Deck 17: The Ethical Auditor: Factors Affecting Auditor Decision Making

Question 1

You have been tasked with drafting a code of ethical conduct for your firm. What should you include?

Answer 1

a. The fundamental principles in a code of ethical conduct as defined by IFAC should incorporate rules of professional behavior in the following areas:
i) Integrity: A professional accountant should be straightforward and honest in performing professional services.
ii) Objectivity: A professional accountant should be fair and should not allow prejudice or bias, conflict of interest, or influence of others to override objectivity.
iii) Professional Competence and Due Care: A professional accountant should perform professional services with due care, competence, and diligence, and maintain professional knowledge and skill at a level required to ensure that a client receives competent, up-to-date, professional service.
iv) Confidentiality: A professional accountant should respect the confidentiality of information acquired during the course of an engagement and should not use or disclose any such information without proper and specific authority or unless there is a legal or professional right or duty to disclose.
v) Professional Behavior: A professional accountant should act in a manner consistent with the good reputation of the profession and refrain from conduct that might discredit the profession.
vi) Technical Standards: A professional accountant should provide professional services in accordance with the relevant technical and professional standards and should exercise due care and skill. The auditor should also comply with the instructions of the client insofar as they are compatible with the requirements of integrity, objectivity, and independence.
b. Communicating quality control problems to firm leadership:
A mechanism should be established and promoted which permits professional staff to communicate quality control problems including ethical problems which arise on engagements or in other matters to the firm leadership.

Question 2

What three basic heuristics or ways of simplifying complex information processing tasks might affect an auditor's professional judgment?

Answer 2

a. Availability Heuristic: An individual's ability to identify options and evaluate likely outcomes is often affected by his or her own prior experiences, how quickly something can be retrieved from memory, or the stimuli's salience.
b. Representativeness Heuristic: Individuals often use stereotypes for evaluating new situations. Similarities between familiar and unfamiliar situations may cause an individual to judge that an unfamiliar situation is similar to a situation previously encountered, and should be handled in a similar manner.
c. Anchoring and Adjustment Heuristic: In many decision contexts, an individual approaches a decision with a preconceived notion or prior expectation of the appropriate choice to make. The anchoring and adjustment heuristic reflects the tendency of an individual to inadequately revise his or her opinion in the face of new information.

Question 3

Briefly describe five philosophical frameworks for evaluating ethical behavior.

Answer 3

a. Utilitarianism involves making decisions that will provide the greatest benefit to the greatest number.
b. The Golden Rule involves making decisions that result in treating others in a manner in which the individual making the decision would like to be treated (assuming the individual is not sadistic, masochistic, or suicidal).
c. Theory of Rights suggests that the rights of a decision maker and other parties should be equally balanced in making a decision.
d. Theory of Justice suggests that decisions should treat all stakeholders fairly, impartially, and equitably.
e. Enlightened Self-Interest involves pursuing long term self-interests and avoiding a short-term focus that might harm others.

Question 4

Your firm is reviewing its quality control standards for acceptance and continuance of clients. What policies and procedures should be included?

Question 5

What elements of non-sampling risk may be due to errors in judgment or may result because of ethical lapses?

Question 6

Clearly, the nature of the audit creates some tension for the auditor between his own individual ethics and organizational actions. What institution forces create tension for the auditor between individual ethics and organization actions?

Question 7

What are the requirements of good audit firm quality control standards concerning human resources?

Question 8

What factors, both inside the firm and outside of the firm, motivate auditors toward making ethical decisions?

Question 9

What are some safeguards to protect independence?

Question 10

Your firm is reviewing its status and policies with regard to independence. You have been asked to research the nature of the threats to auditor independence and provide a brief report to the review committee.

Question 11

As an auditor or accountant, what are the six steps that an individual's decision process follows for deciding among multiple alternatives?

Question 12

In the wake of numerous financial and audit scandals and the Sarbanes-Oxley Act, your firm desires to reduce the potential effect of ethical dilemmas and judgment biases on the audit process. What techniques do you suggest?

Question 13

When are auditor judgments ethical in nature? How are Arthur Andersen and Enron an example of ethical failure?

Question 14

What are some reasons that extensive psychological research suggests even well-intentioned auditors may make mistakes in professional judgment?

Question 15

Describe some important judgments in the audit process.

Question 16

The SEC independence rules issued in 2000 and the Sarbanes-Oxley Act independence rules from 2002 prohibit a number of other relationships and services for public companies registered with the SEC. Describe three examples of these types of relationships and services.

Question 17

Accountants and auditors are members of a profession. What are the hallmarks of a profession?

Question 18

What is ethics and how does it affect individual behavior?

Question 19

In the wake of recent scandals, your firm is considering ways to limit exposure to this type of event. In considering the possible ways that ethical breaches happen, you have been asked to answer this question: Why do good people do questionable things?

Question 20

What is the independence requirement expected of auditors? What is the danger of a perception of lack of independence? …of independence in fact?