Although professional guidance is provided to assist CPAs in making judgments about the appropriate response to individual situations, many situations tend to be in a “gray” area. Following are some scenarios that CPAs periodically encounter.

Required:

For each situation, identify the potential ethical issue involved, the appropriate action per the professional standards, and the rationale for the suggested actions.

a. The CPA is considering obtaining a loan from a major bank in the city. The bank is an audit client of the CPA’s firm.

1. The CPA is the partner in charge of the bank’s audit and wants to obtain a mortgage to build a home.

2. The CPA is a partner who does not work on the audit and wants to obtain a mortgage to build a home.

3. The CPA is a partner on the audit, but the bank is the only one that provides home mortgages in the city where the audit firm is located.
4. The partner on the audit engagement seeks a $14,000 car loan.
5. The CPA isa staff auditor seeking a home mortgage. She does not work on the audit of the bank.
6. The loan will assist the audit partner in a real estate development with several other partners. The other partnership has been successful and its track record is good. The loans are not material to the bank but are material in relationship to the partner’s total assets.

b. The CPA suspects that the audit client may be violating current environmental rules, but there is no evidence that the Environmental Protection Agency (EPA)
or state authority is aware of it. The client believes it is “stretching” the terms of existing law, but that defending a lawsuit is less costly than complying with the existing regulations. The auditor is considering whether an ethical duty exists to notify the EPA of the problem. The auditor is environmentally conscious and does not believe in social policy that would tolerate stretching environmental laws.

c. The management of a publicly held company has hired a number of relatives at extravagant salaries. The relatives do not perform any work. The cost is buried in salaries expense and no separate disclosure is presented.

d. An internal auditor discovers that a divisional manager has been systematically overcharging the government for goods sold to it on a cost-plus basis. The external auditors have not found the misstatement. The internal auditor, who is personally convinced that the activities are material and fraudulent, reports this to the president of the company, who assures the auditor that the problem will be addressed by management and that appropriate action will be taken.