Copyright © 2016 McGraw-Hill Education. All rights reserved.

No reproduction or distribution 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

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-2
  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
 Min. standards for education and experience
 Need for public confidence
 CPA product is credibility

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-3
 Designed to provide CPAs guidance and rules
in he performance of professional
responsibilities.
 Code consists of
 Principles
 Rules
 Interpretations
 Other guidance (definitions, pending revisions, etc.)

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-4
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-5
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-6
  Purpose—Address situations not directly included
in the Code of Professional Conduct

 Overall approach—Consider threats to compliance

with Code 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

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-7
  Adverse Interest—client litigation against CPA
 Advocacy Threat—CPA endorses a client product
 Familiarity—CPA’s close friend employed by
client
 Management Participation—CPA authorizes a
client transaction
 Self-Interest—CPA has financial interest in client
 Self-Review—CPA performs bookkeeping
services for client
 Undue Influence—CPA and firm threatened with
dismissal from an engagement.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-8
  Created by profession, legislation, or
regulation—continuing education
requirements on 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
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-9
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-10
  Responsibilities
 The Public Interest
 Integrity
 Objectivity and Independence
 Due Care
 Scope and Nature of Services

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-11
 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).
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-12
  Independence of mind (actual
independence)
 Independence of appearance

Both are required.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-13
  The AICPA Conceptual Framework for
Independence is used to evaluate threats to
independence. As with the earlier presented
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 non-independence exists.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-14
  Adverse Interest— Litigation between client and CPA
firm
 Advocacy of client—CPA promotes client securities as
part of an initial public offering
 Familiarity—Spouse holds a key position with client
 Financial Self-Interest of CPA—CPA owns stock in
the client
 Management Participation—CPA Serves as officer of
client
 Self-Review—CPA firm has provided consulting
services that relate to audit
 Undue Influence--Pressure from client to reduce audit
procedures

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-15
  Created by profession, legislation or
regulation—education requirements

 Implemented by attest client—effective board

of director oversight

 Implemented by CPA firm—stressing

importance of independence

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-16
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-17
 Individual vs. Firm Independence
Not all individuals need to 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

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-18
  No partner or professional employee may own
more than 5% of attest client’s outstanding
equity securities
 Combination of all such persons must also be at 5%
or below
 No partner or professional employee may be a
director, officer, employee, promoter, trustee,
etc. of a client

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-19
  All direct financial interests are prohibited,
regardless of amount
 Material indirect financial interests are
prohibited

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-20
 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 tock of a
client
Type allowed
for individual None Immaterial
CPA to retain
independence
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-21
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-22
 Relative Effect on Accountant and Firm Independence
Immediate Family (spouse, General Rule: A covered member’s immediate family members must, in general, comply
spousal equivalent, or with the Independence Rule. Accordingly, when an immediate family member violates
dependent) the Independence Rule or one of its interpretations, independence of the covered member
and the firm is impaired.
Exceptions to the General Rule: The accountant and firm are independent:
1. When a family member is employed by a client in other than a key position.
2. In certain circumstances in which the immediate family member participates in a
benefit plan related to a client.
Close Relatives (parent, Accountant and firm independence is impaired if an individual on the audit team, an
sibling, or nondependent individual in a position to influence the attest engagement, or any partner in the
child) engagement office has a close relative who has:
1. A key position with the client, or
2. A material financial interest of which the accountant has knowledge.
Other Relatives and Friends Independence is only impaired when a reasonable person, aware of all relevant facts
relating to a situation would conclude that there is an unacceptable threat to
independence; this evaluation (at both the accountant and the firm level) is made based on
the AICPA Conceptual Framework.

*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.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-23
  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
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-24
  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

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-25
 General Standards
 Apply to all CPA services
 Member shall comply with following standards:
 Professional competence
 Due Professional Care
 Planning and Supervision
 Sufficient Relevant Data

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-26
 Technical Body Standards
 Auditing Standards Board  Statements on Auditing
(ASB) Standards
 Management Consulting  Statements on Standards for
Services Executive Consulting Services
Committee (MCSEC)
 Accounting and Review  Statements on Standards for
Accounting and Review Services
Services Committee
(ARSC)  Statements on Standards for
 ASB, MCSEC, and ARSC Attestation Engagements
 FASB, GASB and FASAC
 FASB, GASB and FASAC Statements and related
Interpretations

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-27
  Accounting Principles
 Designates GAAP
 The Statements and Interpretations of
 FASB
 GASB
 FASAB

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-28
 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.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-29
  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)

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-30
  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

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-31
  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

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-32
 Form of Organization & Name
 Can practice in any legal business form
 Allows fictitious names as long as not false,
misleading or deceptive

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-33
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-34
  Members in business applicable rules
 Integrity and Objectivity
 General Standards
 Compliance with Standards
 Accounting Principles
 Acts Discreditable

 Others (primarily retired) applicable rule

 Acts Discreditable

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-35
 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.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-36
 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.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-37
 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.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-38
 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.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-39
  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.

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
3-40