auditing and assurance services accounting chapter 5

Chapter 5

Ethics and the Audit Profession

Chapter 5

Ethics and the Audit Profession

Distinguish ethical from unethical behavior in personal and professional contexts.

Resolve ethical dilemmas using an ethical framework.

Explain the importance of ethical conduct for the accounting profession.

Describe the purpose and content of the AICPA Code of Professional Conduct.

Understand Sarbanes-Oxley Act and other SEC and PCAOB independence requirements and additional factors that influence auditor independence.

Apply the AICPA Code rules and interpretations on independence and explain their importance.

Understand the requirements of other rules under the AICPA Code.

Describe the enforcement mechanisms for CPA conduct.

Distinguish ethical from unethical behavior in

personal and professional contexts.

Ethics can be defined broadly asa set of moral principles or values.

Each of us has such a set of values.

We may or may not have consideredthem explicitly.

Responsibility

Core Ethical

Values

Fairness

Trustworthiness

Respect

Caring

Citizenship

Ethical behavior is necessary for a societyto function in an orderly manner.

The need for ethics in society is sufficientlyimportant that many commonly heldethical values are incorporated into laws.

The person’s ethical standards are differentfrom those of society as a whole.

The person chooses to act selfishly.

Person A finds a briefcase containingimportant papers and $1,000.

He tosses the briefcase and keeps the money.

He brags to his friends about his good fortune.

This action probably differs from most of society.

Person B faces the same situation butresponds differently.

He keeps the money but leaves the briefcase.

He tells nobody and spends the money.

He has violated his own ethical standardsand chose to act selfishly.

Resolve ethical dilemmas using an ethical framework.

An ethical dilemma is a situation a personfaces in which a decision must be madeabout appropriate behavior.

Auditors face many ethical dilemmas in their business careers.

Everybody does it

If it’s legal, it’s ethical

Likelihood of discovery and consequences

1. Obtain the relevant facts

2. Identify the ethical issues from the facts

3. Determine who is affected

4. Identify the alternatives available to the person who must resolve the dilemma

5. Identify the likely consequence of each alternative

6. Decide the appropriate action

A staff person has been informed thathe will work hours without recordingthem as hours worked.

Firm policy prohibits this practice.

Another staff person has stated thatthis is common practice in the firm.

Is it ethical for the staff person to work hours andnot record them as hours worked in this situation?

What alternatives does the staff person have?

Who is affected?

How are they affected?

Explain the importance of ethical conduct for the accounting profession.

GAAS andinterpretationsCPA

examination

Qualitycontrol

Peerreview

PCAOBand SEC

Conduct of

CPA firm

personnel

Code ofProfessional

Conduct

Continuingeducation

requirements

Legalliability

AICPA practicesections

Describe the purpose and content of the AICPA Code of Professional Conduct.

1. Responsibilities:Professionals should exercise sensitive andmoral judgments in all their activities.

2. The public interest:Members should accept the obligation to actin a way that will serve and honor the public.

3. Integrity:Members should perform all responsibilitieswith the highest sense of integrity.

4. Objectivity and independence:Members should be objective, independent,and free of conflicts of interest.

5. Due care:Members should observe the profession’sstandards and strive to improve competence.

6. Scope and nature of services:A member in public practice should observe the Code of Professional Conduct.

Part A Part B Part C

Establishes fivefundamental

principles

Describes how framework applies in certain situations

Evaluate and eliminate threats

Accountants in public practice

Accountants in business

Understand Sarbanes-Oxley Act and other SEC and PCAOB independence requirements and

additional factors that influence auditor independence.

The AICPA and IESBA codes of ethicsboth define independence as consisting of two components

Independence of mind

Independence in appearance

SEC auditor independence rules strengthenedin 2003 consistent with the Sarbanes-Oxley Act.

The Sarbanes-Oxley Act and revised SECrules further restrict the type of nonaudit services that can be provided by auditors.

The PCAOB has also issued additionalindependence rules related to theprovision of certain tax services.

Prohibited Services

1. Bookkeeping and other accounting services2. Financial information systems design and

implementation3. Appraisal or valuation services4. Actuarial services5. Internal audit outsourcing6. Management of human resource functions7. Broker, dealer, or investment adviser or investment banker services8. Legal and expert services unrelated to the audit9. Any other service that the PCAOB determines by regulation is impermissible

A selected number of members of acompany’s board who help auditors remain independent.

Comprised of three to five independent directors.

All members must be independent.

At least one audit committee member must be a financial expert.

A one year “cooling off” period must occurbefore a member of the audit engagement team can accept a key management position at a client.

The Sarbanes-Oxley Act requires thatthe lead and concurring audit partnerrotate off the audit engagementafter a period of five years.

SEC rules on financial relationshipstake an engagement perspective.

SEC rules prohibit ownership inaudit clients by those personswho can influence the audit.

Shopping for accounting principles

Engagement and payment of audit fees by management

Can the auditor be truly independent if payment depends on company management?

Apply the AICPA Code rules and interpretations on independence

and explain their importance.

Rule 101 – Independence

A member in public practice shall beindependent in the performance ofprofessional services as required bystandards promulgated by bodiesdesignated by Council.

Interpretations of Rule 101 prohibitcovered members from owning anydirect investments in audit clients.

Covered members

Direct versus indirect financial interest

Material or immaterial

Former practitioners Normal lending procedures Financial interests and employment

of immediate and close family members Joint closely held investments with a

client Director, officer, management,

or employee of a company

A lawsuit or intent to start a lawsuit betweena CPA firm and its client, the ability of theCPA firm and client to remain objectiveis questionable.

The interpretations regard such litigation asa violation of Rule 101.

The AICPA Code permits a CPA firmto do both bookkeeping and auditingfor a private company audit client.

1. Client must accept full responsibilityfor the financial statements.

2. The CPA must not assume the roleof employee or of management.

3. The CPA must conform to auditing standards.

The SEC and AICPA rules do not allowaudit firms to provide bookkeepingservices to public company audit clients.

Consulting and other nonaudit services

Unpaid fees

Understand the requirements of other rules under the AICPA Code.

102 – Integrity and objectivity

201 – General standards

202 – Compliance with standards

203 – Accounting principles

301 – Confidential client information

302 – Contingent fees

501 – Acts discreditable

502 – Advertising and other forms of solicitation

503 – Commissions and referral fees

505 – Form of organization and name

Describe the enforcement mechanisms for CPA conduct.

AICPA Professional

Ethics DivisionState Board of Accountancy

PCAOBEnforcement

Division

Copyright

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

auditing and assurance services accounting chapter 5

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