Modern Auditing Beynton Solution Manual Chapter 03

7/27/2019 Modern Auditing Beynton Solution Manual Chapter 03

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CHAPTER3

PROFESSIONALETHICS

Learning Check

3.1. General ethics attempts to deal with two questions that can serve as guides

to behavior: (1) "What good do I see!" and () "What is m# obligation in

this circumstance!" General ethics attempts to deal with these questions b#de$ining what is good $or the individual and societ#% and b# tr#ing to

establish the nature o$ obligations or duties that individuals owe themselves

and each other.

3&. 'he ethical absolutist school o$ thought sa#s there are universal standards

that do not change over time that appl# to ever#one. 'he ethical relativist

school o$ thought sa#s that peoples ethical udgments are determined b# the

changing customs and traditions o$ societ# in which the# live.

3&3. 'he si* steps in one general $ramewor $or ethical decision maing are:

+btain the $acts relevant to the decision.

Identi$# the ethical issues $rom the $acts.

,etermine who will be a$$ected b# the decision and how.

Identi$# the decision maers alternatives.

Identi$# the consequences o$ each alternative.

-ae the ethical choice

3&. a. /ro$essional ethics include standards o$ behavior $or a pro$essional

person that are designed $or both practical and idealistic purposes. 'he#

must be both realistic and en$orceable0 the# should be above the law but

below the ideal.

.b /ro$essional ethics are imposed b# a pro$ession on its members who

voluntaril# accept standards o$ pro$essional behavior more rigorous than


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those required b# law. 'he# are generall# promulgated through a code o$

ethics.

3&. a. 'he core values identi$ied in the 2/ 4ision /roect are (1) continuing

education and li$elong learning% () competence% (3) integrit#% ()attunement to business issues% and () obectivit#.

b. 2ontinuing education and li$elong learning is important to ensuring the

public con$idence in a 2/s abilit# to maintain cutting edge sills in a

rapidl# changing environment. 2/s must demonstrate competence in

G/% G5% and in their abilit# to understand the connection

between business per$ormance and reported $inancial per$ormance in

order to earn the public6s trust. Integrit#% which means practicing with

honest# and acting with pro$essional ethics% is critical earning the public

trust. 2/s opinion on the $inancial statements would be worthlesswithout con$idence that 2/s are honest and act with integrit#.

ttunement to broad business issues is what separates 2/s $rom other

pro$essionals and allows 2/s to e*ercise the pro$essional udgment

that is so important in accounting and auditing. 7inall#% obectivit# and

the $reedom o$ bias or con$licts o$ interest allows 2/s to earn both a

client6s and the public6s trust. In combination% these core values have

helps 2/s earn a reputation $or being a trusted in their role as

independent auditors.

3&8. 'he /ro$essional 9thics 'eam o$ the I2/ $unctions through an e*ecutive

committee that is responsible $or:

/lanning the programs o$ the divisions subcommittees and supervising

their implementation.

Issuing $ormal polic# statements and pronouncements

9stablishing prima $acie violations o$ the 2ode or b#laws $or possible

disciplinar# action.

/roposing changes in the 2ode.

3&. a. 'he two sections o$ the I2/s 2ode o$ /ro$essional 2onduct are (a) the

/rinciples and (b) the ;ules o$ 2onduct. 'he two t#pes o$

pronouncements related to them are Interpretations o$ the ;ules o$

2onduct and 9thics ;ulings.


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b. +nl# the ;ules o$ 2onduct are meant to be en$orceable. . a. 'he principles e*press the basic tenets o$ ethical conduct and provide

the $ramewor $or the rules.

b. 'he principles and their essence are:

;esponsibilities & members should e*ercise sensitive pro$essional

and moral udgments in all their activities.

/ublic interest & members should serve the public interest% honor the

public trust% and demonstrate commitment to pro$essionalism.

Integrit# & members should have the highest sense o$ integrit#.

