Electronic Presentations in Microsoft PowerPoint

Prepared by

Brad MacDonald
SIAST

2009 McGraw-Hill Ryerson Limited

Chapter Overview

Learning Objectives

Learning Objectives
1. Explain the importance of professional ethics in audit decision making. 2. Analyze whether a PAs conduct conforms to provincial rules of professional ethics. 3. Explain the importance of an independence framework for auditors. 4. Outline the types of penalties that various provincial associations and government agencies can impose on PAs when enforcing rules of professional conduct. 5. Apply and integrate the chapter topics to analyze a practical auditing situation / case / scenario.
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Learning Objectives Online Appendix 4A

6. Evaluate an ethical decision problem using the critical thinking framework.

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Chapter Overview
General Ethics Codes of Professional Ethics Independence and Objectivity Regulation and Quality Control

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Auditors Responsibility to Society

Auditors have three areas of responsibility to society.
1. Moral Responsibilities.
Covered under the study of ethics. A public accountant should be upright, not kept upright. Covered by the rules of conduct. Covered under criminal and civil law.
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2. Professional Responsibilities.

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3. Legal Responsibilities.

General Ethics
Professional responsibilities (ethics) are the rules and principles for the proper conduct of an auditor in his/her professional work.
Professional ethics are necessary for a number or reasons:
Obtain respect and confidence of the public. Distinguish professional from general public. To achieve order within the profession. Provide a means of self-policing the profession.

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General Ethics
Overview
Ethics: that branch of philosophy which is the systematic study of reflective choice, of the standards of right and wrong Ethical problem: A situation when you must make a clear choice among alternative actions, and the right choice is not absolutely clear.

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General Ethics
Ethical behaviour: That which produces the greatest good, or that which conforms to rules and principles. Why do we need a code of ethical conduct?
A code serves as a reference and benchmark for individuals.
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General Ethics
Ethics refer to the role of the decision maker. In addition, the professional accountant serves other roles:
Spectator observing colleagues Advisor counseling co-workers Instructor teaching accounting students Judge serving on disciplinary committees Critic reviewing the ethical decisions of others
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An Ethical Problem
In your work as an auditor, you discover that the cashier, who has custody over the petty cash fund, has forged several payment records in order to cover innocent mistakes and to make the fund balance each month when it is replenished. Your investigation reveals that the amount involved during the year is $240. the cashier is a woman, age 55, and the president of the company is a man who can tolerate no mistakes, intentional or otherwise, in the accounting records. In fact, he is unyielding in this respect. He asks you about the results of your audit. Not doubting that the cashier would be fired if the forgeries were known, should you remain silent and thus not tell the truth?
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General Ethics
An ethical decision process:
1. 2. 3. 4. 5. 6. Recognize a decision problem. Collect evidence. Think about rules of behaviour. Considering probable outcomes. Analyze the situation. Take action.

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The Imperative Principle Kant

Universal principles must always be followed regardless of the consequences.
Rules must always be followed because they are rules. General objection to this principle is that rules always have exceptions. Second problem is determining which (conflicting) duty is important. Rules of conduct have been greatly influenced by the imperative principle.

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The Principle of Utilitarianism

The ultimate criterion of an ethical decision is the balance of good over evil consequences produced by an action.
Greatest good for greatest number is all that matters. Permits an action that causes a minority to suffer.

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Critical Thinking Framework

The critical-thinking framework consists of principles, concepts and their application.
This framework provides structure to dealing with ethical and other issues. Ethics is an important concept within the framework. A questioning mind is a required precondition in the framework.

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Critical Thinking
Goal: Do the right thing or learn the truth 1. Learn the views of others on the situation. 2. Identify the claims at issue. 3. Explain the reasons for the competing claims. 4. Evaluate the argument supporting the claim. 5. Reach a conclusion about the claim.
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Critical Thinking
Professional judgment in auditing is essentially critical thinking on accounting issues and the evidence related to them.
This reasoning should be documented.

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Codes of Professional Ethics

Each of the PA bodies (CA, CGA, CMA) has its own rules of professional conduct. Typical framework follows:
Introduction and purpose Fundamental principles and standards General rules Specific rules Discipline Interpretations of the rules
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Fundamental Principles
The member should act to maintain the professions reputation. The member should use due care and maintain his/ her professional competence. The member should maintain independence in the appearance, as well as the fact of independence of his or her professional judgment. The member should preserve client confidentiality. The member should base his/her reputation on professional excellence. The member should show professional courtesy to other members at all times.
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Framework for a Code of Conduct

Objective: to serve the public interest. Principles necessary to attain objective:
Integrity Objectivity Professional Competence and due care Confidentiality Professional behaviour

Conformity is achieved by identifying, evaluating, and controlling threats to nonconformity to an acceptable level
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Rules of Professional Conduct

The Rules of Professional Conduct derive their authority from the bylaws of the profession.
Rules apply to members and all persons associated in public practice including employees and partners. Certain principles apply to all professional accountants.

