Session 1.2 Flashcards
CH19 - Professional Conduct
What are the 3 theories of ethical behavior?
- Utilitarianism
- Rights-based approach
- Justice Based
What are the 5 fundamental rules of Professional Conduct?
- Professional behaviour
- Integrity
- Objectivity
- Professional competence
- Confidentiality
What is professional behaviour (def)?
In carrying out their responsibilities as professionals, members should conduct themselves in a manner that will maintain the good reputation of the profession
What is integrity (def)?
To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity as well as observing the profession’s technical and ethical standards
What is objectivity (def)?
A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be INDEPENDENT in fact and appearance when providing auditing and other assurance services
CORNERSTONE of the profession
What is professional competence (def)?
A member strive continually to improve competence and the quality of services by staying current on developments in their professional services.
What is confidentiality (def)?
A member protects confidential information acquired in providing services and establishing business relationships
What is the independence rule?
A member in public practice shall be independent in the performance of professional services, as required by the standards promulgated by regulatory bodies
Includes F/S audits and reviews, and other assurance services
What are the 9 prohibited non-audit services (Sarbanes Oxley Act)
- Bookkeeping
- Actuarial Services
- Broker / Dealer
- Financial information, system design, implementation
- Internal audit outsourcing services
- Legal services
- Appraisal or valuation services
- Management functions / HR
- Expert services
What are the 5 threats to independence?
- Self-interest
- Familiarity
- Self-review
- Intimidation
- Advocacy
What are the 2 types of self-interest threats?
- Direct
- Material indirect
What is the direct self-interest threat?
A financial interest that is owned or controlled by the individual or entity
What is the material indirect self interest threat?
When an engagement member has a financial interest in an entity that is associated with an assurance entity, for example an investment in a mutual fund that owns the entity’s shares.
Self-interest threat:
Could unpaid fees be considered an outstanding debt by the entity to the auditor – a direct financial interest on the part of the auditor?
If fees pertaining to services provided more than one year prior to the date of the audit report remain unpaid, the auditor’s independence is impaired with respect to that entity. However, unpaid fees from an audited entity that is in bankruptcy do not impair the auditor’s independence.
What are 3 examples of situation that can impair independence, concerning intimidation threat?
- Commencement of litigation by management alleging deficiencies in audit work for the entity
- Expressed intention by management to commence litigation against the CPA alleging deficiencies in audit work would also impair independence if the auditor concluded that it is probable that such a claim will be filed.
- The commencement of litigation by the CPA against management alleging management fraud or deceit .
Self-review threat
What are 3 things an auditor shouldn’t do?
- Audit his own work (e.g., bookkeeping)
- Function in the role of management
- Assist in management decision-making
What are 2 examples of advocacy threats?
- Auditor promotes a client’s shares so a person invest
- Auditor assures the bank that his client is creditworthy
Familiarity Threat
What does the Independence Rule and its relevant interpretations state regarding the independence of a CPA?
The independence of a CPA is impaired if the CPA performs a managerial or other significant role for an entity’s organization during the time period covered by an assurance engagement.
Who (2) is subject to the Independence Rule (other than the auditor)
A covered member’s immediate family
Close relatives (non-dependant children, brothers, sisters, parents, grandparents, in-laws, and respective spouses)
What are the 2 situations in which a close relative can impair the auditor’s independence?
A close relative has a financial interest in the entity that is material to the close relative, and the CPA participating in the engagement is aware of the interest
An individual participating in the engagement has a close relative who could exercise significant influence over the financial or accounting policies of the entity.
How long can an auditor be the lead and engagement review partner for? And what’s the cooling off period after that
7 years
then
1 year
You trade off experience for objectivity
What are the 5 exceptions when a CPA can disclose confidential information?
- If required by peer review body
- To meet GAAP or CAS disclosure requirements
- As part of an investigative or disciplinary proceeding
- To comply with a valid subpoena
- To allow for the review for a purchase, sale or merger (be careful that prospective buyer doesn’t disclose any confidential info to a third party)
What are the 2 contingent fee rules?
A member can not
- Perform for a contingent fee any professional service for, or receive such a fee from, a client whom the member or the member’s firm performs:
* audit or review of F/S
* A compilation of a F/S expected to be used by a third party if the compilation report does not disclose a lack of independence
* An examination of prospective financial information
- Prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client
Commission and Referral Fees Rule
What are the prohibited commissions? (3)
A member in public practice shall NOT for a commission recommend or refer to a client any product or service or receive a commission, when a member or the member’s firm also performs for that client:
* an audit or review F/S
* a compilation of F/S expected to be used by a third party and the compilation report does not disclose a lack of independence
* an examination of prospective financial information
Commission and Referral Fees Rule
What does the disclosure of permitted commissions state?
A member in public practice who is not prohibited by this rule from performing services for or receiving a commission and who is paid or expects to be paid a commission shall disclose that fact to any person or entity to whom the member recommends or refers a product or service to which the commission relates.
What is the rule regarding referral fees?
Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall DISCLOSE such acceptance or payment to the client.
What is the advertising and other forms of solicitation rule?
-A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is FALSE, MISLEADING, or DECEPTIVE.
-Solicitation by the use of coercion, over-reaching, or harassing conduct is prohibited.
What are some elements of quality controls? (8)
- The firm’s risk assessment process
- Resources
- Relevant ethical requirements
- Governance and leadership
- Engagement performance
- Acceptance and Continuance of Relationships
- Monitoring
- Information and Communication
