Audit I - Chapter 2, Pt. II, Ethics.pptx

accounting

1. Chapter 2 part II-1 Professional Ethics

2. What Are Ethics? Ethics can be defined broadly as a set of moral principles or values Honesty, integrity, Trustworthiness, Responsibility, Caring, Respect, Fairness and Citizenship are attributes of ethical behaviors. Philosophers, religious organizations, and other groups have defined in various ways ( Laws and regulations, church doctrine, code of ethics etc ):- ideal sets of moral principles or values , which indicates the importance of ethics in society 2 Auditing part I YA AAUSC, 2022

3. What Are Ethics? Ethics Distinguished from Laws Ethical behavior goes beyond legal behavior The law defines the minimum standard of behavior that society considers acceptable . Ethical behavior rises to a higher level . Ethics is not just a definition of the lowest acceptable behavior; it is a search for the highest attainable behavior 3 Auditing part I YA AAUSC, 2022

4. Figure 4.1 Illustrative Prescribed Ethical Principles 4 Auditing part I YA AAUSC, 2022

5. What Are Ethics? Need for Ethics Ethical behavior is needed for a society to function in an orderly manner. Ethics is glue that holds a society together . ( If there is no ethics , for example if everyone lied, there will be no effective communication, a state of chaos will be created .) Since ethics is very important for effective functioning of the society, commonly held ethical values are incorporated into laws. 5 Auditing part I YA AAUSC, 2022

6. Why People Act Unethically Unethical behavior- is an act which is against the moral principles of the society People differ in their moral principles due to the difference in their background Two Reasons for Why People act Unethically: The person’s ethical standards are different from those of society as a whole - In some unethical acts those who commit feel no guilt when they are arrested because their ethical standards differ from those of the society as a whole ( Eg extreme cases such as drug dealers, bank robbers). 6 Auditing part I YA AAUSC, 2022

7. Why People Act Unethically 2 . The person chooses to act selfishly- (selfish behavior) Here, a person purposely act selfishly , he/she knows what the appropriate behavior is, but selfishness makes them to behave unethically. Eg . tax evaders, people engaged in corrupted acts are motivated by personal financial greed; acts of people who cheat on exams are caused by laziness. 7 Auditing part I YA AAUSC, 2022

8. Ethical Dilemmas An ethical dilemma is a situation a person faces in which a decision must be made about appropriate behavior . Auditors, accountants, and other businesspeople face many ethical dilemmas in their business careers. Dealing with a client who threatens to seek a new auditor unless an unqualified opinion is issued presents an ethical dilemma if an unqualified opinion is inappropriate . Deciding whether to confront a supervisor who has materially overstated departmental revenues as a means of receiving a larger bonus is an ethical dilemma . Continuing to be a part of the management of a company that harasses and mistreats employees or treats customers dishonestly is an ethical dilemma, especially if the person has a family to support and the job market is tight. 8 Auditing part I YA AAUSC, 2022

9. Methods of Resolving Ethical Dilemmas 1. By Rationalizing Unethical Behavior -These are attempts to resolve ethical dilemmas by rationalizing unethical behavior, but this is not advisable since it results in unethical conduct 1. Everybody Does It, so why not me? 2. If it’s legal, it’s ethical 3. Likelihood of discovery and consequences Eg . Everybody Does It, so why not me? - Bad behaviors such as falsifying tax returns, cheating on exams, or sell defective products are commonly the result of the rationalization that everyone else is doing it and therefore it is normal. 9 Auditing part I YA AAUSC, 2022

10. Methods of Resolving Ethical Dilemmas 2 . If it is legal, it is ethical: -Using the argument that all legal behavior is ethical relies heavily on the perfection of laws. Under this philosophy, one would have no obligation to return a lost object unless the person could prove that it was his or hers. 10 Auditing part I YA AAUSC, 2022

