2 Professional Responsibilities Flashcards
(217 cards)
1
Q
What is the AICPA Code of Professional Conduct?
A
It governs the performance of professional responsibilities by members of the American Institute of Certified Public Accountants (AICPA).
2
Q
What are the principles of the AICPA’s Code of Professional Conduct?
A
- Responsibilities
- The public Interest
- Integrity
- Objectivity and Independence
- Due Care
- Scope and Nature of Services
3
Q
What is the principle of responsibility?
A
All members should exercise sensitive professional and moral judgments when carrying out their professional responsibilities.
4
Q
What is the principle of the public interest?
A
All members should act to benefit the public interest, honor the public trust, and demonstrate commitment to professionalism..
5
Q
What is the principle of Integrity?
A
All members should perform all professional responsibilities with the highest sense of integrity to maintain public confidence. This requires a member to be honest and candid within the limits of client confidentiality.
6
Q
What is the principle of objectivity and independence?
A
All members should maintain objectivity and be free of conflicts of interest. Objectivity is a state of mind that lends value to a member’s services and is a distinguishing feature of the profession.
- a member must be impartial, intellectually honest, and free of conflicts of interest
- a member in public practice should be independent in fact and appearance when providing attestation services.
- a member not in public practice need not be independent
7
Q
What is the principle of due care?
A
All members hould:
- follow the profession’s technical and ethical standards
- strive for improved competence and quality services
- discharge professional responsibility to the best of their ability
7
Q
What is the principle of due care?
A
All members hould:
- follow the profession’s technical and ethical standards
- strive for improved competence and quality services
- discharge professional responsibility to the best of their ability
8
Q
What is the principle of scope and nature of services?
A
A member in public practice should follow the principles of the Code of Professional Conduct in determining the nature and scope of services.
This is for members in public practice only
9
Q
What are the Rules of Conduct that apply to members in public practice?
A
- integrity and objectivity
- independence
- general standards
- compliance with standards
- accounting principles
- acts discreditable
- contingent fees
- commissions and referral fees
- advertising and other forms of solicitation
- confidential client information
- form of organization and nature
These rules also apply to members in business
10
Q
What are considered professional services?
A
All services requiring accounting and related skills that are:
- performed for a client
- performed for an employer
- performed as a volunteer
10
Q
What are considered professional services?
A
All services requiring accounting and related skills that are:
- performed for a client
- performed for an employer
- performed as a volunteer
11
Q
Who issues interpretations?
A
The AICPA’s Professional Ethics Executive Committee provide guidelines for the scope and application of the Rules but do not limit their scope or application.
- Interpretations are enforceable because they guide implementation of the Rules
- A member who departs from an interpretation must justify such action in any disciplinary hearing
11
Q
Who issues interpretations?
A
The AICPA’s Professional Ethics Executive Committee provide guidelines for the scope and application of the Rules but do not limit their scope or application.
- Interpretations are enforceable because they guide implementation of the Rules
- A member who departs from an interpretation must justify such action in any disciplinary hearing
12
Q
When should a member consult the conceptual framework for members in public practice section of the code?
A
Whether or not the member is in business, the conceptual framework is applied when a member is confronted with a professional responsibility issue for which no specific rule governs.
13
Q
What are the steps in the conceptual framework?
A
- Identify threats
- Evaluate the significance of a threat
- Identify and apply safeguards
14
Q
What are threats?
A
Relationships or circumstances that a member encounters in various engagements and work assignments that may compromise compliance with the rules.
15
Q
What is evaluating the significance of a threat?
A
In evaluating the significance of an identified threat, the member should determine whether a threat is at an acceptable level. A threat that is an acceptable level when a reasonable and informed third party who is aware of the relevant information would be expected to conclude that the threat would not compromise the member’s compliance with the rules.
16
Q
What is identifying and applying safeguards?
A
If, in evaluating the significance of an identified threat, the member concludes that the threat is not an acceptable level, they should apply safeguards to eliminate the threat or reduce it to an acceptable level.
17
Q
What are the 7 types of threats?
