Professional Ethics

1. Professional Ethics Independence is the big issue

2. auditorsINDEPENDENCEDAY

3. Auditors Work for Banking Clients, Not Investors:  Resistance to Disclosing Subprime Poison Repurchase Risk "Auditors Aren’t Forcing Full Repurchase Risk Exposure Disclosure," by Francine McKenna, re:TheAuditors, September 27, 2010 ---

5. Page 81 • CPA firms are engaged by management for private companies or the audit committee for public companies, and are paid by the company issuing the financial statements, but the primary beneficiaries of the audit are financial statement users.

6. John What is the second General Standard ?

7. 2nd general standard The auditor must maintain independence in mental attitude in all matters relating to the audit

8. p. 75-81 ethical dilemma- p. 82-85 Code of Professional Conduct p. 85-92 Independence p. 93-101 read the rule in the highlighted box Handout 101-1 interpretation of rule 101 101-5 Loans -- be familiar don’t learn Definitions -- Good

9. Resolving Dilemmas p. 78Problem Solving • Obtain relevant facts • Identify issues • Determine who is affected and how they are affected • Identify alternatives • Identify the benefits and consequences of each alternative • Decide on appropriate alternative

10. Bryan’s Dilemma page 79 • Eating Time • Signing off audit procedures that were not performed • Client will change auditors if you qualify your report • Audit fee contingent upon reported earnings

11. AICPA Principles v Rules

12. David Conceptually, what is the difference between a rule and a principle ?

13. AICPA’s Code of Professional Conduct p 82 principles Ideal standards of ethical conduct in philosophical terms Principles are not enforceable rules of conduct establish minimum standards of acceptable conduct rules are enforceable

14. Katie What are the six principles of professional conduct?

17. Page 83

18. responsibilities in carrying out their responsibilities as professional, members should exercise sensitive professional and moral judgments in all their activities 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

19. integrity tomaintain and broaden public confidence, members should perform all professional responsibilitieswith the highest sense of integrity 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.

20. due care A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibilities to the best of the member’s ability scope and nature of services observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided

21. Sources AICPA, SEC & PCAOB are consistent

22. SEC guiding principles not in book Independence in fact Independence in appearance Auditors are not independent if relationships Create mutual or conflicting interests with client Audit their own work Act as management or employee of the client Be an advocate for the client

23. SEC prohibited service page 86 Bookkeeping and accounting services Financial info system design & implementation Appraisal or valuation services Actuarial services Internal audit outsourcing Management or HR functions Broker, investment advisor, investment banking Legal services

24. Rules of Conduct

31. Interpretation of Rule 101-1 handout • .. Covered member • Direct financial interest or material indirect financial interest in the audit client • Trustee of trust or executor of estate … • Joint investments with the client (or client’s Mgmt) • Loans to or from the client • Prof Employee - Member of group owning > 5% • Prof Employee - Director or any capacity equivalent to management

32. rule 101 independence handout A covered member period of engagement • Direct or Material Indirect financial interest • Trustee or Executor • Jointly held investment with the client • Loans (some exceptions 101-5 handout) Bgroup of prof employees, partners, immediate families period of engagement Own 5% of client’s equity securities C professional employee, partner, firm period of engagement period covered by financial statements Any capacity equivalent to management Covered members Group of Prof Emp Prof Employees

33. rule 101 independence handouts A covered member • Direct or Material Indirect financial interest • Trustee of Executor • Jointly held investment with • Loans (some exceptions 101-5 handout) Bgroup of prof employees, partners, immediate families Own 5% of client’s equity securities C period covered by financial statements professional employee, partner, firm Any capacity equivalent to management Period of the engagement and Period covered by Fin State

34. rule 101 independence handout A covered member period of engagement • Direct or Material Indirect financial interest • Trustee or Executor • Jointly held investment with the client • Loans (some exceptions 101-5 handout) Bgroup of prof employees, partners, immediate families period of engagement Own 5% of client’s equity securities C professional employee, partner, firm period of engagement period covered by financial statements Any capacity equivalent to management

35. critical periods of time

36. critical periods of time • period covered by the financial statements • period of the professional engagement

37. 1/1/11 12/31/11 1/28/12 3/11/12 3/15/12 period covered by financial stateengagementopinion

38. critical periods of time • financial interests • positions equivalent to being a member of management

39. Andrea can a partner (in the engagement office) resign her position on the client’s board of directors before the audit begins without jeopardizing the accounting firm’s independence

40. can a partner (in the engagement office) resign her position on the client’s board of directors before the audit begins without jeopardizing the accounting firm’s independence 1/1/11 12/31/11 1/28/12 3/15/12 period covered by financial state engagement opinion

41. Chelsea W can a staff person, assigned to the engagement, sell their stock before the audit begins without jeopardizing the accounting firm’s independence ?

42. can a staff person, assigned to the engagement, sell their stock before the audit begins without jeopardizing the accounting firm’s independence ? 1/1/11 12/31/11 1/28/12 3/15/12 period covered by financial state engagement opinion

43. Lian can the engagement partner sell their stock before the audit begins without jeopardizing the accounting firm’s independence

44. can the engagement partner sell their stock before the audit begins without jeopardizing the accounting firm’s independence 1/1/11 12/31/11 1/28/12 3/15/12 period covered by financial state engagement opinion

45. financial interest • the period covered by the financial statements • the period of the professional engagement • the time of expressing an opinion 1/1/11 12/31/11 1/28/12 3/15/12 period covered by financial state engagement opinion

46. positions equivalent to being management connected with the client .... in any capacity equivalent to that of a member of management or of an employee trustee for any pension fund or profit sharing trust of the client

47. any management capacity • the period covered by the financial statements • the period of the professional engagement • the time of expressing an opinion 1/1/11 12/31/11 1/28/12 3/15/12 period covered by financial state engagement opinion

48. covered member

49. Rory which members of the accounting firm are included in the phrase covered member ?

50. Covered member page 89 • Individuals on engagement • Individuals in a position to influence the engagement • Partner or manager providing > 10 hrs non-audit work • Partners in same office as engagement partner • The firm and its employee benefit plan • Any entity controlled by covered members