1. MODERN AUDITING 7th Edition
William C. Boynton
California Polytechnic State University at San Luis Obispo
Raymond N. Johnson
Portland State University
Walter G. Kell
University of Michigan
Developed by:
Dr. Raymond N. Johnson, CPA
John Wiley & Sons, Inc.

2. Ethics and Morality
General Ethics attempts to deal with ethical questions by defining what is good for the individual and society, and by trying to establish the nature of obligations or duties that individuals owe themselves and each other.
Professional Ethics must extend beyond moral principles. They include standards of behavior for a professional person that are designed for both practical and idealistic purposes.
Why do we need to look at professional ethics???? Bottom line is that as CPAs, the value of our attest function rests upon the public’s acceptance of us a professionals who bring integrity to the financial reporting process. If we lose the public’s trust, we lose our franchise.
Put up PWC article!

3. Framework for Ethical Decision Making
Obtain the facts relevant to the decision.
Identify the ethical issues from the facts.
Determine who will be affected by the decision and how.
Identify the decision-maker’s alternatives
Identify the consequences of each alternative
Make the ethical choice

4. AICPA Code Sections and Related Pronouncements Figure 3-1
Just like GAAS and GAAP, there is a hierarchy. The top level framework provides a guiding structure to set up the actual rules to be followed.

5. Focus on AICPA Rules Universally understood by CPAs
HOWEVER, CPAs must be aware of rules that may be written into State Board of Accountancy law.

6. Principles In the Code, the 6 principles are identified as follows:
1. Responsibilities
2. The Public Interest
3. Integrity
4. Objectivity and Independence
5. Due Care
6. Scope and Nature of Services
The essence of each are:
Responsibilities: to maintain and enhance the stature of the profession.
The Public Interest: accept that we are ultimately responsible to the public (which is made up of shareholders, etc).
Integrity: be honest and candid
Objectivity and Independence: be impartial and unbiased in your mind, and be independent in fact (not have any relationship that biases your dealings with the client) and appearance (not have any relationships which could cause others to think you are biased in your dealings with the client). Use PWC article as an example of independence in appearance being breached, but don’t know if were still independent in fact since that is a state of mind.
Due care: don’t be negligent
Scope and Nature of Services: Do work that is appropriate for a CPA,

7. Rules of Conduct Figure 3-2

8. Rules of Conduct Figure 3-2

9. Independence Rules Sources of authoritative guidance on independence
AICPA Rule 101
SEC Rules
Sarbanes-Oxley Rules
What is the logic behind an engagement based approach vs. a firm based approach?
Argument to prohibit non-audit services is to preserve the integrity of the audit
Argument to allow is that CPAs are the most knowledgeable about clients to provide the highest quality non-audit services AND it helps them learn more for audit purposes

10. Independence Rules – SEC/AICPA
All firm members are prohibited from having:
Financial interests of > 5% of audit clients
Business or employment relationship with the client
Covered Persons/Members are subject to additional independence rules
Influence:
Consultative: Technical folks
Oversight: If supervise partner ex: at cluster level, determine compensation
Review: QC folks

11. Independence Rules – SEC/AICPA
Who are “Covered Persons/Members”?
Any member of the engagement team
Partners and managers with consultation, oversight or review responsibilities related to the engagement.
Direct supervisors of the engagement partner including all successive senior levels
Partners and managers who perform (or expect to perform) more than 10 hours of non-attest services for the client.
Partners who are in the same office as the lead partner on the engagement.
The firm, its benefit plans, and entities controlled by covered persons
Those who evaluate partners’ performance and compensations, including members of compensation committees
Individuals who consult with the audit team regarding technical or industry related issues that are specific to the engagement.
Individual who participate in quality control activities for the firm.

12. Independence Rules – SEC/AICPA
Prohibited Activities
Cannot have a direct, or material indirect, investment in the audit client.
Cannot be a trustee or a trust or executor of an estate who invests directly in an audit client. (The AICPA and SEC permits an exception for a trustee who lacks authority to make investment decisions)
Cannot have a joint, closely held investment that is material to the covered member.
Cannot have loans to or from the audit client (there are some very limited exceptions).

