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5/28/2018 arens solution manual Chapter 4
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2008 Prentice Hall Business Publishing,Auditing 12/e,Arens/Beasley/Elder 4 - 1
Professional Ethics
Chapter 4
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Learning Objective 1
Distinguish ethical from unethical
behavior in personal and
professional contexts.
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What Are Ethics?
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.
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Illustrative PrescribedEthical Principles
Trustworthiness
Responsibility
Caring
Respect
Fairness
Citizenship
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Need for Ethics
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.
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Why People Act Unethically
The persons ethical standards are differentfrom those of society as a whole.
The person chooses to act selfishly.
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A Person Chooses toAct SelfishlyExample
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.
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A Person Chooses toAct SelfishlyExample
Person Bfaces 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 self ish ly.
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Learning Objective 2
Resolve ethical dilemmas using
an ethical framework.
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Ethical Dilemmas
An ethical dilemma is a situation a personfaces in which a decision must be madeabout appropriate behavior.
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RationalizingUnethical Behavior
Everybody does it
Likelihood of discovery and consequences
If its legal, its ethical
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Resolving Ethical Dilemmas
1. Obtain the relevant facts
2. Identify the ethical issues from the facts
3. Determine who is affected
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Resolving Ethical Dilemmas
4. Identify the alternatives available to theperson who must resolve the dilemma
5. Identify the likely consequence of eachalternative
6. Decide the appropriate action
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Relevant Facts
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.
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Ethical Issue
Is it ethical for the staff person to work hours andnot record them as hours worked in this situation?
How are they affected?
What alternatives does the staff person have?
Who is affected?
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Learning Objective 3
Explain the importance of ethical
conduct for the accounting
profession.
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Special Need for EthicalConduct in Professions
Our society has attached a specialmeaning to the term professional.
Professionals are expected to conductthemselves at a higher levelthan most other members of society.
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Difference Between CPAFirms and Other Professionals
CPA firms are engaged and paid by thecompany issuing the financial statements.
Primary beneficiaries of the audit arestatement users.
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CPAs Encouraged to ConductThemselves at a High Level
Legal
liability
AICPA practice
sections
Continuing
education
requirements
GAAS and
interpretations
Code of
Professional
Conduct
CPA
examination
Qualitycontrol
Peer
review
PCAOB
and SEC
Conduct of
CPA firm
personnel
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Learning Objective 4
Describe the purpose and
content of the AICPA
Code of Professional Conduc t .
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Code of Professional Conduct
Principles
Ideal standards of ethical conduct
stated in philosophical terms.
They are not enforceable.
Rules of
conduct
Minimum standards of ethical
conduct stated as specific rules.
They are enforceable.
Interpretationsof the rules
of conduct
Interpretation of the rules of conduct by
the AICPA Division of Professional Ethics.
They are not enforceable, but a
practitioner must justify departure.
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Code of Professional Conduct
Ethical
rulings
Published explanations and answers
to questions about the rules of
conduct submitted to the AICPA by
practitioners and others interestedin ethical requirements.
They are not enforceable, but a
practitioner must justify departure.
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Ethical Principles
1. Responsib i l i t ies:
Professionals should exercise sensitive andmoral judgments in all their activities.
2. The publ ic interest:
Members should accept the obligation to act
in a way that will serve and honor the public.
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Ethical Principles
3. In tegrity :
Members should perform all responsibilitieswith integrity to maintain public confidence.
4. Object iv i ty and independence:
Members should be objective, independent,
and free of conflicts of interest.
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Ethical Principles
5. Due care:
Members should observe the professionsstandards and strive to improve competence.
6. Scope and nature of services:
A member in public practice should observe
the Code of Professional Conduc t.
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Standards of Conduct
Principles
Rules of
conductSubstandardconduct
Ideal conductby practitioners
Minimum level
of conduct bypractitioners
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Learning Objective 5
Understand Sarbanes-Oxley Act
and other SEC and PCAOB
independence requirements
and additional factors that
influence auditor independence.
