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Chapter 3

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ACC 521
Kathryn Bewley

CHAPTER 3: AUDITORS’ ETHICALAND LEGAL RESPONSIBILITIES Introduction • Auditors are responsible to the society; their responsibility can be divided into 3 categories: o Moral o Professional o Legal Moral responsibilities: Auditor responsibilities to conform to broad social norms of behavior Professional responsibilities: the rules and principles for the proper conduct of an auditor in her work; necessary to obtain the respect and confidence of the public, achieve order within the profession, and provide a means of self-policing the profession; also known as professional ethics. Legal responsibilities: The risks auditors accept in a court of law while practicing public accounting o These risk s include risks that arise from failing to use due care in the conduct of the audit. General ethics Two aspects of ethics operate in the professional environment: 1) General ethics (the spirit or principles) 2) Professional ethics (the rules) • Ethical behavior in auditing is no more than special application of the general notion of ethical conduct devised by philosophers for men • Ethical conduct in auditing draws its justification and basic nature from the general theory of ethics Overview Ethics: that branch of philosophy which is the systematic study of reflective choice, of the standards of right and wrong by which it is to be guided, and the goods toward which it may ultimately be directed Three elements of ethics: 1) It involves questions requiring reflective choice (decision problems) 2) Involves guides of rights and wrong (moral principles) 3) It is concerned with the consequences of decisions Ethical problem: a problem exists when you must make a choice among alternative actions and the right choice is not absolutely clear Ethical dilemma: A problem that arises when a reason to act in a certain way is offset by a reason to not act that way Critical Thinking: the process of justifying one’s conclusion or decision by providing good or acceptable reasons. Ethical behavior consists of the following: 1) It is that which produces the greatest good 2) It is that which conforms to moral rules and principles An ethical Decision Process • Reflective choice involves an important sequence of events, beginning with recognizing decision problems • Collecting evidence refers to thinking about rules of behavior and outcomes of alternative actions • The process ends by analyzing the situation and taking action Philosophical principles in ethics Monistic theories: ethical theories that assume universal principles apply regardless of the specific facts of a situation Pluralistic theories: ethical theories that assume that there are no universal principles and that the best approach is to use the principles that is most relevant to a particular case Deontological (Kantian) ethics: The moral theory that an action is right if it is based on a sense of duty or obligation Imperatives: universal principles assumed by monistic moral theories Consequentialism: a moral theory that the choice of action is made based solely on the consequence; that is that it maximizes utility; note that economies and business are based on this theory Utilitarianism: a moral theory that the right choice is the one which results in the greatest good for the greatest number of people Moral imagination: Part of ethical reasoning where one has the ability to imagine others’ feelings about the consequences of a decision Professional skepticism and critical thinking Professional skepticism: an auditor’s tendency to question management representation and look for corroborating evidence before accepting them • Professional skepticism means recognizing that circumstances causing the financial statements to be materially misstated may exist o Note that implementing this concept of skepticism, the auditor first needs to define “misstatement” and “materiality” and then implement them in practice • Professional skepticism is inherent in applying due care In accordance with general standards • The relationship between truthfulness, meaning, and the actual words used in the auditor’s report and in the financial statements that are referenced in the report are all part of the auditor’s critical thinking process • The belief that the potential for conflict of interest always exists causes auditors to perform procedures in search of misstatements and omissions that would have a material effect on the financial statements o This tends to make audits more extensive and expensive • Once audit procedures give them evidence that financial misstatements are not misleading, the audit team must be willing to accept that fact and left go of skepticism Critical-thinking framework: Principles and concepts to help structure you’re thinking so that your conclusions will be more justified • Auditors relies on the fundamental principles, such as fairness of presentation and in the circumstances, meeting the public interest and maintaining the reputation of the profession • Critical thinking means involving principles in your analysis of an issue o The principles of a questioning mind, or skepticism, which represents mental attitude incorporating all the rest of the critical thinking principles ( ethics of virtue/ character) • The goal of the critical thinking framework reflect the ideal audit virtues o Doing the right things and learning the truth is the way of summarizing the traditional audit virtues of objectivity, integrity, skepticism, professional competence, due care, independence, confidentiality and professional behavior Steps of the critical thinking framework: Step 1: Clarifying the auditor’s role in an engagement Step 2: identifying what issues need to be resolved in the engagement Step 3: Using moral imagination to make sure all moral and ethical issues have been taken into account o Moral imagination is required to see things from management’s point of view and from the investor’s point of view Step 4 and 5: Reflect the role of logic, or the need for justification in critical thinking o Applying logic means identifying reason supporting a claim or conclusion o There must be a link between the reason and the conclusion • critical thinking involves questioning the application of a standard, the concepts and principles underlying it and the consistency of standards to one another • Questioning of standards may go back to questions about goals of financial reporting, as is becoming evident with the CAS’s new classification of financial reporting frameworks in general purpose versus special purpose, and fairness of presentation verses compliance with objectives • CAS 200.013 new distinguishes between “compliance” and “fair presentation” financial reporting frameworks Professional Judgment: critical thinking on accounting issues and evidence related to them • Critical thinking framework can be use for deciding when audit conclusion is justified Code of professional Ethics • The ICAO member’s handbook, identifies the various activities and regulation in Ontario and includes a section on professional conduct that is divided into 3 parts: 1) The foreword 2) The rules of professional conduct 3) The interpretation of the rules • The forewords has the following defined sections o FIRST SECTION: sets out the purpose of the rules, which is to guide the profession in serving the public o SECOND SECTION: reviews the key characteristics that mark a profession and a professional, concluding that “chartered accountancy is a profession” o THIRD SECTION: identifies 6 fundamental statements of accepted conduct 1) The member should act to maintain the profession’s reputation 2) Member should use due care and maintain his or her professional competence 3) Member should maintain the appearance of independence as well as the fact of independence of their professional judgment 4) Member should preserve client confidentiality 5) Members should base their reputation on professional excellence 6) Member should show professional courtesy to other members • The foreword singles out several principles o Sustaining of profession competence o Avoiding conflict of interest in respects to client’s affairs o Practice development based on professional excellence rather than self-promotion • The interpretation of rules section provides detailed explanations to help members understand applications of the rules. Serving the Public Interest • Auditors convicted of minimal offenses or fraud could have their certification revoked. • Rules 205 relates to the auditor not being associated with misleading financial information o This rule clarifies what it means to serve the public with interest as an auditors o The responsibility to the public is paramount Independence and objectivity • Independence is a way of achieving objectivity and it is the term given to the objectivity required in a special case of assurance engagement •
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