Chapter 2.docx

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University of Toronto Scarborough
Financial Accounting
Henry Wong

Chapter 2: Ethics, Legal Liability, and Client Acceptance 2.1 The Fundamental Principles of Professional Ethics generally speaking, ethics are the standards of behaviour that promote human welfare or the overall public good Integrity integrity the obligation that all members of the accounting professional bodies be straightforward and honest members should not be associated with information that is materially false or misleading Objectivity objectivity the obligation that all members of the professional bodies not allow their professional feelings or prejudices to influence their professional judgment members should be unbiased and not allow a conflict of interest or influence of others to impair their decision process Professional competence and due care professional competence the obligation that all members of the accounting professional bodies maintain their knowledge and skill at a required level due care the obligation to complete each task thoroughly, document all work, and finish on a timely basis Confidentiality confidentiality the obligation that all members of the professional bodies refrain from disclosing information that is learned as a result of their employment to people outside of their workplace an exception is made where a client has allowed this disclosure to occur or where there is a legal requirement to disclose such information members are also 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 professional behaviour the obligation that all members of the professional bodies comply with rules and regulations and ensure that they do not harm the reputation of the profession 2.1.1 Specific rules incorporating the principles of professional ethics a fee can be provided only when requested by the potential client fee quotes cannot be provided to a client without adequate knowledge of the work to be performed fee quotes cannot be significantly lower than the fees charged by a predecessor firm advertising must be in good taste and it cannot be false or misleading or make unsubstantiated claims 2.2 Association and Independence association occurs when a public accountant is involved with financial information there are 3 ways in which association can happen: 1. when the public accountant performs a service or consents to the use of his or her name implying that a service was performed with the information 2. when a third party indicates, without the consent of the public accountant, that he or she is associated with the info 3. when a third party assumes that the public accountant is associated with the information independence the ability to act with integrity, objectivity, and professional scepticism it is fundamental to every audit and must be adhered to by every auditor who provides assurance services it is the responsibility of those charged with governance (the board of directors and management) in a company to ensure that the financial statements meet these requirements it is the responsibility of the external auditor to form an opinion on the fair presentation of the financial statements there are two forms of independence: o Independence of mind is the ability to act with integrity, objectivity, and professional scepticism. It is the ability to make a decision that is free from bias, personal beliefs, and client pressures. Independence of mind is also referred to as actual independence. o Independence in appearance is the belief that independence of mind has been achieved. It is not enough for an auditor to be independent of mind; they must also be seen as independent. Auditors must consider their actions carefully and ensure that nothing is done to compromise their independence both of mind and in appearance.2.2.1 Threats to independence the rules of professional conduct identify 5 key threats to auditor independence they are self-interest, self-review, advocacy, familiarity, and intimidation threats self-interest threat can occur when an accounting firm or its staff has a financial interest in an assurance client self-review threat can occur when the assurance team needs to form an opinion on their own work or work performed by others in their firm advocacy threat can occur when a firm or its staff acts on behalf of its assurance client familiarity threat the threat that can occur when a close relationship exists or develops between the assurance firm (staff) and the client (staff) intimidation threat can occur when a member of the assurance team feels threatened by client staff or directors reporting issuer public company with market capitalization and a book value of total assets greater than $10 million some of the additional requirements to ensure auditor independence for reporting issuers include the following: o audit partners must be rotated every 7 years, with a 5-year break from the audit engagement o audit committee must pre-approve all services provided to the client by the firm o audit partners may not be directly compensated for selling non-assurance services to the audit client o when an engagement team member accepts employment in a financial reporting role with a client, the firm must refrain from being the auditor of that client for at least 1 year from the date the financial statements were filed with security regulators 2.2.2 Safeguards to independence safeguards are mechanisms that have been developed by the accounting profession, legislators, regulators, clients, and accounting firms, which are used to minimize the risk that a threat will surface and to deal with a threat when one becomes apparent Safeguards created by clients corporate governance the rules, systems, and processes within companies used to guide and control independent directors non-executive directors without any business or other ties to the company Safeguards created by accounting firms Threats to Independence Safeguards to Independence Self-interest threat o policies and procedures within an accounting firm identifying any staff with financial interest in an assurance client
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