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Presentation on theme: "MODERN AUDITING 7th Edition"— Presentation transcript:

William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Walter G. Kell University of Michigan Developed by: Dr. Raymond N. Johnson, CPA Gregory K. Lowry, MBA, CPA John Wiley & Sons, Inc.

Ethics and Morality AICPA Code of Professional Conduct Rules of Conduct  Rule 101 — Independence  Rule 102 — Integrity and Objectivity  Rule 201 — General Standards  Rule 202 — Compliance with Standards  Rule 203 — Accounting Principles  Rule 301 — Confidential Client Information

 Rule 302 — Contingent Fees  Rule 501 — Acts Discreditable  Rule 502 — Advertising and Other Forms of Solicitation  Rule 503 — Commissions and Referral Fees  Rule 505 — Form of Organization and Name Enforcement of the Rules

4 Ethics and Morality General Ethics attempts to deal with ethical questions by defining what is good for the individual and society, and by trying to establish the nature of obligations or duties that individuals owe themselves and each other. Professional Ethics must extend beyond moral principles. They include standards of behavior for a professional person that are designed for both practical and idealistic purposes.

5 AICPA Code of Professional Conduct
AICPA Professional Ethics Team 1. Standard Setting 2. Ethics Enforcement 3. Technical Inquiry Services

6 Code Sections and Related Pronouncements Figure 3-1

7 Principles In the Code, the 6 principles are identified as follows:
1. Responsibilities 2. The Public Interest 3. Integrity 4. Objectivity and Independence 5. Due Care 6. Scope and Nature of Services

8 Rules of Conduct Figure 3-2

9 Rules of Conduct Figure 3-2

10 Independence Rules Financial Interests Business Relationships
Direct Indirect Business Relationships “Member or Member’s Firm” Other Client Services Litigation Unpaid Fees

11 Other Client Services - General
No other relationships that impair independence Client must accept full responsibility for the financial statements CPA must not assume the role of employee or management in the client’s operations The CPA must confirm to professional standards in performing the attest engagement

12 Drivers of Change New SEC Rules
Family relationships and dual careers Change in importance of non-audit services View to prohibit non-audit services View to allow non-audit services

13 Financial Relationships
Investments in audit clients The accounting firm and its retirement and investment plans Covered persons Immediate family member of covered person Any “person” with over 5% Other financial relationships Exceptions Inheritance or gifts New audit engagements Benefit and compensation plans

14 Employment Relationships
Employment of accountant by audit client Employment of former accounting firm employee Employment of certain relatives by audit client Exercises more than minimal influence over accounting records Exercises influence over the financial statements Employment at audit firm of former audit client employee

15 Business Relationships
Joint ventures with audit clients Joint ventures with management, directors, etc.

16 Non-Audit Services Bookkeeping and accounting services
Valuation services and fairness opinions Actuarial services Outsourced internal audit 40% $200 Million in Assets Management functions

17 IT Design and Implementation
Management must: Acknowledge to the auditor and audit committee management's responsibility for the clients system of internal controls. Identify a person within management to make all management decisions with respect to the project. Make all the significant decisions with respect to the IT project. Evaluate the adequacy and results of the project. Not rely on the accountant's work as the primary basis for determining the adequacy of its financial reporting system.

18 Quality Control System to monitor and correct problems

19 Disclosure Rules Audit Fees IT consulting fees All other fees
Audit committee review of non-audit services Use of persons other than full time employees in the audit

20 Integrity and Objectivity
In the performance of a professional service, a member shall maintain objectivity and integrity; shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

21 General Rules 201 General Standards Compliance with Standards
A) Professional competence B) Due professional care C) Planning and supervision D) Sufficient, relevant data Compliance with Standards Accounting Principles

22 Confidential Client Information
General rule: Must not disclose confidential client information without the consent of the client. Exceptions: Rules 202 and 203 Valid subpoena or summons Board of Accountancy or AICPA inquiry Peer review

23 Other rules Discreditable acts
Advertising and other forms of solicitation Commissions and referral fees Form of organization and name

24 AICPA / State Society Enforcement of the Rules
1. Joint Ethics Enforcement Procedures 2. Joint Trial Board Procedures a. Admonish the member. b. Suspend the member for a period of no more than 2 years. c. Expel the member. 3. Automatic Disciplinary Provisions

25 Board of Accountancy Enforcement of the Rules
1. Board of Accountancy Enforcement Procedures 2. Disciplinary Provisions a. Fines. b. Continuing professional education. c. Revoke license to practice.


27 Copyright Copyright 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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