11. Methods of Resolving Ethical Dilemmas 3. Likelihood of Discovery and Consequences This philosophy relies on evaluating the likelihood that someone else will discover the behavior. The person also assesses the severity of the penalty (consequences) if there is a discovery. Eg . in deciding whether to correct an unintentional overbilling to a customer when the customer has already paid the full amount . - If the seller believes that the customer will detect the error and respond by not buying in the future , the seller will inform the customer now; otherwise, the seller will wait to see if the customer complains. 11 Auditing part I YA AAUSC, 2022

12. Methods of Resolving Ethical Dilemmas Formal frameworks with six-step have been developed to help people resolve ethical dilemmas : 1. Obtain the relevant facts. 2. Identify the ethical issues from the facts. 3. Determine who is affected by the outcome of the dilemma and how each person or group is affected. 4. Identify the alternatives available to the person who must resolve the dilemma. 5. Identify the likely consequence of each alternative. 6. Decide the appropriate action. 12 Auditing part I YA AAUSC, 2022

13. Methods of Resolving Ethical Dilemmas SOME ETHICAL VIOLATIONS ARE MORE SEVERE THAN OTHERS Eg . Look at the following unethical act Tom is much busy in a social life to work overtime. To make certain that work does not interfere with his social life, he tests only part of the assigned sample. For example, if he is asked to test 25 cash disbursement transactions, he tests the first 15 but indicates that he has tested all 25. A supervisor, curious about Tom’s amazing ability to beat the time budget, decides to carefully review Tom’s work. When the firm discovers that Tom is signing off procedures without completing them, he is dismissed that day—no counseling out, no 2 weeks’ notice. 13 Auditing part I YA AAUSC, 2022

14. Ethical framework The IESBA ethical framework recognizes that there are: Ethical principles to be followed. These principles are subject to risks ( threats ) Threats must be addressed, (Accountants should use safeguards to avoid or to respond to risks by reducing them to acceptable levels). 14 Auditing part I YA AAUSC, 2022

15. Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level. They fall into two broad categories : (a) Safeguards created by the profession, legislation or regulation; and (b) Safeguards in the work environment . Safeguards created by the profession, legislation or regulation include: Educational, training and experience requirements for entry into the profession. Continuing professional development requirements. Corporate governance regulations. Professional standards. Professional or regulatory monitoring and disciplinary procedures. External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant Auditing part I YA AAUSC, 2022 15

16. Fundamental Ethical principles 1. Objectivity 2. Integrity 3. Professional competence and due care 4. Confidentiality 5. Professional Behavior 16 Auditing part I YA AAUSC, 2022

17. Fundamental Ethical principles 1. Integrity ; - r equires members to be honest and straightforward in all professional and business relationships. If they see something is amiss, they should say so and shouldn’t try to conceal it; they shouldn’t ‘turn a blind eye ’; they shouldn’t try to be ambiguous; they should state things plainly. Objectivity- , members should be influenced by t he facts and the facts only. - They must avoid bias, conflict of interest and undue influence . - S hall not knowingly misrepresent facts or subordinate his or her judgment to others Professional competence and due care - They must keep themselves up-to-date with legislation and recent developments. They shouldn’t take on work which they are not qualified for or for which they have no skills. They must be diligent, they must be careful. 17 Auditing part I YA AAUSC, 2022

18. Fundamental Ethical principles Cont’d… Confidentiality .- Auditors have access to information that is highly confidential and which is price sensitive . That information must be held confidentially. Members should not disclose confidential information unless they have a legal or professional duty to do so. An example of a legal duty to disclose information can arise if a member thinks that a client or the person they are working fo r is involved in money laundering . Professional behavior. They should comply with the law and they should avoid any actions which discredit the profession . for example, when they are trying to advertise their services they shouldn’t say that other members are bad or poor. They should confine themselves to promoting what they are good at; they shouldn’t criticize other professionals. 18 Auditing part I YA AAUSC, 2022

19. Threats to the principles of professional ethics Threats to compliance from the fundamental ethical principles arise from Self-interest Self-review Familiarity Intimidation. Advocacy 19 Auditing part I YA AAUSC, 2022

