Auditing and Client Essay

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CHAPTER 3

Professional Ethics

Review Questions

3-1 An ethical dilemma is a situation that an individual faces involving a decision about appropriate behavior. Ethical dilemmas generally involve situations in which the welfare of one or more other individuals is affected by the results of one’s decision.

3-2 Internal and external standards represent the two major types of constraints on decisions that involve ethical issues. Examples of internal standards are individuals' views on the importance of truthfulness, fairness, loyalty, and caring for others. External standards are those that are imposed upon individuals by society, peers, organizations, employers, or one’s profession. For example, the AICPA Code of Professional Conduct is an external constraint on members of the AICPA.

3-3 The basic purpose of a professional code of ethics is to provide members of a profession with guidelines for maintaining a professional attitude and conducting themselves in a manner that will enhance the stature of their discipline.

3-4 The two parts of the AICPA Code of Professional Conduct are:

(1) Principles—goal-oriented and aspirational guidelines which address members' responsibilities, the public interest, integrity and objectivity, independence, due care, and the scope and nature of services.

(2) Rules—more detailed regulations which support the principles.

3-5 The categories of threats to independence include (only three required):

(1) Self-review—Using as a part of the attest engagement evidence that was obtained on a nonattest engagement.

(2) Advocacy—Actions that promote an attest client’s interest.

(3) Adverse interest—Actions between the public accountant and the client that are in opposition.

(4) Familiarity—Having a close or longstanding relationship with client personnel or with individuals who performed nonattest services.

(5) Undue influence—An attest client’s management coerces the accountant or exercises excessive influence over the accountant.

(6) Financial self-interest—A potential benefit to the accountant from a financial interest in, or some other financial relationship with an attest client.

(7) Management participation—The accountant taking on the role of client management or otherwise performing management functions.

3-6 Rule 202 of the AICPA Code of Professional Conduct requires CPAs to adhere to appropriate professional standards in the performance of various professional services. In the case of financial statement audits those standards are the generally accepted auditing standards.

3-7 A CPA would have an indirect financial interest in an audit client if he or she had an investment in another entity which, in turn, had an interest in the audit client. Examples might include (1) an investment in a mutual fund which owns stock of the audit client, (2) investment in another corporation which owns securities of the audit client, and (3) ownership of shares in a bank which has extended loans to the client company.
The Code of Professional Conduct only prohibits those indirect financial interests in audit clients that are material in relation to the CPA's net worth.

3-8 Bill Scott’s father is considered a “close relative.” Since a close relative only impairs a CPA’s independence when that relative has a key position with the client, it is doubtful that Bill’s independence is impaired. (If, however, Bill’s father were in a key position, Bill’s independence would be impaired and he should not participate on the attest engagement team.) Accordingly, neither Scott's nor the firm's independence is likely to be impaired. Nonetheless, it may well be a wise decision to keep Scott off of the audit.

3-9 The public accounting firm's independence would not be impaired as long as Greg Scott did not personally participate in the audit of this particular client. Because Scott's father is a "close relative," Scott is not independent and must not become involved with the audit.
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