A
- Adverse interest threat
- Advocacy threat
- Familiarity threat
- Management participation threat
- Self-interest threat
- Self-review threat
- Undue influence threat
17
Q
What are the 7 types of threats?
A
- Adverse interest threat
- Advocacy threat
- Familiarity threat
- Management participation threat
- Self-interest threat
- Self-review threat
- Undue influence threat
18
Q
What is an adverse interest threat?
A
A member may not act with objectivity because his or her interests are opposed to the client’s interests.
19
Q
What are examples of adverse interest threats?
A
- a client has expressed an intention to commence litigation against the member
- a client or offier, director, or significant shareholder of the client participates in litigation against the member’s firm
- a subrogee (an insurer) asserts a claim against the member’s firm for recovery of insurance payments made to the client.
- a class action lawsuit is filed against the client and its officers and directors as well as the firm and its professional accountants
19
Q
What are examples of adverse interest threats?
A
- a client has expressed an intention to commence litigation against the member
- a client or offier, director, or significant shareholder of the client participates in litigation against the member’s firm
- a subrogee (an insurer) asserts a claim against the member’s firm for recovery of insurance payments made to the client.
- a class action lawsuit is filed against the client and its officers and directors as well as the firm and its professional accountants
20
What is an advocacy threat?
A member may promote a client's interests or position to the extent that his or her objectivity or independence is compromised.
21
What are examples of advocacy threats?
1. a member provides forensic accounting services to a client in litigation or a dispute with third parties
2. a firm acts as an investment adviser for an officer, a director, or a 10% shareholder of a client
3. a firm underwrites or promotes a client's shares
4. a firm acts as a registered agent for a client
5. a member endorses a client's services or products
22
What are familiarity threats?
Due to a long or close relationship with a client, a member may become too sympathetic to the client's interests or too accepting of the client's work or product.
23
What are example of familiarity threats?
1. a member's immediate family or close relative is employed by the client
2. a member's close friend is employed by the client
3. a former partner or professional employee joins the client in a key position and has knowledge of the firm's policies and practices for the professional services engagement
4. senior personnel have a long association with a client
5. a member has significant close business relationship with an officer, a director, or a 10% shareholder of a client
24
What is the management participation threat?
A member may take on the role of client management or otherwise assume management responsibilities, during an engagement to provide nonattest services.
25
What is the self-interest threat?
A member may benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client.
26
What are examples of self- interest threats?
1. a member has financial interest in a client and the outcome of a professional services engagement may affect the fair value of that financial interest.
2. the spouse of a member enters into employment negotiations with the client
3. a firm enters into a contingent fee arrangement for a tax refund claim that is not a predetermined fee
4. excessive reliance on revenue from a signle client exists
27
What are self-review threats?
A member may benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client.
28
What are examples of self-review threats?
1. a member relieson the work product of the member's firm
2. a member performs bookkeeping services for a client
3. a partner in a member's office was associated with the client as an employee, an officer, a director, or a contractor
29
What is are undue influence threats?
A member may subordinate his or her judgment to an individual assiciated with a client or any relevant third party due to an individual's:
1. reputation or expertise
2. aggressive or dominant personality
3. attempts to coerce or exercise excessive influence over the member
29
What are examples of undue influence threats?
1. a firm is threatened with dismissal from a client engagement
2. a client indivates that it will not award additional engagements to a firm if the firm continues to disagree with the client onan accounting or tax matter
3. an individual associated with a client or any relevant third party threatens to withdraw or terminate a professional service unless the member reaches certain judgments or conclusions
30
What are safeguards?
Safeguards may partially or completely eliminate a threat or diminish the potential influence of a threat.
31
What are the 3 categories of safeguards?
1. Safeguards created by the profession, legislation, or regulation
2. Safeguards implemented by the client
3. Safeguards implemented by the CPA firm
32
What are examples of safeguards created by the profession, legislation, or regulation?
1. education and training requriements on independence and ethics rules
2. external review of a firm's quality control system
3. legislation establishing prohibitions and requrements for a firm or a firm's professional employees
4. professional resources, such as hotlines, for consultation on ethical issues
32
What are examples of safeguards created by the profession, legislation, or regulation?