20. Threats to professional ethics 1. Self-interest threat: This threat includes the following: Financial interests –If the auditor owns share in client’s business, the auditor may want to maximize return from the investment and overlook adjustments which would affect the value of their investment Close business relationships – If audit firm enters in to business relationships with clients ( eg . Joint venture, marketing arrangement ) this leads to self interest because the auditor would have an interest in the successful operation of the client. Employment with an audit client-If a partner retired from an audit partnership and immediately went to work for a client, it is considered as if the auditor was lenient in previous audit to secure job in the client’s business . A period of at least 2 years should pass before an ex-partner works for client 20 Auditing part I YA AAUSC, 2022

21. Threats to professional ethics …..Self-interest Gifts and hospitality- Acceptance of goods, services and hospitality from an audit client can create self-interest, intimidation and familiarity threats as the auditor may feel indebted to the client. Loans and guarantees- Loans and guarantees between an audit client and the firm , the audit team member or immediate family that are not in normal course of business or not in commercial terms are not permitted . Overdue fees- A self interest threat may be created if a significant amount of fees is not paid before the auditor’s report for the following year is issued. Contingent fees- Fees based on a particular outcome , eg . Level of profits of the company , are not permitted as the auditor may overlook adjustments that would reduce profit . It should not be based on the type of audit report. It should be based on the time and complexity of the audit . 21 Auditing part I YA AAUSC, 2022

22. Threats to professional ethics …..Self-interest Fee dependency : threats can be created if fees from one client represent a large proportion (if more than 15% of the audit firm’s revenue) is generated from one client for two consecutive years ). Overdependence could lead the auditor to ignore adjustments for fear of loosing the client. 2. Self-review-This threat arises when the auditor works for the client and that work is subject to check by the auditor Provision of non-audit services - eg if the auditor prepares financial statements and audits them Internal Audit Services - eg if the auditor performs internal audit service and has to check if internal control system is working effectively Valuation services, Taxation services - eg if the auditor performs valuation service and has to check if valuation is properly done, provide taxation service and do the same (auditors will be reluctant to criticize the work their firm has done) 22 Auditing part I YA AAUSC, 2022

23. Threats to professional ethics 3. Familiarity threat- This can arise because of: Friendship, family or business connections Having an audit client for a long period of t ime, -Familiarity makes the auditor too sympathetic/kind or too trusting of the clien t and loses objectivity & professional skepticism. -The code requires that an engagement partner cannot serve a Public Interest Entity for more than 7 years 23 Auditing part I YA AAUSC, 2022

24. Threats to professional ethics 4 . Intimidation threat. It is a threat that deter the audit team not to act properly Eg . Threatened litigation (when the client sue the audit firm) the firm is then faced with the risk of losing the client, bad publicity Eg . Blackmailing - eg if the audit firm has received a gift or hospitality from the client , the possibility of that being made public may crate intimidation threat to objectivity Rarely physical intimidation may arise which threatens and deter auditors from being objective 24 Auditing part I YA AAUSC, 2022

25. Threats to professional ethics 5. Advocacy threats This includes promoting the position of client or representing them in some way which makes the audit firm to be seen as ‘taking side ’with the client Eg . acting as an advocate on behalf of an audit client in litigation or disputes with third parties Negotiating on the client's behalf for finance Loan of personnel from an audit firm to an audit client Providing valuation services to an audit client Providing taxation services to an audit client 25 Auditing part I YA AAUSC, 2022

26. Safeguards to the Ethical Threats Where such threats exist, the auditor must put in place safeguards that eliminate them or reduce them to clearly insignificant levels. Quality control procedures: This includes having an appropriate reviewer, not a member of that audit team to review the work performed . Discussing the issue with the audit committee Partner rotation Separating team when dealing with matters of confidential nature ( eg when two competing companies are audited with one audit firm separate teams are assigned to ensure confidentiality) If the auditor is unable to implement fully adequate safeguards , the auditor must not carry out the work (should resign) 26 Auditing part I YA AAUSC, 2022 (

