CHAPTER 3

PROFESSIONAL ETHICS
Learning Check
3.1. General ethics attempts to deal with two questions that can serve as guides
to behavior: (1) "What good do I see!" and (") "What is m# obligation in
this circumstance!" General ethics attempts to deal with these questions b#
de$ining what is good $or the individual and societ#% and b# tr#ing to
establish the nature o$ obligations or duties that individuals owe themselves
and each other.
3&". 'he ethical absolutist school o$ thought sa#s there are universal standards
that do not change over time that appl# to ever#one. 'he ethical relativist
school o$ thought sa#s that people(s ethical )udgments are determined b# the
changing customs and traditions o$ societ# in which the# live.
3&3. 'he si* steps in one general $ramewor $or ethical decision maing are:
+btain the $acts relevant to the decision.
Identi$# the ethical issues $rom the $acts.
,etermine who will be a$$ected b# the decision and how.
Identi$# the decision maer(s alternatives.
Identi$# the consequences o$ each alternative.
-ae the ethical choice
3&.. a. /ro$essional ethics include standards o$ behavior $or a pro$essional
person that are designed $or both practical and idealistic purposes. 'he#
must be both realistic and en$orceable0 the# should be above the law but
below the ideal.
.b /ro$essional ethics are imposed b# a pro$ession on its members who
voluntaril# accept standards o$ pro$essional behavior more rigorous than
those required b# law. 'he# are generall# promulgated through a code o$
ethics.
3&1. a. 'he core values identi$ied in the 2/3 4ision /ro)ect are (1) continuing
education and li$elong learning% (") competence% (3) integrit#% (.)
attunement to business issues% and (1) ob)ectivit#.
b. 2ontinuing education and li$elong learning is important to ensuring the
public con$idence in a 2/3s abilit# to maintain cutting edge sills in a
rapidl# changing environment. 2/3s must demonstrate competence in
G33/% G335% and in their abilit# to understand the connection
between business per$ormance and reported $inancial per$ormance in
order to earn the public6s trust. Integrit#% which means practicing with
honest# and acting with pro$essional ethics% is critical earning the public
trust. 3 2/3s opinion on the $inancial statements would be worthless
without con$idence that 2/3s are honest and act with integrit#.
3ttunement to broad business issues is what separates 2/3s $rom other
pro$essionals and allows 2/3s to e*ercise the pro$essional )udgment
that is so important in accounting and auditing. 7inall#% ob)ectivit# and
the $reedom o$ bias or con$licts o$ interest allows 2/3s to earn both a
client6s and the public6s trust. In combination% these core values have
helps 2/3s earn a reputation $or being a trusted in their role as
independent auditors.
3&8. 'he /ro$essional 9thics 'eam o$ the 3I2/3 $unctions through an e*ecutive
committee that is responsible $or:
/lanning the programs o$ the division(s subcommittees and supervising
their implementation.
Issuing $ormal polic# statements and pronouncements
9stablishing prima $acie violations o$ the 2ode or b#laws $or possible
disciplinar# action.
/roposing changes in the 2ode.
3&:. a. 'he two sections o$ the 3I2/3(s 2ode o$ /ro$essional 2onduct are (a) the
/rinciples and (b) the ;ules o$ 2onduct. 'he two t#pes o$
pronouncements related to them are Interpretations o$ the ;ules o$
2onduct and 9thics ;ulings.
b. +nl# the ;ules o$ 2onduct are meant to be en$orceable. <owever% the
2/3 must )usti$# an# departures $rom the Interpretations and 9thics
;ulings.
3&=. a. 'he term practice o$ public accounting means per$ormance $or a client%
b# a member or a member(s $irm% while holding out as 2/3(s)% o$ the
pro$essional services o$ accounting% ta*% personal $inancial planning%
litigation support services% and those pro$essional services $or which
standards are promulgated b# bodies designated b# 2ouncil.
b. 'he term holding out re$ers to an# action initiated b# a member that
in$orms others o$ his or her status as a 2/3 or 3I2/3 accredited
specialist.
3&>. a. 'he principles e*press the basic tenets o$ ethical conduct and provide
the $ramewor $or the rules.
b. 'he principles and their essence are:
;esponsibilities & members should e*ercise sensitive pro$essional
and moral )udgments in all their activities.
/ublic interest & members should serve the public interest% honor the
public trust% and demonstrate commitment to pro$essionalism.
Integrit# & members should have the highest sense o$ integrit#.
