Quality Auditing: Why it Matters

14 important questions on Quality Auditing: Why it Matters

Direct financial interest

A direct financial interest is a financial interest owned directly by or under the control of, an individual or entity or beneficially owned tourgh an investment vehicle, estate, or trust when the beneficiary conrols that intermediary or has the authority to supervice or perticipate in the intermediary's investment decisions.

What are the two related, but distinct, public policy goals which the independence requirements serve?

1. One goal is to foster high-quality audits by minimizing the possibility that any eternal factors will influence the auditor's judgments
2. The other related goal is to promote investor confidence in the financial statements of public companies.

According to the four basic principles of the SEC statements on independence, the independence of the auditor is impaired when the auditor has a relationship that:

1. Creates a mutual or conflicting interest between the accountant and the audit client
2. Places the accountant in the position of auditing his or her own work
3. Results in the accountant acting as management or an employee of the audit client
4. Places the accountant in a position of being an advocate for the audit client
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What are the additional requirements for professional conduct for auditors of public companies

- Preapproval of services
- Fee disclosures
- Audit partner rotation
- Prohibited services (e.g. bookkeeping, financial information system inplementation and design, management functions, legal services unrelated to the audit, actuarial services etc)

What are the five fundamental principles of the Code of Ethics for Professional Accountants of the IESBA?

- Integrity
- Objectivity
- Professional Competence and Due Care
- Confidentiality
- Professional Behavior

What is a difficulty auditors face when exercising professional skepticism?

Being human: we trust others and accept information and assertions as truth. Further, if an auditor did not rust management, that auditor would presumably cease to perform audit services for that client.

How can audit firms be sure that they maintain and exercise appropriate professional skepticism?

- Training on how to be skeptical
- Create firm policies and procedures to encourage skepticism

When does an ethical dillemma occurs?

An ethical dillemma occurs when there are confliciting moral duties or an individual is ethically required to take an action that may conflic with his or her immediate self-interest.

What does the rights theory requires?

It requires that the 'rights'of affected parties be examined as a constraint on ehical decision making.

Ethical decision making framework

1. Identify the ethical issue(s)
2. Determine the affected parties and identify their rights
3. Determine the most important rights
4. Develop alternative courses of actions
5. Determine the likely consequences of each proposed course of action
6. Assess the possible conseuqences
7. Decide on the approprate course of action

What are the three things that can happen in the beginning-of-period client portfolio?

- Client-initiated departures
- Client continuance decisions
- Client acceptance decisions

Which evaluation is important by client continuance decisions and client acceptance decisions?

- Risk
- Audit fees

Auditors should provide aut services only when the preconditions for an audit are present. These preconditions are:

- Management's use of an acceptable financial reporting framework
- The agreement of management that it acknowledges and understands its responsibilities

Indirect financial interest

An indirect financial interest occurs when the beneficiary neither controls the intermediary nor has the authority to supervise or participate in the intermediary's investment decisions. The concept is that a covered member may have some limited financial interest in clients as long as the interest are not direct and not material.

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