27. Special Need for Ethical Conduct in Professions Special Need for Ethical Conduct in Professions The society has attached a special meaning to the term professional . Professionals are expected to conduct themselves at a higher level than most other members of soci ety. For example, when the press reports that a physician, clergyperson, a Lawyer, or CPA has been indicted/accused for a crime , most people feel more disappointment than when the same thing happens to people who are not labeled as professionals. Professional Ethics- is one pillar up on which the audit profession stands 27 Auditing part I YA AAUSC, 2022

28. Special Need for Ethical Conduct in Professions Code of professional ethics is necessary in that: It is not practical for most customers to evaluate the quality of the performance of professional services because of their complexity. Eg . A patient cannot be expected to evaluate whether an operation was properly performed. -A financial statement user cannot be expected to evaluate audit performance. - Most users have neither the competence nor the time for such an evaluation. Public confidence in the quality of professional services is enhanced when the profession encourages high standards of performance and conduct on the part of all practitioners. Thus, Code of professional ethics is a means of self regulation by imposing the codes in addition to the rule of the land and other rules and regulations by which we have to abide by whether we like it or not . is a means of recognition as a profession ; and enhances the profession’s image 28 Auditing part I YA AAUSC, 2022

29. Difference Between CPA Firms and Other Professionals Other professionals- are typically engaged and paid by a client and have primary responsibility to be an advocate for that client CPA firms -are usually engaged by management for private companies and the audit committee for public companies: They are paid by the company issuing the financial statements, but the primary beneficiaries of the audit are financial statement users . Frequently the auditor doesn’t know or have contact with the statement users, but has frequent meetings and ongoing relationships with client personnel 29 Auditing part I YA AAUSC, 2022

30. Cont … The potential liability of CPAs due to improper professional practices is considered to be higher as compared to the case in other professions . Why? The parties that will be injured is larger in the case of improper practices of CPAs Eg : Physician/attorney- the injured parties could be the client If CPAs are negligent in expressing opinions on financial statements – millions of investors could sustain losses Therefore, code of ethics governing the conduct of audit professional is essential 30 Auditing part I YA AAUSC, 2022

31. Figure 4.2 Ways the Profession and Society Encourage C P A s to Conduct Themselves at a High Level 31 Auditing part I YA AAUSC, 2022

32. Code of Professional Conduct Members of the AICPA agree to follow the AICPA Code of Professional Conduct The Code consists the following three major parts : Principles- Principles provide ideal standards of conduct, they provide the framework for the rules that govern the CPA’s performance of professional responsibilities. They are not enforceable(not a must to follow). Ex, members behave in a way that enhances and does not detract from the reputation of all the members. Members should act ethically and act in a way that will serve the public interest 2. Rules of Conduct- are minimum standards of ethical conduct stated as specific rules, they are enforceable ( must be followed by members )= At what level do practitioners conduct themselves in practice ? (at high, or at low level) 3. Interpretations of the rules- Interpretations are used to address circumstances members may face that are threats to compliance with the rules of conduct. 32 Auditing part I YA AAUSC, 2022

33. 1. Principles of Professional Conduct Principle Description 1. Responsibilities In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. CPAs (Audit firms) have responsibility to all who use their service 2. The Public Interest Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism . T hose in the profession are required to commit themselves for public interest 3.Integrity To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. It requires the auditor to be impartial, the auditor will give his own honest opinion , in spite of what the consequences might be. 33 Auditing part I YA AAUSC, 2022

34. .. 1. Principles of Professional Conduct Principle Description 4. Objectivity and Independence A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services. -These are cornerstones of the auditing profession. -Audit reports are valued/trusted because of auditor’s independence 5. Due Care A member should observe the profession’s technical and ethical standards, strive continually to improve competence and quality of services , and discharge professional responsibility to the best of the member’s ability . (should not accept the work for which there is no expertise, once accepted, perform diligently & Carefully) 6. Scope and Nature of Services A member in public practice should observe the principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. (so that conflict of interest is not created while providing different services) 34 Auditing part I YA AAUSC, 2022

