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What two things does independence require?
- Independence of Mind
- Independence in Appearance
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Independence of Mind
The state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgement.
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Independence in Appearance
The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would reasonably conclude that a person's integrity, objectivity, or professional skepticism had been compromised.
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Threats to Noncompliance/Independence
- Self-interest
- Self-Review
- Advocacy
- Familiarity
- Intimidation
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Safeguards created by the profession, legislation, or regulation
- Education, training, experience requirements for entry
- Continuing education
- Professional standards, monitoring, discipline
- External review
- External review of firm's quality control
- Legislation
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Safeguards within a client
- Appointment of auditors, approved by others than management
- Client has competent staff
- Internal procedures to ensure objective choices
- Corporate governance structure
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Safeguards within a professional accounting firm
- Leadership stressing independence and public interest
- Policies to implement and monitor assurance engagements
- Documented independence policies
- Policies to monitor reliance on revenue from a single client
- Using partners with separate reporting lines
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Most common conflicts of interest for accountants
- Self-interest versus interests of other stakeholders
- Self-interest and interest of stakeholder versus other stakeholder interest
- Interest of one client over another
- Interest of one or more stakeholders over other stakeholder(s)
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Caution should be exercised in the application of legal standards to ethical problems because...
- Law is always changing and lags behind society
- What is legal is not always ethical
- Legal interpretations are not relevant when sued
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Private Securities Reform Act
Changes auditor liability from having to share equally with the partners to having to bear a portion allocated by the jury.
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Haig v Bamford
An accountant will be found liable to a third party where the accountant had actual knowledge of the limited class of which the third party is a member, and that third party will use and rely on the statement.
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Caparo foreseeability test
A duty is said to arise only where the auditor knew the purpose for which the financial statements were to be used by the person relying on them.
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Ultramares
An immediate legal relationship (contract) must exist between the parties in order for one to be liable to another.
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Five defenses and proactive measures for auditors
- Due diligence and due care
- Contributory negligence
- Engagement letter provisions
- Documentation and record keeping
- Legal counsel
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