sound like general good conduct.
Fix: Competence is about skills, knowledge and care. Behaviour is about obeying laws and avoiding actions that bring the profession into disrepute.

Worked examples

Example 1

An accountant is asked by her manager to leave out a large expense from a draft report so the company looks more profitable. She agrees because she is afraid of losing her job. Which fundamental principle is most directly breached? A) Confidentiality B) Integrity C) Professional competence and due care D) Professional behaviour

Show the solution

Identify the action: she knowingly leaves out a real expense so the report misleads.
Identify the cause: pressure from her manager, linked to fear of losing her job.
Test each option. Confidentiality concerns disclosing information, which is not the issue. Competence concerns skill and care, not deliberate omission.
Professional behaviour is broader, but the central fault is a lack of honesty in preparing misleading information.
Being straightforward and honest is integrity.

Answer: B) Integrity

Example 2

State two differences between external audit and internal audit, and state who is responsible for preparing a company's financial statements.

Show the solution

Difference 1, independence and appointment: an external auditor is independent of the company and is appointed by the shareholders. An internal auditor is appointed by management and is part of or contracted by the company.
Difference 2, purpose and reporting: external audit gives an opinion on whether the financial statements give a true and fair view and reports to shareholders. Internal audit reviews controls, risk management and efficiency and reports to management or the audit committee.
Optional extra: external audit is usually a legal requirement for larger companies, whereas internal audit is not.
Responsibility for preparing the financial statements: this lies with the directors, not the auditor.

Answer: External audit is independent, shareholder-appointed and gives an opinion on the financial statements; internal audit is management-appointed and reviews controls and efficiency. The directors are responsible for preparing the financial statements.

Exam tips

Learn the five principle names and a one-line meaning of each. Scenario questions test matching behaviour to principle.
Watch for absolute words such as 'guarantees', 'ensures' or 'prepares' in audit options. They are usually wrong.
In multiple response questions, read how many answers to select and tick exactly that number.
If a scenario involves pressure to mislead, think integrity first. If it involves a conflict of interest or bias, think objectivity.
Keep directors' duties and auditors' duties in separate boxes in your mind. Many questions swap them as a trap.

Practice questions from Key principles and concepts of accounting

Audit, Governance and Ethical Principles in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Audit, Governance and Ethical Principles: frequently asked questions

What is the main purpose of an external audit?

It is to give an independent opinion on whether the financial statements give a true and fair view and follow the applicable framework. This increases the confidence users, especially shareholders, can place in them. It gives reasonable assurance, not a guarantee.

What is the difference between internal and external audit?

External audit is independent of management, is usually required by law for larger companies and reports to shareholders. Internal audit is set up by management, covers controls, risk and efficiency, and reports to management or the audit committee. Its scope is decided by the company.

What are the directors' responsibilities for financial statements?

Directors must keep proper accounting records and prepare financial statements that give a true and fair view. They choose suitable accounting policies, safeguard the company's assets and take reasonable steps to prevent and detect fraud. The auditor's work does not replace these duties.

What is the difference between integrity and objectivity?

Integrity means being honest and straightforward. Objectivity means not allowing bias, conflicts of interest or undue influence to affect your judgement. A scenario about lying or misleading points to integrity; one about a conflict or pressure on judgement points to objectivity.