35. 2. Rules of Conduct Conceptual Framework for rules of Conduct Since the rules of conduct cannot address all circumstances, the Code includes a conceptual framework approach for members to use to evaluate threats to compliance. As per the conceptual framework there are three steps to evaluate the threats to compliance with the Code , these are: 1. Identify the threats. 2. Evaluate the significance of the threat. 3 . Identify and apply safeguards. Using this framework, more than one safeguard may be necessary when a threat is identified 35 Auditing part I YA AAUSC, 2022

36. Cont.. 1 . Identify threats. When a member encounters a relationship or circumstance that is not specifically addressed by a rule or interpretation, the member should evaluate whether the relationship or circumstance creates a threat to following the rule . 2. Evaluate the significance of the threat. In evaluating the significance of a threat, the member should determine whether the threat is at an acceptable level. A threat is at an acceptable level when a reasonable and informed third party who is aware of the relevant information would be expected to conclude that the threat would not compromise the member’s compliance with the rules . 3. Identify and apply safeguards . If the member concludes that the threat is not at an acceptable level, the member should apply safeguards to eliminate the threat or reduce it to an acceptable level Auditing part I YA AAUSC, 2022 36

37. 2 .Rules of Conduct: The Seven categories of threats to Compliance with Rules Under the A I C P A Code of Professional Conduct Threat Definition Example of a Threat 1 . Adverse interest threat The threat that a member will not act with objectivity because the member’s interests are opposed to the attest client’s interests. (There is actual or threatened litigation between an auditor and his client.) Objectivity may be threatened or (appear to be threatened) Mgt may not be willing to disclose information, so sufficient evidence may not be obtained Fear of the consequence of the litigation may make the auditor not to be objective 2. Advocacy threat The threat that a member will promote an attest client’s interest or position to the point that his or her objectivity or independence is compromised. A member/audit firm promoting the shares of an audit client Threats to compliance with the AICPA's Code of Professional Conduct fall into seven broad categories . 37 Auditing part I YA AAUSC, 2022

38. … .2. Rules of Conduct: The Seven categories of threats to Compliance with Rules Under the A I C P A Code of Professional Conduct Threat Definition Example of a Threat 3. Familiarity threat The threat that, due to a long or close relationship with an attest client, a member will become too sympathetic to the client’s Interest or too accepting of the client’s work or product. A member’s close friend is employed by the client. 4.Management Participation threat The threat that a member will take on the role of an attest client management or otherwise assume management responsibilities, such as may occur during an engagement to provide nonattest services. Due to a loss of client personnel, the attest client asks a member firm to assist with accounting activities, including the authorization of transactions. 38 Auditing part I YA AAUSC, 2022

39. …… .2. Rules of Conduct: The Seven categories of threats to Compliance with Rules Under the A I C P A Code of Professional Conduct Threat Definition Example of a Threat 5.Self-interest threat The threat that a member could benefit, financially or otherwise, from an interest in, or relationship with , an attest client or persons associated with the client . (the financial interest inappropriately influence auditor’s judgment) The member has a financial interest in an attest client, and the outcome of a professional services engagement may affect the fair value of the financial interest. 6.Self-review threat The threat that a member will not appropriately evaluate the results of a previous judgment or service performed or supervised by the member or an individual in the member’s firm and that the member will rely on that service in forming a judgment as part of another service. The member performs bookkeeping services for the attest client and then performs an audit of those financial statements. 39 Auditing part I YA AAUSC, 2022

40. …The Seven categories of threats to Compliance with Rules Under the A I C P A Code of Professional Conduct Threat Definition Example of a Threat 7. Undue influence threat The threat that a member will subordinate his or her judgment to an individual associated with a client or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member. (t his threat arises when the other party dominates or influences the member due to their aggressiveness, manipulation, flattery, or otherwise. ) The client indicates that it will not award additional engagements to the firm if the firm continues to disagree with the client on an accounting or tax matter. 40 Auditing part I YA AAUSC, 2022

