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not disclose any such information to third parties without proper and specific
authority unless there is a legal or professional right or duty to disclose. Confidential
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Responsibilities In carrying out their responsibilities as professionals, members
should exercise sensitive professional and moral judgments in all their
activities.
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a. Yes.
b. Yes.
c. A covered member is:
intermediary nor has the authority to supervise or participate in the intermediary’s
investment decisions.
e. The following services are prohibited for publicly traded audit clients:
• Bookkeeping services
• Financial information systems design and implementation
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a. Rule 102 requires that the AICPA member shall maintain objectivity and
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a. Confidential information is information obtained during the conduct of an audit
related to the client’s business or business plans; the auditor is prohibited from
communicating confidential information except in very specific instances defined
b. External auditors do not have to keep client information confidential in the
following situations:
• To assure the adequacy of accounting disclosures required by GAAP
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a. A contingent fee is a fee established for the performance of any service in which a
fee will not be collected unless a specified finding or result is attained, or in which
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The Code is enforced by voluntary cooperation, public opinion and associated legal
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a. Hart is not violating the rules of the AICPA’s Code as long as he is not
performing any attestation services for Sanders. Attestation services include
audits or reviews of its financial statements, examinations of its prospective
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Fraud Focus: Contemporary and Historical Cases
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a. When the business environment involves financial difficulties, audit firms such as
KPMG will likely experience high levels of litigation. Reasons for this include the
following:
• Liability doctrines that include joint and several liability statutes
permitting a plaintiff to recover the full amount of a settlement from an
external auditing firm, even though that firm is found to be only partially
responsible for the loss (often referred to as the deep-pocket theory, i.e.,
sue those who can pay)
b. Auditors should not be held liable simply because the client’s business fails.
Rather, they should be held liable if they fail to detect a material misstatement,
including material fraud, in the financial statements. Users and regulators demand
this quality standard for auditors.
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c. Auditor defenses include:
• Due diligence; that is, the auditor did what a prudent auditor would have done.
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a. Flanagan’s actions were inappropriate because they violated the auditor
independence rule (Rule 101).
b. Independence is the cornerstone of the auditing profession. Without it, external
financial statement users have no reason to believe in the auditor’s opinion
because they will perceive that the auditor is acting in the interests of
management and the company rather than acting in the public interest and
impartially as external users demand.
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Application Activities
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a. The student will be able to obtain insights on this case from a variety of online
news sources. News accounts of this case indicate the following red flags:
Beazer’s culture was to “make the numbers” during a time when housing sales had
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This project presents an opportunity for the student to read actual SEC releases. The
detail in these two releases makes for very interesting cases and will likely have relevant
implications for the students.
a. AAER 2326 (September 30, 2005) (Administrative Proceeding File No. 3 -12065)
provides details on a number of actions taken by Caswell that were considered
improper professional conduct. In terms of the ACIPA’s Code, one obvious
b. While individual answers will of course vary, we present a potential approach to
moving through the seven steps in resolving the difficult ethical issue encountered
by Caswell.
Step 1. Although Caswell accepted management’s rationale for omitting the debt
disclosure, the fact that Caswell and others on the engagement team proposed, on at least
six occasions, that such disclosure be included in the financial statements suggests that
Step 2. Affected parties include shareholders (right to receive accurate investment
information), the audit committee and board of directors (right to receive an accurate
portrayal of the accounting function of the organization; although nine Board positions
Step 3. In cases such as this, shareholder of the audit clients is usually thought to have the
Step 4.
• Appeal further to the Audit Partner, trying to encourage the audit partner to “do the
right thing”.
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Step 5.
• Appeal further to the audit partner. Likely consequences: unknown, depending on the
partner’s personality and the ability of Caswell to deliver the message in an effective
manner.
Step 6. The greatest good for the greatest number accrues to ensuring that the relevant
information is conveyed in the market. This action is most likely associated with alerting
Step 7. The most appropriate course of events would be to follow through the potential
actions in sequence, beginning with persuasive conversations with the audit partner and
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This problem requires the student to read a recent report available at the web site of the
CAQ. We find that it is valuable for students to be aware of recent activities of
organizations that have an impact on the audit profession.