+bectivit# and independence & a member should maintainobectivit# and be $ree o$ con$licts in all engagements and be

independent in $act and in appearance in rendering auditing and

attest services.

,ue care & a member should observe the pro$ession6s standards%

strive continuall# to improve competence and the qualit# o$ service%

and discharge responsibilities to the best o$ the members abilit#.

5cope and nature o$ services & the /rinciples o$ the 2ode should be

observed in determining the scope and nature o$ services to be

provided.

3.1?. a. 'he authorit# o$ the rules is provided in the b#laws o$ the I2/.

b. 'he rules di$$er in their applicabilit#. 5i* rules appl# onl# to members in

public practice whereas the remainder appl# to all members.


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3&11. a. ;ule 1?1 states: member in public practice shall be independent in the

per$ormance o$ pro$essional services as required b# standards

promulgated b# bodies designated b# 2ouncil.

b. 'he bodies that have issued technical standards that require a member tobe independent are the uditing 5tandards @oard and the ccounting

and ;eview 5ervices 2ommittee.

3&1. a. 'he e*pression "a member or a members $irm" includes:

ll individuals (o$ an# ran) participating in the engagement% e*cept

those who per$orm onl# routine clerical $unctions% such as t#ping

and photocop#ing.

ll individuals with a managerial position located in an o$$ice

participating in a signi$icant portion o$ the engagement (e.g.% the

director o$ human resources).

ll proprietors% partners% or shareholders o$ the members $irm%

whether or not participating in the engagement.

n# entit# ($or e*ample% a partnership% corporation% trust% oint

venture% or pool) whose operating% $inancial% or accounting policies

can be controlled b# one or more o$ the persons described above or

b# two or more such persons i$ the# choose to act together.

b. 'here are three time periods:

'he period o$ the auditors pro$essional engagement% which includes

audit planning and both interim and #ear&end $ield wor.

'he period covered b# the $inancial statements% which is the clients

$iscal #ear.

'he time o$ e*pressing the auditors opinion% which is the date o$ the

auditors report.

3&13. a. 7irst% a member o$ his $irm cannot have (or be committed to have) an#

direct $inancial interest in a client such as owning stoc. n indirect

$inancial interest e*ists when a member or his $irm owns stoc in a

mutual $und that% in turn% owns stoc in the client or when a members

nondependent close relative has a $inancial interest in the client. n


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indirect $inancial interest cannot be material. 5econd% a member is not

allowed to have a oint closel# held business investment with a client or

o$$icers% directors% or principal stocholders that is material. 'hird% a

member is not permitted to have an# loan to or $rom a client or the

individuals mentioned above which is not made under normal lending

terms.

b. 'he t#pes o$ business relationships that are prohibited are those in

which the member or members $irm (1) has signi$icant in$luence over

the operating% $inancial% or accounting policies o$ the client or () is

involved in "audit&sensitive" activities within the clients organiAation.

3&1. a. Alternative practice structuresare arrangements are what appears to be

a single accounting $irm ma# in $act be several separate legal entities.

b. 7ollowing are several e*amples o$ alternative practice structures. 'he

consulting practice o$ an accounting $irm ma# be part o$ an alternative

practice structure% with man# o$ the same shareholders as the accounting

and auditing practice% but di$$erent pro$it sharing arrangements.

+rganiAations lie merican 9*press have also purchased various

accounting $irms% emplo# the 2/s directl#% and lease emplo#ees bac

to the 2/ $irm which eeps its own identit# to per$orm attest wor.

c. 2ommon reason $or developing alternative practice structures is tobetter manage the multi&disciplinar# environment that man# accounting

$irms compete in. lternative practice structures allow $irms to

establish di$$erent pro$it sharing arrangements in each practice structure

and to shield one part o$ the practice $rom the liabilit# e*posure o$

another part o$ the practice.

