Ethical Dilemmas And Auditor Independence: Examine The Role

Ethical Dilemmas And Auditor Independence1 Examine The Role Of Profes

Examine the role of professional ethics in conducting an audit. Select an ethical dilemma that may arise during an audit and discuss how you would resolve it. Discuss auditor independence in the AICPA Code rules. Examine current safeguards available to reduce the risks of violating auditor independence. Ethics Rule and Illegal Acts. Discuss the CPA responsibility in reporting illegal acts as stated in the article below. Would the new rule reduce AICPA ethics violations? Support your conclusion. Analyze the fundamental differences between remeasurement and the translation approach when preparing a foreign currency financial statement for a company of your choice. Next, determine two to three (2-3) situations when remeasurement is most appropriate. Provide support for your position. Analyze the underlying conceptual differences between the temporal method of translation and the current rate method of translation. Determine how the balance sheet exposure differs under the two (2) aforementioned methods. Select the method that you believe provides the least balance sheet exposure. Provide a rationale for your selection.

Paper For Above instruction

Introduction

The realm of auditing is fundamentally anchored in the adherence to professional ethics and independence, ensuring integrity, objectivity, and transparency in financial reporting. Ethical dilemmas frequently challenge auditors, requiring them to navigate complex moral landscapes while maintaining public trust and complying with regulatory frameworks. Simultaneously, auditor independence is critical for credible audits, and safeguarding measures are continually evolving to mitigate risks of bias or undue influence. Additionally, the handling of illegal acts and currency translation issues exemplifies technical and ethical complexities faced by auditors. This paper explores these themes, emphasizing the importance of ethical standards, independence safeguards, legal responsibility, and methodological choices in financial statement translation.

Role of Professional Ethics in Auditing

Professional ethics serve as the backbone of auditing, guiding auditors in executing their duties responsibly and ethically (ASB, 2020). Ethics principles such as integrity, objectivity, professional competence, confidentiality, and professional behavior frame the conduct expectations for auditors (IFAC, 2018). Upholding these principles fosters trust among stakeholders and ensures accurate financial disclosures. A significant ethical dilemma that can arise during an audit involves the pressure to modify or manipulate financial statements to meet targets or conceal negative performance. For example, an auditor may be pressured by management to overlook misstatements or inflate revenues. To resolve this, the auditor must adhere strictly to ethical standards, communicate concerns to those charged with governance, and refuse to compromise independence or objectivity. If the pressure persists, escalating the issue to higher regulatory authorities or resigning from the engagement can be appropriate responses (ICAEW, 2017).

Auditor Independence in the AICPA Code

Auditor independence is a cornerstone of the AICPA Code of Professional Conduct, ensuring that auditors maintain an impartial stance free from conflicts of interest that could influence their judgment (AICPA, 2022). Independence rules encompass both independence in fact and appearance, requiring auditors to avoid relationships or transactions that could impair objectivity. Current safeguards include mandatory partner rotation, restrictions on non-audit services provided to audit clients, and peer reviews, all designed to preserve independence (Gray et al., 2019). These measures help reduce the risk of self-interest threats, advocacy threats, and familiarity threats, thereby strengthening audit quality.

CPA Responsibility in Reporting Illegal Acts

CPAs hold a critical responsibility in reporting illegal acts discovered during audits. The AICPA's Code of Professional Conduct emphasizes a duty to report suspected illegal acts that may influence financial statements or violate laws and regulations (AICPA, 2022). The recent rule mandates that CPAs discuss such suspicions with clients, providing an opportunity for remediation or disclosure to authorities if necessary. This obligation seeks to enhance ethical compliance and protect investors and the public. Whether this new rule will reduce ethics violations depends on enforcement, awareness, and the perceived repercussions of misconduct. Evidence suggests that clear reporting obligations increase accountability, but challenges remain in detecting and acting upon illegal acts (Louwers et al., 2019).

