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No reproduction or further
distribution permitted without the prior written consent of McGraw-Hill Education 3-1
 Identify the problem
 Identify possible courses of action
 Identify any constraints relating to the
decision
 Analyze the likely effects of the possible
courses of action
 Select the best course of action

©McGraw-Hill Education. 3-2

Gary Watson, a graduating business student at a
small college, is currently interviewing for a job. Gary
was invited by both Tilly Manufacturing Co. and
Watson Supply Company to travel to a nearby city
for an interview. Both companies have offered to pay
Gary’s expenses. His total expenses for the trip were
$96 for mileage on his car and $45 for meals. As he
prepares the letters requesting reimbursement, he is
considering asking for the total amount of the
expenses from both employers. His rationale is that if
he had taken separate trips, each employer would
have had to pay that amount.

©McGraw-Hill Education. 3-3

 Responsibility to serve the public
 CPA is representative of the public
 Complex body of knowledge
 Abundance of authoritative pronouncements
 Standards of Admission to the Profession
 Minimum standards for education and experience
 Need for public confidence
 CPA product is credibility

©McGraw-Hill Education. 3-4

 Designed to provide CPAs guidance and rules
in the performance of professional
responsibilities
 Code consists of
 Principles
 Rules
 Interpretations
 Other guidance (definitions, pending revisions, etc.)

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 Purpose—Address situations not directly included in
the Code of Professional Conduct

 Overall approach—Consider the threats to

compliance with requirements and available
safeguards

 Code includes 3 conceptual frameworks

 For CPAs in public practice
1. Threats to code compliance
2. Threats to independence
 CPAs in business
3. Threats to code compliance

©McGraw-Hill Education. 3-8

 Self-Interest—CPA has financial interest in client
 Self-Review—CPA makes accounting decisions for
client
 Management Participation—CPA authorizes a client
transaction
 Advocacy Threat—CPA endorses a client product
 Familiarity—CPA’s close friend employed by client
 Intimidation/Undue Influence—CPA and firm
threatened with dismissal from an engagement
 Adverse Interest—client litigation against CPA

©McGraw-Hill Education. 3-9

 Created by profession, legislation, or
regulation—continuing education requirements
for independence and ethics

 Implemented by the client—client tone at the

top

 Implemented by the firm—policies and

procedures designed to implement and monitor
engagement quality control
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 Integrity
 Objectivity (and Independence)
 Professional Competence and Due Care
(Responsibilities)
 Confidentiality
 Professional behavior (Scope and Nature of
Services, the Public Interest)

©McGraw-Hill Education. 3-12

RULES*
 Independence
 Integrity and Objectivity
 General Standards
 Compliance with Standards
 Accounting Principles
 Acts Discreditable
 Contingent Fees
 Commissions and Referral Fees
 Advertising and Other Forms of Solicitation
 Confidential Client Information
 Form of Organization and Name

* In order discussed in text (Integrity and Objectivity precedes independence in

Code).
©McGraw-Hill Education. 3-13
 Independence of mind (actual independence)
 Independence of appearance
 Both are required

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 The AICPA Conceptual Framework for
Independence is used to evaluate threats to
independence. As with the earlier presented
framework for the code, the approach considers:
 Whether the Code directly addresses the threat
 If the Code does not directly address the threat, the
auditor considers whether adequate safeguards exist to
eliminate the threat to independence
 The perspective used throughout is whether a
reasonable person, aware of all the relevant facts
would conclude that an unacceptable risk of lack
of independence exists

©McGraw-Hill Education. 3-15

 Financial Self-Interest of CPA—CPA owns stock in the
client

 Self-Review—CPA firm has provided consulting services

that relate to financial statements
 Management Participation—CPA Serves as officer of client

 Advocacy of client—CPA promotes client securities as part

of an initial public offering

 Familiarity—Spouse holds a key position with client

 Intimidation/Undue Influence--Pressure from client to

reduce audit procedures
 Adverse Interest— Litigation between client and CPA firm

©McGraw-Hill Education. 3-16

 Created by profession, legislation, or regulation—
continuing education requirements

 Implemented by attest client—effective board of

director oversight

 Implemented by CPA firm—stressing importance

of independence in training programs

©McGraw-Hill Education. 3-17

©McGraw-Hill Education. 3-18
Individual vs. Firm Independence
Not all individuals must be independent
The firm must be independent to perform attest services

Covered Members include:

 Staff working on the attest engagement
 An individual who may influence the attest engagement
 A partner in the office in which the partner in charge of the attest
engagement primarily practices
 Partners or managers that provide a specified amount of nonattest
services to client
 The public accounting firm and its employee benefit plan
 Any entity controlled by one or more of the above

©McGraw-Hill Education. 3-19

 No partner or professional employee may own
more than 5% of attest client’s outstanding
equity securities
 Combination of all such persons may not own more
than 5%
 No partner or professional employee may be a
director, officer, employee, promoter, trustee,
etc. of a client

©McGraw-Hill Education. 3-20

 All direct financial interests are prohibited,
regardless of amount
 Material indirect financial interests are
prohibited
 Gifts from clients or management may impair
independence

©McGraw-Hill Education. 3-21

 Direct Financial Indirect
Interest Financial
Interest
Example Investment in client, Investment in a
such as owning mutual fund, which
capital stock or in turns owns
providing a loan capital stock of a
client
Type allowed
for individual None Immaterial
CPA to retain
independence
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*Summary omits consideration of certain detailed factors that may affect independence. Consult independence rule
and its interpretations for a detailed consideration of the effect on independence of family members and relatives.