3&1. a. ;ule ?1 states: member shall compl# with the $ollowing standards

and with an# interpretations thereo$ b# bodies designated b# 2ouncil.

b. 'he $our subcategoriAes are (1) pro$essional competence% () due

pro$essional care% (3) planning and supervision% and () su$$icient

relevant data.


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3&18. a. 'he essence o$ ;ule 3?1 is that a member in public practice shall not

disclose an# con$idential client in$ormation without the consent o$ the

client.

b. ;ule 3? prohibits contingent $ees $or an# pro$essional servicewhenever a member in public practice also per$orms (1) an audit or

review o$ a $inancial statement0 or () a compilation o$ a $inancial

statement when the member e*pects% or reasonabl# might e*pect% that

a third part# will use the $inancial statement and the members

compilation report does not disclose a lac o$ independence0 or (3) an

e*amination o$ prospective $inancial in$ormation. 'he rule also

prohibits preparing an original or amended ta* return or claim $or a ta*

re$und $or a contingent $ee $or an# client.

3.1. a. Bnder ;ule ?1% a member is prohibited $rom (1) retaining clientrecords% () discrimination in emplo#ment% (3) $ailure to $ollow

standards in government audits% and () negligence in the preparation

o$ $inancial statements.

b. Bnder ;ule ?% a member cannot engage in advertising or other

$orms o$ solicitation in a manner that is $alse% misleading% or deceptive.

5olicitation b# the use o$ coercion% overreaching% or harassing conduct

is also prohibited.

c. ;ule ?3 states that a member in public practice shall not $or acommission recommend or re$er to a client an# product or service or

an# product or service to be supplied b# a client% or receive a

commission when the member or the members $irm also per$orms $or

that client (1) an audit or review o$ a $inancial statement0 () a

compilation o$ a $inancial statement and the members compilation

report does not disclose a lac o$ independence0 or (3) an e*amination

o$ prospective $inancial in$ormation.

3&1=. a. ;ule ? permits a 2/ to practice public accounting onl# in a $orm o$

organiAation permitted b# state law or regulation whose characteristics

con$orm to resolutions o$ 2ouncil. ,epending on the state% this ma#

include a sole proprietorship% a partnership% a pro$essional corporation%

and a limited liabilit# partnership or corporation (CC/ or CC2).


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b. Bnder ;ule ?% characteristics con$orming to resolutions o$ 2ouncil

include:

super maorit# (88 D3E) o$ the ownership o$ a $irm must belong

to 2/s. Fon&2/ owners must be activel# engaged in providing

services to the $irms clients as their principal occupation.+wnership b# others is considered against the public interest and

continues to be prohibited

2/ must have ultimate responsibilit# $or all services provided

b# the $irm that are governed b# 5tatements on uditing 5tandards

or 5tatements on 5tandards $or ccounting and ;eview 5ervices.

Fon&2/ owners must abide b# the I2/ 2ode o$ /ro$essional

2onduct% must meet certain education requirements% and complete

the same wor&related continuing pro$essional education

requirements as 2/s.

3&1>. 'he two groups that are responsible $or en$orcing the rules are the I2/

and state societies o$ 2/5. 'he ma*imum penalt# b# either group is

e*pulsion $rom membership.

3&?. 'he purpose o$ 99/ is to mae en$orcement o$ the ;ules o$ 2onduct more

e$$ective and disciplinar# action more uni$orm. Bnder 99/% complaints

against a member ma# be $iled with either the I2/ or the state societ#.

9ach group ma# act independentl# or ointl#.

3&1. 'he oint 'rial @oard consists o$ at least 38 I2/ members. 'he trial

board becomes involved onl# when earlier en$orcement procedures have

$ound the complaint to be serious or the member involved has re$used to

cooperate. 'he trial board ma# (1) admonish the member% () suspend the

member $or a period o$ no more than two #ears% or (3) e*pel the member.