Foreign Currency Financial Statements: Remeasurement and Translation

The preparation of foreign currency financial statements involves two primary approaches: remeasurement and translation. Remeasurement converts financial statements from the foreign currency to the reporting currency based on historical exchange rates and is typically used when the functional currency is the local currency of the foreign entity (IFRS, 2021). Translation, however, involves converting the entire financial statement using a specific method suitable for the reporting purpose; the two main methods are the temporal method and the current rate method. Remeasurement is most appropriate in situations where the foreign operation is considered a subsidiary with a functional currency different from its local currency, particularly when there is significant inflation or economic instability (Kieso et al., 2021).

Differences Between Remeasurement and Translation

Remeasurement focuses on converting assets, liabilities, income, and expenses based on current and historical exchange rates, emphasizing the economic reality within the entity. In contrast, translation normalizes financial statements to conform to the reporting currency for consolidating financial statements, often for foreign subsidiaries (IAS 21, 2022). Remeasurement typically affects income statement items, leading to fluctuating reported net income, while translation impacts the balance sheet's equity and asset values without directly affecting income unless remeasurement adjustments are recognized.

Temporal Method vs. Current Rate Method

The temporal method translates monetary assets and liabilities at current exchange rates, while non-monetary items are translated at historical rates. The current rate method, however, translates all assets and liabilities at the current exchange rate, with equity balances translated at historical rates (IFRS, 2021). The fundamental difference lies in the handling of income statement items and how balance sheet exposure varies: the temporal method aligns income statement items with the rates prevailing when they were recognized, reducing balance sheet volatility. Conversely, the current rate method can lead to significant translation gains or losses due to fluctuating exchange rates, thereby increasing balance sheet exposure.

Minimum Balance Sheet Exposure and Method Selection

The temporal method generally results in lower balance sheet exposure because it matches income statement effects to the rates at the time of recognition, providing stability against exchange rate fluctuations. In contrast, the current rate method can generate substantial translation adjustments, creating volatility in the equity section of the balance sheet (Chen & Lee, 2017). Based on this analysis, the temporal method offers the least balance sheet exposure, making it more suitable for companies seeking stability in financial reporting. However, the choice depends on the company's functional currency and operational environment.

Conclusion

Ethical conduct and independence remain vital pillars of credible auditing, with professional standards guiding auditors in navigating complex dilemmas and maintaining objectivity. Safeguarding measures, including regulations and ongoing training, enhance auditor independence, critical for investor confidence. The ethical responsibilities surrounding illegal acts demand strict reporting obligations that bolster transparency and accountability. Regarding foreign currency translation, understanding the differences between remeasurement and translation and selecting appropriate methods—such as the temporal method for stability—help organizations accurately reflect their financial positions amid currency fluctuations. Together, these elements underscore the importance of integrity, transparency, and technical competence in auditing and financial reporting.

References

1. American Institute of CPAs (AICPA). (2022). Code of Professional Conduct.
2. International Accounting Standards Board (IASB). (2022). IFRS standards and guidance on foreign currency translation. IFRS Foundation.
3. International Federation of Accountants (IFAC). (2018). Conceptual Framework for Ethical Behavior. IFAC.
4. International Federation of Accountants (IFAC). (2021). Handbook of International Quality Control, Auditing, Review, Other Assurance, and Related Services Pronouncements.
5. Gray, G. L., Manson, S., & White, K. (2019). The AICPA Auditing Standards and Safeguards for Independence. Journal of Accountancy, 227(4), 56-62.
6. Institut of Chartered Accountants in England and Wales (ICAEW). (2017). Auditing and Ethical Dilemmas in Practice. ICAEW Publication.
7. Kieso, D., Weygandt, J., & Warfield, T. (2021). Intermediate Accounting (17th ed.). Wiley.
8. Louwers, T., Ramsay, R., Sinason, D., & Stallings, B. (2019). Auditing & Assurance Services (7th ed.). McGraw-Hill Education.
9. International Accounting Standards (IAS). (2022). IAS 21 – The Effects of Changes in Foreign Exchange Rates.
10. Chen, Y., & Lee, J. (2017). Exchange Rate Effects on Financial Statements: A Cross-country Analysis. Journal of International Financial Management & Accounting, 28(1), 1-24.