I NTEGRITY AND O BJECTIVITY 2 - Auditing, Assurance Services, and Forensics

P RACTICE

7.3 I NTEGRITY AND O BJECTIVITY 2

In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others. Under rule 102 [ET Section 102.01], a member must maintain objectivity and integrity in the performance of a professional service.

In dealing with his or her employer’s external accountant, a member must be candid and not knowingly misrepresent facts or knowingly fail to disclose material facts. This would include, for example, responding to specific inquiries for which his or her employer’s external accountant requests written representation.

A member shall be considered to have knowingly misrepresented facts in violation of rule 102 when he or she knowingly:

– makes, or permits or directs another to make, materially false and misleading entries in an entity’s financial statements or records; or – fails to correct an entity’s financial statements or records that are

materially false and misleading when he or she has the authority to record an entry; or

– signs, or permits or directs another to sign, a document containing materially false and misleading information.

A conflict of interest may occur if a member performs a professional service for a client or employer and the member or his or her firm has a relationship with another person, entity, product, or service that could, in the member’s professional judgment, be viewed by the client, employer, or other appropriate parties as impairing the member’s objectivity. If the member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client, employer, or other appropriate parties, the rule shall not operate to prohibit the performance of the professional service. When making the disclosure, the member should consider Rule 301, Confidential Client Information [ET Section 301.01].

2 ET Section 102 Prohibits a Member from Knowingly Misrepresenting Facts or Subordinating His or Her Judgment When Performing Professional Services.

7 PRoFESSIoNAL STANDARDS: INDEPENDENCE, INTEGRITY … 121 Rule 102 [ET Section 102.01] prohibits a member from knowingly misrepresenting facts or subordinating his or her judgment when performing professional services. Under this rule, if a member and his or her supervisor have a disagreement or dispute relating to the preparation of financial statements or the recording of transactions, the member should take the following steps to ensure that the situation does not constitute a subordination of judgment:

– the member should consider whether (a) the entry or the failure to record a transaction in the records, or (b) the financial statement presentation or the nature or omission of disclosure in the financial statements, as proposed by the supervisor, represents the use of an acceptable alternative and does not materially misrepresent the facts.

If, after appropriate research or consultation, the member concludes that the matter has authoritative support and/or does not result in a material misrepresentation, the member need do nothing further.

– if the member concludes that the financial statements or records could be materially misstated, the member should make his or her concerns known to the appropriate higher level(s) of management within the organization (e.g.,the supervisor’s immediate superior, senior management, the audit committee or equivalent, the board of directors, the company’s owners). The member should consider documenting his or her understanding of the facts, the accounting principles involved, the application of those principles to the facts, and the parties with whom these matters were discussed.

– if, after discussing his or her concerns with the appropriate person(s) in the organization, the member concludes that appropriate action was not taken, he or she should consider his or her continuing relationship with the employer. The member also should consider any responsibility that may exist to communicate to third parties, such as regulatory authorities or the employer’s (former employer’s) external accountant. In this connection, the member may wish to consult with his or her legal counsel.

– the member should at all times be cognizant of his or her obliga- tions under interpretation 102-3 [ET Section 102.04].

Educational services (e.g.,teaching full- or part-time at a univer- sity, teaching a continuing professional education course, or engag- ing in research and scholarship) are professional services as defined

122 F. I. LESSAMBO

in ET Section 92.11, and are therefore subject to rule 102 [ET Section 102.01]. Rule 102 [ET Section 102.01] provides that the member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

A member or a member’s firm may be requested by a client:

– To perform tax or consulting services engagements that involve act- ing as an advocate for the client.

– To act as an advocate in support of the client’s position on accounting or financial reporting issues, either within the firm or outside the firm with standard setters, regulators, or others.

Services provided or actions taken pursuant to such types of client requests are professional services [ET Section 92.11] governed by the Code of Professional Conduct and shall be performed in compliance with Rule 201, General Standards [ET Section 201.01], Rule 202, Compliance With Standards [ET Section 202.01], and Rule 203, Accounting Principles [ET Section 203.01], and inter- pretations thereof, as applicable. Furthermore, in the performance of any professional service, a member shall comply with rule 102 [ET Section 102.01], which requires maintaining objectivity and integrity and prohibits subordination of judgment to others. Moreover, there is a possibility that some requested professional services involving client advocacy may appear to stretch the bounds of performance standards, may go beyond sound and reasonable professional practice, or may compromise credibility, and thereby pose an unacceptable risk of impairing the reputation of the member and his or her firm with respect to independence, integrity, and objectivity. In such circumstances, the member and the member’s firm should consider whether it is appropriate to perform the service.

A

PPENDIX

– Auditor Independence: Evidence on the Joint Effects of Auditor Tenure and Non-audit Fees, by Ferdinand A. Gul, Bikki L. Jaggi, and Gopal v. Krishnan; AUDITING: A Journal of Practice &

Theory, November 2006, vol. 25, No. 2, pp. 1–23.

7 PRoFESSIoNAL STANDARDS: INDEPENDENCE, INTEGRITY … 123

P

^RACTICE

Question 1

The following are the attributes of an independent auditor, except:

(a) To be independent an auditor must be without bias with respect to the client since otherwise, he would lack that impartiality nec- essary for the dependability of his findings

(b) Independence does not imply the attitude of a prosecutor but rather a judicial impartiality that recognizes an obligation for fair- ness not only to management and owners of a business but also to creditors and those who may otherwise rely (in part, at least) upon

(d) To be independent, the auditor must have limited obligation or interest in the client, its management, or its owners

Question 2

Which of the following assertions is inaccurate may challenge the auditor’s independence in fact or/and the perceived independence?

(a) An independent auditor auditing a company in which he was also a director may be biased

(b) An auditor with a substantial financial interest in a company may be biased in expressing his opinion on the financial statements of the company

(d) Independent auditors should avoid situations that may lead out- siders to doubt their independence

Question 3

When the covered member’s former employer is one of the sponsors of a governmental public employee retirement system, the covered member may continue to participate in the same governmental plan if:

(a) The covered member neither participates on nor is in a position to influence the attest engagement team during the entire period he or she participates in the plan

124 F. I. LESSAMBO

(b) His or her current employer is also one of the sponsors of the same plan and participation is required or offered to all employees in comparable employment positions

(c) The covered member has managerial responsibilities in governmental agency under the supervision of the Securities and Exchange Commission

(d) The covered member has no influence of control over the investment strategy, benefits, or other management activities associated with the plan

Question 4

An immediate family member’s employment by an attest client would impair independence, unless:

(a) The immediate family member does not have primary responsibility for significant accounting functions that support material com- ponents of the financial statements

(b) The immediate family member does not have responsibility for the preparation of the financial statements

(d) The immediate family member has the ability to exercise significant influence over the content of the financial statements

Question 5

If a covered person is the beneficiary of a trust that has a financial interest in a restricted entity, the independence of a member firm ordi- narily would be impaired if:

(a) The indirect financial interest in the restricted entity is material to the covered person

(b) The trust was created by the covered person who is named as beneficiary, or

(d) The beneficiary had indirect control over the investment decisions or assets of the trust

(e) All of the above

PART II

Audit Planning

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