Auditing and Ethics · Ethics and Terms of Audit Engagements

Ethical Requirements and Fundamental Principles in Auditing

Updated 4 October 2026 · Fact-checked

The Code of Ethics sets five fundamental principles for every professional accountant: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Under the conceptual framework you identify threats to these principles, evaluate them, and address them with safeguards. If a threat cannot be reduced to an acceptable level, you decline or end the engagement.

Understand Ethical Requirements and Fundamental Principles

An audit is only useful if users trust the auditor. Trust comes from ethics. SA 200 requires the auditor to comply with relevant ethical requirements, including independence, when doing an audit. In India these requirements come from the Code of Ethics issued by ICAI, which is built on the international ethics code.

The Code sets out five fundamental principles. Integrity means being straightforward and honest in all professional and business relationships. Objectivity means not letting bias, conflict of interest or the influence of others override your professional judgment. Professional competence and due care means keeping your knowledge and skill at the level needed, and acting diligently and in line with technical and professional standards. Confidentiality means respecting information you get through your work and not disclosing it without proper authority or a legal or professional right or duty to do so. Professional behaviour means complying with laws and regulations and avoiding conduct that discredits the profession.

Integrity and objectivity are often confused. Integrity is about honesty: you do not mislead or knowingly associate with false information. Objectivity is about impartiality: your judgment is not swayed by self-interest or pressure. You can be honest and still biased, for example if you go easy on a long-standing client because of a friendship.

The Code does not try to list every situation. Instead it gives a conceptual framework. You must identify threats to compliance with the fundamental principles, evaluate how significant they are, and address them. You do this by eliminating the circumstances, applying safeguards, or declining or ending the engagement. Threats fall into categories: self-interest, self-review, advocacy, familiarity and intimidation.

Independence is a related idea. It supports objectivity and integrity. For audit work, the Code requires independence of mind and independence in appearance. This is why the framework matters most in audit engagements.

Key rules to remember

Five fundamental principles: Integrity + Objectivity + Professional competence and due care + Confidentiality + Professional behaviour; Write all five by name. Define each in one line. Exam answers lose marks when a principle is missed.
Conceptual framework approach: Identify threats → Evaluate significance → Address threats (eliminate, safeguard, or decline/end engagement); Use this sequence in every case-study answer. Safeguards apply only when the threat can be brought to an acceptable level.
Categories of threats: Self-interest, Self-review, Advocacy, Familiarity, Intimidation; Match the facts to the category. For example, a close relative of the auditor holding a key post in the client is a familiarity threat.
Acceptable level: Threat acceptable if a reasonable and informed third party would likely conclude compliance with the principles is not compromised; This is the test for whether safeguards are enough. If not, decline or withdraw.
Integrity vs Objectivity: Integrity = honesty and straightforwardness; Objectivity = impartial judgment free from bias and undue influence; Use this for 'differentiate' questions.

How to solve Ethical Requirements and Fundamental Principles questions

Most ethics questions give a short scenario and ask whether a principle is breached or what the auditor should do. Use the same method every time.

1Read the facts and underline who is involved: auditor, client, relatives, other firm staff, and what interest or pressure exists.
2Name the fundamental principle at risk. Ask which one is being tested: honesty (integrity), bias (objectivity), skill and care (competence), disclosure (confidentiality) or conduct (professional behaviour).
3Identify the category of threat: self-interest, self-review, advocacy, familiarity or intimidation. Give one line of reasoning from the facts.
4Evaluate significance. Say whether the threat is at an acceptable level, considering its nature and the circumstances.
5State the response: eliminate the circumstances, apply safeguards that fit the threat, or decline or end the engagement if the threat cannot be reduced.
6Conclude clearly in one sentence: breached or not, and what the auditor should do.
7Where relevant, link to SA 200, which requires the auditor to comply with relevant ethical requirements including independence.

Quickest way: Principle, threat, response in three lines

When to use it: Use this for MCQs and for short scenario answers when time is tight.

For MCQs, match the keyword. Honest and truthful points to integrity. Bias or conflict points to objectivity. Skill and diligence points to competence and due care. Disclosure of client information points to confidentiality. Conduct and law points to professional behaviour.
For threat-type MCQs, map the keyword. Own financial interest is self-interest. Reviewing own work is self-review. Promoting the client's position is advocacy. Close relationship is familiarity. Pressure or threat is intimidation.
Eliminate options that say safeguards always solve the problem. Some threats are too significant, and the answer is to decline or withdraw.
For written answers, use three labelled lines: Principle at risk, Threat category with reason, Response and conclusion. Each line earns step marks.
Always end with a firm conclusion. A balanced answer with no conclusion loses marks.

