Audit Final Outline

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CHAPTER 19: PROFESSIONAL CONDUCT, INDEPENDENCE, AND QUALITY CONTROL Ethics and Professional Conduct
* Ethics- system or code of conduct based on moral duties and obligations that indicate how an individual should interact with others in society. * Professionalism- refers to the conduct, aims, or qualities that characterize or mark a profession or professional person. * Most important concepts: personal responsibility and integrity * Accounting profession has developed a Code of Professional Conduct that guides the behavior of accounting professionals. Theories of Ethical Behavior

* Some ethical choices difficult simply due to the temptation or pressure to pursue one’s self-interest. * Other choices are complicated by sheer difficulty of sorting out the issues and deciphering what might be appropriate or inappropriate actions to take. * 3 overlapping methods/theories of ethical behavior:

* (1) Utilitarianism- the interests of all parties affected, not just one’s self-interest should be considered. * (2) Rights-based approach- individuals have certain rights and other individuals have a duty to respect those rights; should undertake actions only if it doesn’t violate the rights of any individual. * (3) Justice-based approach- concerned with issues such as equity, fairness and impartiality. An Overview of Ethics and Professionalism in Public Accounting * SEC- has legal authority to oversee the public accounting profession; has allowed private-sector entities such as the FASB and the ASB to set accounting (FASB) and auditing (ASB) standards. * PCAOB- adopted professional standards established by the AICPA on an interim basis in 2003, including Code of Professional Conduct.

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The AICPA Code of Professional Conduct: A Comprehensive Framework for Auditors * Consists of two sections:
* Principles of Professional Conduct- setting forth ideal attitudes and behaviors. * Rules of conduct- defining minimum standards.

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* Rules of Conduct- typically cover the same ground as the Principles of Professional Conduct but are somewhat more specific; grouped into 5 categories: * Independence, Integrity, and Objectivity (Section 100) * General Standards and Accounting Principles (Section 200) * Responsibilities to Clients (Section 300)

* Responsibilities to Colleagues (Section 400)
* Other Responsibilities and Practices (Section 500)

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Independence, Integrity, and Objectivity
* Performing a compilation of a client’s financial statements does not require independence, but an accountant or firm lacking independence must explicitly indicate that in the compilation report. * Independence is not required to perform other nonattest services (i.e. tax preparation or consulting services) if those services are the only services provided to a particular client. * Every individual on the engagement team and others who may be in a position to influence the engagement must be independent with respect to the attest client. * CPA firm must also be independent with respect to client. * Firms required by AICPA and PCAOB to establish and maintain a system of quality control to ensure firm’s compliance with independence standards. * Financial Relationships

* Prohibits members from any financial relationship with client that may impair/give appearance of impairing independence. * Includes direct or material indirect financial interest in client. * Materiality of interest is only considered if interest is indirect; direct interest impairs independence even if it is considered immaterial. * Financial interest is ownership interest in an equity or debt security issued by an entity. * Direct- financial interest that is owned directly by an individual/entity, or...
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