3-1 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-2  Identify the problem  Identify possible courses of action  Identify any constraints relating to the decision  Analyze the likely effects of the possible courses of action  Select the best course of action Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-3  Responsibility to serve the public  CPA is representative of the public  Complex body of knowledge  Abundance of authoritative pronouncements  Standards of Admission to the Profession  Min. standards for education and experience  Need for public confidence  CPA product is credibility Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-4  Designed to provide CPAs guidance and rules in he performance of professional responsibilities.  Code consists of  Principles  Rules  Interpretations  Other guidance (definitions, pending revisions, etc.) Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-5 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-6  Responsibilities  The Public Interest  Integrity  Objectivity and Independence  Due Care  Scope and Nature of Services Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-7 RULES*  Independence  Integrity and Objectivity  General Standards  Compliance with Standards  Accounting Principles  Acts Discreditable  Contingent Fees  Commissions and Referral Fees  Advertising and Other Forms of Solicitation  Confidential Client Information  Form of Organization and Name  * In order discussed in text (Integrity and Objectivity precedes independence in Code). Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-8  Independence of mind (actual independence)  Independence of appearance Both are required. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-9  The AICPA Conceptual Framework for Independence is used to evaluate threats to independence. As with the earlier presented code, the approach considers  Whether the Code directly addresses the threat  If the Code does not directly address the threat, the auditor considers whether adequate safeguards exist to eliminate the threat to independence  The perspective used throughout is whether a reasonable person, aware of all the relevant facts would conclude that an unacceptable risk of non-independence exists. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-10  Adverse Interest — Litigation between client and CPA firm  Advocacy of client —CPA promotes client securities as part of an initial public offering  Familiarity —Spouse holds a key position with client  Financial Self-Interest of CPA —CPA owns stock in the client  Management Participation —CPA Serves as officer of client  Self-Review— CPA firm has provided consulting services that relate to audit  Undue Influence --Pressure from client to reduce audit procedures Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-11  Created by profession, legislation or regulation —education requirements  Implemented by attest client—effective board of director oversight  Implemented by CPA firm —stressing importance of independence Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-12 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-13 Individual vs. Firm Independence Not all individuals need to be independent The firm must be independent to perform attest services Covered Members include  Staff working on the attest engagement  An individual who may influence the attest engagement  A partner in the office in which the partner in charge of the attest engagement primarily practices  Partners or managers that provide a specified amount of nonattest services to client  The public accounting firm and its employee benefit plan  Any entity controlled by one or more of the above Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-14 Direct Financial Interest Indirect Financial Interest Example Investment in client, such as owning capital stock or providing a loan Investment in a mutual fund, which in turns owns capital tock of a client Type allowed for individual CPA to retain independence NoneImmaterial Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-15 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-16 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. RelativeEffect on Accountant and Firm Independence Immediate Family (spouse, spousal equivalent, or dependent) General Rule: A covered member’s immediate family members must, in general, comply with the Independence Rule. Accordingly, when an immediate family member violates the Independence Rule or one of its interpretations, independence of the covered member and the firm is impaired. Exceptions to the General Rule: The accountant and firm are independent: 1. When a family member is employed by a client in other than a key position. 2. In certain circumstances in which the immediate family member participates in a benefit plan related to a client. Close Relatives (parent, sibling, or nondependent child) Accountant and firm independence is impaired if an individual on the audit team, an individual in a position to influence the attest engagement, or any partner in the engagement office has a close relative who has: 1.A key position with the client, or 2.A material financial interest of which the accountant has knowledge. Other Relatives and Friends Independence is only impaired when a reasonable person, aware of all relevant facts relating to a situation would conclude that there is an unacceptable threat to independence; this evaluation (at both the accountant and the firm level) is made based on the AICPA Conceptual Framework. *Summary omits consideration of certain detailed factors that may affect independence. Consult independence rule and its interpretations for a detailed consideration of the effect on independence of family members and relatives.

3-17  Bookkeeping  Financial systems design and Implementation  Appraisal or valuation services  Actuarial services  Internal audit outsourcing  Management functions or human resource services  Investment services  Legal services and expert services  Certain tax services Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-18  Applies to all members of the AICPA and to all services provided by CPAs  Violations  Makes, or permits or directs another to make, materially incorrect entries in a client’s financial statements or records  Fails to correct financial statements that are materially false or misleading when member has such authority  Signs, or permits or directs another to sign, a document containing materially false and misleading information Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-19  General Standards  Apply to all CPA services  Member shall comply with following standards:  Professional competence  Due Professional Care  Planning and Supervision  Sufficient Relevant Data Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-20 Technical Body  Auditing Standards Board (ASB)  Management Consulting Services Executive Committee (MCSEC)  Accounting and Review Services Committee (ARSC)  ASB, MCSEC, and ARSC  FASB, GASB and FASAC Standards  Statements on Auditing Standards  Statements on Standards for Consulting Services  Statements on Standards for Accounting and Review Services  Statements on Standards for Attestation Engagements  FASB, GASB and FASAC Statements and related Interpretations Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-21  Accounting Principles  Designates GAAP  The Statements and Interpretations of  FASB  GASB  FASAB Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-22 Retaining client records may be considered an act discreditable to the profession Rules:  Client prepared records —should always be returned to the client.  Client records prepared by the CPA (e.g. payroll records)— should be provided to client, except they may be withheld if they are incomplete or fees are due for them.  Supporting records (e.g., adjusting entries)—should be provided to client, but may be withheld if fees are due for them.  CPA working papers (e.g., audit programs)—CPA’s property and need not be provided to client, unless required by law. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-23  Allowable for clients for which the CPA provides none of the following services:  An audit or review of financial statements  A compilation of financial statements expected to be used by a third party and does not disclose a lack of independence  An examination of prospective financial information  Contingent fees are not allowed to prepare an original or amended tax return or claim for tax refund (Note: All tax contingent fees are prohibited under PCAOB Standards) Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-24  Commissions and Referral Fees Rule  As is the situation with contingent fees, such fees are only allowed for a nonattest client  Allowable commissions received must be disclosed to the client  Advertising Rule  May advertise as long as it is not false, misleading or deceptive Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-25  A member in public practice shall not disclose any confidential client information without the specific consent of the client.  Auditors cannot directly disclose illegal acts by the client unless they have a legal duty to do so  Confidential but not privileged communications with client Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-26  Form of Organization & Name  Can practice in any legal business form  Allows fictitious names as long as not false, misleading or deceptive Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-27 Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-28 Internal auditors are expected to apply & uphold the following principles:  Integrity. The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment.  Objectivity. Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communi- cating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments.  Confidentiality. Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obliga- tion to do so.  Competency. Internal auditors apply the knowledge, skills, and experience needed in the performance of internal auditing services. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Integrity; Internal auditors: 1. Shall perform their work with honesty, diligence, and responsibility. 2. Shall observe the law and make disclosures expected by the law and the profession. 3. Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization. 4. Shall respect and contribute to the legitimate and ethical objectives of the organization. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Objectivity; Internal Auditors : 1. Shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization. 2. Shall not accept anything that may impair or be presumed to impair their professional judgment. 3. Shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Confidentiality; Internal auditors: 1. Shall be prudent in the use and protection of information acquired in the course of their duties. 2. Shall not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

3-32  4. Competency; Internal auditors 1. Shall engage only in those services for which they have the necessary knowledge, skills, and experience. 2. Shall perform internal auditing services in accordance with the Standards for the Professional Practice of Internal Auditing. 3. Shall continually improve their proficiency and the effectiveness and quality of their services. Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.