41. Concept check What is the purpose of the Principles of Professional Conduct? Identify the six principles. 2. Explain the conceptual framework for the Rules of Conduct and how it should be applied. 41 Auditing part I YA AAUSC, 2022

42. 3. Interpretations of rules of Conduct The need for interpretations of the rules of conduct arises when there are frequent questions from practitioners about a specific rule. The Professional Ethics Executive Committee(PEEC) of the AICPA prepares each interpretatio n based on a consensus of a committee made up principally of public accounting practitioners. Before interpretations are finalized, they are issued as exposure drafts to the profession and others for comment. Interpretations provide guidelines about the scope and application of the rules, and members must justify any departure in a disciplinary hearing. The most important interpretations are discussed as a part of each section of the rules 42 Auditing part I YA AAUSC, 2022

43. Independence Rule The value of auditing depends heavily on the public’s perception of the independence of auditors CPA firms are required to be independent for certain services that they provide: The Independence Rule applies to audits and other types of attestations A CPA firm can do tax returns and provide management services without being independent 43 Auditing part I YA AAUSC, 2022

44. Cont … Independence consists of two components: Independence of mind Reflects the auditor’s state of mind that permits the audit to be performed with an unbiased attitude Independence in appearance The result of others’ interpretations of the auditor’s independence –perception by others 44 Auditing part I YA AAUSC, 2022

45. Cont.. Significant issues and interpretations involving independence: - Financial interests- The AICPA Code prohibits covered members from owning any stock or other direct investment in audit clients regardless of materiality because it is potentially damaging to actual audit independence Covered members include those who can influence the audi t eg . Those who are involved in audit team, supervisors, partners,.. These independence rules- also generally apply to the covered member’s immediate family. Immediate family members are a spouse, spousal equivalent , or dependent . 45 Auditing part I YA AAUSC, 2022

46. Cont … ….Significant issues and interpretations involving independence: Related financial interest issues that can impair independence include: Loans between CPA firm and client Employment of Immediate and Close Family Member- eg . If the parent of the audit partner is chief executive officer , it is difficult to maintain independence Joint Closely held Investments with a Clien t - an investment by the member and the client that enables them to control the entity or property also impairs independence. If a CPA is a member of the board of directors or an officer of a client company , his or her ability to make independent evaluations of the fair presentation of financial statements is affected 46 Auditing part I YA AAUSC, 2022

47. Cont.. ….Significant issues and interpretations involving independence: - Consulting , bookkeeping, and other non attest services CPA firms offer many other services to attest clients that may potentially impair independence . Such activities are permissible as long as the member does not perform management functions or make management decisions The AICPA independence rules require members to adhere to more restrictive independence rules of other regulatory bodies, such as the SEC Eg . It is not permissible for an audit firm to provide bookkeeping services to a public company audit client under both SEC rules and the AICPA rules on independence . 47 Auditing part I YA AAUSC, 2022

48. Cont.. ..Significant issues and interpretations involving independence: - Litigation between CPA firm and client- where management sues a CPA firm claiming a deficiency in the previous audit , the CPA firm is not considered independent for the current year’s audit - Unpaid fees- Independence is considered impaired if billed or unbilled fees remain unpaid for professional services provided more than one year before the date of the report. Such unpaid fees are considered a loan from the auditor to the client and are therefore a violation of independence. Unpaid fees from a client in bankruptcy do not violate independence. 48

49. Cont.. ..Significant issues and interpretations involving independence: - Network of firms- Pressure may arise from outside the practice from associated practices or organizations, or from other external sources such as bankers, government which may impair independence The firm’s quality control review procedure should be designed to deal with this 49 Auditing part I YA AAUSC, 2022

50. Sarbanes–Oxley and Related Independence Requirements Auditors of public companies must comply with the independence requirements of the Sarbanes–Oxley Act, the PCAOB , and the SEC Sarbanes–Oxley and SEC rules restrict the types of nonaudit services that can be provided to publicly held audit clients Sarbanes–Oxley also requires the audit committee of a public company to be responsible for the appointment , compensation , and oversight of the work of the auditor 50 Auditing part I YA AAUSC, 2022

