Final Exam Study Flashcards
What is the Audit Risk Formula?
AR = IR x CR x DR
What is the purpose of SOX?
To restore the public’s trust in financial institutions and financial statements
What is the PCAOB? How is its board comprised? What does it do?
Public Company Accounting Oversight Board; 5 member board appointed by SEC (2 of which are CPAs); It registers public accounting firms to allow them to sign and prepare audit reports and sets standards for audit reports and financial statement audits.
What is the AICPA Code of Conduct framework consist of?
- Principles
- Rules & Interpretations
Principles are the foundation for rules & interpretations
Under the AICPA Code of Professional Conduct, what is the principle of integrity?
Integrity is acting in accordance with principle. It includes honesty and it accommodates honest mistakes or omissions.
Under the AICPA Code of Professional Conduct, what is the principle of Professionalism?
Professionalism is the acceptance of one’s duty to the public’s interest, especially when the inputs and outputs of work performed cannot be verified.
Under the AICPA Code of Professional Conduct, what is the principle of Independence?
Independence is the freedom of conflict of interest in fact and appearance. It is external and extrinsic in nature.
Under the AICPA Code of Professional Conduct, what is the principle of Objectivity?
Objectivity is the freedom of conflict of interest as a state of mind. It is internal and intrinsic in nature.
Under the AICPA Code of Professional Conduct, what is the principle of Due Care?
Due care is maintaining a quality of work that is expected of the profession (licensed CPA). It includes continuing professional education (CPE), supervising subordinates, and the use of experts (when necessary)
Under the AICPA Code of Professional Conduct, what is the principle of Scope of Nature and Services?
The principle of scope and nature of services refers to providing the appropriate level of care depending on the job that is to be done (e.g., audit vs. review vs. compilation)
Corporations as moral agents
In the eyes of the legal system, corporations are legal persons. However, corporations themselves cannot make decisions, individuals do within a corporate internal decision (CID) structure, which raises the question of whether or not corporations can make decisions given the possibility of the diffusion of responsibility (vanishing individual responsibility).
Vanishing individual responsibility of corporations
Acting within the confines of a given CID framework makes it difficult to assign individual responsibility for corporate outcomes. This contributes greatly to a diffusion of responsibility, where no particular person(s) can be held morally responsible (e.g., homeless person on street not getting food/money)
Narrow vs broad view of corporate responsibility
Narrow view (Milton Friedman): a business's sole responsibility is to maximize profits. Anything else leads to a less efficient economy. Broad view: Businesses enter into social contracts with all those involved (directly and indirectly) and have a fiduciary duty to employees, shareholders, and other parties affected by its practices
Debating Corporate Responsibility: The Invisible Hand argument
(Supporting narrow view of corp. responsibility) Corporations should not be held accountable for non-economic matters as it distorts the business’s mission
Objection: Does not apply to modern corporations who are highly pressured by the public to be responsible citizens
Debating Corporate Responsibility: The “let the government do it” argument
(Supports broad view) Corporations have a natural and insatiable appetite for profits and, as such, should be controlled by a gov’t controlled system of laws and incentives
Objection: Gov’t cannot anticipate all corporate moral challenges, but manifests many of the same structural characteristics that test moral behavior inside a corporation.