1. education and training requriements on independence and ethics rules
2. external review of a firm's quality control system
3. legislation establishing prohibitions and requrements for a firm or a firm's professional employees
4. professional resources, such as hotlines, for consultation on ethical issues
33
What are examples of safeguards implemented by the client?
1. tone at the top emphasizes the client's commitment to fair financial reporting and compliance
2. policies and procedures are in place to address ethical conduct, or achieve fair financial reporting and compliance with the applicable laws, rules, regulations, and corporate governance policies.
3. a governance structure, such as an active audit committee, is in place to ensure appropriate decision making
34
What are examples of safeguards implemented by the CPA firm?
1. firm leadership stressing the importance of complying with the rules and the expectation that engagement teams will act in the public interest
2. policies and procedures designed to implement and monitor engagement quality control or promote appropriate professional conduct
3. someone from senior management designated as the person responsible for overseeing the firm's quality contorl system and ensuring it is functioning adequately
4. a disciplinary mechanism designed to promote compliance with policies and procedures
35
What is the conceptual framework for members in business?
This section of the code should be consulted by members in business whether or not they are in public practice.
36
What are the 3 steps of the conceptual framework for members in business?
1. identify threats
2. evaluate the significance of a threat
3. identify and apply safeguards
37
What are types of safeguards for a member in business?
1. safeguards created by the profession, legislation, or regulation
2. safeguards implemented by the employing organization
38
What are examples of safeguards created by the profession, legislation, or regulation for members in business?
1. education and training requirements for ethics and professional responsibilities
2. legislation establishing prohibitions and requirements for entities and employees
3. competency and experience requirements for professional licensure
39
What are examples of safeguards created by te employing organization for members in business?
1. tone at the top emphasizing a commitment to fair financial reporting and compliance with applicable laws, rules, regulations, and corporate governance policies
2. policies and procedures addressing ethical conduct and compliance with applicable laws, rules, and regulations
3. human resource policies and procedures safeguarding against discrimination or harassment, such as those related to a worker's religion, sexual orientation, gender, or disability
4. policies and procedures for implementing and monitoring ethical policies
40
What are examples of knowing misrepresentations in preparation and presentation of information?
1. Knowingly making materially false and misleading entries in fiancial statements or records
2. Failing to correct materially false or misleading statements or records when the member has such authority
3. Signing a document with materially false and misleading information
40
Members may be associated with misleading information, what should members consider?
1. Consulting the employing organization's policies and procedures (Ex - ethics or whistleblowing policy) regarding how such matters should be addressed internally
2. Discussing concerns with the 1) member's supervisor, 2) management, or 3) those charged with governance
41
What should a member consider if appropriate corrective action is not taken regarding misrepresented or misleading information?
1. Consulting with a relevant professional body or the employing organization's internal auditor or external accountant
2. Determining whether any requirements exist to communicate to third parties, including users, external accountants, or regulators
3. Consulting legal counsel regarding the member's responsibilities
42
What should a member do if, after exausting all feasable options, the member determines appropriate action has not been taken regarding misrepresented or misleading information?
The member should refuse to be or to remain associated with the information.
43
Can conflicts of interest be permitted?
Yes, in certain circumstances if disclosure is made to, and consent is obtained from, the appropriate parties.
44
Can conflicts of interest be permitted?
Yes, in certain circumstances if disclosure is made to, and consent is obtained from, the appropriate parties.
45
Can an independence objection be overcome by disclosure and consent?
No
46
What are examples of conflicts of interest?
1. Performing litigation services for the plaintiff when the defendant is a client.
2. Representing two clients in the same matter at the same time who are in a legal dispute.
3. Suggesting that a client invest in a business in which the member has an interest.
4. Providing tax or personal financial planning services to family members with conflicting interests
5. Providing services to a seller and a buyer in the same transaction
## Footnote
EX - divorce or dissolution of a partnership
47
What are a member's obligation to the employer's external accountant?