+b)ectivit# and independence & a member should maintain
ob)ectivit# and be $ree o$ con$licts in all engagements and be
independent in $act and in appearance in rendering auditing and
attest services.
,ue care & a member should observe the pro$ession6s standards%
strive continuall# to improve competence and the qualit# o$ service%
and discharge responsibilities to the best o$ the member(s abilit#.
5cope and nature o$ services & the /rinciples o$ the 2ode should be
observed in determining the scope and nature o$ services to be
provided.
3.1?. a. 'he authorit# o$ the rules is provided in the b#laws o$ the 3I2/3.
b. 'he rules di$$er in their applicabilit#. 5i* rules appl# onl# to members in
public practice whereas the remainder appl# to all members.
3&11. a. ;ule 1?1 states: 3 member in public practice shall be independent in the
per$ormance o$ pro$essional services as required b# standards
promulgated b# bodies designated b# 2ouncil.
b. 'he bodies that have issued technical standards that require a member to
be independent are the 3uditing 5tandards @oard and the 3ccounting
and ;eview 5ervices 2ommittee.
3&1". a. 'he e*pression "a member or a member(s $irm" includes:
3ll individuals (o$ an# ran) participating in the engagement% e*cept
those who per$orm onl# routine clerical $unctions% such as t#ping
and photocop#ing.
3ll individuals with a managerial position located in an o$$ice
participating in a signi$icant portion o$ the engagement (e.g.% the
director o$ human resources).
3ll proprietors% partners% or shareholders o$ the member(s $irm%
whether or not participating in the engagement.
3n# entit# ($or e*ample% a partnership% corporation% trust% )oint
venture% or pool) whose operating% $inancial% or accounting policies
can be controlled b# one or more o$ the persons described above or
b# two or more such persons i$ the# choose to act together.
b. 'here are three time periods:
'he period o$ the auditor(s pro$essional engagement% which includes
audit planning and both interim and #ear&end $ield wor.
'he period covered b# the $inancial statements% which is the client(s
$iscal #ear.
'he time o$ e*pressing the auditor(s opinion% which is the date o$ the
auditor(s report.
3&13. a. 7irst% a member o$ his $irm cannot have (or be committed to have) an#
direct $inancial interest in a client such as owning stoc. 3n indirect
$inancial interest e*ists when a member or his $irm owns stoc in a
mutual $und that% in turn% owns stoc in the client or when a member(s
nondependent close relative has a $inancial interest in the client. 3n
indirect $inancial interest cannot be material. 5econd% a member is not
allowed to have a )oint closel# held business investment with a client or
o$$icers% directors% or principal stocholders that is material. 'hird% a
member is not permitted to have an# loan to or $rom a client or the
individuals mentioned above which is not made under normal lending
terms.
b. 'he t#pes o$ business relationships that are prohibited are those in
which the member or member(s $irm (1) has signi$icant in$luence over
the operating% $inancial% or accounting policies o$ the client or (") is
involved in "audit&sensitive" activities within the client(s organiAation.
3&1.. a. Alternative practice structures are arrangements are what appears to be
a single accounting $irm ma# in $act be several separate legal entities.
b. 7ollowing are several e*amples o$ alternative practice structures. 'he
consulting practice o$ an accounting $irm ma# be part o$ an alternative
practice structure% with man# o$ the same shareholders as the accounting
and auditing practice% but di$$erent pro$it sharing arrangements.
+rganiAations lie 3merican 9*press have also purchased various
accounting $irms% emplo# the 2/3s directl#% and lease emplo#ees bac
to the 2/3 $irm which eeps its own identit# to per$orm attest wor.
c. 3 2ommon reason $or developing alternative practice structures is to
better manage the multi&disciplinar# environment that man# accounting
$irms compete in. 3lternative practice structures allow $irms to
establish di$$erent pro$it sharing arrangements in each practice structure
and to shield one part o$ the practice $rom the liabilit# e*posure o$
another part o$ the practice.
3&11. a. ;ule "?1 states: 3 member shall compl# with the $ollowing standards
and with an# interpretations thereo$ b# bodies designated b# 2ouncil.
b. 'he $our subcategoriAes are (1) pro$essional competence% (") due
pro$essional care% (3) planning and supervision% and (.) su$$icient
relevant data.