©McGraw-Hill Education. 3-24

An individual that
 Has primary responsibility for significant accounting
functions that support material components of the
financial statements;
 Has primary responsibility for the preparation of the
financial statements; or
 Has the ability to exercise influence over the contents of
the financial statements, including being a member of
the board, chief executive officer, president, chief
financial officer, chief operating officer, general counsel,
chief accounting officer, controller, director of
internal audit, director of financial reporting, treasurer,
etc.

©McGraw-Hill Education. 3-25

 Bookkeeping
 Financial systems design and Implementation
 Appraisal or valuation services
 Actuarial services
 Internal audit outsourcing
 Management functions or human resource services
 Investment services
 Legal services and expert services
 Certain tax services

©McGraw-Hill Education. 3-26

 Applies to all members of the AICPA and to all
services provided by CPAs
 Violations
 Makes, or permits or directs another to make, materially
incorrect entries in a client’s financial statements or records
 Fails to correct financial statements that are materially false or
misleading when member has such authority
 Signs, or permits or directs another to sign, a document
containing materially false and misleading information

©McGraw-Hill Education. 3-27

 General Standards
 Apply to all CPA services
 Member shall comply with following standards:
 Professional competence
 Due Professional Care
 Planning and Supervision
 Sufficient Relevant Data

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 Accounting Principles
 Designates GAAP
 The Statements and Interpretations of
 FASB
 GASB
 FASAB

©McGraw-Hill Education. 3-30

Retaining client records may be considered an
act discreditable to the profession
Rules:
 Client prepared records—should always be returned to the
client.
 Client records prepared by the CPA (e.g. payroll records)—
should be provided to client, except they may be withheld if
they are incomplete or fees are due for them.
 Supporting records (e.g., adjusting entries)—should be
provided to client, but may be withheld if fees are due for
them.
 CPA working papers (e.g., audit programs)—CPA’s property
and need not be provided to client , unless required by law.

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 Allowable for clients for which the CPA provides none of
the following services:
 An audit or review of financial statements
 A compilation of financial statements expected to be used by a
third party and does not disclose a lack of independence
 An examination of prospective financial information

 Contingent fees are not allowed to prepare an original or

amended tax return or claim for tax refund (Note: All tax
contingent fees are prohibited under PCAOB Standards)

©McGraw-Hill Education. 3-32

 Commissions and Referral Fees Rule
 As is the situation with contingent fees, such fees are
only allowed for a nonattest client
 Allowable commissions received must be disclosed to
the client

 Advertising Rule
 May advertise as long as it is not false, misleading, or
deceptive

©McGraw-Hill Education. 3-33

 A member in public practice shall not
disclose any confidential client information
without the specific consent of the client.
 Auditors cannot directly disclose illegal acts
by the client unless they have a legal duty to
do so
 Confidential but not privileged
communications with client

©McGraw-Hill Education. 3-34

 Form of Organization and Name
 Can practice in any legal business form
 Allows fictitious names as long as not false,
misleading, or deceptive, e.g., a sole
proprietor practicing in a partnership name

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©McGraw-Hill Education. 3-36
 Members in business applicable rules
 Integrity and Objectivity
 General Standards
 Compliance with Standards
 Accounting Principles
 Acts Discreditable

 Others (primarily retired CPAs) applicable rule

 Acts Discreditable

©McGraw-Hill Education. 3-37

Internal auditors are expected to apply & uphold the following principles:
 Integrity. The integrity of internal auditors establishes trust and
thus provides the basis for reliance on their judgment.
 Objectivity. Internal auditors exhibit the highest level of
professional objectivity in gathering, evaluating, and communi-
cating information about the activity or process being examined.
Internal auditors make a balanced assessment of all the relevant
circumstances and are not unduly influenced by their own interests
or by others in forming judgments.
 Confidentiality. Internal auditors respect the value and ownership
of information they receive and do not disclose information without
appropriate authority unless there is a legal or professional obliga-
tion to do so.
 Competency. Internal auditors apply the knowledge, skills, and
experience needed in the performance of internal auditing services.

©McGraw-Hill Education. 3-38

1. Integrity; Internal auditors:
1. Shall perform their work with honesty, diligence, and
responsibility.
2. Shall observe the law and make disclosures
expected by the law and the profession.
3. Shall not knowingly be a party to any illegal activity,
or engage in acts that are discreditable to the
profession of internal auditing or to the organization.
4. Shall respect and contribute to the legitimate and
ethical objectives of the organization.

©McGraw-Hill Education. 3-39

2. Objectivity; Internal Auditors:
1. Shall not participate in any activity or relationship
that may impair or be presumed to impair their
unbiased assessment. This participation includes
those activities or relationships that may be in
conflict with the interests of the organization.
2. Shall not accept anything that may impair or be
presumed to impair their professional judgment.
3. Shall disclose all material facts known to them that,
if not disclosed, may distort the reporting of activities
under review.

©McGraw-Hill Education. 3-40

3. Confidentiality; Internal auditors:
1. Shall be prudent in the use and protection of
information acquired in the course of their duties.
2. Shall not use information for any personal gain or in
any manner that would be contrary to the law or
detrimental to the legitimate and ethical objectives of
the organization.

©McGraw-Hill Education. 3-41

4. Competency; Internal auditors
1. Shall engage only in those services for which they
have the necessary knowledge, skills, and
experience.
2. Shall perform internal auditing services in
accordance with the Standards for the Professional
Practice of Internal Auditing.
3. Shall continually improve their proficiency and the
effectiveness and quality of their services.

©McGraw-Hill Education. 3-42