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Ethics Chapter 10

independence rule
auditors must critically evaluate client financial statements and avoid circumstances that might lead an observer to doubt an auditor’s objectivity
audit opinion
CPA expresses positive assurance that financial statements do fairly present a company’s financial results and position
review opinion
CPA expresses negative assurance that is not aware of any facts that compromise the trustworthiness of financial statements
covered member
subject to the full range of independence requirements
immediate family
covered member’s spouse, spousal equivalent, and dependents
close relatives
parents, brothers, sisters, and self supporting children
seven threats to independents
familiarity threat, adverse interest threat, advocacy threat, undue influence threat, self review threat, management participation threat, self interest threat
close relationship between an accountant and client personnel makes the accountant too sympathetic to the client’s viewpoint or too reluctant to objectively challenge the client’s views
adverse interest
a client’s interests are opposite to the accountant’s interests, such as when they threaten or are in a lawsuit against each other
an accountant promotes a client’s interest such as by representing it in an administrative hearing or marketing proposal
undue influence
a client’s aggressiveness dominant personality or sphere of influence may intimidate an accountant into subordinating its judgement to the client’s views
self review
an accountant cannot objectively evaluate or audit services such as accounts receivable or payroll source document preparation, that he or she previously performed in a role essentially equivalent to being a client employee
management participation
an accountant cannot objectively evaluate or audit judgments or decisions that he or she made while serving in a role as a client director, officer, or equivalent managerial decision maker
self interest
an accountant has an economic or other interest in the success of a client or a person associated with a client. an accountant may not have any direct interest or a material indirect interest as a client
key position
managerial role in which a person has primary responsibility for preparing financial statements or significant influence on the content of financial statements
financial reporting oversight role
refers to key position
adverse interest threat
auditor’s independence is extinguished when an auditor and client have commenced, or threatened to commence, litigation against one another
advocacy threat
arises when an accountant’s service as a client representative makes others reasonably doubt her ability to remain an inpartial arbiter of facts
confirmation bias
tendency to consciously or unconsciously reinforce a previously held belief by seeking out corroborating evidence and disregarding contradictory evidence is known as
undue influence threat
when a client overreaches in its attempts to entice an auditor to subordinate its best judgment to conform to the client’s wishes
intimidation threat
client’s honorable expression of a legitimate viewpoint crosses an ethical line to become dishonorable act
self review threat
separation of responsibilities would become blurred is CPAs were allowed to prepare financial statements and review their accuracy
management participation threat
audit impairs independence when it assumes a client leadership role
knowledge spillover
result when a CPA firm performs both tax and audit services for a client
direct interest
when covered member owns one share of stock in a client
indirect interest
covered member owns a stake in another entity but does not control or influence entity’s investment decisions
material indirect interest
determined in relation to covered member’s net worth
selective perception
auditors unwittingly skew interpretations of ambiguous information to give their clients benefit of the doubt
professional skepticism
requires auditors to ask probing and occasionally prickly questions
researchers have observed people essentially make decisions using psychological present value calculation
moral seduction
gradual process by which people unconsciously adopt the perspective of others with whome they regularly interact

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