Common mistakes in Ethical Requirements and Fundamental Principles

Treating integrity and objectivity as the same thing.
Both sound like fairness and honesty, so students use them interchangeably.
Fix: Remember: integrity is about honesty and not misleading; objectivity is about impartial judgment free from bias or undue influence. Quote the distinction in one line.
Listing only three or four fundamental principles.
Students forget professional competence and due care is one principle, or leave out professional behaviour.
Fix: Memorise the order: integrity, objectivity, competence and due care, confidentiality, professional behaviour. Count to five before moving on.
Saying safeguards can fix every threat.
The word safeguard feels like a universal solution.
Fix: State that if a threat cannot be eliminated or reduced to an acceptable level, the auditor should decline or end the engagement.
Confusing threat categories, especially self-interest and self-review.
Both involve the auditor's own position, so facts look similar.
Fix: Ask: is the issue the auditor's financial or other interest (self-interest), or evaluating work the firm itself did (self-review)?
Treating confidentiality as an absolute duty with no exceptions.
Students learn the rule but not the conditions.
Fix: Say disclosure is not permitted without proper authority, unless there is a legal or professional right or duty to disclose, for example where law requires it.
Writing generic ethics essays without using the facts.
Students recall theory and skip application.
Fix: Quote the key fact from the scenario in each step and tie it to a principle and a threat.

Worked examples

Example 1

CA Rohan is the statutory auditor of Meera Ltd. During the audit, Meera Ltd's managing director, a close friend of Rohan for 20 years, asks him to overlook a minor overstatement of inventory. Rohan agrees and does not report it. Identify the principle and threat involved and state what Rohan should have done.

Show the solution

Principle at risk: objectivity. Rohan let a personal friendship override his professional judgment. Integrity is also affected because ignoring a known misstatement means not being straightforward.
Threat category: familiarity threat, because a long and close relationship with the managing director makes him too sympathetic to the client's interests. There may also be an element of intimidation if the request was pressing.
Significance: the threat is significant. It led directly to a known misstatement being ignored, so it is not at an acceptable level.
Response: Rohan should have refused the request, asked management to correct the inventory, and evaluated the effect of the misstatement on the audit opinion. If management refused and the matter was material, he should have modified the opinion as required by the standards. If he could not remain objective, he should have withdrawn.

Answer: Rohan breached objectivity and integrity. The threat is familiarity, with possible intimidation. He should have insisted on correction, reported as required, and withdrawn if he could not stay objective.

Example 2

Differentiate between integrity and objectivity under the Code of Ethics, with one example each of a breach.

Show the solution

Integrity: being straightforward and honest in all professional and business relationships. It also means not being knowingly associated with information the professional believes is false or misleading.
Objectivity: not allowing bias, conflict of interest or undue influence of others to override professional or business judgment. It is about impartial judgment.
Basis of difference: integrity concerns honesty of conduct and communication. Objectivity concerns freedom of judgment from bias or pressure.
Example of an integrity breach: an auditor signs a report knowing the financial statements contain a misstatement he has chosen not to mention.
Example of an objectivity breach: an auditor accepts a gift or a favour from the client and, because of it, goes easy on audit procedures, even without lying about anything.

Answer: Integrity is honesty and straightforwardness; objectivity is impartial judgment free from bias, conflict of interest or undue influence. Knowingly signing a misleading report breaches integrity; letting a client favour affect audit judgment breaches objectivity.

Exam tips

Learn the five principles as a list and write each with a one-line definition. This alone earns marks in theory questions.
In scenario questions, name the principle, then the threat category, then the response. Use the facts from the question in each line.
For 'differentiate' questions, give at least three points of difference in a tabular-style layout using short lines, since the examiner rewards clear contrast.
In MCQs, watch for options that claim safeguards always work or that confidentiality can never be broken. Both are usually wrong.
Link ethics to SA 200 in one line where the question mentions audit compliance or independence.

Practice questions from Ethics and Terms of Audit Engagements

Ethical Requirements and Fundamental Principles in other exams

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

Ethical Requirements and Fundamental Principles: frequently asked questions

What are the fundamental principles of ethics in the Code of Ethics?

There are five: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. Every professional accountant must comply with them. In exams, write each one with a short definition.

How does SA 200 relate to the Code of Ethics?

SA 200 requires the auditor to comply with relevant ethical requirements, including those on independence, when conducting an audit. In India these requirements come from the Code of Ethics. So ethics is part of the audit framework, not a separate topic.

What are the threats under the conceptual framework?

The categories are self-interest, self-review, advocacy, familiarity and intimidation. You identify which one applies, evaluate how significant it is, and then respond. The response can be removing the circumstances, applying safeguards, or declining or ending the engagement.

What is the difference between integrity and objectivity?

Integrity is about honesty and being straightforward, and not being linked with misleading information. Objectivity is about impartial judgment that bias, conflicts of interest or undue influence do not override. You can be honest yet biased, so they are separate principles.