3&. Bnder the automatic disciplinar# provisions o$ the I2/% suspension or

termination o$ membership can result without a hearing $or certain acts. 'he

actions that ma# invoe automatic disciplinar# provisions are: crime punishable b# imprisonment $or more than one #ear.

Will$ul $ailure to $ile an# income ta* return that the member% as an

individual ta*pa#er% is required b# law to $ile.

'he $iling o$ a $alse or $raudulent income ta* return on the members or

a clients behal$.


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Will$ul aiding in the preparation and presentation o$ a $alse and

$raudulent income ta* return o$ a client.

Objective Questions

3&3. 1. d . b 3. a

3&. 1. a . a 3. c

3&. 1. b . c 3. b

Comprehensive Questions

3&8. (9stimated time & ? minutes)

a. /ro$essional ethics evolve over time and continue to be in the process

o$ change as the practice o$ public accounting changes. code o$

ethics provides standards o$ behavior $or a pro$essional person that aredesigned $or both practical and idealistic purposes. code o$ ethics

signi$icantl# a$$ects the reputation o$ a pro$ession and the con$idence

in which it is held.

b. In some respects% the /rinciples section o$ the 2ode that e*presses the

basic tenets o$ ethical conduct% and that is more enduring% draws $rom

the ethical absolutists school o$ thought. In contrast% the ;ules o$

2onduct section% which is revised more $requentl# to re$lect changing

customs and traditions o$ societ#% draws $rom the ethical relativists

school o$ thought.

c. 9*ample 1: In auditing 2lient % the auditor discovers that 2lient

has been underbilled b# another client% 2lient @. 5hould the auditor

in$orm 2lient @ when doing the audit o$ @!


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9*ample : While per$orming a management consulting engagement%

the engagement team discovers an irregularit# that was missed b# the

separate audit engagement team that per$ormed the last annual audit.

,oes the 2/ $irm have a responsibilit# to bring the matter discovered

b# the management consulting team to an#ones attention!

d. ccording to the /reamble to the I2/s 2ode% the 2/ has

responsibilities to the $ollowing three groups: (1) the public% ()

clients% and (3) colleagues.

3&. (9stimated time & minutes)

+btain the $acts relative to the decision: 'his would include determining

the speci$ics o$ the string o$ operating losses and the clients current

$inancial position% data on the probabilit# and e$$ects o$ additionaloperating losses% including an assessment o$ materialit# $rom the

perspective o$ potential users o$ the $inancial statements% and the speci$ics

o$ the $inancial statement and $ootnote disclosures management proposes

to mae.

Identi$# ethical issues $rom the $acts: 'he ethical issue relates to the need

to mae a decision on whether to require the client to mae the disclosure

based on a udgment call when there ma# be evidence that di$$erent

auditors might reach di$$erent udgments based on the same $acts. 'he

auditor ma# have di$$icult# reaching a udgment% but the auditor must not

subordinate his or her udgment to others.

,etermine who will be a$$ected b# the decision and how: mong the

staeholders are management% emplo#ees% customers% creditors% and

stocholders whose wel$are could be adversel# a$$ected b# the disputed

disclosure i$ it were to become a sel$&$ul$illing prophec# as $eared b#

management. +n the other hand% some o$ these staeholders might bene$it

$rom the disclosure now i$ in $act the entit# ultimatel# has to close down.

'he auditor is also a staeholder. 2ompelling the client to mae thedisclosure might result in loss o$ the client. @ut $ailure to require the

disclosure $ollowed b# the entit#s having to discontinue operations could

leave the auditor vulnerable to charges o$ $ailing to compl# with

pro$essional standards% possibl# resulting in monetar# losses and damage

to the auditors reputation as well as the reputation o$ the pro$ession.


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Identi$# the decision maers alternatives: 'wo alternatives are: (1) de$er

to the clients reasoning and udgment and do not require the disclosure%

and () insist on the disclosure. In case o$ the latter% i$ the client re$uses to

go along% the auditor ma# have to issue a quali$ied or adverse opinion%

rather than an unquali$ied opinion with e*planator# language% or withdraw

$rom the engagement.