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Independence
The value of auditing depends heavilyon the publics perception of theindependence of auditors.
Independence in fact
Independence in appearance
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Sarbanes-Oxley Act and SEC Provisions
Addressing Auditor Independence
The SEC adopted rules strengthening auditorindependence in January 2003 consistent withthe requirements of the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act and the revised SECrules further restrict, but do not completely
eliminate the type of nonaudit servicesthat can be provided to the public.
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Sarbanes-Oxley Act and SEC Provisions
Addressing Auditor Independence
The PCAOB has also issued additionalindependence rules related to theprovision of certain tax services.
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Sarbanes-Oxley Act and SEC Provisions
Addressing Auditor Independence
1. Bookkeeping and other accounting services
2. Financial information systems design and implementation
3. Appraisal or valuation services
4. Actuarial services
5. Internal audit outsourcing
6. Management of human resource functions
7. Broker, dealer, or investment adviser
or investment banker services8. Legal and expert services unrelated to the audit
9. Any other service that the PCAOB determines
by regulation is impermissible
Prohibited Services
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Audit Committees
An audit committee is a selected numberof members of a companys board of directorswhose responsibilities include helpingauditors remain independent of management.
Most audit committees are made up of three
to five or sometimes as many as sevendirectors who are not a part of companymanagement.
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Audit Committees
The Sarbanes-Oxley Act requires that allmembers of the audit committeebe independent.
Companies must disclose whether or notthe audit committee includes at least
one financial expert.
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Conflicts Arising fromEmployment Relationships
The SEC has added a one year cooling off period before a member of the auditengagement team can work for theclient in certain key management positions.
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Partner Rotation
The Sarbanes-Oxley Act requires thatthe lead and concurring audit partnerrotate off the audit engagementafter a period of five years.
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Ownership Interests
SEC rules prohibit ownership inaudit clients by those personswho can influence the audit.
SEC rules on financial relationshipstake an engagement perspective.
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Independence StandardsBoard
It was dissolved in July 2001
ISB pronouncements and interpretationsremain enforceable unless they conflictwith the independence rulingsissued by the SEC.
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Other Issues
Shopping for accounting principles
Engagement and payment ofaudit fees by management
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Learning Objective 6
Apply the AICPA Code rules and
interpretations on independence
and explain their importance.
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Rules of Conduct
Rule 101Independence
A member in public practice shall beindependent in the performance ofprofessional services as required bystandards promulgated by bodies
designated by Council.
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Financial Interests
Interpretations of Rule 101 prohibitcovered members from owning anydirect investments in audit clients.
Covered members
Direct versus indirect financial interest
Material or immaterial
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Related FinancialInterests Issues
Former practitioners
Normal lending procedures
Financial interests and employment
of immediate and close family members
Joint investor or investee relationship
with client
Director, officer, management,or employee of a company
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Litigation Between CPA Firmand Client
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 as
a violation of Rule 101.
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Bookkeeping and OtherServices
The AICPA Codepermits a CPA firmto do both bookkeeping and auditingfor the same client.
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Bookkeeping and OtherServices
1. Client must accept full responsibilityfor the financial statements.
2. The CPA must not assume the roleof employee or of management.
3. The audit must conform to GASS.
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Bookkeeping and OtherServices
The SEC and AICPA rules do not allowaudit firms to provide bookkeepingservices to public company audit clients.
Consulting and other nonaudit services
Unpaid fees
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Learning Objective 7
Understand the requirements of
other rules under the AICPA Code.
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Other Rules of Conduct
102Integrity and objectivity
201General standards
202Compliance with standards
203Accounting principles
301Confidential client information
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Other Rules of Conduct
302Contingent fees
501Acts discreditable
502Advertising and other forms
of solicitation
503Commissions and referral fees
505Form of organization and name
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Learning Objective 8
Describe the enforcement
mechanisms for the rules
of conduct.
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Enforcement
Action by AICPA Professional Ethics Division
Action by a state Board of Accountancy
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End of Chapter 4