acco 465 powerpoint ch 4
TRANSCRIPT
Electronic Presentations
in Microsoft® PowerPoint®
Prepared by
Brad MacDonald SIAST
© 2009 McGraw-Hill Ryerson Limited
Learning Objectives
Chapter Overview
Learning Objectives
Chapter Overview Slide 3
1. Explain the importance of professional ethics in audit decision making.
2. Analyze whether a PA’s 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.
Learning Objectives
Learning Objectives
Chapter Overview Slide 4
6. Evaluate an ethical decision problem using the critical thinking framework.
Learning Objectives Online Appendix 4A
Learning Objectives
Chapter Overview Slide 5
• General Ethics • Codes of Professional Ethics • Independence and Objectivity • Regulation and Quality Control
Chapter Overview
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 6
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.” 2. Professional Responsibilities.
• Covered by the rules of conduct. 3. Legal Responsibilities.
• Covered under criminal and civil law.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 7
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 8
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 9
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 10
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
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 11
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?
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 12
General Ethics
An ethical decision process: 1. Recognize a decision problem. 2. Collect evidence. 3. Think about rules of behaviour. 4. Considering probable outcomes. 5. Analyze the situation. 6. Take action.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 13
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 14
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 15
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 16
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 17
Critical Thinking
Professional judgment in auditing is essentially critical thinking on accounting issues and the evidence related to them.
– This reasoning should be documented.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 18
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
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 19
Fundamental Principles – The member should act to maintain the profession’s
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 20
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 non-conformity to an acceptable level
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 21
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 22
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 23
Integrity
Integrity is the duty to be honest and conscientious in performing professional services.
– A PA must “be upright” not be “kept upright.”
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 24
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 member’s professional judgment.
– Independence: • Objectivity in the case of an assurance
engagement.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 25
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…
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 26
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;
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 27
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
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 28
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…
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 29
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 30
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
PA’s
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 31
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 32
Practical Independence
Three concepts of independence are useful in avoiding influences that might bias judgment.
– Programming Independence – Investigative Independence – Reporting Independence
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 33
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 34
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 35
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 36
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 37
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 38
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 39
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 40
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 41
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 42
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 43
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 client’s books and records, • employment discrimination, • failure to follow government guidelines in
government audits, and • false entries in clients records
– Rules include expulsion of members.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 44
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 45
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 46
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 47
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 48
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 49
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 member’s name may be publicized.
– The institutes provide for an appeal process.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 50
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 51
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.
Learning Objectives
Chapter Overview Learning objective 1 2 3 4 Slide 52
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.