Auditing and Assurance Services

Seventeenth Edition, Global Edition

Chapter 25
Professional Ethics

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Learning Objectives (1 of 2)
25.1 Distinguish ethical from unethical behavior in personal
and professional contexts
25.2 Resolve ethical dilemmas using an ethical framework
25.3 Explain the importance of ethical conduct for the
accounting profession
25.4 Describe the purpose and content of the AICPACode
of Professional Conduct

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Learning Objectives (2 of 2)
25.5 Apply the AICPACode rules and interpretations on
independence and explain their importance
25.6 Understand the Sarbanes–Oxley Act and other SE C
and PCAO B independence requirements and
additional factors that influence auditor independence
25.7 Understand the requirements of other rules under the
AICPACode
25.8 Describe the enforcement mechanisms for CPA
conduct

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What Are Ethics?
• Ethics can be defined broadly as a set of moral principles
or values
• Ethical behavior is necessary for a society to function in
an orderly manner
• The need for ethics in society is sufficiently important that
many commonly held ethical values are incorporated into
laws

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Why People Act Unethically
• Most people define unethical behavior as conduct that
differs from what they believe is appropriate given the
circumstances
• There are two primary reasons why people act
unethically:
– The person’s ethical standards are different from those
of society as a whole
– The person chooses to act selfishly

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Figure 25.1 Illustrative Prescribed
Ethical Principles

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Special Need for Ethical Conduct in
Professions
• Professionals are expected to conduct themselves at a
higher level than most other members of society
• Public confidence in the quality of professional services is
enhanced by high standards of performance and conduct
• It is essential that:
– Client and external financial statement users have
confidence in the quality of audits and other services
– Users regard CPAfirms as competent and unbiased

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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
– The primary beneficiaries of the audit are financial
statement users

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Figure 25.2 Ways the Profession and
Society Encourage C P As to Conduct
Themselves at a High Level

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Code of Professional Conduct (1 of 2)
• Members of the A I C P A agree to follow the A I C P A Code of
Professional Conduct
• The Code consists of:
– Principles that provide the framework for the rules that
govern the CPA’s performance of professional
responsibilities
– Rules of Conduct that must be followed by members
– Interpretations of the rules to address circumstances
members may face that are threats to compliance with
the rules of conduct

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Code of Professional Conduct (2 of 2)
• Rules of conduct are enforceable and many practitioners
refer to them as the A I C P A Code of Professional Conduct
• When practitioners conduct themselves at the minimum
level set up the profession, it does not imply unsatisfactory
conduct
• The profession has presumably set the standards
sufficiently high to make the minimum conduct satisfactory

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Table 25.2 Principles of Professional
Conduct (1 of 2)
Principle Description
Responsibilities In carrying out their responsibilities as professionals, members
should exercise sensitive professional and moral judgments
in all their activities.
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.

Integrity To maintain and broaden public confidence, members should

perform all professional responsibilities with the highest
sense of integrity.

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Table 25.2 Principles of Professional
Conduct (2 of 2)
Principle Description
Objectivity and A member should maintain objectivity and be free of conflicts of
Independence interest in discharging professional responsibilities. A
member in public practice should be independent in fact and
appearance when providing auditing and other attestation
services.
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.
Scope and Nature A member in public practice should observe the principles of
of Services the Code of Professional Conduct in determining the scope
and nature of services to be provided.

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Table 25.3 Threats to Compliance with
Rules Under the A I C P A Code of
Professional Conduct (1 of 3)

Threat Definition Example of a Threat

Adverse The threat that a member will not act with An officer, director, or significant
interest objectivity because the member’s interests shareholder participates in
are opposed to the attest client’s interests. litigation against the firm.

Advocacy The threat that a member will promote an A member endorses an attest
attest client’s interest or position to the point client’s services or products.
that his or her objectivity or independence
is compromised.
Familiarity The threat that, due to a long or close A member’s close friend is
relationship with an attest client, a member employed by the client.
will become too sympathetic to the client’s
Interest or too accepting of the client’s work
or product.

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Table 25.3 Threats to Compliance with
Rules Under the A I C P A Code of
Professional Conduct (2 of 3)

Threat Definition Example of a Threat

Management The threat that a member will take on the role Due to a loss of client personnel,
Participation of an attest client management or otherwise the attest client asks a member
assume management responsibilities, such firm to assist with accounting
as may occur during an engagement to activities, including the
provide nonattest services. authorization of transactions.
Self-interest The threat that a member could benefit, The member has a financial
financially or otherwise, from an interest in, interest in an attest client, and
or relationship with, an attest client or the outcome of a professional
persons associated with the client. services engagement may
affect the fair value of the
financial interest.

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Table 25.3 Threats to Compliance with
Rules Under the A I C P A Code of
Professional Conduct (3 of 3)
Threat Definition Example of a Threat
Self-review The threat that a member will not The member performs
appropriately evaluate the results of a bookkeeping services for the
previous judgment or service performed or attest client and then performs
supervised by the member or an individual an audit of those financial
in the member’s firm and that the member statements.
will rely on that service in forming a
judgment as part of another service.
Undue The threat that a member will subordinate his The client indicates that it will not
influence or her judgment to an individual associated award additional engagements
with a client or any relevant third party due to the firm if the firm continues
to that individual’s reputation or expertise, to disagree with the client on
aggressive or dominant personality, or an accounting or tax matter.
attempts to coerce or exercise excessive
influence over the member.

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Figure 25.3 Standards of Conduct

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Independence Rule (1 of 3)
• 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

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Independence Rule (2 of 3)
• 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

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Independence Rule (3 of 3)
• Significant issues and interpretations involving
independence:
– Financial interests
– Related financial interest issues
– Consulting, bookkeeping, and other nonattest services
– Litigation between CPA firm and client
– Unpaid fees
– Network of firms

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Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Learning Objective 25.6
Understand the Sarbanes–Oxley Act and other SEC and
PCAOB independence requirements and additional factors
that influence auditor independence

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Sarbanes–Oxley and Related
Independence Requirements (1 of 2)
• 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

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Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Sarbanes–Oxley and Related
Independence Requirements (2 of 2)
• There are other independence rules related to the
following:
– Conflicts arising from employment relationships
– Partner rotation
– Ownership interests
– Shopping for accounting principles (“opinion
shopping”)
– Engagement and payment of audit fees by
management

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 Cancelled Parts
Objective 2: Ethical Dilemmas
Objective 7: Other Rules of Conduct
Objective 8: Enforcement

Pages
788 - 791
805 - 814

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