The report (page 2) explicitly states: “Professional skepticism is necessary for high–
quality professional judgment, but it is only one component of what is necessary for the
auditor to exercise sound professional judgment. For example, skepticism without
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a. The principles in the revised Code are basically the same as presented in the text
(those based on the Code prior to its revision). The primary reason for the revision
in the Code was to make the Code more user-friendly; there were few substantive
changes in the guidance provided by the revised Code.
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violation of the rules; however, the member should evaluate the significance of
the threat.
b. Evaluate the significance of a threat. In evaluating the significance of an
identified threat, the member should determine whether a threat is at an
c. Identify and apply safeguards. If, in evaluating the significance of an identified
threat, the member concludes that the threat is not at an acceptable level, the
member should apply safeguards to eliminate the threat or reduce it to an
Academic Research Cases
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a. The issue being addressed is whether the financial importance of the client to the
audit firm has an impact on jurors’ evaluations of auditor liability, as well as the
award of any punitive and/or compensatory damages. Punitive damages are
intended to punish the defendant for misconduct and compensatory damages are
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address the issue of independence with the jury to attempt to show impairment of
the auditor’s independence. The juror’s perception of the auditor’s independence,
rather than the reality of the independence, will affect the outcome in court.
b. The results of the study indicate that client importance, in terms of financial
significance to an audit firm, affects jurors’ (1) perceptions of the auditor’s
c. Practicing auditors that find themselves involved in a lawsuit, as well as their
attorneys, need to consider the importance of the audit client involved with
respect to revenue for the firm. The financial significance of the client and how
the jurors may interpret the independence of the auditor should be considered
d. Participants were undergraduate students who were taking economics or
introductory business courses. The participants were provided an audit litigation
case scenario with jury instructions for assessing liability as well as compensatory
and punitive damages. First, participants were asked to read the scenario and
provide negligence verdicts, if appropriate, assess awards. Then the participants
were asked to complete a post-experimental questionnaire to provide
supplemental variables of interest to the research. The group was divided into 2
groups where the audit client was described as either “one of the largest clients in
the office” or “one of the smallest clients in the office”. The results are based on
187 completed case materials.
The authors used a single factor (importance of client) between-subjects design.
Accordingly, the primary test of whether client importance affected jurors’
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e. The research for this paper is based on responses to an experimental case and thus
the information presented to the respondent is more limited than the respondent
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a. The issue being addressed is independence risk and how this risk affects audit
quality. Independence risk is the risk that an auditor’s independence in the
performance of an audit may be compromised or perceived as being
compromised. In order for independence risk to exist there must be a real or
b. There are a number of conclusions that can be gained from analyzing the
framework. These include:
• Incentives that could lead to independence risk can be direct or indirect. Direct
incentives involve real or potential monetary benefit or the possibility of
monetary loss. Some examples would include contingent fees, job offers, and
personal investments in the client’s company. Indirect incentives could result
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governance, which includes the board of directors and the client’s audit
committee involvement in the client-auditor relationship, helps to mitigate
independence risk. Regulatory oversight plays a major role in setting governance
rules through the SEC, ISB, and AICPA. Auditing firm policies such as
• Regulators are increasing their focus on auditor independence. A focus on
standard-setting initiatives to close the recurring issue of audit judgment decisions
for gray areas should be implemented.
c. There is a conflict of interest between those companies seeking capital and
investors that provide capital. Investors are at a disadvantage regarding
information about those seeking capital. Therefore, investors rely on auditors to
provide independent assurance that the financials they are receiving are fairly
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a. Using the context of an actual past auditor – client disagreement scenario, the
authors explore how certain client representative behaviors, including
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b. The authors find that the frequency of past client– auditor disagreements is
negatively associated with the auditor’s trust of the client representative, while the
length of client association is positively associated with trust. These findings
suggest that auditors are less likely to trust argumentative clients and more likely
to trust a long-term client.
c. Though the findings seem almost intuitive, it is important to consider and analyze
factors influencing an auditor’s trust because an auditor’s level of trust (and thus
their professional skepticism and auditor independence) is called into question
d. The authors conducted a field study in which 71 auditors in six international
accounting firms in Canada participated. All auditors were chartered accountants
employed at the manager to partner level, with an average of 17.5 years of
experience following their certification.
The field study required participants to complete a questionnaire related to a
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e. The evidence obtained by the authors relied on the accuracy of respondents’
interpretation of past events, which could have been recalled incorrectly and could
be biased by its very nature. Additionally, the authors examined a relatively few