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Serving the Public Interest

The single most important principle is that accountants must serve the public interest. The profession must maintain a good reputation at all time.
If a professional accountant is convicted of a relatively minimal offence or fraud, his/ her certification is usually revoked.

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Integrity
Integrity is the duty to be honest and conscientious in performing professional services.
A PA must be upright not be kept upright.

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Independence and Objectivity

Independence and objectivity are closely related terms.
Objectivity:
Member in public practice shall hold himself/ herself free of any influence, interest, or relationship that impairs the members professional judgment.

Independence:
Objectivity in the case of an assurance engagement.
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Canadian Business Corporations Act, Section 161

The term independence is used in the Canadian Business Corporations Act as a key qualification of an auditor.
161. (1) Qualification of auditor. Subject to subsection (5), a person is disqualified from being an auditor of a corporation if he is not independent of the corporation

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Canadian Business Corporations Act, Section 161

161. (2) Independence For the purpose of this section, a) independence is a question of fact; and b) a person is deemed not to be independent if he or his business partner I. is a business partner, a director, an officer or an employee of the corporation or any of its affiliates, or a business partner of any director, officer or employee of any such corporation or any of its affiliates;
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Canadian Business Corporations Act, Section 161

161. (2) Independence For the purpose of this section, a) independence is a question of fact; and b) a person is deemed not to be independent if he or his business partner II. beneficially owns or controls, directly or indirectly, a material interest in the securities of the corporation or any of its affiliates, or

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Canadian Business Corporations Act, Section 161

161. (2) Independence For the purpose of this section, a) independence is a question of fact; and b) a person is deemed not to be independent if he or his business partner III. has been a receiver-manager, liquidator or trustee in bankruptcy of the corporation or any of its affiliates within two years of his proposed appointment as auditor of the corporation. (3) Duty to resign. An auditor who becomes disqualified under this section shall, subject to subsection (5) resign forthwith

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Independence Standards
The CICA, IFAC and CGA-Canada all have an independence standard framework based on five threats to independence.
Self-review threat, self-interest threat, advocacy threat, familiarity threat, and intimidation threat.
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Independence
The Canadian Business Corporations Act requires independence for audits.
Many other services offered by public accountants also require independence. A member is considered to be in public practice if he or she:
Lets it be known publicly that they are a PA, and offers the types of serviced rendered by other PAs

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Independence
The concept of independence is critical to the public accounting profession.
Not only must an accountant be independent in fact, he/she must also appear independent to others.
Independence in fact is a mental state and is difficult to prove. Independence in appearance is governed by legislation and rules of professional conduct.

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Practical Independence
Three concepts of independence are useful in avoiding influences that might bias judgment.
Programming Independence Investigative Independence Reporting Independence

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Permitted Loans
The accountant will not be deemed to be in conflict of interest for:
home mortgages, immaterial loans, or secured loans made by financial institutions to the accountant under normal lending procedures, terms and requirements.

Otherwise, independence would be impaired by virtue of the financial relationship between the auditor and the lender.
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Permitted Loans
Independence also is not impaired by a member obtaining:
auto loans or leases collateralized by the automobile, insurance policy loans based on surrender values, loans collateralized by cash deposits, or credit card balances, if the loans are made in the normal course of business for the issuer.
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Other Issues Related to the Independence Principle

Honorary Positions in Non-Profit Organizations:
PAs independence is not impaired if the member is an honorary director where criteria are met.

Retired Partners:
Retired partners may impair independence after they have left the firm, except where conditions relating to their retirement are satisfied.

Accounting Services:
Where PA has appearance of having prepared the statements, independence may be impaired.
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Other Issues Related to the Independence Principle

Rotation of Partners and Second Partner Review:
Rotation of the lead audit partner and/or the concurring partner is required every five years. A second partner review is mandated by both SOX and the CPAB.

Actual or Threatened Litigation:

PAs are considered not independent when company management threatens or starts a suit against the PA, or when the PA threatens or starts a suit against the company.
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Other Issues Related to the Independence Principle

Investor or Investee Relationships:
Material investments by the PA and by the client need to be considered.

Effect of Family Relationships:

Financial interests of spouses and dependent persons, and some interests of close relatives are attributed to the member.