Identi$# the consequences o$ each alternative: 'he consequences are

d#namic and will liel# depend on whether the entit# does in $act have to

close down. I$ the auditor does not require the disclosure and the entit#

does have to close down due to continued losses% man# parties% including

the auditor% ma# su$$er adverse consequences. @ut mandating the

disclosure might induce negative consequences that could otherwise have

been avoided% or it might reduce the negative consequences that might

ensue $rom not maing the disclosure. ;egardless o$ whether the entit#eventuall# has to shut down% the auditors giving in to the clients position

could establish a precedent that would be di$$icult to overcome in $uture

dealings with the client% and i$ it were to become nown% in dealings with

other clients. 7urther% i$ the auditor subordinates his or her udgment to

the client% he or she has violated the I2/s 2ode (;ule 1?) and is

subect to sanctions.

-ae the ethical choice: 'his is each individuals call.

3&=. (9stimated time & minutes)

a.a 'here are two integral sections o$ the 2ode:

/rinciples that e*press the basic tenets o$ ethical conduct and

provide the $ramewor o$ the ;ules.

;ules which govern the per$ormance o$ pro$essional services b#

members.

b. 'he principles are not en$orceable in their own right. ll o$ the rules

are en$orceable in their own terms.

c.a 'he si* principles (articles) are


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;esponsibilities. In carr#ing out their responsibilities as

pro$essionals% members should e*ercise sensitive pro$essional and

moral udgments in all their activities.

'he public interest. -embers should accept the obligation to act

in a wa# that will serve the public interest% honor the public trust%and demonstrate commitment to pro$essionalism.

Integrit#. 'o maintain and broaden public con$idence% members

should per$orm all pro$essional responsibilities with the highest

sense o$ integrit#.

+bectivit# and independence. member should maintain

obectivit# and be $ree o$ con$licts o$ interest in discharging

pro$essional responsibilities. member in public practice should

be independent in $act and appearance when providing auditingand other attestation services.

,ue care. member should observe the pro$essions technical and

ethical standards% strive continuall# to improve competence and

the qualit# o$ services% and discharge pro$essional responsibilit# to

the best o$ the members abilit#.

5cope and nature o$ services. member in public practice should

observe the /rinciples o$ the 2ode o$ /ro$essional 2onduct in

determining the scope and nature o$ services to be provided.

d. /ossible courses o$ action are:

;esponsibilities & a member should cooperate with other members

to (1) improve the art o$ accounting% () maintain the publics

con$idence in the pro$ession% and (3) carr# out the pro$essions

sel$&governance responsibilities.

'he public interest & members should act with integrit# and strive

earnestl# to continuall# demonstrate their dedication to

pro$essional e*cellence. 2/ is e*pected to meet both qualit#and pro$essional standards in all engagements.

Integrit# & members must be honest and candid0 members act with

integrit# when the# observe both the $orm and the spirit o$

technical and ethical standards.


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+bectivit# and independence & members should avoid

circumstances that involve con$licts o$ interest0 a 2/ should not

have a $inancial interest or a e# business relationship with the

client.

,ue care & a member should discharge his or her pro$essionalresponsibilities with competence and diligence and engagements

should be planned and supervised.

5cope and nature o$ services & a member should decline an#

engagement i$ an# principle cannot be met and should assess

whether the requested service is consistent with his or her role as a

pro$essional.

e. 'he rules are applicable to all members o$ the I2/ whenever the#

per$orm pro$essional services e*cept that ;ules 1?1% 3?1% 3?% ?%?3% and ?% pertain onl# to members in public practice.

3&>. (9stimated time & 3? minutes)

3&3?. (9stimated time & 3? minutes)

a. In auditing and e*pressing opinions on $inancial statements% the 2/

is required at all times to maintain independence o$ thought and

action. Independence is a maor part o$ the 2/s pro$essional

integrit#&the qualit# that maes his or her opinion valuable to third

parties who will be rel#ing on the $inancial statements on which he or

she gives an opinion.

