Ethics, Legal Liability, and Client Acceptance Flashcards
Rules of professional conduct:
Confidentiality - Members shall not disclose any confidential client information.
Professional Behavior - Members should behave in the best interest of their profession and the public.
Integrity and Due care - Act ethically and honestly.
Competence - Members should be technically competent.
They are required to attend ongoing professional education and keep up to date with accounting/auditing standards.
Adherence to Professional Standards - Adherence to accounting standards (IFRS, ASPE, etc.)
Non-association with false and misleading information - No member can sign or associate with false, fraudulent misleading information.
Independence
The ability to act with integrity and objectivity,
5 threats to independence:
1) Self-interest threat - When the auditor has a financial interest in the client or in the financial results of the client.
2) Self-review threat - The auditor is in a position of having to audit his or her own work during the audit.
3) Advocacy Threat - When the auditor is perceived to be promoting the client’s position on a matter.
4) Familiarity threat - The auditor is familiar or “besties” with the client due to a long association with the client.
5) Intimidation threat - When the client intimidates the auditor with respect to the content of the financial statements
How to Mitigate Independence Threats:
1) Not accept the audit.
2) Rotation of senior members on the audit engagement.
3) Circulate client list every year to see who owns shares in the clients.
4) Do not compile F/S or records for the client that you are auditing.
Independence needs to be present in appearance and in fact. That means, even if you are independent of your client, but it may be perceived that you are not, you cannot take on the client.
Legal Liability
Auditor Responsibility and Fraud
Fraud - Intentional vs Errors - Mistakes
Auditors should have a professional skepticism about the occurrence of fraud.
It is hard to detect fraud, but it is important to always keep it at the back of your mind.
Don’t take management’s word for it - always corroborate their responses
If you understand the Fraud Triangle as an auditor, it may be easier to detect fraud
Fraud Triangle - Has Three Elements
1) Incentive / Pressure - “You need to pay for kids university”
2) Rationalization - “ They don’t pay me enough”
3) Opportunity - “The safe to the blank cheques is never locked”
2.1.2 Specific Rules Incorporating the principles of Professional ethics
Fees and Pricing
Fee quotes cannot be provided to a client without adequate knowledge of the work to be performed. Fees quoted should not be significantly lower than the fees charged by a predecessor firm. If fees quoted are significantly lower than those of the predecessor, it may suggest the quality of the audit work or the independence of the auditor may be compromised. Contingency fees (based on outcome of service) are not permitted for engagements where independence is required, for compilation engagements, and for the preparation of income tax returns.
Advertising
Advertising must be in good taste and it should not bring disrepute to the profession. Advertising cannot be false or misleading or make unsubstantiated claims. For example, a firm should not imply that it is better than competing firms.
Contact with Predecessor
Before accepting a new engagement, the new auditor is required to contact the predecessor auditor and ask if there is any reason why they should not accept the engagement. The rules of professional conduct require the predecessor auditor to reply on a timely basis. Due to the requirement of confidentiality, the response will be limited to a yes or no unless the client gives permission to the predecessor auditor to provide more information. Exhibit 2.1 presents rule 302 as excerpted from the CPA Code of Professional Conduct.
Often when a client changes auditors, the new auditor will need information from the predecessor auditor. To ensure a smooth transition, the rules of professional conduct require that the predecessor auditor put the client’s interest first. Therefore, client information needed by the new auditor is to be provided. While the predecessor auditor is not required to provide the new auditor with proprietary information or working papers, documents that are considered property of the client, such as account groupings and tax returns, should be provided. Professional courtesy also suggests that the predecessor meet with the new auditor to allow the new auditor to gain the required documentation to support the new client’s opening balances.
