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What two things does independence require?
- Independence of Mind
- Independence in Appearance
Independence of Mind
The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement.
Independence in Appearance
The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would reasonably conclude that a person's integrity, objectivity, or professional skepticism had been compromised.
Threats to Noncompliance/Independence
Safeguards created by the profession, legislation, or regulation
- Education, training, experience requirements for entry
- Continuing education
- Professional standards, monitoring, discipline
- External review
- External review of firm's quality control
Safeguards within a client
- Appointment of auditors, approved by others than management
- Client has competent staff
- Internal procedures to ensure objective choices
- Corporate governance structure
Safeguards within a professional accounting firm
- Leadership stressing independence and public interest
- Policies to implement and monitor assurance engagements
- Documented independence policies
- Policies to monitor reliance on revenue from a single client
- Using partners with separate reporting lines
Most common conflicts of interest for accountants
- Self-interest versus interests of other stakeholders
- Self-interest and interest of stakeholder versus other stakeholder interest
- Interest of one client over another
- Interest of one or more stakeholders over other stakeholder(s)
Caution should be exercised in the application of legal standards to ethical problems because...
- Law is always changing and lags behind society
- What is legal is not always ethical
- Legal interpretations are not relevant when sued
Private Securities Reform Act
Changes auditor liability from having to share equally with the partners to having to bear a portion allocated by the jury.
Haig v Bamford
An accountant will be found liable to a third party where the accountant had actual knowledge of the limited class of which the third party is a member, and that third party will use and rely on the statement.
Caparo foreseeability test
A duty is said to arise only where the auditor knew the purpose for which the financial statements were to be used by the person relying on them.
An immediate legal relationship (contract) must exist between the parties in order for one to be liable to another.
Five defenses and proactive measures for auditors
- Due diligence and due care
- Contributory negligence
- Engagement letter provisions
- Documentation and record keeping
- Legal counsel