Analysis:
Objectivity and integrity are always required, but the rules concentrate on conflicts of interest based on financial measures.
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Professional Competence and Due Care

Professional competence and due care principles are required under the rules of conduct, as well as under GAAS.
The professional competence and due care principles are a comprehensive statement of general standards that accountants are expected to observe in all areas of practice. These are principles that enforce the various series of professional standards.

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Compliance with Professional Standards

PAs shall perform professional services in accordance with generally accepted standards of practice for the profession.
Extension and refinement of the due care principle. Practical effect of the rule is to make noncompliance with all technical standards subject to disciplinary proceedings. The failure to follow auditing standards, accounting and review standards, and assurance, compilation and professional conduct standards is a violation of this rule.
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Confidentiality
A member in public practice shall not disclose any confidential information without the specific consent of the client.
This rule does not:
relieve the PA from complying with a valid summons, or prohibit a member from
complying with applicable laws, a review of his/her professional practice, or participating in disciplinary hearings.

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Confidentiality
Confidentiality is intended to facilitate a free flow of information.
PA will require access to sensitive information to discharge responsibilities. Creates difficulties over auditors obligations to blow the whistle on illegal practices. In general, PAs are not obligated to do so. May be required if the client has intentionally associated PA with misleading statements, conduct, or reports. Seek legal counsel.
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Fees
Contingency Fees:
PAs shall not offer professional service for a fee contingent on the results of such service. PAs should not represent that no fee will be charged except in the case of services of a charitable nature.

Fee Quotation:
Fees are quoted only when requested by a client or prospective client, and then only when adequate information is obtained.
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Discreditable Acts
Public accountants will not bring discredit to the profession.
Discreditable acts might include the following: fraud, false tax returns, conviction on a criminal offence, withholding clients books and records, employment discrimination, failure to follow government guidelines in government audits, and false entries in clients records Rules include expulsion of members.
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Advertising and Other Forms of Solicitation

A PA shall not seek clients by advertising in a manner that is false, misleading, or deceptive.
Advertising must not include: unjustified expectations of favourable results, implied ability to influence officials or agencies or courts, incorrect fee estimates, or misleading representations Some liberalization of rules has taken place because of the Canadian Charter of Rights and Freedoms.
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Commissions and Referral Fees

Prohibited Commissions:
PAs may not receive any referral commissions where the engagement involves assurance services. PAs may receive commissions on the sale or purchase of an accounting practice.

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Form of Organization and Name

Form of Organization
The practice shall be under the personal charge of a member who is a public accountant.

Name of Organization
Firm names may not be misleading. The name of the firm usually consists of the names of the partners.
Names of past owners may be included in successor firms.
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Regulation and Quality Controls

A public accountant will be expected to observe rules of conduct published in several codes of ethics.
Determined by the nature of the services provided, by membership in accounting associations, and by the nature of the client.

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Self-Regulatory Discipline
Accounting firms and individuals are subject to the rules of an association by choice.
Only by choosing to belong do they become subject to the rules. The institutes have a responsibility to investigate all complaints. Three conclusions are possible: The member did not breach the rules. The member did breach the rules, but the infraction is not serious. Issue a written admonishment. The breach is serious, charges are laid, and the matter is brought before the disciplinary committee.
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Self-Regulatory Discipline
The disciplinary committee can reach a decision of guilty or not guilty.
If guilty, penalties may include one or more actions. The member could be:
reprimanded or suspended, struck off student registry or expelled, assigned professional development course, required to complete a period of supervised practice, reinvestigated, charged costs or fines, and the decision and members name may be publicized.

The institutes provide for an appeal process.

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Public Regulation Discipline

The traditional self-regulatory system is now supplemented by the Canadian Public Accountability Board (CPAB).
This is a national body that reviews public company audits and the auditors quality control systems. The PCAOB performs a comparable function in the U.S. Both bodies are to act as preventive controls to problems of audits of public companies.
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Public Regulation Discipline

Securities exchanges have some disciplinary powers.
The U.S. SEC conducts public regulation disciplinary actions and can deny the privilege to practice before the SEC.
This effectively removes the PA from audits of public companies.

The OSC in Canada is seeking some of the same powers.

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Consequences of Unethical/ Illegal Acts

Conforming to the rules is not always easy due to conflicts between the various rules.
Deficiencies in the codes of conduct: No or insufficient prioritization is put forward. Consultation on ethical matters is inhibited for some members. Fair hearing process is not indicated, members are uncertain whether to come forward. There is no protection for whistle blowers. Sanctions are unclear; applicability is not defined. Conflict resolution mechanisms are deficient.
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