Week 2 - 3

Question 1

Human nature - two visions

Answer 1

• Unconstrained vision: improve social conditions – remove artificial constraints
• Constrained vision: need external constraints (laws, institutions, traditions) to behave well (Smith)

Question 2

IFAC code of ethics (standards of ethical behavior)

Answer 2

o Integrity: auditor should be straight forward and honest.
o Objectivity: auditor should not allow for bias or to be override by professional or business judgement.
o Professional competence: auditor must maintain professional knowledge and skills at all levels and act in accordance to the standards.
o Confidentiality: auditor refrains from disclosing confidential information.
o Professional behavior: the auditor should comply with laws and regulations and should not discredit the profession.

Question 3

Institutional forces contribute to ethical dilemmas

Answer 3

o Audit firm contract with client (client hires, contracting power (fees))
o Audit firm reward systems (technical, client management (revenues for audit firm))

Question 4

Decision process

Answer 4

• Utilitarianism: involves making decision that will increase the benefits to some while doing no harm to others
• Golden rule: involves making decision that result in treating others in a way the individual making the decision would
  like to be treated
• Theory of rights: suggest that the rights of a decision maker and other parties should be equally balanced in deciding
• Theory of justice: suggests that decisions should treat all stakeholders fairly, impartially, and equitably
• Enlightened self-interest: involves pursuing long-term self-interests and avoiding a short-term focus that might harm
  others

Question 5

Judgment biases

Answer 5

udgment biases
- Availability heuristic (how much of information is available when individual makes decision)
o Ease of recall
o Retrievability
o Presumed associations
- Representativeness heuristic (how sensitive are you to base rates, misconceptional to change, etc)
o Insensitivity to base rates
o Insensitivity to sample size
o Misconception of change
o Regression to the mean
o Conjunction fallacy
- Anchoring and adjustment heuristic
o Insufficient anchor adjustment
o Conjunctive and disjunctive events
o Overconfidence
- Other biases (hindsight, confirmation)

Question 6

How to overcome judgment biases?

Answer 6

• Improve expertise
• Training
• Group decision making and review of individual decisions
• Justification of decisions
• Use of decision aids
• Consultations with other experts
• Internal quality reviews
• Rewarding ethical conduct

Question 7

How client advocacy and a (mis)matched foreign decision environment affect auditor judgment - Litjes, Pinsker van Beest
(2019)

Answer 7

If auditor is in a home base environment they are more likely to follow (if they have latitude in decision making) client preference. In foreign environment are less likely to follow client preference.

Question 8

Utilitarianism

Answer 8

involves making decision that will increase the benefits to some while doing no harm to others

Question 9

Golden rule

Answer 9

involves making decision that result in treating others in a way the individual making the decision would
like to be treated

Question 10

Theory of rights

Answer 10

suggest that the rights of a decision maker and other parties should be equally balanced in deciding

Question 11

Theory of justice

Answer 11

suggests that decisions should treat all stakeholders fairly, impartially, and equitably

Question 12

Enlightened self-interst

Answer 12

involves pursuing long-term self-interests and avoiding a short-term focus that might harm
others