DISCUSSION QUESTIONS AND PROBLEMS
4-21 (OBJECTIVES 4-1, 4-2) Newspaper headlines frequently highlight instances where business professionals, politicians, and others are accused of engaging in unethical behavior.
In response, there have been numerous attempts to reduce their occurrence. For example,
some have argued for universities to include more courses in ethics.
a. Describe what constitutes “ethics” and highlight the challenges of developing a set of
rules and guidance to increase ethical behavior in society.
b. Why is ethics important to the conduct of business in a market-based economy?
c. Why do individuals act unethically?
d. What are common rationalizations individuals use to justify their unethical behavior?
e. Discuss whether ethics should be taught, for example, in university courses.
4-22 (OBJECTIVES 4-5, 4-6) The following situations involve the provision of nonaudit services.
Indicate whether providing the service is a violation of AICPA rules or SEC rules including
Sarbanes–Oxley requirements on independence. Explain your answer as necessary.THE
AUDITING PROFESSION
a. Providing advice to a private company client on accounting for a merger with another
private company.
b. Providing bookkeeping services to a private company. The source documents were
prepared and authorized by the client.
c. Providing internal audit services to a public company that is not an audit client.
d. Implementing a financial information system designed by management for a private
company.
e. Recommending a tax shelter to a client that is publicly held. The services were preap-
proved by the audit committee.
f. Providing bookkeeping services to a public company. The services were preapproved
by the audit committee of the company.
g. Providing internal audit services to a public company audit client with the preap-
proval of the audit committee.
4-23 (OBJECTIVES 4-5, 4-7) Each of the following situations involves a possible violation of
the AICPA Code of Professional Conduct. For each situation, state the applicable rule of con-
duct and whether it is a violation.
a. Stefan, CPA, provides tax services, management advisory services, and bookkeeping
services and also conducts audits for the same nonpublic client. Because the firm is
small, the same person often provides all the services.
b. Roberta Marteens is a CPA, but not a partner, with three years of professional experi-
ence with Johnson and Batchelor, CPAs. She owns 25 shares of stock in an audit client
of the firm, but she does not take part in the audit of the client, and the amount of
stock is not material in relation to her total wealth.
c. A nonaudit client requests assistance of Taylor Bordeaux, CPA, in the installation of a
local area network. Bordeaux has no experience in this type of work and no knowl-
edge of the client’s computer system, so she obtains assistance from a computer
consultant. The consultant is not in the practice of public accounting, but Bordeaux
is confident of her professional skills. Because of the highly technical nature of the
work, Bordeaux is not able to review the consultant’s work.
d. In preparing the personal tax returns for a client, Sarah Milsaps, CPA, observed that
the deductions for contributions and interest were unusually large. When she asked
the client for backup information to support the deductions, she was told, “Ask me no
questions, and I will tell you no lies.” Milsaps completed the return on the basis of the
information acquired from the client.
e. Silvia Panster, CPA, set up a casualty and fire insurance agency to complement her
auditing and tax services. She does not use her own name on anything pertaining to
the insurance agency and has a highly competent manager, Meg Emrich, who runs
it. Panster often requests Emrich to review the adequacy of a client’s insurance with
management if it seems underinsured. She believes that she provides a valuable ser-
vice to clients by informing them when they are underinsured.
f. Seven small Austin, Texas, CPA firms have become involved in an information proj-
ect by taking part in an interfirm working paper review program. Under the pro-
gram, each firm designates two partners to review the audit files, including the tax
returns and the financial statements, of another CPA firm taking part in the pro-
gram. At the end of each review, the auditors who prepared the working papers and
the reviewers have a conference to discuss the strengths and weaknesses of the audit.