3&18. a. 'he essence o$ ;ule 3?1 is that a member in public practice shall not
disclose an# con$idential client in$ormation without the consent o$ the
client.
b. ;ule 3?" prohibits contingent $ees $or an# pro$essional service
whenever a member in public practice also per$orms (1) an audit or
review o$ a $inancial statement0 or (") a compilation o$ a $inancial
statement when the member e*pects% or reasonabl# might e*pect% that
a third part# will use the $inancial statement and the member(s
compilation report does not disclose a lac o$ independence0 or (3) an
e*amination o$ prospective $inancial in$ormation. 'he rule also
prohibits preparing an original or amended ta* return or claim $or a ta*
re$und $or a contingent $ee $or an# client.
3.1:. a. Bnder ;ule 1?1% a member is prohibited $rom (1) retaining client
records% (") discrimination in emplo#ment% (3) $ailure to $ollow
standards in government audits% and (.) negligence in the preparation
o$ $inancial statements.
b. Bnder ;ule 1?"% a member cannot engage in advertising or other
$orms o$ solicitation in a manner that is $alse% misleading% or deceptive.
5olicitation b# the use o$ coercion% overreaching% or harassing conduct
is also prohibited.
c. ;ule 1?3 states that a member in public practice shall not $or a
commission recommend or re$er to a client an# product or service or
an# product or service to be supplied b# a client% or receive a
commission when the member or the member(s $irm also per$orms $or
that client (1) an audit or review o$ a $inancial statement0 (") a
compilation o$ a $inancial statement and the member(s compilation
report does not disclose a lac o$ independence0 or (3) an e*amination
o$ prospective $inancial in$ormation.
3&1=. a. ;ule 1?1 permits a 2/3 to practice public accounting onl# in a $orm o$
organiAation permitted b# state law or regulation whose characteristics
con$orm to resolutions o$ 2ouncil. ,epending on the state% this ma#
include a sole proprietorship% a partnership% a pro$essional corporation%
and a limited liabilit# partnership or corporation (CC/ or CC2).
b. Bnder ;ule 1?1% characteristics con$orming to resolutions o$ 2ouncil
include:
3 super ma)orit# (88 "D3E) o$ the ownership o$ a $irm must belong
to 2/3s. Fon&2/3 owners must be activel# engaged in providing
services to the $irm(s clients as their principal occupation.
+wnership b# others is considered against the public interest and
continues to be prohibited
3 2/3 must have ultimate responsibilit# $or all services provided
b# the $irm that are governed b# 5tatements on 3uditing 5tandards
or 5tatements on 5tandards $or 3ccounting and ;eview 5ervices.
Fon&2/3 owners must abide b# the 3I2/3 2ode o$ /ro$essional
2onduct% must meet certain education requirements% and complete
the same wor&related continuing pro$essional education
requirements as 2/3s.
3&1>. 'he two groups that are responsible $or en$orcing the rules are the 3I2/3
and state societies o$ 2/35. 'he ma*imum penalt# b# either group is
e*pulsion $rom membership.
3&"?. 'he purpose o$ G99/ is to mae en$orcement o$ the ;ules o$ 2onduct more
e$$ective and disciplinar# action more uni$orm. Bnder G99/% complaints
against a member ma# be $iled with either the 3I2/3 or the state societ#.
9ach group ma# act independentl# or )ointl#.
3&"1. 'he Goint 'rial @oard consists o$ at least 38 3I2/3 members. 'he trial
board becomes involved onl# when earlier en$orcement procedures have
$ound the complaint to be serious or the member involved has re$used to
cooperate. 'he trial board ma# (1) admonish the member% (") suspend the
member $or a period o$ no more than two #ears% or (3) e*pel the member.
3&"". Bnder the automatic disciplinar# provisions o$ the 3I2/3% suspension or
termination o$ membership can result without a hearing $or certain acts. 'he
actions that ma# invoe automatic disciplinar# provisions are:
3 crime punishable b# imprisonment $or more than one #ear.
Will$ul $ailure to $ile an# income ta* return that the member% as an
individual ta*pa#er% is required b# law to $ile.
'he $iling o$ a $alse or $raudulent income ta* return on the member(s or
a client(s behal$.
Will$ul aiding in the preparation and presentation o$ a $alse and
$raudulent income ta* return o$ a client.