51. Other Rules of Conduct a. Integrity and Objectivity Auditor shall maintain objectivity and integrity, be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others Integrity means impartiality in performing all serv ices. This rule apply not only to CPAs in public practice, but also to CPAs working in government and industry . The rule requires integrity and objectivity in all kinds of professional work - tax practice and consulting practice as well as audit practice for public accountants and all kinds of accounting work performed by CPAs employed in corporations, not for profit organizations, government and individual practices. 51 Auditing part I YA AAUSC, 2022

52. ….Other Rules of Conduct b. Technical Standards This rule requires CPAs to adhere to professional standards issued by technical standards-setting bodies ( ASB, PCAOB, FASB, IASB, and other technical standards-setting bodies ) c. Confidentiality Practitioners shall not disclose any confidential client information without the specific consent of the client Exceptions to confidentiality: There are four exception concerning responsibilities that are more important than confidential relations with the client. Obligations related to technical standards auditor’s responsibility to apply professional standards is greater than that for confidentiality eg . If standards require disclosure, though information is confidential, it has to be disclosed 52 Auditing part I YA AAUSC, 2022

53. ….Other Rules of Conduct …Exceptions to confidentiality: 2. Subpoena or summons Information obtained during audit is confidential but not privileged. Confidential information is information that should not be disclosed to outside parties unless demanded by a court or an administrative body having subpoena or summon power. Privileged information , is information that cannot be even demanded by a court. Eg . communication between the penitent and confessor father, doctor and patient, and plaintiff defendant and lawyer are examples of privileged information Auditors can provide information when required by court, this is not violation of the rule of confidentiality The rules of privileged and confidential communications are based on the belief that they facilitate a free flow of information between parties to the relationship 53 Auditing part I YA AAUSC, 2022

54. ….Other Rules of Conduct …Exceptions to confidentiality: 3. Peer review When a CPA or CPA firm conducts a peer review of the quality controls of another CPA firm, it is normal practice to examine several sets of audit files. If the peer review is authorized by the AICPA, state CPA society, or state Board of Accountancy, client permission to examine the audit documentation is not needed . The peer reviewers must keep the information obtained confidential and cannot use the information for other purposes 4. Response to ethics division If a practitioner is charged with inadequate technical performance by the AICPA Ethics Division trial board under any of the technical standards rules, board members are likely to want to examine audit documentation. The fourth exception prevents a CPA firm from denying the inquirers access to audit documentation by saying that it is confidential information . 54 Auditing part I YA AAUSC, 2022

55. ….Other Rules of Conduct d. Contingent Fees Basing fees on the outcome of engagements is prohibited e. Commissions and Referral Fees CPAs are prohibited from receiving commissions from a client to whom they provide attestation services Commissions are permissible if it is from other clients, but they must be disclosed. Referral fees for recommending or referring the services of another CPA are not considered commissions and are not restricted . However, any referral fees for CPA services must also be disclosed. 55 Auditing part I YA AAUSC, 2022

56. …Other Rules of Conduct f. Advertising and Solicitation CPAs are prohibited from advertising or solicitation that is false, misleading, or deceptive g. Form of Organization and Name Restrict the permissible forms of organization and prohibit CPAs from practicing under a firm name that is misleading 56 Auditing part I YA AAUSC, 2022

57. …Other Rules of Conduct h. Discreditable Acts CPAs shall not commit an act discreditable to the profession Examples of discreditable acts: Signing a false or misleading opinion or statements (failure to follow professional standards, government regulations), failure to return clients records, a situation that arise when the CPA have been discharged and not paid for their services, i. Enforcement The ethical responsibilities of CPAs are enforced by the AICPA for members and by state boards of accountancy for licensed CPAs. 57 Auditing part I YA AAUSC, 2022

58. End of Chapter 2: Part II- 1 Questions 58 Auditing part I YA, AAUSC, 2022