Professional Documents
Culture Documents
Chapter 3
Understanding and
Meeting Ethical
Expectations
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Independence: A Foundation
Requirement
Auditors express an opinion about whether
financial statements are fairly presented
To be perceived as creditable, auditors must be
independent in fact and appearance
In fact, means the member must be unbiased
and objective
In appearance means that knowledgeable
users of financial statements must believe the
auditor is independent
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Independence Safeguard: A
Proactive Approach
Actions that firms can take to safeguard independence:
The firm's leadership sets the proper "tone at the top"
Communications with client's audit committee on matters that
may affect the firm's independence
Participating in peer review programs
Implement quality control standards
Set up internal monitoring and compliance procedures
Require professional staff to communicate to firm
management any independence or objectivity issues of
concern
Encourage partner peer review by someone outside of the
audit engagement
Periodically rotate partner in charge of the audit engagement
Monitor threats to independence
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Ethical Theories:
Resolving Issues
Ethical problem occurs when an individual is
morally or ethically required to take an action that
conflicts with his or her immediate self-interest
Ethical dilemma occurs when there are
conflicting moral duties or obligations
Ethical theories present frameworks to assist
individuals in dealing with both ethical problems
and dilemmas. Two such frameworks - utilitarian
theory and rights theory - have influenced the
development of codes of conduct and can be
used by professionals dealing with ethical issues
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Utilitarian Theory
Utilitarian theory - an action is ethical if it achieves
the greatest good for the greatest number of
people. Utilitarianism requires:
Identify potential problem and courses of action
Identify potential impact of actions on each affected
party
Assess the desirability of each action
Perform overall assessment of the greatest good for
the greatest number
Rights Theory
Rights theory - evaluates actions based on the
fundamental rights of the parties involved. Uses
a hierarchy of rights where higher-order rights
take precedence over lower-order rights.
Rights theory requires the rights of affected
parties be examined as a constraint on ethical
decision making.
It is most effective in identifying outcomes that
should be eliminated or identifying situations in
which the utilitarian answer would be at odds
with most societal values.
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