They do not obtain authorization from the audit client before the review takes place.
g. Francisco Hernandez, CPA, serves as controller of a U.S.-based company that has a
significant portion of its operations in several South American countries. Certain
government provisions in selected countries require the company to file financial
statements based on international standards. Francisco oversees the issuance of the
company’s financial statements and asserts that the statements are based on interna-
tional financial accounting standards; however, the standards he uses are not those
issued by the International Accounting Standards Board.
PROFESSIONAL ETHICS
4-24 (OBJECTIVES 4-5, 4-7) Each of the following situations involves possible violations of the
AICPA Code of Professional Conduct. For each situation, state whether it is a violation of the Code.
In those cases in which it is a violation, explain the nature of the violation and the rationale
for the existing rule.
a. Jessica Alma has been serving as the senior auditor on the audit of Carolina BioHealth,
Inc. Because of her outstanding work, the head of internal audit at Carolina BioHealth
extended her an offer of employment to join the internal audit department as an audit
manager. When the discussions with Carolina BioHealth began, Jessica informed her
office’s managing partner and was removed from the audit engagement.
b. The audit firm of Miller and Yancy, CPAs, has joined an association of other CPA
firms across the country to enhance the types of professional services the firm can
provide. Miller and Yancy share resources with other firms in the association, includ-
ing audit methodologies, audit manuals, and common IT systems for billing and time
reporting. One of the partners in Miller and Yancy has a direct financial interest in the
audit client of another firm in the association.
c. Spencer Dunn is the partner in charge of the audit of Brentwood Bank. Dunn is in the
process of purchasing a mountain house and has obtained mortgage financing from
Brentwood Bank.
d. Melanie Greer’s audit client has a material investment in Summit, Inc. Greer’s non-
dependent parents also own shares in Summit, and Summit is not an attest client of
Greer’s firm. The amount of her parent’s ownership in Summit is not significant to
Greer’s net worth.
e. Joe Pugh is a former partner in Pinnacle and Hughes, CPAs. Recently, he left the firm to
become the chief operating officer of Ensworth Clothing, Inc., which is an audit client of
Pinnacle and Hughes. In his new role, Pugh has no responsibilities for financial reporting.
Pinnacle and Hughes made significant changes to the audit plan for the upcoming audit.
f. Odonnel Incorporated has struggled financially and has been unable to pay the audit
fee to its auditor, Seale and Seale, CPAs, for the 2017 and 2018 audits. Seale and Seale
is currently planning the 2019 audit.
g. Morris and Williams, a regional CPA firm, is providing information systems consult-
ing to one of their publicly traded audit clients. They are assisting in the implementa-
tion of a new financial reporting system selected by management.
h. Chris Lancaster is a financial analyst in the financial reporting department of
Cockerham International, a privately held corporation. Chris was asked to prepare
several journal entries for Cockerham International related to transactions that have
not yet occurred. The entries are reflected in financial statements that the company
recently provided to the bank in connection with a loan outstanding due to the bank.
4-25 (OBJECTIVE 4-5) Marie Janes encounters the following situations in doing the audit of a
large auto dealership. Janes is not a partner.
1. The sales manager tells her that there is a sale (at a substantial discount) on new cars
that is limited to long-established customers of the dealership. Because her firm has
been doing the audit for several years, the sales manager has decided that Janes should
also be eligible for the discount.
2. The auto dealership has an executive lunchroom that is available free to employees
above a certain level. The controller informs Janes that she can also eat there any time.
3. Janes is invited to and attends the company’s annual holiday party. When presents
are handed out, she is surprised to find her name included. The present has a value of
approximately $200.
Use the three-step process in the AICPA conceptual framework to assess whether Janes’
independence has been impaired.
a. Describe how each of the situations might threaten Janes’ independence from the
auto dealership.
b. Identify a safeguard that Janes’ firm could impose that would eliminate or mitigate
the threat of each situation to Janes’ independence.
c. Assuming no safeguards are in place and Janes accepts the offer or gift in each situa-
tion, discuss whether she has violated the rules of conduct.
d. Discuss what Janes should do in each situation
