Presentation on theme: "MODERN AUDITING 7th Edition"— Presentation transcript:
1 MODERN AUDITING 7th Edition William C. BoyntonCalifornia Polytechnic State University at San Luis ObispoRaymond N. JohnsonPortland State UniversityWalter G. KellUniversity of MichiganDeveloped by:Dr. Raymond N. Johnson, CPAGregory K. Lowry, MBA, CPAJohn Wiley & Sons, Inc.
2 CHAPTER 3 PROFESSIONAL ETHICS Ethics and MoralityAICPA Code of Professional ConductRules 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
3 CHAPTER 3 PROFESSIONAL ETHICS 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 NameEnforcement of the Rules
4 Ethics and MoralityGeneral 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 Team1. Standard Setting2. Ethics Enforcement3. 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. Responsibilities2. The Public Interest3. Integrity4. Objectivity and Independence5. Due Care6. Scope and Nature of Services
10 Independence Rules Financial Interests Business Relationships DirectIndirectBusiness Relationships“Member or Member’s Firm”Other Client ServicesLitigationUnpaid Fees
11 Other Client Services - General No other relationships that impair independenceClient must accept full responsibility for the financial statementsCPA must not assume the role of employee or management in the client’s operationsThe CPA must confirm to professional standards in performing the attest engagement
12 Drivers of Change New SEC Rules Family relationships and dual careersChange in importance of non-audit servicesView to prohibit non-audit servicesView to allow non-audit services
13 Financial Relationships Investments in audit clientsThe accounting firm and its retirement and investment plansCovered personsImmediate family member of covered personAny “person” with over 5%Other financial relationshipsExceptionsInheritance or giftsNew audit engagementsBenefit and compensation plans
14 Employment Relationships Employment of accountant by audit clientEmployment of former accounting firm employeeEmployment of certain relatives by audit clientExercises more than minimal influence over accounting recordsExercises influence over the financial statementsEmployment at audit firm of former audit client employee
15 Business Relationships Joint ventures with audit clientsJoint ventures with management, directors, etc.
16 Non-Audit Services Bookkeeping and accounting services Valuation services and fairness opinionsActuarial servicesOutsourced internal audit40%$200 Million in AssetsManagement 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 ControlSystem to monitor and correct problems
19 Disclosure Rules Audit Fees IT consulting fees All other fees Audit committee review of non-audit servicesUse 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 competenceB) Due professional careC) Planning and supervisionD) Sufficient, relevant dataCompliance with StandardsAccounting Principles
22 Confidential Client Information General rule: Must not disclose confidential client information without the consent of the client.Exceptions:Rules 202 and 203Valid subpoena or summonsBoard of Accountancy or AICPA inquiryPeer review
23 Other rules Discreditable acts Advertising and other forms of solicitationCommissions and referral feesForm of organization and name
24 AICPA / State Society Enforcement of the Rules 1. Joint Ethics Enforcement Procedures2. Joint Trial Board Proceduresa. 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 Procedures2. Disciplinary Provisionsa. Fines.b. Continuing professional education.c. Revoke license to practice.
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