1. Copyright © 2010 South-Western/Cengage Learning
Chapter 3
Judgmental and Ethical Decision-Making Frameworks and Associated Professional Standards
Auditing
A Business Risk Approach 7e
Rittenberg
Johnstone
Gramling
Copyright © 2010 South-Western/Cengage Learning

2. Audit Opinion Formulation Process

3. LO 1 Framework for Professional Decision-Making

4. LO 2 Accepting a Public Trust
To maintain the public's trust, public accountants must act with professional integrity
Ethical problem occurs when an individual is morally or ethically required to take an action that may conflict with his or her immediate self-interest
Ethical dilemma occurs when there are conflicting moral duties or obligations

5. LO 5 The Sarbanes-Oxley Act of 2002 as a Reaction to Ethical Lapses

13. International Ethics Standards Board for Accountants
The IESBA Code of Ethics require accountants to adhere to five fundamental principles:
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behavior

14. The AICPA Principles of Professional Conduct (continued)
Responsibilities - members should exercise sensitive professional and moral judgment in all their activities
Public interest - members should act in a way that serves the public interest, maintains public trust, and shows commitment to professionalism
Objectivity and independence - members should be objective and free of conflicts when performing professional responsibilities. Members in public practice must be independent in fact and appearance when providing attestation services.

15. The AICPA Principles of Professional Conduct (continued)
Integrity - members should perform all professional responsibilities with the highest sense of integrity
Due care - members shall observe the profession's ethical and technical standards, strive to improve competence and quality of services provided, and discharge professional responsibilities to the best of their ability.
Scope and nature of services - members in public practice shall observe the principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.

16. The AICPA Rules of Conduct
Rule 101: Independence
Rule 102: Integrity and Objectivity
Rule 201: General Standards
Rule 202: Compliance with Standards
Rule 203: Accounting Principles
Rule 301: Confidential Client Information
Rule 302: Contingent Fees
Rule 501: Acts Discreditable
Rule 502: Advertising and Other Forms of Solicitation
Rule 503: Commissions and Referral Fees
Rule 505: Form of Organization and Name

17. Independence – Rule 101
Rule 101: "A member in public practice shall be
independent in the performance of professional
Services as required by standards promulgated by
bodies designated by the Council."
The auditor is required to be independent when providing attestation services. The standards for providing consulting, tax, or bookkeeping services do not require independence.
There are several interpretations that provide more detailed guidance on the application of Rule 101.

18. Independence – Rule 101
Independence would be considered impaired if during the period of engagement, a covered member had, or was committed to acquire, a direct or material indirect financial interest in an attestation client
Covered member is defined as
An individual on the attest engagement team
An individual in a position to influence the attest engagement, or
A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement

19. Independence – Rule 101
A covered member's immediate family is also subject to Rule 101 with some exceptions
Independence would be considered impaired if a member holds key positions with attest clients during the period covered by the financial statements or the period of engagement
A covered member's independence would be considered impaired if a close relative is employed and has a key position with the client or has a material financial interest in the client of which CPA has knowledge

20. Integrity and Objectivity - Rule 102
Requires members to act with integrity and objectivity, be free of conflicts of interest, and not knowingly misrepresent facts or subordinate their judgment to others.
Rule applies to performance of all professional services by all members

21. General Standards - Rule 201
Members shall provide only those services that they are able to perform with professional competence
Members shall exercise due professional care in performance of services
Professional services shall be adequately planned and supervised
Members must gather sufficient relevant data to provide a reasonable basis for any conclusions or recommendations rendered in connection with professional services
Applies to all services provided by all members

22. Confidential Client Information - Rule 301
In order for an auditor to develop a complete understanding of the client, there must be a free flow and sharing of information between client and auditor. To ensure this happens, the client must be assured that the auditor will not communicate confidential information to outside parties.
Rule 301 prohibits members from disclosing confidential client information obtained during an engagement except with client consent.

23. Confidential Client Information - Rule 301 - Exceptions
Disclosures required by GAAP or GAAS
Comply with subpoenas or summons or to comply with applicable laws and government regulations
Provide information for outside review of firm's practice under PCAOB, AICPA, or State Board of Accountancy authorization
Initiate a compliant with, or respond to inquiries made by, recognized investigative and disciplinary agencies (including the AICPA, state CPA societies, State Board of Accountancy)

24. Contingent Fees - Rule 302
Contingent fee - fee for the performance of a service where the collection or amount depends on whether a specified finding or result is attained
Contingent fees are prohibited for any service provided to an attestation client. Why? Such contingent fees would give the auditor a financial interest in client results

25. Commissions and Referral Fees - Rule 503
Members in public practice are prohibited from receiving commissions for recommending products and services to attest clients. Why? The commission gives the auditor a financial interest in his/her client's decisions.
Commissions are allowed for recommending products or services to non-attest clients, but must be disclosed to the client
Members may pay or receive fees for referral of any professional services (including attest services) as long as the client is notified of the fee

26. Enforcement of the Code
Members who violate the AICPA code may have their membership terminated
Members who violate a State Board of Accountancy's code are subject to disciplinary action including suspension or revocation of the member's certificate and license to practice.
If the State Board suspends the member's certificate, it can mandate conditions, such as additional continuing education, that must be satisfied before the member's certificate is reinstated.

27. LO 7 Independence Rules of the SEC and the PCAOB
SEC and PCAOB have established independence guidance and rules that apply to auditors of publicly held companies
The SEC has taken a principles-based approach in dealing with independence issues

28. Independence Rules of the SEC and the PCAOB
Auditor independence is impaired when
mutual or conflicting interest between the accountant and the audit client is created
accountant is placed in the position of auditing his or her own work
accountant is acting as management or an employee of the audit client
An accountant is placed as an advocate for the audit client

29. Prohibited non audit services
Bookkeeping or other services related to the accounting records of audit client
Financial information systems design and implementation
Appraisal and valuation services, fairness opinions, or contribution-in-kind reports
Actuarial services,
Internal audit outsourcing services,
Management functions, etc

30. LO 8 Further Considerations Regarding Auditor Independence
Independence is the cornerstone of auditing profession
Auditors must be independent
in fact – objective and unbiased in their actions and
in appearance – perceived by knowledgeable users of financial statements as independent

31. LO 9 Major Threats to Independence
Compensation schemes
Who is the client?
Familiarity with the client
Time pressures
Rationalizing behavior
Providing nonaudit services

32. Managing Threats to Independence
Establishing and monitoring corporate codes of conduct
Developing appropriate compensation schemes
Implementing high-level reviews of decisions to accept or retain clients
Separating consulting activities from audit activities
Performing within-firm reviews of audit work and audit documentation
Performing reviews and inspections within the profession

33. Important Role of Audit Committees
Oversight of engagement of company’s external auditor
Overseeing auditors independence
Preapprove permitted services provided by auditor
Require firms to communicate certain information related to the firm’s independence