A member in business must be candid and not knowingly misrepresent facts or fail to disclose material facts.
48
If a member and their supervisor or any person within the organization have differences of opinion, and the member concludes that the position taken by others is not in compliance but does not result in a material misrepresentation of fact or violation of laws or regulations are the threats considered significant?
No
49
What should the member consider if, after discussing with the supervisor, the difference of opinion is not resolved with higher levels of mangement?
1. Determining whether any additional reporting requirements exist
2. Consulting legal counsel
3. Documenting his or her understanding of the issues and the nature of the discussions.
50
What should the member do, if a difference of opinion and they conclude that an appropriate action was not taken and a material misrepresentation of fact or violation of laws or regulations exist?
The member should consider ending his or her relationship with the member's organization and take appropriate steps to eliminate his or her exposure to subordination of judgment.
51
What are examples of other issues related to integrity and objectivity?
1. A member is required to disclose the use of a third-party service provider when offering professional services. If the client objects, the third-party service provider may not be used.
2. A member in business must act with objectivity and integrity when providing educational services, such as teaching and research.
3. A member should consider the risks to integrity and objectivity when providing services related to client advocacy
4. A member should not allow pressure from others to result in a breach of the integrity and objectivity rule. A member should also not place pressure on others to breach the rule.
52
What is the independence rule?
A member in public practice must be independent when performing professional services as required by standards issued by bodies designated by the AICPA Council.
53
What are the bodies designated by the AICPA council to issue standards?
- The AICPA
- The Securities and Exchange Commissoin (SEC)
- The Public Company Accounting Oversight Board (PCAOB)
- The Government Accountability Office (GAO)
- The Department of Labor (DOL)
54
As defined by the professional ethics executive committee, a member must have independence of mind and independence in appearance, what does that mean?
1. Mind - The member must intellectually honest
2. Appearance - The member must be free of any obligation to, or interest in, the client, management or owners
55
What is independence of mind (fact)?
Permits a member to perform an attest service without being affected by influences that compromise professional judgement, thereby allowing an individual to act with integrity and exercise objectivitiy and professional skepticism.
56
What is independence in appearance?
The avoidance of circumstances that would cause a reasonable and informed third party who has knowledge of all relevant information, including the safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or a member of the attest engagement team is compromised.
57
Independence is impaired if a covered member has certain interests or relationships, a covered member includes?
1. An individual on the attest engagement team
2. An individual who can influence the engagement
3. A partner (or equivalent) or manager who provides more than 10 hours of nonattest services to a client
4. A partner (or equivalent) in the office where the lead engagement partner primarily practices in relation to the engagement
5. The accounting firm, including the firm's employee benefit plans
6. An entity whose policies can be controlled by the foregoing parties, alone or acting together.
| In general, the definition of covered members includes those in a positi
58
When is independence impaired?
If a covered member has any direct financial interest in an attest client during the period of the engagement.
## Footnote
The restriction includes the covered member's immediate family (spouse and dependents)
59
What is financial interest?
A financial interest is ownership in an equity or debt security issued by an entity, including an option or derivative.
60
What is a direct financial interest?
A financial interest is direct if it is based on direct ownership, control or beneficial ownership through an intermediary (Ex - estate trust, or investment vehicle controlled by the beneficiary).
61
What are types of direct financial interests?
When a covered member:
1. owns shares in a mutual fund that is an attest client
2. participates in an employee benefit plan sponsored by an attest client
3. owns bonds issued by an attest client
4. owns a prepaid (529) tuition plan administered by an attest client
5. owns shares of a client that are held in a blind truest for the covered member, if the member has various rights, such as the power to amend or revoke the trust or to control the trust
## Footnote
An unsolicited financial interest in a client, such as through a gift or inheritance, does not impair independence if dosposed within 30 days
62
Is independence impaired if a covered member has a loan?
Yes, if a covered member has a loan to or from an attest client, or its officers, directors, or owners (10% or greater), during the period of the engagement with certain exceptions.
## Footnote
A covered member must not borrow money from an attest client
63
Independence is impaired if a covered member has loans, what are the exceptions to this?