13. Independence Rules – SEC/AICPA
Immediate family members of covered persons
Includes: spouse, spouse equivalent, dependent
Must follow same rules as covered person
Exception: can be employed by audit client unless “exercise influence” over client F/S (Key Person Test)
Close relatives of covered persons
Includes: parents, non-dependent children, siblings of audit team members
May not hold a “key position” in an audit client and may not hold a material financial interest in an audit client
Trustee: conflict between fiduciary responsibility to trust/estate and audit responsibility

14. Independence
Independence in Fact
Appearance of Independence

15. Independence Rules – 101-2 Employment or Association with an Audit Client
If a partner or a professional employee leaves the CPA firm and is subsequently employed by the client in a key position, independence will be impaired unless ALL of the following conditions are met.
Retirement benefits
Not in a position to influence the accounting firm’s operations or policies
Not associated with the former firm
Consider the risk that, by virtue of the former partner or professional employees prior knowledge of the audit plan, that audit effectiveness will be reduced.
The attest engagement team has appropriate experience and stature to deal with the former partner or professional employee.
The subsequent attest engagement is reviewed to determine whether the engagement team members maintained the appropriate level of professional skepticism.

16. Independence Rules – Employment PCAOB & SEC
Positions: CEO, CFO, Controller, Chief Accounting Officer, or person in an equivalent position
Prohibited Activity: Cannot have been employed by the company’s audit firm during the 1 year period preceding the audit.

17. Independence Rules – Non-Attest Services PCAOB & SEC
The following non-audit services are prohibited:
Bookkeeping and accounting services
IT Design & Implementation
Appraisal and Valuation services
Actuarial services
Internal audit services
Management & HR functions
Broker/Dealer and Investment Banking services
Legal or expert services unrelated to audit services
“Other services” the PCOAB determines to be unacceptable
So far tax services have not been prohibited.
Again, basic idea is that can’t do non-audit work if either would result in auditing own work or perception that CPA was acting as mgmt or employee of client. Here’s the basic idea:
Auditors should not audit their own work
Perform management functions or
Act as Advocates for client!
SEC rules slightly less restrictive for mgmt/hr and IT design & implementation

18. Independence Rules – 101-3 Performance of Other Services
Rule indicates that before performing non-attest services, the member should establish an understanding with the client regarding:
the objectives of the engagement,
the services to be performed,
management's responsibilities,
the CPA’s responsibilities, and
the limitations of the engagement.

19. Independence Rules – 101-3 Performance of Other Services
General activities that impair independence
Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf of a client or having the authority to do so
Preparing source documents or originating data, in electronic or other form, evidencing the occurrence of a transaction (for example, purchase orders, payroll time records, and customer orders)
Having custody of client assets
Supervising client employees in the performance of their normal recurring activities
Determining which recommendations of the member should be implemented
Reporting to the board of directors on behalf of management
Serving as a client's stock transfer or escrow agent, registrar, general counsel or its equivalent

20. Integrity and Objectivity (102)
In the performance of a professional service, a member shall maintain objectivity and integrity; shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
This applies to ALL professional services and ALL members, including those not in public accounting. That is a big deal if working for a company.

21. Confidential Client Information (301)
General rule: Must not disclose confidential client information without the consent of the client.
Exceptions
F/S not GAAP
Courts
Peer review or ethics board
Exceptions:
Client failed to follow GAAP, must report in opinion even if this discloses confidential information
required by the courts
Part of peer review program

22. Other Ethics Rules Contingent Fees (302) Discreditable acts (501)
Advertising and other forms of solicitation (502)
Commissions and referral fees (503)
Form of organization and name (505)
Discreditable: in scope of duties as a CPA. Ex. Not paying taxes, disclosing/soliciting questions on CPA exam!
Advertising: gen OK. Use PHX lawyers ad’s as an example
Commissions and referral fees:
$ for referring client to xone OR for referring services to a client
can’t take if doing attest, if allowed then must disclose to client
Form of org: Can’t be misleading. If doing attest, > 50% of ownership m.b. CPAs

23. Board of Accountancy Enforcement of the Rules
1. Board of Accountancy Enforcement Procedures
2. Disciplinary Provisions
a. Fines.
b. Continuing professional education.
c. Revoke license to practice.