Q1. What are the six core ethical values described by the Josephson Institute?

What are some other sources of ethical values?

The six core ethical values described by the Josephson Institute are:

1. Trustworthiness 4. Fairness

2. Respect 5. Caring

3. Responsibility 6. Citizenship

There are many other potential sources of ethical values, including laws and
regulations, church doctrines, codes of professional ethics, and individual organizations
codes of conduct.

Q2. Describe an ethical dilemma. How does a person resolve an ethical dilemma?

An ethical dilemma is a situation that a person faces in which a decision must be made about
the appropriate behavior. There are many possible ethical dilemmas that one can face, such
as finding a wallet containing money, or dealing with a supervisor who asks you to work
hours without recording them.

An ethical dilemma can be resolved using the six-step approach The six steps are:

1. Obtain the relevant facts.

2. Identify the ethical issues from the facts.

3. Determine who is affected by the outcome of the dilemma and how each person
or group is affected.

4. Identify the alternatives available to the person who must resolve the dilemma.

5. Identify the likely consequence of each alternative.

6. Decide the appropriate action.

Q3. Why is there a special need for ethical behavior by professionals? Why do the
ethical requirements of the CPA profession differ from those of other professions?

There is a special need for ethical behavior by professionals to maintain public confidence in
the profession, and in the services provided by members of that profession.

The ethical requirements for CPAs are similar to the ethical requirements of other
professions. All professionals are expected to be competent, perform services with due
professional care, and recognize their responsibility to clients. The major difference between
other professional groups and CPAs is independence. Because CPAs have a responsibility to
financial statement users, it is essential that auditors be independent in fact and

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appearance. Most other professionals, such as attorneys, are expected to be an advocate for
their clients.

Q4. List the four parts of the Code of Professional Conduct, and state the purpose
of each.?

PART PURPOSE
1. Principles of Professional 1. Provide ideal standards of ethical conduct and
Conduct help practitioners understand the ideal
conduct of a CPA.
2. Rules of conduct 2. Provide minimum standards of ethical conduct
stated as specific rules.
3. Interpretation of the rules 3. Provide formal interpretations of the rules of
of conduct conduct to answer questions that frequently
arise about the rules of conduct.
4. Ethical rulings 4. Provide more detailed guidance to
practitioners about interpretation of the rules
of conduct for less commonly raised
questions.

Q5. Distinguish between independence of mind and independence in appearance.

State three activities that may not affect independence of mind but are likely to
affect independence in appearance.

Independence in fact exists when the auditor is actually able to maintain an unbiased
attitude throughout the audit, whereas independence in appearance is dependent on others'
interpretation of this independence and hence their faith in the auditor.

Activities which may not affect independence in fact, but which are likely to affect
independence in appearance are: (Notice that the first two are violations of the Code of
Professional Conduct.)

1. Ownership of a financial interest in the audited client.

2. Directorship or officer of an audit client.

3. Performance of management advisory or bookkeeping or accounting services

and audits for the same company.

4. Dependence upon a client for a large percentage of audit fees.

5. Engagement of the CPA and payment of audit fees by management.

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Q6. Why is an auditors independence so essential?

Independence in auditing means taking an unbiased viewpoint. Users of financial statements

would be unlikely to rely on the statements if they believed auditors were biased in issuing
audit opinions.

What consulting or nonaudit services are prohibited for auditors of public companies? What
other restrictions and requirements apply to auditors when providing nonaudit services to
public companies?

Auditors of public companies are prohibited from performing the following nonaudit
services:

1. Bookkeeping and other accounting services

2. Financial information systems design and implementation

3. Appraisal or valuation services

4. Actuarial services

5. Internal audit outsourcing

6. Management or human resource functions

7. Broker or dealer or investment adviser, or investment banker services

8. Legal and expert services unrelated to the audit

9. Any other service that the PCAOB determines by regulation is impermissible

Nonaudit services that are not prohibited by the SarbanesOxley Act and the SEC
rules must be pre approved by the companys audit committee.

In addition, an accountant is not independent of an audit client if an audit partner received

compensation based on selling engagements to that client for services other than audit,
review and attest services.

Companies are required to disclose in their proxy statement or annual filings with
the SEC the total amount of audit and nonaudit fees paid to the audit firm for the two most
recent years. Four categories of fees are to be reported:

(1) audit fees;

(2) audit-related fees;

(3) tax fees; and

(4) all other fees.

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Companies are also required to provide further breakdown of the other fees category, and
provide qualitative information on the nature of the services provided.

Q7. Explain how the rules concerning stock ownership apply to partners and
professional staff. Give an example of when stock ownership would be prohibited
for each.?

