Lec 3 Flashcards
which is more profitable, audit or consulting, and why
consulting is more profitable because it is a product which can be sold to multiple clients, while auditing is client specific
why are accountants expected to be more ethical than other professions?
because of the three-party accountability model, auditors are paid by the clients but are accountable to the users of the statements
how is an auditor different to a lawyer
an auditor is responsible to the final users of the statements not the client, while the lawyer is accountable to the clients
do all provinces use the same code of ethics?
yes
what are the general ethics described as professional responsibilities?
they are rules and principles for the proper conduct of an auditor
list the general ethics rules of an auditor
- auditors must conduct work:
- for the respect and confidence of the public
- which distinguishes professional from general public
- where rules of professional conduct are maintained
- where rules of conduct provide a means of self-policing the profession
basic principles of governing conduct
1 - act to maintain the profession’s reputation
2 - use due care and maintain their professional competence
3 - maintain independence in the appearance, as well as the fact
4 - preserve client confidentiality
5 - develop practice based upon professional excellence (reputation)
6 - professional courtesy to other members should be maintained
Meaning of acting to maintain the profession’s reputation
should act in a way that maintains the good reputation of the profession and its ability to serve the public interest
- should not be associated with any misleading information or misrepresentation
what is the most important principle that accountants must adhere to
serve the public interest
does the profession have to maintain a good reputation at all time and what are some examples of what happens when they dont
yes,
e.g. minor offences such as frequent NSF cheques - CPA revoked
e.g. cannot go bankrupt - CPA revoked
what does it mean to have professional competence and due care
maintain integrity, use due care and maintain professional competence
integrity is the duty to what?
be honest and conscientious in performing professional work
what are the three things you need to be free of to be objective?
free of influence, interest, and relationships that worsen your professional judgement
what are the two considerations of being independent
be independent in fact and in appearance
why is independence in fact difficult to prove and how is it overcome
it is difficult because it is a state of mind, it is solved by being independent in appearance
what does it mean to be independent in appearance
to follow the rules and legislation of the profession
what are the 5 threats to independence
- self review threat
- self interest threat
- advocacy threat
- familiarity threat
- intimidation threat
what must an auditor do if they recognize that a threat might exist
document actions taken or decline the engagement
define self review threat and give example
auditor placed in a position where they have to audit their own work
e.g. when you do the record keeping or you help implement an accounting system
define self-interest threat
when an accountant has a financial interest in the client or its financial results
what are three examples of self-interest threats
- auditor has borrowed from client
- owns shares of the client
- client fees are significant is relation to total income collected by office
define advocacy threat
when the firm is promoting the client’s position
when is it okay to advocate for a client
when the auditor is testifying in court in behalf of the client
define familiarity threat
when it is difficult to behave with professional skepticism
what are two ways that aim to avoid familiarity threat
- the one year cooling off period where an auditor cannot work for the client until a year after so that audit practices are not revealed
- partner rotation every 5 years
define intimidation threat
client intimidates the firm in respect to contents of the F/S or the conduct of the audit
what are examples of intimidation threats
- client threatens to replace audit firm
- client places a maximum fee it will pay which is unrealistic based on the hours
how are family interests in the client treated
interests of spouses, dependants, and close relatives are treated as if they were the auditors
a member shall NOT be associated with what
shall not be associated with false or misleading financial information
define confidentiality
shall not disclose financial information of a client without consent
what are the three exceptions when it comes to the confidentiality principle
- CPAB inspects your audit
- courts require information
- when there is disciplinary action against the auditor by the provincial CPA body
what can be done if you are in canada and find F/S fraud in regards to stock market regulators (OSC)
you do not need to to report F/S fraud to OSC - just issue a qualified or adverse opinion
what can be done if you are in usa and find F/S fraud in regards to stock market regulators (SEC)
MUST report F/S fraud to SEC and issue a qualified or adverse opinion
what are contingency fees and are they allowed
fees that are dependent on the result of an audit - these fees are prohibited
can auditors receive commission fees
commission fees are prohibited
what two professional qualities are used to deal with potential biases
professional skepticism and judgement
what are the steps in auditing critical thinking process
- define role in engagement
- identify contentious issues
- understand reasons and motivations for competing positions
- evaluate the arguments
- form a conlcusion based on validity, how strongly the reasons support the conclusion, relevance of the conclusion
expectation gap
gap between what the final users expect of the auditors and what the auditors actually perform
what are the two types of ethics in the professional environment
general ethics (principles) ad professional ethics (rules)
consequentialism:
moral theory that the choice of action is made based solely on the con-sequences, that is, that it maximizes utility; note that economics and busi-ness are based on this theory
steps in professional judgement
- Identifying the crucial issues
- Gathering information on all the significant assertions
- Identifying possible alternative courses of action
- Evaluating the alternative courses of actions
- Deciding on the best course of action