Independence is an attitude o$ mind that goes much deeper than

sur$ace compliance with visible standards. It results in unbiased

udgment and obective consideration o$ all the $actors involved in

planning and conducting an audit and in arriving at and e*pressing an

opinion. It results in the 27s rising above the interests o$ the client

in de$erence to the interests o$ readers and users o$ the statements.'he requirement $or independence o$ action places upon the

2/ the responsibilit# $or assessing his or her relationships with the

enterprise. 'hese relationships must be evaluated b# the same criteria

that a third part# in possession o$ all the $acts would appl#% that is%

whether the 2/ is in a position where there would be pressures to


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subordinate decisions or udgments to personal $inancial interests or

the reasons o$ others.

b 5i* o$ the ;ules o$ 2onduct relate either directl# or indirectl# to

independence. 'he rules are:

;ule 1?1 & Independence% which states that a member in public

practice shall be independent in the per$ormance o$ pro$essional

services. Interpretation 1?1&1 precludes an# direct or material indirect

$inancial interest and certain business relationships with the client

enterprise.

;ule 1? & Integrit# and +bectivit#% which states that the member

shall not nowingl# misrepresent $acts nor subordinate his or her

udgment to others in the practice o$ public accounting.

;ule ? & 2ompliance with 5tandards% which includes the G5

that requires the auditor to maintain an independent mental attitude in

all matters relating to the assignment.

;ule 3? & 2ontingent 7ees% which requires the 2/ to avoid certain

situations where he or she might receive an e*ceptional $inancial

return that is conditioned b# the outcome o$ his or her $indings.

;ule ? & dvertising and +ther 7orms o$ 5olicitation% which

prohibits a 2/ $rom soliciting business in a manner that ma# lessen

his or her independence.

;ule ?3 & 2ommissions and ;e$erral 7ees% which prevents the

member $rom pa#ing or receiving commissions in certain situations

because such dealings ma# impair his or her independence.

c. 'he acceptance b# the 2/ o$ the unsecured interest bearing notes inpa#ment o$ unpaid $ees would not be construed as discrediting the

2/s independence in relations with the client because the notes are

merel# a substitution $or an open account pa#able. 'he rule o$

pro$essional conduct that prohibits a 2/ $rom having an# $inancial

interest in a client does not e*tend to the liabilit# $or the 2/s

unpaid $ee as long as an# prior #ears $ees are paid prior to issuing a


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report on the current #ears statements. I$ liabilit# $or the 2/s

current $ee was considered to be $inancial interest in a client% the

present $orm o$ the 2/ client relationship would not be permitted to

continue because o$ten ($requentl# in engagements $or continuing

audits) the client statements being audited include a liabilit# $or the

2/s services.

d.a 1. Bnder the conditions cited% the 2/ cannot render an

independent opinion on the $inancial statements o$ the ;oc#


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a. Rule of Conduct b. Additional Circumstance

/rinciples pronouncements o$ the

Governmental ccounting

5tandards @oard (G5@) have

been $ollowed.

. ;ule ?1 & cts ,iscreditable member $ails to compl# with

continuing pro$essional education

requirements.

3. ;ule ? & dvertising and

+ther 7orms o$ 5olicitation

5olicitation o$ clients b# the use o$

coercion% overreaching% or

harassing conduct is prohibited.

. ;ule ?3 & 2ommissions and

;e$erral 7ees

member shall not pa# acommission to obtain a client

when the member also per$orms

an e*amination o$ prospective

$inancial statements.

. ;ule 3? & 2ontingent 7ees members $ees ma# not be

contingent on the results o$ the

service.

8. ;ule 3?1 & 2on$idential 2lientIn$ormation

member is permitted to disclosein$ormation in an I2/ qualit#

control review.

