Copyright © 2007 Pearson Education Canada 1 Chapter 2: Professional Relationships.

Copyright © 2007 Pearson Education Canada1

Chapter 2: Professional Relationships

Copyright © 2007 Pearson Education Canada

2-2

Chapter 2 Objectives Explain the importance of ethics Learn how to work through an ethical dilemma Examine the difference between public

accountants and other professionals Discuss the role of a code of professional conduct

for public accountants Identify the facets of independence List the reasons for audit committee involvement

in the audit process Focus on key rules of professional conduct Identify rules of conduct enforcement processes


2-3

What are ethics?

A set of moral principles or values Unique for each individual May or may not be considered explicitly Differences arise because of: life

experiences, successes and failures, influences of parents, teachers, religious organizations, friends


2-4

Why do we need ethics?

Helps society function in an orderly manner

Some are incorporated into laws to help prevent people from behaving unethically (perhaps due to different standards or selfishness)


2-5

Illustrative ethical principles (Figure 2-1, p. 34)

TrustworthinessRespectResponsibility

FairnessCaringCitizenship


2-6

Resolving ethical dilemmas (where a decision must be made about appropriate behaviour)

1. Obtain the relevant facts2. Identify the ethical issues from the facts3. Determine who is affected by the

outcome of the dilemma and how4. Identify the alternatives available5. Identify the likely consequence of each

alternative6. Decide on the appropriate action


2-7

Practice problem 2-24 (p. 55)

Let’s look at an ethical dilemma that could occur in public practice

What would you do if you were Barbara?


2-8

Why is ethical conduct important in professions?

The term “professional” carries a responsibility to the public

Public confidence is affected if a professional (e.g. doctor, lawyer, accountant, clergy) commit a crime

This happens because the general public cannot evaluate the competence of professionals


2-9

How are accountants different from other professionals?

Third parties are involved in the accountability relationship: the accountant is hired by management, yet reports to shareholders

Other professionals are normally hired by the users of the service


2-10

Triple trouble

Practice problem 2-22, page 54

This practice problem describes criminal behaviour on the part of the accountants

Who is “guilty?” Why?


2-11

Encouraging high quality work among PAs


2-12

Six basic principles governing conduct

Maintaining the good reputation of the profession

Perform services with integrity, due care; sustain professional competence

Be and remain free of influence (independence)

Duty of confidence (confidentiality)

Develop practice based upon professional excellence (advertising to be in good taste and accurate)

Professional courtesy should be maintained


2-13


General principles can be used to guide behaviour

What general principles has Gilbert violated?

How does this link to the professional rules of conduct?


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Independence

Independence in auditing means taking an unbiased viewpoint in the performance of audit tests, the evaluation of the results, and the issuance of the auditor’s reports

Three important concepts:– Independence in fact– Independence in appearance– Threats to independence


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Independence in fact

The auditor must be independent when conducting an audit or review level assurance engagement (independence is not required for a compilation)

Can you think of an example where the auditor is NOT factually independent?


2-16

Independence in appearance

This aspect of independence is based upon the unbiased viewpoint of others

It is possible for you to believe that your are independent, whereas an unbiased observer might disagree with you

Can you think of an example?


2-17

Threats to independence

The auditor is required to consider the five facets of independence before accepting or continuing an engagement

The threats are to be documented If a situation exists that affects a threat, the

auditor must document the actions taken, or decline the engagement


2-18

Self-interest threat

Definition: When the member has

a financial interest in the client or in the financial results of the client

Example(s): The firm or member

owns shares in or has a loan to the client

The client fees are significant in relation to the total fee base of the PA or of the firm


2-19

Self-review threat

Definition: When the PA is

placed in the position of having to audit his or her own work during the audit.

Example(s): PA prepared original data or

records for the client as part of a bookkeeping engagement. PA designed and implemented an accounting information system used to process client records.


2-20

Advocacy threat

Definition: When the firm

or member is perceived to promote (or actually does promote) the client’s position.

Example(s): PA is acting as an advocate in

resolving a dispute with a major creditor of the client.

The firm or PA is promoting the sale of shares or other securities for the client, or is receiving a commission for such sales.


2-21

Familiarity threat

Definition: Occurs when it is

difficult to behave with professional skepticism during the engagement.

Example(s): There is a long

association of senior staff with the client (e.g. being on the engagement for ten years)

A former partner of the firm is now the chief financial officer of the client


2-22

Intimidation threat Definition: The client

intimidates the firm or staff with respect to the content of the financial statements or with respect to the conduct of the audit.

Example(s): The client threatens to

replace the audit firm over a disclosure disagreement.

The client places a maximum upon the audit fee that is unrealistic with respect to the amount of work that needs to be completed.


2-23

Importance of an audit committee

Consists of a sub-committee of the board of directors

Should be non-management and competent

Auditor should report to them

Adds significantly to external and internal auditor’s independence


2-24

Practice question 2-18, p. 53

Review the purpose of an audit committee, and the roles that can be undertaken by audit committee members

Explain how this type of committee can be made more effective


2-25

Aids to maintaining independence

Legal liability: you may be sued

Rules of professional conduct: identify do’s and don’t’s of financial and business relationships

Generally accepted auditing standards: maintain objectivity

Public accounting firm quality control standards: help provide reasonable assurance with respect to independence

Audit committee: helps maintain independence from management


2-26

Aids to maintaining independence (continued)

Shopping for accounting principles: Section 7600 provides rules

Approval of auditor by shareholders: helps to provide more objectivity than management

Conclusion: Use a combination of all of the above to help maintain an unbiased business relationship


2-27


Three situations are described How do these situations affect Marie

Janes’ independence?


2-28

Confidentiality

Members of all three accounting bodies shall not disclose any confidential client or employer information without the specific consent of the client or employer.


2-29


Stuck between confidentiality and fair presentation of financial statements …

What would you do?


2-30

Advertising and Solicitation

All three accounting bodies prohibit solicitation of another accountant’s client and advertising which is not in keeping with the profession’s high standards

Advertising may include complimentary material about the accounting firm but should not claim any superior skills


2-31

Professional Courtesy to Other Members

Fact

The ICAO rules of professional conduct require an auditor to communicate with the predecessor auditor and ask if there is any reason why the auditor should not undertake the audit.

Question

What do you do if the predecessor auditor does not co-operate with you and will not give you an answer?


2-32

Practice Problem 2-16 (p. 52)

Use these practice problems to assess your knowledge of the professional rules of conduct

Remember to read a current copy of these rules from the web site of your provincial institute

Copyright © 2007 Pearson Education Canada 1 Chapter 2: Professional Relationships.

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