MODERN AUDITING 7th Edition

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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.
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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.

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Framework for Ethical Decision Making

1. Obtain the facts relevant to the decision.
2. Identify the ethical issues from the facts.
3. Determine who will be affected by the decision
   and how.
4. Identify the decision-makers alternatives
5. Identify the consequences of each alternative
6. Make the ethical choice

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AICPA Code Sections and Related
PronouncementsFigure 3-1
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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.

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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

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Rules of Conduct
Figure 3-2
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Rules of Conduct
Figure 3-2
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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?

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Independence Rules SEC/AICPA

• All firm members are prohibited from having
• Financial interests of gt 5 of audit clients
• Business or employment relationship with the
  client
• Covered Persons/Members are subject to additional
  independence rules

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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.

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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).

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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

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Independence

• Independence in Fact
• Appearance of Independence

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Independence Rules 101-2Employment 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
  firms 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.

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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 companys audit firm during the 1 year
  period preceding the audit.

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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.

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Independence Rules 101-3Performance of Other
Services

• Rule 101-3 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 CPAs responsibilities, and
• the limitations of the engagement.

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Independence Rules 101-3Performance 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

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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.

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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

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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)

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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.