AICPA Code of Professional Conduct and Independence – Key Terms (Vocabulary)

Vocabulary flashcards covering key concepts related to independence, professional conduct, ethical conflicts, and tax service standards from the lecture notes.

Threats to Independence

Situations that impair independence in fact or appearance; examples include self-review, advocacy, adverse interest, familiarity, undue influence, financial self-interest, and management participation.

Self-Review Threat

When the auditor reviews their own previous work or inappropriately evaluates a decision they helped make, compromising objectivity.

Advocacy Threat

Promoting a client’s interests or representing the client in disputes, which can impair objective judgment.

Adverse Interest Threat

Litigation or antagonism between the client and the auditor that threatens independence.

Familiarity Threat

A close or long-standing relationship with client personnel that erodes objectivity.

Undue Influence Threat

Pressure from a client to influence the auditor’s judgments or to replace the auditor.

Financial Self-Interest Threat

Having a financial stake in the client or related parties that impairs objectivity.

Management Participation Threat

Auditing firm takes on client management responsibilities or internal controls, compromising independence.

Safeguards

Measures to mitigate threats to independence, such as tone at the top, policies, training, and third-party consultation.

Tone at the Top

Leadership’s ethical attitude and actions that establish an integrity-driven culture within the organization.

External Consultation

Seeking advice from third parties (professional bodies, legal counsel, or other CPAs) to mitigate threats.

Conceptual Framework for Independence

A risk-based approach identifying threats, applying safeguards, and determining if threats are mitigated to maintain independence.

Independence in Fact and Appearance

Independence is required both in reality (fact) and in how others perceive the auditor (appearance).

Subordination of Judgment

Knowingly misrepresenting facts or deferring to others in a way that undermines professional judgment.

Integrity and Objectivity

core ethical principles; conflicts of interest threaten these, requiring safeguards and disclosure.

Professional Skepticism

A questioning mindset that enhances independent thought and evidence gathering in audits.

System 2 Thought Process

Deliberate, analytical reasoning used to apply ethical principles and evaluate evidence.

KPMG Professional Judgment Framework

A framework for decision-making: clarify issues, consider alternatives, gather information, reach conclusions, and document rationale.

Ethical Conflicts

Situations where conflicts of interest challenge ethical decision-making and may require safeguards or disclosures.

Nonattest Services to an Attest Client

Certain nonaudit services that pose conflicts; auditors should not perform management functions for attest clients; governance safeguards are needed.

Materiality in Independence

Using materiality to judge whether nonaudit services impair independence; can complicate or obscure improper relationships.

SEC Actions Against Big Four

Examples of SEC-enforced independence or conduct violations involving PwC, EY, KPMG, and Deloitte.

General Standards

Rules requiring competence, adherence to professional standards, and appropriate accounting principles.

Acts Discreditable

Actions that bring discredit to the profession (e.g., discrimination, negligence, failure to file taxes, etc.).

Confidentiality

Not disclosing client information without consent, with permitted disclosures under certain conditions (e.g., subpoenas, legal requirements).

SSTS – Tax Services Standards

Standards governing tax practice, including how tax positions are advised and disclosed to clients and authorities.

SSTS No. 1 – Tax Return Positions

Tax positions advised or known by the CPA with a realistic possibility of success, plus disclosure responsibilities and penalties for noncompliance.

SSTS 1-1 – Reporting and Disclosure Standards

Process for determining if a tax position will be sustained, including facts, reasonableness, authorities, business purpose, and economic substance.

Circular 230 – Conflicts of Interest

IRS practice rules prohibiting conflicts of interest; allows waivers under specified conditions.

Waiver of Conflicts of Interest

Conditions under which a conflict may be waived, typically requiring competence, legality, and written informed consent.