. ;ule 1?1 & Independence member shall not be connected

with the enterprise as a promoter%

director% or o$$icer.

=. ;ule ?1 & General 5tandards member shall e*ercise due

pro$essional care in the

per$ormance o$ an engagement.>. ;ule 1?1 & Independence member shall not have an#

oint% closel# held business

investment with the enterprise.

1?. ;ule ? & 7orm o$ /ractice

and Fame

'he $irm cannot designate itsel$ as

"-embers o$ the I2/" unless


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a. Rule of Conduct b. Additional Circumstance

all its owners are members o$ the

Institute.

11. ;ule 1? & Integrit# and

+bectivit#

member shall not nowingl#

misrepresent $acts.

1. ;ule ? & 2ompliance with

5tandards

member shall compl# with the

standards o$ the ccounting and

;eview 5ervices 2ommittee in a

review engagement.

13. ;ule 3? & 2ontingent 7ees 7ees are not regarded ascontingent i$ $i*ed b# courts.

1. ;ule 3?1 & 2on$idential 2lient

In$ormation

In$ormation ma# be disclosed to

compl# with a validl# issued and

en$orceable subpoena.

1. ;ule ?3 & ccounting

/rinciples

member issues an unquali$ied

opinion when the statements

depart $rom principles

promulgated b# the G5@.

3&3. (9stimated time & 3 minutes)

a. Rule of Conduct b. Effect on Rule

1. ;ule 1?1 &

Independence

Indeterminate. 'he in$ormation needed to

assess the applicabilit# o$ Interpretations 1?1&

1()() and 1?1& is not stated.

. ;ule ?3 & ccounting

/rinciples

Fo violation. G5@ principles are recogniAed

as authoritative pronouncements $or

governmental entities.

3. ;ule ?1 & cts 4iolation. 'his is considered to be an act

discreditable creditable to the pro$ession.


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. ;ule 1?1 &

Independence

Fo violation. ;etirement pa#ments to

individuals $ormerl# engaged in the practice o$

public accounting are speci$icall# permitted

absent certain conditions.

. ;ule 1?1 &

Independence

Fo violation. 'he prohibition against direct

$inancial interest in interpretation 1?1&1 applies

onl# to the period o$ the pro$essional

engagement or at the time o$ e*pressing an

opinion.

8. ;ule ?1 & General5tandards

4iolation. member shall undertae onl#engagements that member or members $irm

can reasonabl# e*pect to complete with

pro$essional competence.

. ;ule 3? & 2ontingent

7ees

Fo violation. members $ee ma# var#

depending on the comple*it# o$ the

engagement.

=. ;ule ? & dvertising

and +ther 7orms o$

5olicitation

Fo violation. 'he rule can no longer be used to

prevent members $rom using advertising that

includes sel$&laudator# claims.

>. ;ule 1?1 &

Independence

4iolation. Interpretation 1?1&1 states that a

member cannot be an o$$icer o$ the client

during the time period covered b# the $inancial

statements.

1?. ;ule 3?1 & 2on$idential

2lient In$ormation

Indeterminate. Fo in$ormation is given as to

whether the client approved disclosure o$ the

in$ormation.

11. ;ule 1? & Integrit# and

+bectivit#

4iolation. member should not per$orm a

pro$essional service when he or she has acon$lict o$ interest.

1. ;ule ? & dvertising

and +ther 7orms o$

5olicitation

Fo violation. 'he rule can no longer be used to

prevent members $rom using advertising that

includes testimonials.

13. ;ule ? & 2ompliance Fo violation. 'he ccounting and ;eview


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with 5tandards 5ervices 2ommittee is the bod# designated to

promulgate standards $or review services $or

nonpublic entities.

1. ;ule 1?1 &

Independence

4iolation. Interpretation 1?1&1 states that a

members independence is impaired b# serving

in this capacit# (business relationship) $or a

ban client.