Objective Questions
3&"3. 1. d ". b 3. a
3&".. 1. a ". a 3. c
3&"1. 1. b ". c 3. b
Comprehensive Questions
3&"8. (9stimated time & "? minutes)
a. /ro$essional ethics evolve over time and continue to be in the process
o$ change as the practice o$ public accounting changes. 3 code o$
ethics provides standards o$ behavior $or a pro$essional person that are
designed $or both practical and idealistic purposes. 3 code o$ ethics
signi$icantl# a$$ects the reputation o$ a pro$ession and the con$idence
in which it is held.
b. In some respects% the /rinciples section o$ the 2ode that e*presses the
basic tenets o$ ethical conduct% and that is more enduring% draws $rom
the ethical absolutists school o$ thought. In contrast% the ;ules o$
2onduct section% which is revised more $requentl# to re$lect changing
customs and traditions o$ societ#% draws $rom the ethical relativists
school o$ thought.
c. 9*ample 1: In auditing 2lient 3% the auditor discovers that 2lient 3
has been underbilled b# another client% 2lient @. 5hould the auditor
in$orm 2lient @ when doing the audit o$ @!
9*ample ": While per$orming a management consulting engagement%
the engagement team discovers an irregularit# that was missed b# the
separate audit engagement team that per$ormed the last annual audit.
,oes the 2/3 $irm have a responsibilit# to bring the matter discovered
b# the management consulting team to an#one(s attention!
d. 3ccording to the /reamble to the 3I2/3(s 2ode% the 2/3 has
responsibilities to the $ollowing three groups: (1) the public% (")
clients% and (3) colleagues.
3&":. (9stimated time & "1 minutes)
+btain the $acts relative to the decision: 'his would include determining
the speci$ics o$ the string o$ operating losses and the client(s current
$inancial position% data on the probabilit# and e$$ects o$ additional
operating losses% including an assessment o$ materialit# $rom the
perspective o$ potential users o$ the $inancial statements% and the speci$ics
o$ the $inancial statement and $ootnote disclosures management proposes
to mae.
Identi$# ethical issues $rom the $acts: 'he ethical issue relates to the need
to mae a decision on whether to require the client to mae the disclosure
based on a )udgment call when there ma# be evidence that di$$erent
auditors might reach di$$erent )udgments based on the same $acts. 'he
auditor ma# have di$$icult# reaching a )udgment% but the auditor must not
subordinate his or her )udgment to others.
,etermine who will be a$$ected b# the decision and how: 3mong the
staeholders are management% emplo#ees% customers% creditors% and
stocholders whose wel$are could be adversel# a$$ected b# the disputed
disclosure i$ it were to become a sel$&$ul$illing prophec# as $eared b#
management. +n the other hand% some o$ these staeholders might bene$it
$rom the disclosure now i$ in $act the entit# ultimatel# has to close down.
'he auditor is also a staeholder. 2ompelling the client to mae the
disclosure might result in loss o$ the client. @ut $ailure to require the
disclosure $ollowed b# the entit#(s having to discontinue operations could
leave the auditor vulnerable to charges o$ $ailing to compl# with
pro$essional standards% possibl# resulting in monetar# losses and damage
to the auditor(s reputation as well as the reputation o$ the pro$ession.
Identi$# the decision maer(s alternatives: 'wo alternatives are: (1) de$er
to the client(s reasoning and )udgment and do not require the disclosure%
and (") insist on the disclosure. In case o$ the latter% i$ the client re$uses to
go along% the auditor ma# have to issue a quali$ied or adverse opinion%
rather than an unquali$ied opinion with e*planator# language% or withdraw
$rom the engagement.
Identi$# the consequences o$ each alternative: 'he consequences are
d#namic and will liel# depend on whether the entit# does in $act have to
close down. I$ the auditor does not require the disclosure and the entit#
does have to close down due to continued losses% man# parties% including
the auditor% ma# su$$er adverse consequences. @ut mandating the
disclosure might induce negative consequences that could otherwise have
been avoided% or it might reduce the negative consequences that might
ensue $rom not maing the disclosure. ;egardless o$ whether the entit#
eventuall# has to shut down% the auditor(s giving in to the client(s position
could establish a precedent that would be di$$icult to overcome in $uture
dealings with the client% and i$ it were to become nown% in dealings with
other clients. 7urther% i$ the auditor subordinates his or her )udgment to
the client% he or she has violated the 3I2/3(s 2ode (;ule 1?") and is
sub)ect to sanctions.
-ae the ethical choice: 'his is each individual(s call.
3&"=. (9stimated time & "1 minutes)
a.a 'here are two integral sections o$ the 2ode:
/rinciples that e*press the basic tenets o$ ethical conduct and
provide the $ramewor o$ the ;ules.
;ules which govern the per$ormance o$ pro$essional services b#
members.
b. 'he principles are not en$orceable in their own right. 3ll o$ the rules
are en$orceable in their own terms.
c.a 'he si* principles (articles) are
;esponsibilities. In carr#ing out their responsibilities as
pro$essionals% members should e*ercise sensitive pro$essional and
moral )udgments in all their activities.