- Independence is not impaired by vertain loans from a client financial institution:
1. auto loans and leases collateralized by the auto
2. loans fully collateralized by the cash surrender value of insurance cash deposits
3. credit cards with a total outstanding balance of $10k or less on a current basis by the payment due date.
- Certain loans that are considered "grandfathered" because they were in existence before independence rules became more restrictive
64
Can independence be impaired if a covered member has a material indirect financial interest in an attest client during the period of engagement?
Yes
65
What are the indirect finanial interests that a covered member may have?
A covered member (and his or her immediate family) may have some limited financial interests in clients as long as they are:
1. Not direct
2. Not material to the wealth of the member or the client.
66
When can a covered member or spouse have interest in a mutual fund?
A covered member or spouse may own shares in a mutual fund that holds shares of a client if the mutual fund investment is not material to the member. Ownership of 5% or less of the shares of a diversified mutual fund indicates an immaterial, indirect financial interest in the underlying investments of the mutal fund.
67
In certain circumstances, independence may be impaired if a covered member is a trustee of a trust or executor of an estate that has a direct or material indirect financial interest in an attest client during the period of engagement. In this situation, when is independence impaired?
If the covered member is in a position to make decisions related to the trust or estate that involves investments or other financial interests in clients.
68
What are examples of actions, regarding trusts and estates, causing independence impairment?
The independence is impaired if:
1. The member can make investment decisions for the trust or estate
2. The trust or estate holds more than 10% of the ownership interests of a client
3. The value of the holding exceeds 10% of the total assets of the trust or estate
69
What are examples of actions, regarding trusts and estates, causing independence impairment?
The independence is impaired if:
1. The member can make investment decisions for the trust or estate
2. The trust or estate holds more than 10% of the ownership interests of a client
3. The value of the holding exceeds 10% of the total assets of the trust or estate
70
What are joint, closely held investments?
A joint, closely held investment is an investment in property or an entity by a member and a client (or officer, director, or owner who has significant influence over the client) that gives them control of the property or entity.
## Footnote
Independence is impaired if a covered member has a material joint, closely held investment with an attest client during the period of engagement.
71
What are prohibited investments?
A covered member must not:
1. Join with a client to develop and market a product
2. Own a vacation home jointly with a key officer or principal shareholder of a client.
72
Some members of a CPA firm, other than covered members, may have certain financial interests in clients without affecting the independence of the firm. When is independence impaired?
Independence is impaired if a firm partner or professional employee owns more than 5% of an attest client during the period of engagement.
## Footnote
A partner must not have equity interest in a client of the firm
73
What is a professional employee?
An employee in the office that conducts an audit, who is not part of the engagement team
74
When is independence impaired regarding simultaneous employment or association with an attest client?
Simultaneous employment or association with an attest client of a partner or professional employee of the member's firm impairs independence if the service is:
1. As an employee, director, officer, member of management, etc.
2. During the period of the financial statement or the engagement
## Footnote
The partner or professional employee must not appear to be acting in the capacity of management or employee of the client. This status includes having the responsibility to perform any duties of employees or management.
75
When is independence impaired regarding service as a campagin treasurer?
If the campaign organization is an attest client, during the period of professional engagement, a professional employee of the firm serves as a campaign treasurer.
## Footnote
Independence is not impaired if the attest client is a third-party, ex- the city or political party, and not the candidate
75
When is independence impaired regarding service as a campagin treasurer?
If the campaign organization is an attest client, during the period of professional engagement, a professional employee of the firm serves as a campaign treasurer.
## Footnote
Independence is not impaired if the attest client is a third-party, ex- the city or political party, and not the candidate
76
When is independence impaired regarding the former employment or association of a covered member with an attest client?
If the covered member was formally employed or associated with attest client as an officer, director, promoter, underwriter, etc.
77
What must a covered member do, in regards to former employment or association, before becoming a covered member?
1. They must disassociate from the client before becoming a covered member
2. They must not participate on the engagement team
3. They must not be able to influence the engagement when their former employment or association overlaps the period of engagement.