1. ;ule ?3 & 2ommissions

and ;e$erral 7ees

Indeterminate. member is allowed to pa# a

commission to obtain a client provided

disclosure is made to the client.

Cases

3.33. (9stimated time & 3? minutes)

a. Bnder I2/ rules (Interpretation 1?1&3) 2/s ma# per$orm

booeeping and accounting services and remain independent i$ the

$ollowing $our conditions are met.

'he 2/ must not have an# other relationships% such as a $inancial

interest% that would impair his or her independence. 'he client must accept $ull responsibilit# $or the $inancial statements.

'he 2/ must not assume the role either o$ an emplo#ee or

management in the client6s operations (e.g.% the 2/ should not

initiate transactions or sign chec).

'he 2/ must con$orm to pro$essional standards in per$orming the

attest engagement.

9ven thought ones and ones dra$ts the $inancial statements% the# can

remain independent as long as the above conditions are met.

b. I$ W'I is a public compan# 592 rules have long prohibited 2/s $rom

per$orming booeeping and accounting services $or 592 registrants.

c. Bnder I2/ rules ones and ones can per$orm business valuation

services and consulting services $or non&public companies. I$ ones and

ones is to remain independent% however% the# must not assume


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management responsibilit# in the process and the client must tae $ull

responsibilit# $or e# assumptions and an# $inal decisions based on a

consulting engagement. ones and ones must act strictl# in an advisor#

capacit#.

d. Bnder the 592 rules 2/s can per$orm a variet# o$ consulting services and

business valuation services $or a client. (uthors Fote: Bnder 592 ;ules

adopted on Fovember 1% ??? there are signi$icant restrictions on the

nature o$ non&audit services% including business valuation and consulting

services that can be per$ormed $or an audit client. 7or e*ample% an

accounting $irm cannot provide appraisal or valuation services% or $airness

opinions% where it is reasonabl# liel# that the results o$ an# valuation or

appraisal would be material to the $inancial statements. 'here are also

signi$icant restrictions on the role that an accounting $irm can pla# when

assisting the client with I' consulting services. 5tudents and $acult# shouldconsult the supplemental material provided on the new 592 Independence

;ules).

3&3. (9stimated time & 3? minutes)

1. member o$ the I2/ ma# practice public accounting in an# $orm

o$ organiAation permitted b# state law or regulation as long as the

characteristics o$ the organiAation con$orm to a resolution adopted b#

2ouncil o$ the I2/.


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Inc.% and Gilberts status is not that o$ an investor. In this respect%

Gilbert is in violation o$ Interpretation ?&1.

3. 9*pressing an unquali$ied opinion on Grandtimes $inancial statements%

which did not disclose a material lien on the building asset% is aviolation o$ both ;ule ? (2ompliance with 5tandards)% and ;ule ?3

(ccounting /rinciples). ;ule ? includes auditing standards

promulgated b# the uditing 5tandards @oard. 'hese standards include

the requirement that a member shall not permit his or her name to be

associated with $inancial statements unless the member has complied

with generall# accepted auditing standards. 'he third standard o$

reporting sa#s that in$ormative disclosures are to be regarded as

reasonabl# adequate unless otherwise stated in the report. 5ince there

was no disclosure o$ the building lien in the $inancial statements%Gilbert should have quali$ied his opinion.

;ule ?3 requires that a member shall not e*press an opinion that

$inancial statements are presented in con$ormit# with generall#

accepted accounting principles i$ such statements contain an#

departure $rom an accounting principle promulgated b# the bod#

designated b# 2ouncil to establish such principles. ccounting

;esearch @ulletin Fo. ?% which was published b# a bod# designated

b# 2ouncil% requires disclosure o$ assets pledged as securit# $or loans.

.


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3&3. (9stimated time & 3 minutes)

Research Questions

7or the reasons stated in the introduction to this manual% solutions are not provided

$or this categor# o$ questions.

Modern Auditing Beynton Solution Manual Chapter 03

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