'he public interest. -embers should accept the obligation to act
in a wa# that will serve the public interest% honor the public trust%
and demonstrate commitment to pro$essionalism.
Integrit#. 'o maintain and broaden public con$idence% members
should per$orm all pro$essional responsibilities with the highest
sense o$ integrit#.
+b)ectivit# and independence. 3 member should maintain
ob)ectivit# and be $ree o$ con$licts o$ interest in discharging
pro$essional responsibilities. 3 member in public practice should
be independent in $act and appearance when providing auditing
and other attestation services.
,ue care. 3 member should observe the pro$ession(s technical and
ethical standards% strive continuall# to improve competence and
the qualit# o$ services% and discharge pro$essional responsibilit# to
the best o$ the member(s abilit#.
5cope and nature o$ services. 3 member in public practice should
observe the /rinciples o$ the 2ode o$ /ro$essional 2onduct in
determining the scope and nature o$ services to be provided.
d. /ossible courses o$ action are:
;esponsibilities & a member should cooperate with other members
to (1) improve the art o$ accounting% (") maintain the public(s
con$idence in the pro$ession% and (3) carr# out the pro$ession(s
sel$&governance responsibilities.
'he public interest & members should act with integrit# and strive
earnestl# to continuall# demonstrate their dedication to
pro$essional e*cellence. 3 2/3 is e*pected to meet both qualit#
and pro$essional standards in all engagements.
Integrit# & members must be honest and candid0 members act with
integrit# when the# observe both the $orm and the spirit o$
technical and ethical standards.
+b)ectivit# and independence & members should avoid
circumstances that involve con$licts o$ interest0 a 2/3 should not
have a $inancial interest or a e# business relationship with the
client.
,ue care & a member should discharge his or her pro$essional
responsibilities with competence and diligence and engagements
should be planned and supervised.
5cope and nature o$ services & a member should decline an#
engagement i$ an# principle cannot be met and should assess
whether the requested service is consistent with his or her role as a
pro$essional.
e. 'he rules are applicable to all members o$ the 3I2/3 whenever the#
per$orm pro$essional services e*cept that ;ules 1?1% 3?1% 3?"% 1?"%
1?3% and 1?1% pertain onl# to members in public practice.
3&">. (9stimated time & 3? minutes)
3&3?. (9stimated time & 3? minutes)
a. In auditing and e*pressing opinions on $inancial statements% the 2/3
is required at all times to maintain independence o$ thought and
action. Independence is a ma)or part o$ the 2/3(s pro$essional
integrit#&the qualit# that maes his or her opinion valuable to third
parties who will be rel#ing on the $inancial statements on which he or
she gives an opinion.
Independence is an attitude o$ mind that goes much deeper than
sur$ace compliance with visible standards. It results in unbiased
)udgment and ob)ective consideration o$ all the $actors involved in
planning and conducting an audit and in arriving at and e*pressing an
opinion. It results in the 273(s rising above the interests o$ the client
in de$erence to the interests o$ readers and users o$ the statements.
'he requirement $or independence o$ action places upon the
2/3 the responsibilit# $or assessing his or her relationships with the
enterprise. 'hese relationships must be evaluated b# the same criteria
that a third part# in possession o$ all the $acts would appl#% that is%
whether the 2/3 is in a position where there would be pressures to
subordinate decisions or )udgments to personal $inancial interests or
the reasons o$ others.
b 5i* o$ the ;ules o$ 2onduct relate either directl# or indirectl# to
independence. 'he rules are:
;ule 1?1 & Independence% which states that a member in public
practice shall be independent in the per$ormance o$ pro$essional
services. Interpretation 1?1&1 precludes an# direct or material indirect
$inancial interest and certain business relationships with the client
enterprise.
;ule 1?" & Integrit# and +b)ectivit#% which states that the member
shall not nowingl# misrepresent $acts nor subordinate his or her
)udgment to others in the practice o$ public accounting.
;ule "?" & 2ompliance with 5tandards% which includes the G335
that requires the auditor to maintain an independent mental attitude in
all matters relating to the assignment.
;ule 3?" & 2ontingent 7ees% which requires the 2/3 to avoid certain
situations where he or she might receive an e*ceptional $inancial
return that is conditioned b# the outcome o$ his or her $indings.
;ule 1?" & 3dvertising and +ther 7orms o$ 5olicitation% which
prohibits a 2/3 $rom soliciting business in a manner that ma# lessen
his or her independence.
