Chapter 2: Ethics, Legal Liability and Client Acceptance Flashcards
What are the five principals of professional Ethics as a CPA?
Professional Behaviour: compliance with rules/regulations, do not claim experience/skills that they do not have, do not undermine work performed by others.
Integrity & Due Care: straight-forward and honest, due care.
Professional Competence: maintain knowledge/skill level, keep up to date with professional development, changing standards.
Confidentiality: refrain from disclosing information.
Objectivity: be unbiased, do not allow influence to impair decision process.
What is the five step framework auditors use to make professional judgements?
1) identify and define the issue
2) gather the facts
3) perform the analysis and generate alternatives
4) make a decision
5) document the decision-making process
Auditor Independence
the ability to act with integrity and objectivity.
- Lack of auditor independence impacts on credibility and reliability of the financial statements.
-The auditor must be, and be seen to be independent.
Independence in Fact
- Ability to act independently with integrity, objectivity, and professional scepticism.
- Ability to make a decision free from bias, personal beliefs, and client pressures.
Independence in Appearance
Belief that independence of mind has been achieved.
What are the five auditor independence threats?
1) self-interest threat
2) self-review threat
3) advocacy threat
4) familiarity threat
5) intimidation threat
Self-Interest Threat
can occur if the audit firm or its staff have financial interest in audit client.
What are some examples of self-interest threat?
- Bank account held with the client.
- Shares owned in the client.
- A loan to or from the client.
- Fee dependence, where the fees from a client form a significant proportion of all fees of the firm.
Self-Review Threat
can occur when the assurance team needs to form an opinion on their own work or work done by others in their firm.
What are some examples of self-review threat?
- Assurance team member has recently been an employee or director of the client.
- Preparing information for the client that is then assured.
- Performing services for the client that are then assured.
Advocacy Threat
can occur when an audit firm or assurance staff act, or is believed to act, on behalf of assurance client. Can lead to questioning of auditor’s objectivity.
What are some examples of advocacy threats?
- Encouraging others to buy shares sold by client.
- Representing the client in third-party negotiation.
- Representing the client in a legal dispute.
Familiarity Threat
can occur when close relationship exists or develops between assurance firm and client, or between firm and client personnel. Assurance staff can become too sensitive to needs of clients and lose objectivity.
What are some examples of familiarity threat?
- Long association between assurance firm and client.
- Long association between assurance firm members and client personnel.
- Assurance team member with a close relative holding a senior position of influence at the client.
- Former partner of assurance firm holding senior position at the client.
- Acceptance of gifts by members of assurance team from their client (other than minor tokens).
- Acceptance of hospitality by members of assurance team from client (other than minor gestures).
Intimidation Threat
can occur when member of assurance team feels threatened by the client’s staff or directors. Assurance team member unable to act objectively, fearing negative consequences.
