Auditing Ethics, Code of Conduct, Independence, and Legal Liability

Comprehensive vocabulary flashcards covering key auditing standards, professional ethics rules, SEC filing requirements, and legal liability concepts based on the lecture material.

Securities Act of 1933

Federal legislation requiring companies to file registration statements with the SEC before issuing new securities to the public.

Prospectus

The first part of a registration statement filed with the SEC, issued as part of a public offering of debt or equity to solicit prospective investors, containing audited financial statements.

Section 11 of the Securities Act of 1933

The primary liability section from the perspective of external auditors, imposing penalties for misstatements contained in registration statements.

Securities Exchange Act of 1934

Federal law requiring regulated companies to file periodic reports with the SEC and stockholders.

Form 10-K

Annual reports filed with the SEC containing audited financial statements that must be submitted within 60 to 90 days of the end of the fiscal year.

Form 10-Q

Quarterly financial reports filed with the SEC within 40 to 45 days of the end of each of the first three quarters, which must be reviewed by auditors.

Form 8-K

Reports filed with the SEC describing the occurrence of important events.

SEC Periodic Financial Reports

Mandatory periodic reporting requirements including annual 10-K reports, quarterly 10-Q reports, and event-driven 8-K reports.

Principles of Professional Conduct

Broad principles articulating CPAs' responsibilities to act in the public interest, act with integrity and objectivity, be independent, exercise due care, and perform an appropriate scope of services.

Rules of Conduct

Detailed guidance designed to assist auditors in applying the broad principles contained in the AICPA Code of Professional Conduct.

Rule 200 (Independence)

AICPA rule requiring external auditors to be independent when providing services to either public or private entities.

Direct Financial Interest

A financial interest owned directly by, or under the control of, an individual or entity, or beneficially owned through an investment vehicle where the beneficiary controls the intermediary or participates in investment decisions.

Indirect Financial Interest

A financial interest where the beneficiary does not have control or authority to supervise or participate in the intermediary's investment decisions.

Rule 100 (Integrity and Objectivity)

AICPA rule requiring members to act with integrity and objectivity in all services that may be provided to a client.

Rule 300 (General Standards)

AICPA rule requiring compliance with standards regarding professional competence, due professional care, planning and supervision, and sufficient relevant data.

Rule 310 (Compliance with Standards)

AICPA rule requiring members performing auditing, review, compilation, consulting, tax, or other professional services to comply with designated standards.

Rule 320 (Accounting Principles)

AICPA rule prohibiting members from expressing an opinion that financial data conforms with GAAP if the statements contain material non-conforming modifications.

Privileged Communication

Information about a client that cannot be subpoenaed by a court of law to be used against a client, which most states allow for lawyers but not for auditors.

Rule 700 (Confidentiality)

AICPA rule requiring that a client be assured that an auditor will not communicate confidential information to outside parties, except under specific statutory and regulatory conditions.

Rule 510 (Contingent Fees)

AICPA rule prohibiting fee structures where collection or amount depends on a specified finding or result; strictly prohibited for audit engagements.

Rule 400 (Acts Discreditable)

AICPA rule stating that members are not allowed to commit an act discreditable to the profession.

Rule 600 (Advertising and Other Forms of Solicitation)

AICPA rule prohibiting members in public practice from seeking clients by advertising or solicitation in a false, misleading, deceptive, coercive, or harassing manner.

Rule 520 (Commissions and Referral Fees)

AICPA rule prohibiting commissions for members performing attestation (audit) services when recommending products or services to or from a client.

Rule 800 (Form of Organization and Name)

AICPA rule allowing practice of public accounting only in organizational forms permitted by state law and prohibiting misleading firm names.

Deep-Pocket Theory

The strategy of suing an external audit firm based on its perceived ability to pay damages, even if the firm was only partially responsible for the loss.

Statutory Law

Body of law developed through legislation, including the Securities Act of 1933, Securities Exchange Act of 1934, and Sarbanes-Oxley Act of 2002.

Breach of Contract

Failure to perform a contractual duty that has not been excused.

Common Law

Legal foundation under which third parties suing an auditor must prove they suffered a loss due to reliance on misleading financial statements and that the auditor knew or should have known they were misleading.

Tort

A civil wrong, other than a breach of contract, based on negligence or fraud.

Negligence

Failure to exercise reasonable care, thereby causing harm to another or to property.

Gross Negligence

Failure to use minimal care or evidence showing recklessness or careless disregard for truth.

Fraud

Intentional concealment or misrepresentation of a material fact intended to deceive another person and cause damage.

Scienter

Knowledge on the part of a person making representations, at the time they are made, that they are false.