CH.10-INDEPENDENCE & MORAL SEDUCTION
MGMT PARTICIPATION
ACCT CANNOT OBJECTIVELY EVALUATE DECISIONS THEY MADE WHILE SERVING IN A ROLE AS A CLIENT DIRECTOR/OFFICER -CAN CONSULT/ADVISE/ANALYZE AS LONG AS CLIENT MAKES DECISION
SELF REVIEW
ACCT CANNOT OBJECTIVELY EVALUATE OR AUDIT SERVIES THAT THEY PREVIOUSLY PERFORMED IN A ROLE ESSENTIALLY EQUIVALENT TO BEING A CLIENT EMPLOYEE
SELF-INTEREST
ACCT HAS AN ECONOMIC OR OTHER INTEREST IN THE SUCCESS OF A CLIENT OR A PERSON ASSOCIATED W/ A CLIENT
ADVOCACY
ACCT PROMOTES A CLIENT'S INTEREST, SUCH AS BY REPRESENTING IT IN AN ADMIN HEARING OR MKTG PROPOSAL
AUDIT VS. REVIEW OPINION
AUDIT-EXPRESSES POSITIVE ASSURANCE THAT FINANCIAL STMTS FAIRLY PRESENT A COMPANY'S FINANCIAL POSITION REVIEW-CPA EXPRESSES NEGATIVE ASSURANCE THAT IT IS NOT AWARE OF ANY FACTS THAT COMPROMISE THE TRUSTWORTHINESS OF FINANCIAL STMTS ONLY LICENSED CPA MAY ISSUE ATTEST OPINION *NOT REQUIRED TO SATISFY INDEPENDENCE RULE IF THEY WORK IN INDUSTRY OF PROVIDE TAX SERVICES, ETC.
INDEPENDENCE RULE
AUDITORS MUST CRITICALLY EVALUATE CLIENT FINANCIAL STMTS AND AVOID CIRCUMSTANCES THAT MIGHT LEAD AN OBSERVER TO DOUBT AN AUDITOR'S OBJECTIVITY
UNDER INFLUENCE
CLIENT'S AGGRESSIVENESS/DOMINANT PERSONALITY/SPHERE OF INFLUENCE MAY INTIMIDATE AN ACCT INTO GIVING INTO ITS JUDGEMENT
ADVERSE THREAT
CLIENT'S INTERESTS ARE OPPOSITE TO ACCT'S INTERESTS, SUCH AS WHEN THEY THREATEN OR ARE IN A LAWSUIT WITH EACH OTHER
FAMILIARITY THREAT
CLOSE RELATIONSHIP B/W ACCOUNTANT AND CLIENT MAKES ACCT TOO SYMPATHETIC TO CLIENT'S VIEWPOINT OR TOO RELUCTANT TO OBJECTIVELY CHALLENGE CLIENT'S VIEWS
NONCOVERED MEMBERS
CPA FIRM PARTNERS AND PROFESSIONALS WHO ARE NOT COVERED MEMBERS UNLESS: 1-THEY OWN (INDIVIDUALLY OR COMBINED W/ IMMEDIATE FAMILY MEMBERS) OVER 5% OF AN AUDIT CLIENT'S STOCK 2-SIMULTANEOUSLY ARE EMPLOYED BY AND AUDIT CLIENT IN A POSITION THAT INVOLVES OR MAY INFLUENCE REPORTING PROCESS
COVERED MEMBERS
SUBJECT TO FULL RANGE OF INDEPENDENCE REQUIREMENTS 1-ACCTS ON AN ATTEST ENGAGEMENT TEAM (INCLUDES THOSE PROVIDING A 2ND OPINION. ADMIN NOT INCLUDED) 2-ACCTS IN A POSITION OF INFLUENCE ON AN ATTEST ENGAGEMENT (SENIOR FIRM MEMBERS/SUPERIORS WHO OVERSEE QUALITY CONTROL AND PERFORM PERFORMANCE EVALUATIONS) 3-PARTNERS AND SENIOR ACCT STAFF WHO PROVIDE AT LEAST 10 HOURS OF NONATTEST SERVICES (TAX OR CONSULTING) TO THE ATTEST CLIENT 4-ALL PARTNERS WHO WORK IN THE SAME OFFICE AS THE LEAD ATTEST ENGAGEMENT PARTNER (OFFICE DOES NOT MEAN GEOGRAPHIC WORKPLACE) 5-THE FIRM ITSELF
WHEN IS INDEPENDENCE REQUIRED?