;ule 1?3 & 2ommissions and ;e$erral 7ees% which prevents the
member $rom pa#ing or receiving commissions in certain situations
because such dealings ma# impair his or her independence.
c. 'he acceptance b# the 2/3 o$ the unsecured interest bearing notes in
pa#ment o$ unpaid $ees would not be construed as discrediting the
2/3(s independence in relations with the client because the notes are
merel# a substitution $or an open account pa#able. 'he rule o$
pro$essional conduct that prohibits a 2/3 $rom having an# $inancial
interest in a client does not e*tend to the liabilit# $or the 2/3(s
unpaid $ee as long as an# prior #ear(s $ees are paid prior to issuing a
report on the current #ear(s statements. I$ liabilit# $or the 2/3(s
current $ee was considered to be $inancial interest in a client% the
present $orm o$ the 2/3 client relationship would not be permitted to
continue because o$ten ($requentl# in engagements $or continuing
audits) the client statements being audited include a liabilit# $or the
2/3(s services.
d.a 1. Bnder the conditions cited% the 2/3 cannot render an
independent opinion on the $inancial statements o$ the ;oc# <ill
2orporation. 'he basic premise underl#ing the rules o$
pro$essional conduct pertaining to independence is that the 2/3
should mae a conscious e$$ort to re$rain $rom an# relationships
with a client that might leave pro$essional independence open to
question where he or she intends to e*press an opinion on the
$inancial statements.
In this case the 2/3 has twice violated the pro$ession(s ;ules
o$ /ro$essional 2onduct. @# being the client(s secretar#% the 2/3
has been an o$$icer in the compan# during the period o$ the
pro$essional engagement. 5econdl#% b# temporaril# resigning and
then resuming the position upon e*pressing an opinion (which
does not cure the $irst violation)% the 2/3 has violated the spirit
o$ the ;ules o$ /ro$essional 2onduct pertaining to independence
because he or she is not in $act independent with respect to the
client.
". 'hough the 2/3 merel# assumed an o$$icership with a client as a
temporar# measure% the ;ules o$ /ro$essional 2onduct pertaining
to independence provide $or no e*ceptions. 'he 2/3 is not in a
position to render an opinion on the $inancial statements o$ the
;oc# <ill 2orporation covering the period during which he or
she was an o$$icer. 3$ter the 2/3 has resigned and has become in
$act independent% he or she ma# e*press an opinion on statements
covering subsequent periods.
3&31. (9stimated time & 3? minutes)
a. Rule of Conduct b. Additional Circumstance
1. ;ule "?3 & 3ccounting 3 member shall not e*press an
opinion......unless the
a. Rule of Conduct b. Additional Circumstance
/rinciples pronouncements o$ the
Governmental 3ccounting
5tandards @oard (G35@) have
been $ollowed.
". ;ule 1?1 & 3cts ,iscreditable 3 member $ails to compl# with
continuing pro$essional education
requirements.
3. ;ule 1?" & 3dvertising and
+ther 7orms o$ 5olicitation
5olicitation o$ clients b# the use o$
coercion% overreaching% or
harassing conduct is prohibited.
.. ;ule 1?3 & 2ommissions and
;e$erral 7ees
3 member shall not pa# a
commission to obtain a client
when the member also per$orms
an e*amination o$ prospective
$inancial statements.
1. ;ule 3?" & 2ontingent 7ees 3 member(s $ees ma# not be
contingent on the results o$ the
service.
8. ;ule 3?1 & 2on$idential 2lient
In$ormation
3 member is permitted to disclose
in$ormation in an 3I2/3 qualit#
control review.
:. ;ule 1?1 & Independence 3 member shall not be connected
with the enterprise as a promoter%
director% or o$$icer.
=. ;ule "?1 & General 5tandards 3 member shall e*ercise due
pro$essional care in the
per$ormance o$ an engagement.
>. ;ule 1?1 & Independence 3 member shall not have an#
)oint% closel# held business
investment with the enterprise.
1?. ;ule 1?1 & 7orm o$ /ractice
and Fame
'he $irm cannot designate itsel$ as
"-embers o$ the 3I2/3" unless
a. Rule of Conduct b. Additional Circumstance
all its owners are members o$ the
Institute.
11. ;ule 1?" & Integrit# and
+b)ectivit#
3 member shall not nowingl#
misrepresent $acts.
1". ;ule "?" & 2ompliance with
5tandards
3 member shall compl# with the
standards o$ the 3ccounting and
;eview 5ervices 2ommittee in a
review engagement.
