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Lecture Notes Ch. 4 (ACCT-422)

Lecture Notes Ch. 4 (ACCT-422) - Chapter 4 Professional...

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Chapter 4: Professional Ethics This chapter deals with professional ethics, independence, and the other requirements under the AICPA Code of Professional Conduct. The first part of Chapter 4 (pages 78 – 83) discusses, in general terms, the concept of ethics, and sets forth a framework for resolving an ethical dilemma. The AICPA Code of Professional Conduct sets forth ethical standards applicable to CPAs. You should be familiar with the four parts that make up the Code: principles, rules of conduct, interpretations of the rules of conduct, and ethical rulings (see Fig. 4-3 on page 84). 1. The Principles section of the Code sets forth 6 ethical principles and a discussion of those principles. The principles represent an ideal standard of conduct and are not enforceable. 2. The Rules of Conduct section sets forth rules that must be followed by every CPA in the practice of public accounting and, with some exceptions, by all CPAs not in public practice. The Rules of Conduct section is the only section of the Code that are enforceable. 3. The Interpretations of the Rules of Conduct section consists of published interpretations of specific rules of conduct. They are generated when there are frequent questions from practicing CPAs about a specific rule. Although the interpretations are not per se enforceable, it is usually difficult to justify a departure from the interpretations in a disciplinary hearing. 4. The Ethical Rulings section consists of explanations of specific factual circumstances. They are usually written in a question/answer format where a factual situation is set forth, a question is asked with respect to the factual situation, and the answer is provided. Like the interpretations, ethical rulings are not enforceable, but a departure from the rulings must be justified by the CPA. Chapter 4 then discusses the various rules of conduct, but spends the majority of its discussion on the most important of all the rules, Independence. Independence Users of financial statements rely heavily upon audit reports in making decisions to loan money to a company, invest in a company, etc., because auditors are perceived as being independent of the audited company. If users had reason to believe that an auditor possessed a bias towards the company being audited, the value of the auditor’s report would be substantially diminished. An auditor must be both independent in fact and independent in appearance . Independence in appearance refers to whether the auditor is viewed as independent by
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others. Independence in fact refers to whether the auditor is actually able to maintain an unbiased viewpoint throughout the audit process, including during the planning stage, the field work stage, and in issuing the audit report.
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