Ethical Obligations

Business

Quiz 4 :

Ethics and Professional Judgment in Accounting

Quiz 4 :

Ethics and Professional Judgment in Accounting

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Beauda Medical Center img Questions Assume that both Popperson and Snow are CPAs. Do you think Snow violated his confidentiality obligation under the AICPA Code by informing Popperson about the faulty equipment at CSM? Explain. Assume that Popperson informs the senior auditor in charge of the Beauda Medical audit, and the senior informs the manager, Kelly Kim. A meeting is held the next day with all parties in the office of Ben Smith, the managing partner of the firm. Here's how it goes: Ben: If we tell Beauda about the problems at CSM, we will have violated our confidentiality obligation as a firm to CSM. Moreover, we may lose both clients. Kelly: Lance, you are the closest to the situation. How do you think Beauda's top hospital administrators would react if we told them? Lance: They wouldn't buy the equipment. Ben: Once we tell them, we're subject to investigation by our state board of accountancy for violating confidentiality. We don't want to alert the board and have it investigate our actions. What's worse,we may be flagged for the confidentiality violation in our next peer review. Kelly: Who would do that? I mean, CSM won't know about it, and the Beauda people are going to be happy we prevented them from buying what may be faulty equipment. Senior: I agree with Kelly. They are not likely to say anything. Ben: I don't like it. I think we should be silent and find another way to warn Beauda Medical without violating confidentiality. Lance: What should we do? I need to be clear about my ethical responsibilities and the firm's as well. Analyze the dilemma using the discussion in the chapter about conflicts of interest. Explain the threats in this situation and evaluate the steps to be taken to deal with those threats so as not to violate the rules of conduct. What do you think the firm should do and why?
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AICPA Code of Professional Conduct:
It is a collection of codified statements issued by the (AICPA) American Institute of Certified Public Accountants that outline a CPA's moral and specialized responsibilities.
1.
Steps should be taken with threats so that there is no violation in code of conduct.
In this case, clients expect their auditor or CPA to keep the information shared with them confidential as per the rule of confidentiality underlying AICPA code of professional conduct. S should not have shared the issue that has taken place with CMS inc. pertaining malfunctioning of the heart monitoring equipment with P because P is the auditor of the B medical with which CMS has signed a deal to supply twenty heart monitoring system for its new medical facility.
S has violated the rule of confidentiality of information underlying AICPA by discussing the underlying issue faced by CMS with his colleague P as such information will result in cancellation of the deal being agreed between CMS and B medical because no one wants to install his medical faculty with faulty heart monitoring systems.
2.
In the given situation the activities the firm should perform.
In this case, all the parties involved in the conversation realized that revealing the current status and fact about the malfunctioning of the heart monitoring system will straight away violate the rule of confidentiality underlying AICPA. The threat underlying this situation is that the deal signed between both the companies will get cancelled and they lose both of their clients. Thus the best step suggested to deal with the issue is to keep silent as it will also save the CPA from violation of the rule of confidentiality.
However, it will create question from the ethical perspective that even after knowing the fact, P allowed his client to go ahead with CMS. Hence, it can be concluded the best way is to allow the management and board of the B medical to have through investigation. P in order to perform his ethical duty can emphasize the management to undertake through investigation against the deal being signed with CMS but keep the fact told to him by S hidden so as to secure violation of rule of confidentiality.