13. ;ule 3?" & 2ontingent 7ees 7ees are not regarded as
contingent i$ $i*ed b# courts.
1.. ;ule 3?1 & 2on$idential 2lient
In$ormation
In$ormation ma# be disclosed to
compl# with a validl# issued and
en$orceable subpoena.
11. ;ule "?3 & 3ccounting
/rinciples
3 member issues an unquali$ied
opinion when the statements
depart $rom principles
promulgated b# the G35@.
3&3". (9stimated time & 31 minutes)
a. Rule of Conduct b. Effect on Rule
1. ;ule 1?1 &
Independence
Indeterminate. 'he in$ormation needed to
assess the applicabilit# o$ Interpretations 1?1&
1(3)(.) and 1?1&1 is not stated.
". ;ule "?3 & 3ccounting
/rinciples
Fo violation. G35@ principles are recogniAed
as authoritative pronouncements $or
governmental entities.
3. ;ule 1?1 & 3cts 4iolation. 'his is considered to be an act
discreditable creditable to the pro$ession.
a. Rule of Conduct b. Effect on Rule
.. ;ule 1?1 &
Independence
Fo violation. ;etirement pa#ments to
individuals $ormerl# engaged in the practice o$
public accounting are speci$icall# permitted
absent certain conditions.
1. ;ule 1?1 &
Independence
Fo violation. 'he prohibition against direct
$inancial interest in interpretation 1?1&1 applies
onl# to the period o$ the pro$essional
engagement or at the time o$ e*pressing an
opinion.
8. ;ule "?1 & General
5tandards
4iolation. 3 member shall undertae onl#
engagements that member or member(s $irm
can reasonabl# e*pect to complete with
pro$essional competence.
:. ;ule 3?" & 2ontingent
7ees
Fo violation. 3 member(s $ee ma# var#
depending on the comple*it# o$ the
engagement.
=. ;ule 1?" & 3dvertising
and +ther 7orms o$
5olicitation
Fo violation. 'he rule can no longer be used to
prevent members $rom using advertising that
includes sel$&laudator# claims.
>. ;ule 1?1 &
Independence
4iolation. Interpretation 1?1&1 states that a
member cannot be an o$$icer o$ the client
during the time period covered b# the $inancial
statements.
1?. ;ule 3?1 & 2on$idential
2lient In$ormation
Indeterminate. Fo in$ormation is given as to
whether the client approved disclosure o$ the
in$ormation.
11. ;ule 1?" & Integrit# and
+b)ectivit#
4iolation. 3 member should not per$orm a
pro$essional service when he or she has a
con$lict o$ interest.
1". ;ule 1?" & 3dvertising
and +ther 7orms o$
5olicitation
Fo violation. 'he rule can no longer be used to
prevent members $rom using advertising that
includes testimonials.
13. ;ule "?" & 2ompliance Fo violation. 'he 3ccounting and ;eview
a. Rule of Conduct b. Effect on Rule
with 5tandards 5ervices 2ommittee is the bod# designated to
promulgate standards $or review services $or
nonpublic entities.
1.. ;ule 1?1 &
Independence
4iolation. Interpretation 1?1&1 states that a
member(s independence is impaired b# serving
in this capacit# (business relationship) $or a
ban client.
11. ;ule 1?3 & 2ommissions
and ;e$erral 7ees
Indeterminate. 3 member is allowed to pa# a
commission to obtain a client provided
disclosure is made to the client.
Cases
3.33. (9stimated time & 3? minutes)
a. Bnder 3I2/3 rules (Interpretation 1?1&3) 2/3s ma# per$orm
booeeping and accounting services and remain independent i$ the
$ollowing $our conditions are met.
'he 2/3 must not have an# other relationships% such as a $inancial
interest% that would impair his or her independence.
'he client must accept $ull responsibilit# $or the $inancial statements.
'he 2/3 must not assume the role either o$ an emplo#ee or
management in the client6s operations (e.g.% the 2/3 should not
initiate transactions or sign chec).
'he 2/3 must con$orm to pro$essional standards in per$orming the
attest engagement.
