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MGAD10H3 (23)
Kevin Ha (16)
Chapter 2

MGTD60 - Chapter 2

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University of Toronto Scarborough
Financial Accounting
Kevin Ha

MGTD60H3 - Chapter 2 - Ethics, Legal Liability, and Client Acceptance 2-1 - The Fundamental Principles of Professional Ethics •Generally, ethics are standards of behaviour that promote human welfare or the overall public "good" •In the accounting profession, ethics are standards of behaviour that promote the welfare of society and the accounting profession •Each of the 3 professional accounting bodies has a code of professional conduct •The principles are to act with integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour. •What makes a profession? (1) There is mastery of an intellectual skill due to extensive training and education (2) Services are offered to others for free (3) There is an independent society or institute that sets and maintains the standards to ensure members are qualified and competent (4) There is a code of conduct established and enforced by the society or institute •Integrity - Obligation that all members be straightforward and honest - Not be associated with information that is false and misleading •Objectivity - Not allow personal feelings or prejudices to influence their professional judgement - Should be unbiased and not allow conflict of interest •Professional Competence and Due Care - Must maintain their knowledge and skill at a level required by the professional bodies - Must attain a level of comepetence through education and training - Must keep up to date with changes in regulations and standards - Must act diligently, take care to complete each task thoroughly, document all work, and finish on a timely basis •Confidentiality - Must refrain from disclosing information that is learned as a result of their employment to people outside their workplace - Not allowed to use information to their advantage or to the advantage of another person that has been gained as a result of their employment and is not publicly available •Professional Behaviour - Must comply with rules and regulations and ensure that they maintain the reputation of the profession - Must be honest in their representations to current and prospective clients - Should not claim to be able to provide services that are not able to provide - Should not claim to possess qualifications that they do not possess - Should not claim to have gained experience in areas where they have little or none - Not undermine the quality of work provided by others or question their reputation 2-2 - Auditor's Association and Independence •Association - The term used to indicate a public accountant's involvement with financal information •Association can happen in 3 ways: (1) When the public accountant peforms a service or consents to the use of his/her name implying that a service is performed with the information (2) When a third party indicates, without consent of the PA, that he/she is associated with the information (3) When a third party assumes that the public accountant is associated with the information •When PA is associated with information, he/she must comply with the rules of professional conduct and requirements of the CICA Handbook •PA's association with information mut be clearly communicated to ensure PA's are not associating with false and misleading information •Independence - The ability to act with integrity, objectivity, and professional scepticism - An external auditor is referred to as an independent auditor which highlights the independence in audit engagement - If an auditor is nt independent of their client, it will affect credibility and reliability of the financial statements •Two forms of Independence: (1) Independence of Mind (Actual Independence) - Ability to act with integrity, objectivity, and professional scepticism - Ability to make a decision that is free from bias, personal beliefs, and client pressures (2) Independence in Appearance (Perceived Independence) - Belief that independence of mind has been achieved - Auditors must be seen as independent •Threats to Independence: (1) Self-interest Threat - When an accounting firm or its staff has a financial interest in an assurance client (page 55 for examples) (2) Self-review Threat - When the assurance team forms an opinion on their own work or work performed by others in their firm (page 55 for examples) (3) Advocacy Threat - When an accounting firm and its assurance staff ats or is believed to act on behalf of its assurance client (page 56 for examples) (4) Familiarity Threat - When a close relationship exists or develops between assurance firm (staff) and the client (staff) (page 56 for examples (5) Intimidation Threat - When a member of the assurance firm feels threatended by client staff or directors - Reporting Issuer - A public company with a market capitalization and a book value of total assets greater than $10 million •Safeguards to Independence - Safeguards created by the profession, legislation, or regulation: - Includes education of accountants about the threats to independence and the establishment of a code of ethics - For reporting issuers, legislation requires that an auditor be independent and that a communication of independence be issued to the client annually - Safeguards created by clients: - Corporate Governance - The rules, systems, and processes within companies used to guide and control - The establishment of audit committee to liaise between the assurance partner and management to enhance independence -Indepedent Directors - Non-executive directors without any business or other ties to the company - Clients can put in place policies and procedures dedicated to ensuring that the assurance team has access to all required documents and records when required - Safeguards created by accounting firms: - Client acceptace and continuance procedures to ensure that they identify threats - Partner rotation policies - Policy of peer review - Establish procedures for staff to follow if they become aware of a threat *Summary of Independence Threats and Safeguards page 59-60* 2-3 - The Auditor's Relationships with Others •Auditors and Shareholders - The audit report is address to the shareholders of the company being audited - Main recepients of the financial statements and the attached audit report - Auditors will not often meet with the shareholders except client's annual general meeting, with the exception of major shareholders - Shareholders are in charge for the appointment and removal of their company's auditors - The board usually decides and they will recommend to the shareholders •Auditors and the Board of Directors - Auditors represent the shareholders and oversees the acivities of a company and its management - Ensure that the company is being run to benefit the shareholders - Executive Directors - Part of the management and therefore full-time employees - Non-executive Directors - Not part of the company's management and their involvement is limited to preparing for and attending oard meetings and relevant committee meetings; better representatives of shareholders - Audit partner will meet with members of the board when necessary throughout the audit - Majority of the board members should be indepedent directors - Boards of larger companies have a series of commitees to specifically deal with important issues - Auditor usually deals with the audit committee •Auditors and the Audit Committee - Acts on behalf of the full board of directors to ensure that the financial statements are fairly presented and that the external auditor has access to all records and other evidence required tofor
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