arens solution manual Chapter 4

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


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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

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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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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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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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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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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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

arens solution manual Chapter 4

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