9ven thought Gones and Gones dra$ts the $inancial statements% the# can
remain independent as long as the above conditions are met.
b. I$ W'I is a public compan# 592 rules have long prohibited 2/3s $rom
per$orming booeeping and accounting services $or 592 registrants.
c. Bnder 3I2/3 rules Gones and Gones can per$orm business valuation
services and consulting services $or non&public companies. I$ Gones and
Gones is to remain independent% however% the# must not assume
management responsibilit# in the process and the client must tae $ull
responsibilit# $or e# assumptions and an# $inal decisions based on a
consulting engagement. Gones and Gones must act strictl# in an advisor#
capacit#.
d. Bnder the 592 rules 2/3s can per$orm a variet# o$ consulting services and
business valuation services $or a client. (3uthors Fote: Bnder 592 ;ules
adopted on Fovember 11% "??? there are signi$icant restrictions on the
nature o$ non&audit services% including business valuation and consulting
services that can be per$ormed $or an audit client. 7or e*ample% an
accounting $irm cannot provide appraisal or valuation services% or $airness
opinions% where it is reasonabl# liel# that the results o$ an# valuation or
appraisal would be material to the $inancial statements. 'here are also
signi$icant restrictions on the role that an accounting $irm can pla# when
assisting the client with I' consulting services. 5tudents and $acult# should
consult the supplemental material provided on the new 592 Independence
;ules).
3&3.. (9stimated time & 3? minutes)
1. 3 member o$ the 3I2/3 ma# practice public accounting in an# $orm
o$ organiAation permitted b# state law or regulation as long as the
characteristics o$ the organiAation con$orm to a resolution adopted b#
2ouncil o$ the 3I2/3. <owever% a super ma)orit# (88 "D3E) o$ the
ownership o$ a $irm must belong to 2/3s. Fon&2/3 owners must be
activel# engaged in providing services to the $irm(s clients as their
principal occupation. +wnership b# others is considered against the
public interest and continues to be prohibited. @radle#(s 1?E
ownership% and provision o$ insurance services rather than pro$essional
accounting services% violates this characteristic.
". 3 member in the practice o$ public accounting ma# have a $inancial
interest in a commercial corporation which per$orms% $or the public%
services o$ a t#pe per$ormed b# public accountants and whose
characteristics do not con$orm to resolutions o$ 2ouncil% provided such
interest is not material to the corporation(s net worth% and the member(s
interest in and relation to the corporation is solel# that o$ an investor.
2ertainl# Gilbert(s 1? percent interest is material to 7inancial 5ervices%
Inc.% and Gilbert(s status is not that o$ an investor. In this respect%
Gilbert is in violation o$ Interpretation 1?1&1.
3. 9*pressing an unquali$ied opinion on Grandtime(s $inancial statements%
which did not disclose a material lien on the building asset% is a
violation o$ both ;ule "?" (2ompliance with 5tandards)% and ;ule "?3
(3ccounting /rinciples). ;ule "?" includes auditing standards
promulgated b# the 3uditing 5tandards @oard. 'hese standards include
the requirement that a member shall not permit his or her name to be
associated with $inancial statements unless the member has complied
with generall# accepted auditing standards. 'he third standard o$
reporting sa#s that in$ormative disclosures are to be regarded as
reasonabl# adequate unless otherwise stated in the report. 5ince there
was no disclosure o$ the building lien in the $inancial statements%
Gilbert should have quali$ied his opinion.
;ule "?3 requires that a member shall not e*press an opinion that
$inancial statements are presented in con$ormit# with generall#
accepted accounting principles i$ such statements contain an#
departure $rom an accounting principle promulgated b# the bod#
designated b# 2ouncil to establish such principles. 3ccounting
;esearch @ulletin Fo. 1?% which was published b# a bod# designated
b# 2ouncil% requires disclosure o$ assets pledged as securit# $or loans.
.. <aving @radle# in$orm the insurance compan# o$ the prior lien on
Grandtime(s building is a violation o$ ;ule 3?1 o$ the 2ode% which
en)oins a member $rom violating the con$idential relationship between
himsel$ and his client without consent o$ the client. 'he lien should
have been disclosed in Gilbert(s report on Grandtime(s statements% but
it ma# not be disclosed b# him independentl# to a third part# unless the
client agrees to such disclosure. <owever% ;ule 3?1 should not be
interpreted to preclude a 2/3 $rom correcting a previous error & in this
case e*pressing an opinion that the $inancial statements were prepared
in accordance with generall# accepted accounting principles when% in
$act% the# were not. Gilbert should have $irst% e*hausted all means to
persuade Grandtime to correct the error b# recalling the original
$inancial statements and reissuing them in corrected $orm with a new
auditor(s report.
3&31. (9stimated time & 31 minutes)
Research Questions
7or the reasons stated in the introduction to this manual% solutions are not provided
$or this categor# o$ questions.