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Unformatted text preview: CHAPTER 3 Professional Ethics Review Questions 3-1 An ethical dilemma is a situation that an individual faces involving a decision about appropriate behavior. Ethical dilemmas generally involve situations in which the welfare of one or more other individuals is affected by the results of one’s decision. 3-2 Internal and external standards represent the two major types of constraints on decisions that involve ethical issues. Examples of internal standards are individuals' views on the importance of truthfulness, fairness, loyalty, and caring for others. External standards are those that are imposed upon individuals by society, peers, organizations, employers, or one’s profession. For example, the AICPA Code of Professional Conduct is an external constraint on members of the AICPA. 3-3 The basic purpose of a professional code of ethics is to provide members of a profession with guidelines for maintaining a professional attitude and conducting themselves in a manner that will enhance the stature of their discipline. 3-4 The two parts of the AICPA Code of Professional Conduct are: (1) Principles —goal-oriented and aspirational guidelines which address members' responsibilities, the public interest, integrity and objectivity, independence, due care, and the scope and nature of services. (2) Rules —more detailed regulations which support the principles. 3-5 Rule 202 of the AICPA Code of Professional Conduct requires CPAs to adhere to appropriate professional standards in the performance of various professional services. In the case of financial statement audits those standards are the generally accepted auditing standards. 3-6 A CPA would have an indirect financial interest in an audit client if he or she had an investment in another entity which, in turn, had an interest in the audit client. Examples might include (1) an investment in a mutual fund which owns stock of the audit client, (2) investment in another corporation which owns securities of the audit client, and (3) ownership of shares in a bank which has extended loans to the client company. The Code of Professional Conduct only prohibits those indirect financial interests in audit clients that are material in relation to the CPA's net worth. 3-7 Bill Scott’s father is considered a “close relative.” Since a close relative only impairs a CPA’s independence when that relative has a key position with the client, it is doubtful that Bill’s independence is impaired. (If, however, Bill’s father were in a key position, Bill’s independence would be impaired and he should not participate on the attest engagement team.) Accordingly, neither Scott's nor the firm's independence is likely to be impaired. Nonetheless, it may well be a wise decision to keep Scott off of the audit....
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- Spring '08
- professional conduct, Financial audit, Auditor's report