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Ethics and the Audit Profession
Chapter 5
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Learning Objective 1
Distinguish ethical from unethical behaviorin 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
Citizenship
Responsibility
Trustworthiness Caring
Respect
Fairness
Core Ethical
Values
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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 held
ethical 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 Afinds 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 selfishly.
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Learning Objective 2
Resolve ethical dilemmas using an ethicalframework.
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Ethical Dilemmas
An ethical dilemma is a situation a personfaces in which a decision must be made
about appropriate behavior.
Auditors face many ethical dilemmas in
their business careers.
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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 arethey affected?
What alternatives does the staff person have?
Who isaffected?
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Learning Objective 3
Explain the importance of ethical conductfor the accounting profession.
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Special Need for Ethical Conductin Professions
Our society has attached a specialmeaning to the term professional.
Professionals are expected to conductthemselves at a higher level
than most other members of society.
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Difference Between CPA Firmsand 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
Legalliability
AICPA practicesections
Continuingeducation
requirements
GAAS andinterpretations
Code ofProfessional
Conduct
CPAexamination
Qualitycontrol
Peerreview
PCAOBand SEC
Conduct of
CPA firm
personnel
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Learning Objective 4
Describe the purpose and content of theAICPA Code of Professional Conduct.
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Code of Professional Conduct
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Ethical Principles
1. Responsibilities:Professionals should exercise sensitive and
moral 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.
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Ethical Principles
3. Integrity:Members should perform all responsibilities
with integrity to maintain public confidence.
4. Objectivity 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 professions
standards and strive to improve competence.
6. Scope and nature of services:A member in public practice should observethe Code of Professional Conduct.
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Standards of Conduct
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IESBA Code of Ethics forProfessional Conduct
Part A
Establishes fivefundamental
principles
Evaluate andeliminate threats
Part C
Accountantsin business
Part B
Describes how framework appliesin certain situations
Accountants inpublic practice
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Learning Objective 5
Understand Sarbanes-Oxley Act and otherSEC and PCAOB independence
requirements and additional factors thatinfluence auditor independence.
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Independence
The AICPA and IESBA codes of ethicsboth define independenceasconsisting of two components
Independence of mind
Independence in appearance
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Sarbanes-Oxley Act and SECProvisions Addressing Auditor
Independence
SEC auditor independence rules strengthened
in 2003 consistent with the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act and revised SECrules further restrict the type of nonauditservices that can be provided by auditors.
S b O l A d SEC
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Sarbanes-Oxley Act and SECProvisions 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 ProvisionsAddressing Auditor Independence
1. Bookkeeping and other accounting services2. Financial information systems design and
implementation
3. 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
Prohibited Services
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Audit Committees
A selected number of members of acompanys board who help auditors remain
independent.
Comprised of three to five independentdirectors.
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Audit Committees
All members must be independent.
At least one audit committee member must be
a financial expert.
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Conflicts Arising fromEmployment Relationships
A one year cooling off period must occurbefore a member of the audit engagement
team can accept a key managementposition at a client.
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Partner Rotation
The Sarbanes-Oxley Act requires thatthe lead and concurring audit partner
rotate off the audit engagementafter a period of five years.
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Ownership Interests
SEC rules prohibit ownership inaudit clients by those persons
who can influence the audit.
SEC rules on financial relationshipstake an engagement perspective.
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Other Issues
Shopping for accounting principles
Engagement and payment ofaudit fees by management
Can the auditor be trulyindependent if payment depends
on company 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 interestMaterial or immaterial
R l d Fi i l
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Related FinancialInterests Issues
Former practitioners
Normal lending procedures
Financial interests and employmentof immediate and close family members
Joint investor or investee relationship
with client
Director, officer, management,
or employee of a company
Liti ti B t CPA Fi
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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 Other Services
The AICPA Codepermits a CPA firmto do both bookkeeping and auditingfor a nonpublic client.
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Bookkeeping and Other Services
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 use ofauditing standards.
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Bookkeeping and Other Services
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 forthe rules of conduct.
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Enforcement
AICPAProfessional
Ethics Division
State Board ofAccountancy
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End of Chapter 5
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