WHENEVER A CPA EXPRESSES AND AUDITING OR OTHER ATTEST OPINION
CREDIT ADVANCED BY A CLIENT TO A COVERED MEMBER
-COVERED MEMBERS LOSE INDEPENDENCE IF A CLIENT EXTENDS THEM CREDIT -NOT IMPAIRED IF AN AUDOTR OBTAINS A CAR LOAN OR USE OF A CREDIT CARD ON CUSTOMARY TERMS AND CONDITIONS -OTHER COLLATERALIZED LOANS (HOME, ETC) ARE ALLOWED IN SPECIALIZED SITUATIONS *IF AUDITOR'S FEES FOR PREVIOUSLY RENDERED PROFESSIONAL SERVICES REMAIN UNPAID FOR OVER ONE YEAR, UNPAID FEES RESEMBLE A LOAN, WHICH EXTINGUISHES AUDITOR INDEPENDENCE
MORAL SEDUCTION
-GRADUAL PROCESS BY WHICH PEOPLE UNCONSCIOUSLY ADOPT THE PERSPECTIVES OF OTHERS WITH WHOM THEY REGULARLY INTERACT -GRADUALLY INDULGE CLIENT'S MINOR ETHICAL INFRACTIONS
DISCOUNTING
-LIGHTLY WEIGHT THE EFFECTS OF AN UNCERTAIN EVENT THAT POTENTIALLY MAY ARISE SEVERAL YEARS INTO THE FUTURE BUT HEAVILY WEIGHT THE DEFINITE IMPACT OF AN IMMEDIATE OCCURENCE -MAY LEAD AUDITORS TO EXPEND GENERAL EFFORT TO AVOID IMMEDIATE DISCOMFORT AND INCOME LOSS
CLOSE RELATIVE
-PARENTS, BROTHERS, SISTERS, SELF-SUPPORTING CHILDREN -ATTRIBUTED TO COVERED MEMBER ONLY IF IT IS MATERIAL TO THE RELATIVES NET WORTH OR IT ALLOWS THE RELATIVE TO EXERT SIGNIFICANCE INFLUENCE OVER CLIENT GOVERNANCE
IMMEDIATE FAMILY
-SPOUSE, SPOUSE EQUIVALENT, DEPENDENTS -STOCK IS TREATED AS BEING OWNED BY THE COVERED MEMBER
PROVIDING NONATTEST SERVICES IF:
1-CPA FIRM DOES NOT MAKE CLIENT MANAGERIAL DECISION 2-CLIENT HAS THE SKILL TO SUPERVISE AND EVALUATE NONATTEST SERVICES 3-CLIENT ACCEPTS FULL RESPONSIBILITY FOR ALL SERVICES RENDERED 4-BOTH PARTIES DOCUMENTED IN WRITING AND NATURE THE SCOPE OF THE NONATTEST SERVICES
ATTEST CLIENT SAFEGUARDS
1-EMPLOYMENT OF SKILLED PROFESSIONALS WHO CAN PROPERLY SUPERVISE SERVICES PROVIDED BY AUDIT FIRM 2-TONE AT THE TOP THAT EMPHASIZES COMMITMENT TO CANDID FINANCIAL REPORTING 3-ESTABLISHING A GOVERNANCE STRUCTURE THAT PROMOTES FORTHRIGHT COMMUNICATIONS CONCERNING FINANCIAL REPORTING ISSUES
REGULATORY BODY SAFEGUARDS
1-MANDATORY EDUCATION ON INDEPENDENCE AND ETHICS FOR NEW PROFESSIONALS -MANDATORY CONTINUAING EDUCATION -VIGOROUS MONITORING PROCESSES AND DISCIPLINARY PROCEEDINGS -EXTERNAL QUALITY CONTROL REVIEWS OF CPA FIRMS
AUDITOR SAFEGUARDS
1-POLICIES THAT IDENTIFY FINANCIAL INTERESTS/RELATIONSHIPS THAT JEOPARDIZE IND 2-POLICIES THAT SEGREGATE AUDIT PROFESSIONALS FROM FIRM PERSONNAL WHO PERFORM NONATTEST SERVICES 3-POLICIES THAT IDENTIFY EXCESSIVE RELIANCE -SCHEDULES THAT REGULARLY ROTATE SENIOR PERSONNEL TO DIFFERENT CLIENTS 4-USE OF INTERNAL SUBJECT MATTER EXPERTS TO HELP DIFFUSE UNDUE CLIENT PRESSURES 5-USE OF SENIOR FIRM MEMBER TO OVERSEE QUALITY CONTROL
HOW IS INDEPENDENCE SATISFIED?
1-independent in state of mind (mental commitment to integrity, objectivity, and professional skepticism) 2-independent in appearance (surrounding circumstances should not give an informed observer any reason to doubt auditor's integrity, objectivity, and skepticism)