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Assume that a CPA serves as an audit client's business consultant and performs each of the following services for the client. Identify the threats to independence. Do you believe any safeguards can be employed to reduce the threat to an acceptable level? Explain. a. Advising on how to structure its business transactions to obtain specific accounting treatment under GAAP. b. Advising and directing the client in the accounting treatment that the client employed for numerous complex accounting, apart from its audit of the client's financial statements. c. Selecting the audit client's most senior accounting personnel by directly interviewing applicants for those positions.
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Audit independence refers to work of the internal and external auditor should not be influenced by any parties that may have interest in the businesses which is to be audited. Audit independence is a situation in which audit is conducted without being affected by the influences of others.
To appear to be independent the CPA should perform their work with integrity, objectivity and by using professional skepticism. It means, independence requires integrity, objectivity and unbiased approach of the auditor in an audit process.
There are a number of threats to independence. These are described below:
Self-review threat: Self-review threat arises when CPA review audit evidence during an audit engagement that is based on his own work. For example, source document preparation for generating the financial statement of client.
Advocacy threat: Advocacy threats arise when auditors asked to promote or represent their client in some way. In this, the auditor is not objective in his approach and hence biased in favor of client.
Adverse interest threat: Adverse interest threats arise when auditors take actions or perform works which are opposite to the interest and position of the client.
Familiarity threat: Familiarity threats arise when a close relationship is formed between the CPA and audit client, its employees, management or director.
Undue influence threat: Undue influence threats arise when a CPA works under the influence of other. Say under the influence of the management of the client.
Financial self-interest threat: A financial self-interest threat may arise when there is a potential benefit to CPA in the financial interest. In such a case, independence would be impaired. It can also arise from business relationship with a client or a member of management that creates a mutual self-interest.
Management participation threat: Management participation threat arise when a CPA performs or promise to perform management activities of the audit client.
The CPA serves as an audit client's business consultant and performs services. The threats from these services are given below:
(a)
In this case, there may be familiarity threat and financial self-interest interest. As CPA advising on structuring of business transaction to obtain specific accounting treatment under GAAP.
It is because either any close relationship is formed between CPA and audit client or any potential financial benefit to the CPA.
(b)
In this case, there may be financial self-interest threat and management participation threat. As CPA advising and directing the client in the accounting treatment that the client employed for numerous complex accounting apart from audit of financial statement.
It is because either any potential financial benefit to the CPA or when CPA perform or promise to perform management activities of audit client.
(c)
In this case, there may be undue influence threat and adverse interest threat. As CPA selecting the audit client's most senior accounting personnel by directly interviewing applicants for those positions.
It is because either CPA works under the influence of others say management or takes actions or performs work which is opposite to the interest and position of the audit client.
There are a number of safeguard which can be applied to reduce the threat to a lower level. These are explained below:
Safeguard created by profession (legislation or regulation): These create the responsibility on the professionals to establish good corporate governance regulation, continuing education, requirement on independence and external review of firm quality control system.
Safeguard implemented by client: In this, safeguards are created by audit client in which organization maintain a good governance structure. For example, formation of audit committee for appropriate decision making.
Safeguard implemented by firm: It is including, policies and procedures which are implemented for professional and regulatory requirement. These policies and procedures address the ethical conduct and compliance with law and regulation for the professionals.

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In our discussion of the KPMG professional judgment framework, we pointed out that biased judgments can be made because of judgment tendencies. One such tendency that was not included in the framework is self-serving bias. Explain what you think this means and how it might influence audit judgment.
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Judgment is the process of making a decision, drawing conclusion where there are a number of possible alternative solution.
Professional judgment is a method or way to prepare and audit financial statement of entities. It is like a skill that people have to acquire and develop. By developing those skills, they will be able to make appropriate and correct judgment. It is what makes an accountant as professional. It also underlies fundamental obligation to protect the public interest.
Judgment tendency is a thought process of professional by which a decision is to be made for a particular issue or situation. It differs from person to person depends upon their thought process and objectivity.
Biased judgment might be made from judgment tendencies. Given the increasing judgment and complexity in financial reporting, it is essential that auditor exercise sound judgment and control for biases and tendencies.
Self-serving bias is the tendency of a professional to strengthen his own ego by attributing positive events as per his ability and attributing negative events to forces which are not as per his ability.
Audit judgment refers to giving an opinion on current audit by using previous audit experience and documents.
As per auditors experience and knowledge which is gained from previous audits, they sometimes give an opinion which is beyond the judgment framework. Hence, self-serving bias sometimes influence the audit judgment of the auditor.

