Chapter 1 – The Demand for Audit and Other Assurance Services4 - *
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Learning Objective 1 : Distinguish ethical from unethical behavior in personal and professional contexts
What Are Ethics?
a set of moral principles or values.
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to function in an orderly manner.
The person’s ethical standards are different
from those of society as a whole.
The person chooses to act selfishly.
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Learning Objective 2: Resolve ethical dilemmas using an ethical framework.
Ethical Dilemmas
Likelihood of discovery and consequences
An ethical dilemma is a situation a person
faces in which a decision must be made
about appropriate behavior.
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Determine who is affected
person who must resolve the dilemma
5. Identify the likely consequence of each
alternative
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.
Our society has attached a special
meaning to the term “professional”.
Professionals are expected to conduct
themselves at a higher level than most other
members of society.
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It is essential that users regard CPA firms as competent and unbiased. If users believe that CPA firms do not perform a valuable service, the value of the audit and other attestation reports is reduced and the demand for these services is reduced.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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Learning Objective 4: Describe the purpose and content of the AICPA Code of Professional Conduct.
Code of Professional Conduct
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judgments in all their activities.
2. The public interest:
Members should accept the obligation to act in a way that
will serve and honor the public.
3. Integrity:
maintain public confidence.
conflicts of interest.
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and strive to improve competence.
6. Scope and nature of services:
A member in public practice should observe the
Code of Professional Conduct.
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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.
Independence
independence as consisting of two components
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SEC auditor independence rules strengthened in 2003
consistent with the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act and revised SEC rules further restrict
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The SEC adopted rules strengthening auditor independence in January 2003 consistent with
the requirements of the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act and the revised SEC rules further restrict, but do not completely
eliminate the type of non-audit services that can be provided to the public.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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1. Bookkeeping and other accounting services
2. Financial information systems design and implementation
3. Appraisal or valuation services
4. Actuarial services
7. Broker, dealer, or investment adviser or investment banker
services
8. Legal and expert services unrelated to the audit
9. Any other service that the PCAOB determines by regulation is
impermissible
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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.
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An audit committee is a selected number of members of a company’s board of directors
whose responsibilities include helping auditors remain independent of management.
Most audit committees are made up of three to five or sometimes as many as seven
directors who are not a part of company management.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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Partner Rotation
A one year “cooling off” period must occur before a
member of the audit engagement team can accept a
key management position at a client.
The Sarbanes-Oxley Act requires that the lead and
concurring audit partner rotate off the audit
engagement after a period of five years.
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The SEC has added a one year “cooling off ” period before a member of the audit
engagement team can work for the client in certain key management positions.
Oftentimes, companies may offer employment to a member of the audit team. Should the offer occur during the audit, the independence and objectivity of the auditor may be compromised. Such situations involve a decision by the partner and manager about whether the individual should be removed from the engagement.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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persons who can influence the audit.
SEC rules on financial relationships take an engagement
perspective.
management
payment depends on company management?
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The rules prohibit any ownership by covered persons and their immediate family, including (a) members of the audit engagement team, (b) those in position to influence the audit engagement in the firm chain of command, (c ) partners and managers who provide more than 10 hours of nonaudit services to the client, and (d) partners in the office of the partner primarily responsible for the engagement.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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Learning Objective 6: Apply the AICPA Code rules and interpretations on independence and explain their importance.
Rules of Conduct
Rule 101 – Independence
Material or immaterial
A member in public practice shall be independent in the
performance of professional services as required by
standards promulgated by bodies designated by Council.
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family members
Director, officer, management, or employee of a company
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Former partners who left the firm or have sold their ownership interest are permitted to have relationships with clients of the firm.
Generally loans between a CPA firm or covered members and an audit client are prohibited because it is a financial relationship.
Immediate family members, defined as a spouse, spousal equivalent or dependent are ordinarily treated as if they were the financial interest of the covered member.
If a CPA is a member of the board of directors or an officer of a client company, his or her ability to make independent evaluations of the fair presentation of financial statements is affected.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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The AICPA Code permits a CPA firm to do both
bookkeeping and auditing for a nonpublic client.
Client must accept full responsibility for the financial
statements.
The CPA must not assume the role of employee or
of management.
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Learning Objective 7: Understand the requirements of other rules under the AICPA Code.
Other Rules of Conduct
102 – Integrity and objectivity
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503 – Commissions and referral fees
505 – Form of organization and name
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CPA firms are permitted to charge contingent fees for nonattestation services unless the CPA firm is also performing attestation services for the same client.
A member shall not commit an act discreditable to the profession.
A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive.
A member in public practice shall not for a commission recommend or refer any product or service to be supplied by a client or receive a commission when the member’s firm performs an audit, compilation, or examination of financial information for that client.
A member shall not practice public accounting under a firm name that is misleading.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley
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Learning Objective 8: Describe the enforcement mechanisms for the rules of conduct.
Enforcement
AICPA
Professional
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