Professional Conduct, Independence, and Quality Control Chapter 19 Professional Conduct, Independence, and Quality Control McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Ethics and Professional Conduct LO# 1 Ethics and Professional Conduct Refers to a system or code of conduct based on moral duties and obligations that indicate how an individual should interact with others in society Ethics Refers to the conduct, aims, or qualities that characterize or mark a profession or professional person Professionalism 19-2

Theories of Ethical Behavior LO# 2 Theories of Ethical Behavior Utilitarianism Recognizes that decision making involves trade-offs between the benefits and burdens of alternative actions and focuses on consequences and on individuals affected Rights-Based Approach Assumes that individuals have certain rights and other individuals have a duty to respect those rights when making decisions Justice-Based Approach Is concerned with issues such as equity, fairness, and impartiality 19-3

Standards for Auditor Professionalism LO# 4 Standards for Auditor Professionalism 19-4

LO# 5 The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors Principles of Professional Conduct Rules of Conduct Interpretations of Rules of Conduct Rulings by the Professional Ethics Executive Committee (PEEC) 19-5

Principles of Professional Conduct LO# 6 Principles of Professional Conduct 19-6

Rules of Conduct LO# 7 19-7

“Covered members” must be independent. Independence LO# 8 Rule 101 A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council. Financial Statement Audits Financial Statement Reviews Other Attest Services as defined by SSAEs Interpretation 101-1 “Covered members” must be independent. 19-8

SEC and PCAOB Independence Requirements for Audits of Public Companies LO# 9 SEC and PCAOB Independence Requirements for Audits of Public Companies The SEC’s rules are predicated on three basic principles of auditor objectivity and independence: An auditor should not audit his or her own work. An auditor should not function in the role of management. An auditor should not serve in an advocacy role for his or her client. 19-9

General Standards and Compliance with Standards LO# 10 General Standards and Compliance with Standards Rule 201 A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council. ✔ Professional Competence ✔ Due Professional Care ✔ Planning and Supervision ✔Sufficient Relevant Data Rule 202 A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council. 19-10

Confidential Client Information LO# 11 Rule 301 A member in public practice shall not disclose any confidential client information without the specific consent of the client. Rule 302 A member shall not (1) Perform for a contingent fee any professional service for, or receive such a fee from, a client for whom the member or the member’s firm performs (a) an audit or review of financial statements, (b) a compilation of financial statements expected to be used by a third party if the compilation report does not disclose a lack of independence, or (c) an examination of prospective financial information, or (2) Prepare an original or amended tax return or claim for refund for a contingent fee for any client. 19-11

LO# 12 Disciplinary Actions The Professional Ethics Executive Committee (PEEC) can direct a member to take remedial or corrective actions. Termination of AICPA Membership AICPA Trial Board Actions Suspend AICPA Membership 19-12

Quality Control Standards LO# 13 Quality Control Standards CPA firms are required to implement policies and procedures to monitor the firms’ practices and ensure that professional standards are being followed. In 2004, PCAOB assumed the AICPA’s responsibilities relating to firms that audit public clients and instituted a mandatory quality inspection program for those firms. The AICPA continues to administer a quality review system in order to enable firms to meet their state licensing, federal regulatory, and AICPA membership requirements and to serve firms that audit only privately held clients. 19-13

Elements of Quality Control LO# 14 Elements of Quality Control Leadership: Tone at the Top Relevant Ethical Requirements Client Acceptance and Continuance Human Resources Engagement Performance Monitoring 19-14

PCAOB Inspections of Registered Public Accounting Firms LO# 15 PCAOB Inspections of Registered Public Accounting Firms The PCAOB conducts regular inspections of public accounting firms that are required to register with the Board. 19-15

End of Chapter 19 19-16