Arens14e Ch05 Ppt Ge

7/14/2019 Arens14e Ch05 Ppt Ge

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2012 Pearson Education,Auditing 14/e,Arens/Elder/Beasley 5 - 1

Ethics and the Audit Profession

Chapter 5


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2012 Pearson Education,Auditing 14/e,Arens/Elder/Beasley 5- 2

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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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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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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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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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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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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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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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 forthe rules of conduct.


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Enforcement

AICPAProfessional

Ethics Division

State Board ofAccountancy


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End of Chapter 5

Arens14e Ch05 Ppt Ge

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