4. They must dispose of direct or material indirect financial interests
5. They must cease to participate in most employee benefit plans
78
The covered member's immediate family (spouse or dependents) is subject to the Independence Rule and its interpretations with certain exceptions. What are the exceptions?
An immediate family member may be employed by the attest client in a nonkey position. They may participate in various employee benefit plans under limited circumstances. They must not:
1. participate on the engagement team or be able to influence the engagement
2. be involved in investment decisions
79
When is independence impaired if a close relative holds a key position with or certain financial interests in an attest client?
Independence is impaired if a close relative has financial interest in an attest client that:
1. the individual knows or has a reason to believe is material to the relative
2. permits the relative to exert significant influence over the client
## Footnote
Some latitude is permitted in the application of this rule based on the family relationship
80
If a former partner or professional employee of the firm is subsequently employed or associated with an attest client, when is independence of the firm impaired?
If they hold a key position
81
When is independence not impaired if a former partner or professional employee of the firm is subsequently employed or associated with an attest client?
Independence is not impaired if the person is no longer associated or active with the CPA firm and any retirement compensation is fixed
82
An accounting firm is not independent if a CEO, CFO, Controller, or person in an equivalent position for an issuer if?
1. the person was employed by the firm
2. the person participated in any capacity in the audit of that issuer during the year before the beginning of the audit.
83
What is perception of influence?
Third parties may believe that the person isin a position to influence the engagement.
84
When performing consulting duties for the CPA firm a retired partner must not?
Become a CFO of a client or have retirement pay contingent on retaining the client.
85
Indepence of the firm may be impaired if certain nonattest services are performed for an attest client. When is independence impaired?
The practitioner appears to be an advocate or decision maker for the attest client when performing certain non attest services.
86
What are the general requirements regarding performing nonattest services?
A member should not assume management responsibilities.
87
Before performing nonattest services, what should a member determine?
That the client has agreed to:
1. assume all such responsibilities
2. provide sufficient oversight of the services
3. evaluate the nonattest services for adequacy and results
4. assume responsibility for the results
88
What are examples of activities that are management responsibilities that impair independence?
1. setting policies
2. hiring, terminating, or directing client employees (except when using them to provide assistance)
3. authorizing or executing transactions, or otherwise having the authority to do so on behalf of the client
4. preparing source documents
5. having custody of assets
6. deciding which recommendations to implement or prioritize
7. reporting to those charged with governance on behalf of management
8. serving as a stock transfer escrow agent, registrar, or general counsel
9. accepting responsibility for the financial statements
10. accepting responsibility for a client's project
11. accepting responsibility for designing, implementing, or maintaining internal controls
12. performing ongoing evaluations of control as part of the client's monitoring activities
89
What services impair independence if provided to attest clients?
1. appraisal, valuation, or actuarial services if they involve a significan degree of uncertainty
2. expert witness services
3. management of the client's internal audit services
4. tax advocacy services
5. recruiting, hiring, terminating, or compensating employees
6. providing hosting services
90
What services do not impair independence if provided to attest clients?
1. business risk consulting
2. corporate finance consulting
3. tax preparation services
4. advisory services - advice about management's decisions and strategies, interpreting financial statements and other analyses and attending board meetings as a nonvoting advisor.
91
In providing attest clients with corporate financing consulting, when is independence impaired?
Independence is impaired if a member:
1. commits the attest client to transactions - Ex - employee compensation or benefit arrangements
2. consummates attest client transactions
3. has custody of the attest client's securities
4. acts as a promoter, udnerwriter, broker-dealer, or guarantor of the attest client's securities
92
Can internal audit services be outsourced to the audit firm?
No, but the audit firm may provide advice on how to improve the internal audit function.
93
Can an auditor testify as an advocate of the client in a tax case?
No, but the auditor may prepare the client's tax return
94
What functions can be provided to nonissuers without impairing independence for attest engagements?
1. bookkeeping
2. payroll processing
3. other conventional recordkeeping functions
95
What are examples of the functions that can be provided to nonissuers without impairing attest engagements?