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Is independence impaired when an auditor is hired, paid, and fired by the same corporate managers whose activities are the subject of the audit? Does it matter that in most companies the audit committee hires, evaluate, fires (if appropriate), and determines the fees of the external auditor with minimal input from senior management?
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Tax Shelters img img Questions 1. Evaluate the ethics of the tax shelter transactions, including your concerns about the practices. 2. Who are the stakeholders in this case, and what are your professional responsibilities? 3. What are the options available to you in this matter? 4. What would you do and why?
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Commercialism versus Professionalism (a GVV case) img Questions 1.Discuss the issue of commercialism versus professionalism in the accounting profession with respect to the changes in the rules of conduct described in the case. Do you think these changes are good or bad for the profession? For the public? Explain. 2.What are the threats to compliance with the rules of conduct that arise as a result of the alternative practice structure in this case? Why are they threats? 3.What safeguards might be established to ensure the threats have been eliminated or reduced to acceptable levels? 4.What would you do if you were Billy? Consider the following: • How can you get it done effectively and efficiently? • What do you need to say and to whom? • What can you expect the pushback to be and how might you counteract any reasons and rationalizations?
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How might financial incentives in the form of client services unconsciously introduce auditor bias into the independent audit function? Are there any solutions to the conflict?
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Do you believe the internal audit activity should be independent? Explain.
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AOL-Time Warner 1 img img Questions 1. The role of Joseph Ripp in the accounting fraud at AOL is one of whether a CFO who seemingly goes along with an accounting fraud and then is responsible for uncovering it should be viewed as a hero or villain. How should we view Joseph Ripp in this case: a participant in the fraud or an innocent bystander? A hero or a villain? Explain. 2. Two of the officers-J. Michael Kelly, the former CFO of AOL, and Mark Wovsaniker, former head of accounting policy-consented to the charges of the SEC that they misled the external auditors about the fraudulent transactions. What were the ethical responsibilities of Kelly and Wovsaniker in this matter in general, and specifically with respect to their relationship with the external auditors? Did they violate those standards? 3. Do you think the decision to reverse the charges against Wovsaniker because he did not have ultimate authority over the misleading financial statements was the "right" decision from an ethical perspective? Include in your discussion how that decision accords with the rules of conduct in the AICPA Code.
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M A Transaction img img Questions 1. What are the ethical issues that should be of concern to Kelly Rogers and Pettit Schayes in deciding whether the firm should perform the transaction advisory services for Mikan? 2. Do you believe one party or the other in the proposed transaction would have an advantage if Pettit Schayes is hired to perform the due diligence and advise both clients on the arrangement? 3. Would your concerns be any different if Pettit Schayes were not the auditor of Yardley but instead a different firm audited its financial statements? Explain.
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Family Games, Inc. img Questions 1.Explain the nature of the dilemma for Helen using the AICPA Code as a guide. What steps should she take to resolve the issue? 2.What would you do if you were in Helen's position? How would you attempt to convince Carl Land of the rightness of your position and give voice to your values?
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KBC Solutions img Questions 1. Critically evaluate the judgments made by Grace as the senior by using the KPMG Professional Judgment Framework. 2. Did Grace violate any rules of conduct in the AICPA Code? Explain. 3. Does Rick have any ethical obligations in this matter? What should he do about signing off on the audit and why?
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It has been said that independence is the cornerstone of the accounting profession. Explain what this means. What does it mean to say that auditors have special and critical gatekeeping duties?
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Navistar International Questions 1. Use the Six Pillars of Character and ethical reasoning to assess the ethical values and decisions made by Navistar and Deloitte in the case. 2. Evaluate the deficiencies in internal controls and corporate governance at Navistar. Do you believe external auditors should be expected to discover fraud when a company, such as Navistar, is so poorly run that its personnel did not have the necessary training and expertise, its internal controls were deficient, and it relied too heavily on Deloitte to determine GAAP compliance? Explain. 3. Discuss the deficiencies in the work done by Deloitte for Navistar with respect to the AICPA Code of Professional Conduct.
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Do you believe that the SEC should prohibit auditors from providing all nonaudit services for audit clients? Use ethical reasoning to support your answer.
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Han, Kang Lee, LLC img Questions 1. Do you think the client's accounting approach to the market valuation of the inventory was acceptable under GAAP? Include in your discussion a brief explanation of why fair value measurements are difficult. 2. Evaluate the professional judgment used by Kang and the firm in assessing the client's accounting and reaching its own decision to accept it. 3. Would independence be impaired if the firm were offered, and accepted, the consulting arrangements? Consider whether any threats to independence would exist and, if so, how they might be reduced to an acceptable level. 4. What would you do at this point if you were Joe Kang and why?
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Valley View Hospital img Questions 1. Who are the stakeholders in this case, and what are their interests? 2. What are Kolb's ethical obligations with respect to the Medicare fraud and her reporting it within Valley View under the AICPA Code of Professional Conduct? 3. What would you do at this point if you were Sue Kolb, and why?
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Explain the safeguards that can be used to reduce or eliminate threats to audit independence.
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Explain the threats to professional skepticism that might influence audit judgment.
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What are the dangers of creeping commercialism in the accounting profession?
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