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Arens Solution Manual Chapter 4
Arens Solution Manual Chapter 4
Chapter 4
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Learning Objective 1
Distinguish ethical from unethical behavior in personal and professional contexts.
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Responsibility
Fairness
Caring
Citizenship
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Learning Objective 2
Resolve ethical dilemmas using an ethical framework.
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Ethical Dilemmas
An ethical dilemma is a situation a person faces in which a decision must be made about appropriate behavior.
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Relevant Facts
A staff person has been informed that he will work hours without recording them as hours worked. Firm policy prohibits this practice. Another staff person has stated that this is common practice in the firm.
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Ethical Issue
Is it ethical for the staff person to work hours and not record them as hours worked in this situation?
Who is affected?
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Learning Objective 3
Explain the importance of ethical conduct for the accounting profession.
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Quality control
Peer review
Legal liability
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Learning Objective 4
Describe the purpose and content of the AICPA Code of Professional Conduct.
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Rules of conduct
Interpretation of the rules of conduct by Interpretations the AICPA Division of Professional Ethics. of the rules They are not enforceable, but a of conduct practitioner must justify departure.
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Ethical rulings
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Ethical Principles
1. Responsibilities: Professionals should exercise sensitive and moral judgments in all their activities. 2. The public interest: Members should accept the obligation to act in a way that will serve and honor the public.
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Ethical Principles
3. Integrity: Members should perform all responsibilities with integrity to maintain public confidence. 4. Objectivity and independence: Members should be objective, independent, and free of conflicts of interest.
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Ethical Principles
5. Due care: Members should observe the professions standards and strive to improve competence. 6. Scope and nature of services: A member in public practice should observe the Code of Professional Conduct.
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Standards of Conduct
Ideal conduct by practitioners
Principles
Substandard conduct
Rules of conduct
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Learning Objective 5
Understand Sarbanes-Oxley Act and other SEC and PCAOB independence requirements and additional factors that influence auditor independence.
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Independence
The value of auditing depends heavily on the publics perception of the independence of auditors. Independence in fact
Independence in appearance
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Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence The SEC adopted rules strengthening auditor independence in January 2003 consistent with the requirements of the Sarbanes-Oxley Act. The Sarbanes-Oxley Act and the revised SEC rules further restrict, but do not completely eliminate the type of nonaudit services that can be provided to the public.
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Sarbanes-Oxley Act and SEC Provisions Addressing Auditor Independence The PCAOB has also issued additional independence rules related to the provision of certain tax services.
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Audit Committees
An audit committee is a selected number of members of a companys board of directors whose responsibilities include helping auditors remain independent of management. Most audit committees are made up of three to five or sometimes as many as seven directors who are not a part of company management.
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Audit Committees
The Sarbanes-Oxley Act requires that all members of the audit committee be independent. Companies must disclose whether or not the audit committee includes at least one financial expert.
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Partner Rotation
The Sarbanes-Oxley Act requires that the lead and concurring audit partner rotate off the audit engagement after a period of five years.
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Ownership Interests
SEC rules on financial relationships take an engagement perspective. SEC rules prohibit ownership in audit clients by those persons who can influence the audit.
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Other Issues
Shopping for accounting principles Engagement and payment of audit fees by management
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Learning Objective 6
Apply the AICPA Code rules and interpretations on independence and explain their importance.
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Rules of Conduct
Rule 101 Independence A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.
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Financial Interests
Interpretations of Rule 101 prohibit covered members from owning any direct investments in audit clients. Covered members Direct versus indirect financial interest Material or immaterial
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Learning Objective 7
Understand the requirements of other rules under the AICPA Code.
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Learning Objective 8
Describe the enforcement mechanisms for the rules of conduct.
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Enforcement
Action by AICPA Professional Ethics Division Action by a state Board of Accountancy
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End of Chapter 4
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