Professional Documents
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I. Review Questions 1. There is a special need for ethical behavior by professionals to maintain public confidence in the profession, and in the services provided by members of that profession. The ethical requirements for CPAs are similar to the ethical requirements of other professions. All professionals are expected to be competent, perform services with due professional care, and recognize their responsibility to clients. The major difference between other professional groups and CPAs is independence. Because CPAs have a responsibility to financial statement users, it is essential that auditors be independent in fact and appearance. Most other professionals, such as attorneys, are expected to be an advocate for their clients. Independence in fact exists when the auditor is actually able to maintain an unbiased attitude throughout the audit, whereas independence in appearance is dependent on others interpretation of this independence and hence their faith in the auditor. Activities which may not affect independence in fact, but which are likely to affect independence in appearance are: (Notice that the first two are violations of the Code of Ethics.) 1. 2. 3. 4. 5. 3. Ownership of a financial interest in the audited client. Directorship or officer of an audit client. Performance of management advisory or bookkeeping or accounting services and audits for the same company. Dependence upon a client for a large percentage of audit fees. Engagement of the CPA and payment of audit fees by management.
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In return for the faith placed in CPAs by the public, CPAs should continually seek to demonstrate their dedication to professional excellence. The public interest is defined as the communitys collective well-being. CPAs handle ethical conflicts best by acting with integrity, objectivity, and due professional care and by having a genuine interest in serving the public.
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4.
Apparently, in ethical philosophy, the word conscience is used to describe the undefinable mental process that yields moral decisions. A close kin in the political science terms would be anarchy. Conscience might not be a sufficient guide for personal ethics decisions because the individuals undefinable mental processes may be based on caprice, immaturity, ignorance, stubbornness, or misunderstanding. Conscience may fail to show the consistency, clarity, practicability, impartiality, and adequacy preferred in ethical standards and behavior. Exactly the same can be said about professional ethics decisions because a nonhypocritical individual can no more split his behavior between personal life and professional life than he can voluntarily split his own personality.
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A professional accountant must be prepared to be an agent, spectator, advisor, instructor, judge, and critic. Ethical responsibility for acts of non-CPAs under a CPAs supervision falls under the latters jurisdiction. A CPA shall not permit others to carry out on his behalf, either with or without compensation, acts which, if carried out by the CPA, would place him in violation of the Code of Ethics. The auditors gain from having an audit committee is a direct communication pipeline to the board of directors. Serving as a purchasing agent places Ben Santos father in an audit sensitive position. Accordingly, Santos independence is impaired. Also, since Santos is a managerial employee, he can no longer work in the Manila office of the CPA firm. The CPA firm may retain its independence if Santos transfers to another office (or resigns).
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10. The CPA firms independence would not be impaired as long as Gary Angeles did not personally participate in the audit of this particular client. Once Gary rises to the position in which he becomes a managerial employee of the CPA firm, however, he must be transferred to an office which does not participate in this audit if the firm is to remain independent. 11. Historically, compensation for CPAs serving as expert witnesses had to be based on a standard per diem rate or a fixed sum. However, under certain situations, such contingent fees are allowed only from clients for which the CPA does not also provide to the client financial statement audits, reviews or certain compilations, or prospective financial information examinations. 12. Sanchez may only refer certain clients to his wife or to another life insurance agent who will share such a commission with his wife provided that he does not perform assurance as well as nonassurance services. II. Multiple Choice Questions 1. 2. 3. 4. 5. 6. 7. d b d a a c a* 8. 9. 10. 11. 12. 13. 14. a* a* a a a a c 15. 16. 17. 18. 19. 20. 21. c d a c a a a 22. 23. 24. 25. 26. 27. b d c c b d
*7. A fee for audit clients which is dependent upon the results achieved by the CPAs efforts is a contingent fee and is prohibited for audit clients. *8. An auditors independence would not be considered to be impaired with respect to a financial institution in which the auditor maintains a checking account which is fully insured. *9. The declaration requires the preparer to acknowledge that the return is true, correct, and complete...based on all information of which the preparer has any knowledge.
III. Comprehensive Cases Case 1. a. Interpretation Honorary Directorships and Trusteeships Ela will not be considered independent unless: 1. 2. 3. 4. the position is in fact purely honorary, and listings of directors show she is an honorary director, and she restricts participation strictly to the use of her name, and she does not vote or participate in management functions.
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Interpretation Effect of Family Relationships on Independence Jacks wifes interest is attributed to him, and he would not be independent. The financial interest is considered direct. Interpretation Jack is still not independent, so long as the daughter is a dependent child. The financial interest is considered direct. Interpretation Still not enough. The grandfather (either Jacks father or his father-in-law) is considered a nondependent close relative, but the appearance of independence is impaired. The grandfathers investment is material (50 percent) in relation to his net financial resources. a. Pee and Co. / United Furniture, Inc.: This is a judgment call. In this case, the services can be considered temporary, mechanical in nature and performed on a one-time emergency basis. For these reasons, the SEC would probably not consider independence impaired. Renson & Co. / Spectrum Corporation Laser Division: The SEC would consider independence impaired because of the extent of the bookkeeping
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Case 2.
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services and the relative size of the Division. The only solution that might work is to have another accounting firm audit the Laser Division financials so that Renson & Co. can write a report in reliance on the work of other independent auditors. c. Reyes & Co. / Valley Bank: The SEC would consider independence impaired because of the family relation of Annabelle, her connection with Valleys financial statements and the fact that Kris is a member (partner) in the audit firm. (The PICPA would probably also consider independence impaired because of the apparent closeness of the two sisters and the audit sensitivity of Annabelles job). Cruz & Reyes / Jonas Tomas / Starex Money Market Fund: Jonas is a member since he is a manager and will provide audit services to SMMF. Cruz & Reyes independence is impaired since Jonas holds a direct financial interest. Violation of Code of Professional Ethics? Yes No
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Case 3.
Since Bella had an employment relationship with the client during part of the period covered by the financial statements, her independence is impaired. Case 4. Violation of Code of Professional Ethics? Yes No
This is a violation. It is a contingent fee agreement. Case 5. Although her decision will not be popular with the audit staff, Tracy Ong should thank the client but decline the offer, both for her and for the staff. She should explain that an outsider who had knowledge of all of the relevant facts might view the free use of a condominium as a sizable gift to the auditors, which might influence their independent mental attitude. Thus, we believe that to maintain an appearance of independence, the auditors should not accept this offer. Case 6. No. CPAs may refuse client access to their working papers for any valid business purpose. Therefore, a CPA may require that fees be paid before working papers including such adjusting entries and supporting analysis are provided to the client.