A partner in the office of the partner responsible for an audit engagement cannot own stock
in that audit client.
A partner can own stock in an audit client,
(1) he or she cannot influence the audit engagement and
(2) he or she is not in the same office as the partner responsible for the audit engagement.
A professional staff member cannot own stock in an audit client if he or she is
assigned to the engagement or if he or she becomes a partner in the office of the partner
responsible for the audit engagement.
A professional staff member can own stock in a firms audit client as long as he or she does
not participate in the audit engagement.

Partner violation: A partner in the San Francisco office owns one share of stock of a client
whose audit is conducted by a different partner in the San Francisco office.

Professional staff violation: An audit manager owns stock in a client whose audit is
performed by the office where the audit manager works. The manager is promoted to
partner mid-year. As soon as the manager becomes a partner, there is a violation of Rule
101.

Q8. Many people believe that a CPA cannot be truly independent when payment of fees is
dependent on the management of the client. Explain two approaches that could reduce
this appearance of lack of independence.

Ways to reduce the appearance of the lack of independence are:

- the use of an audit committee to select auditors made up of directors who are not a
part of management;
- a requirement that all changes of auditors and reasons therefore be reported to the
SEC or other regulatory agency; and approval of the CPA firm by stockholders at the
annual meeting.
- The SarbanesOxley act requires that the audit committee of a public company
consist only of independent members and be responsible for the appointment,
termination, and compensation of the audit firm.

Q9. After accepting an engagement, a CPA discovers that the clients industry is more
technical than he realized and that he is not competent in certain areas of the operation.
What are the CPAs options?

A CPA firm has several options when it decides it is not competent to perform an audit:

1. Withdraw from the engagement.

2. Obtain the expertise through continuing education and self-studies.
3. Hire someone who has the expertise.

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 4. Work on a consulting basis with another CPA firm.

Q10 aDescribe an audit committee.

b. What are the typical functions performed by an audit committee?
c. Explain how an audit committee can help an auditor be more independent.
d. Describe the nature of the audit firms communications with the audit committee
regarding independence issues.

a. An audit committee is a special committee formed by the board of directors and

made up of board members. The SarbanesOxley Act requires that all the members of the
audit committee be independent directors, and the committee should include at least one
member who is a financial expert. The audit committee serves as a liaison between the
independent auditor and the board of directors. The audit committee assists and advises the
full board of directors, and, as such, aids the board in fulfilling its responsibility for public
financial reporting.

b. An audit committee member is considered independent if they are not affiliated

with the company or any subsidiaries in a capacity other than their capacity as a
member of the board. audit committee members, in order to be independent,
are barred from accepting any consulting, advisory, or other compensatory fee
from the company or its subsidiaries, other than in their capacity as a board
member.

c. The functions of an audit committee may include the following:

1. Select the independent auditor; discuss audit fee with the auditor; review
auditors engagement letter.
2. Review the independent auditors overall audit plan (scope, purpose, and
general audit procedures).
3. Review the annual financial statements before submission to the full board
of directors for approval.
4. Review the results of the audit including experiences, restrictions,
cooperation received, findings, and recommendations. Consider matters
that the auditor believes should be brought to the attention of the directors
or shareholders.
5. Review the independent auditors evaluation of the companys internal
controls.

d. For public companies, the PCAOB rules require a CPA firm, before its selection as
the companys auditor, to describe in writing and discuss with the audit
committee all relationships between the firm and the company, including
executives in financial reporting positions, to determine whether there is any
impairment of the CPA firms independence. If the CPA firm is selected, these
communications must occur annually.

Q11. The following relate to auditors independence:

a. Why is independence so essential for auditors?
b. Compare the importance of independence of CPAs with that of other professionals,
such as attorneys.
c. Explain the difference between independence in appearance and of mind.

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a. Independence is essential for an auditor because users of financial statements
expect an unbiased viewpoint in the CPA's attestation to the fairness of the financial
statements. If users believe that auditors are not independent, the value of the audit
function is eliminated.
b. Most other professions (attorneys, doctors, dentists, etc.) represent their clients
and perform services intended primarily to assist their clients. For this reason no
assumption of independence is required. The importance of independence for
CPAs is similar to that for judges. For both, a nonadvocacy position is essential.
c. Independence in appearance is how independent the auditor appears to
outsiders such as users of financial statements. Independence in fact refers to
whether the auditor has maintained an attitude of independence throughout
the engagement. For example, an auditor could possibly maintain an attitude of
independence in fact even though he or she held shares of stock in a company
and performed the audit (the auditor would have violated Rule 101). However,
the auditor would not likely be independent in appearance in such a situation.
Both independence in appearance and fact are essential and the Code of
Professional Conduct concerns both.