1. preparing client financial statements based on information in a trial balance
2. processing payroll for a client's signature based on client recordkeeping
3. assisting a client in drafting a stock-offering document or memorandum
96
What is the difference in recordkeeping for issuers vs. nonissuers?
The AICPA allows practitioners to perform recordkeeping for nonissuers if management functions are not performed. The PCAOB rules do not allow these services to be provided to issuers by their auditors.
## Footnote
Issuers are not likely to request these services, issuers usually have their own recordkeeping functions.
96
What is the difference in recordkeeping for issuers vs. nonissuers?
The AICPA allows practitioners to perform recordkeeping for nonissuers if management functions are not performed. The PCAOB rules do not allow these services to be provided to issuers by their auditors.
## Footnote
Issuers are not likely to request these services, issuers usually have their own recordkeeping functions.
97
What is the difference in recordkeeping for issuers vs. nonissuers?
The AICPA allows practitioners to perform recordkeeping for nonissuers if management functions are not performed. The PCAOB rules do not allow these services to be provided to issuers by their auditors.
## Footnote
Issuers are not likely to request these services, issuers usually have their own recordkeeping functions.
98
What is the difference in using software and generating statements for issuers vs. nonissuers?
An auditor of a nonissuer may record transactions into computer software and generate financial statements but must not provide those services for an issuer.
99
What are adverse legal interests?
Legal action creates adverse interests between the parties involved, which can affect independence.
100
Independence may be impaired by actual or threatened litgation during the period of the engagement by either the covered member of the attest client. When is independence not impaired?
1. when the litigation issue is not related to the work product and is not material - Ex - a dispute over biling
2. when the shareholders or others bring a class action suit against both the client and the auditor
101
What are tort claims and reliance on statements?
The attest client alleges that the covered member was negligent, or the covered member may allege that the client's management committed fraud.
## Footnote
In these circumstances, the interests of the attest client and the CPA are opposed, and independence is impaired.
101
What are tort claims and reliance on statements?
The attest client alleges that the covered member was negligent, or the covered member may allege that the client's management committed fraud.
## Footnote
In these circumstances, the interests of the attest client and the CPA are opposed, and independence is impaired.
102
What are tort claims and reliance on statements?
The attest client alleges that the covered member was negligent, or the covered member may allege that the client's management committed fraud.
## Footnote
In these circumstances, the interests of the attest client and the CPA are opposed, and independence is impaired.
103
If a creditor or insurer files a suit alleging reliance on the audited financial statements of an attest client is independence impaired?
No
104
Can CPAs support charitable organizations without impairing independence?
Yes, but they must not have managerial responsibilities.
105
Independence may be impaired if a partner or professional employee of a member's firm holds an honorary directorship or trusteeship of a not-for-profit organization during the period of the engagement or financial statements. Independence is not impaired if?
1. the position is clearly honorary, and the individual cannot vote or participate in board or management decisions
2. the individual is identified in a letterhead, etc., as an honorary director or trustee
106
Who are client affiliates?
1. An entity that a client can control
2. An entity that controls the client if the client is material to the entity
3. An entity in which a client has a material direct financial interest that gives the client significant influence over the entity
4. An entity with significan influence over the client in the form of a material direct financial interest
5. A sister entity of a clietn if the sister entity and the client are material to the entity that controls both
6. A trustee deemed to control a trust client that is not an investment company
7. The sponsor of the plan if the client is a signle-employer employee benefit plan
8. Any union or participating employer that has significant influence over a client that is a multiple or multiemployer employee benefit plan
9. An employee benefit plan sponsored by either a client or an entity controlled by the client
10. An investment advisor, general partner, or trustee of an investment company client(fund) who A) has a material interst in the fund and B) has significant influence or control over the fund
107
When might member involvements with affiliates create an impairment of independence?
Involvements with affiliates create an indirect interest in an attest client. Thus, some measure of materiality is considered as with other indirect interests. Significant mutual interests of a member and a financial statement attest client may cause an impairment of independence.
108
What are alternative practice structures (APS)?
When a CPA firm is closely aligned iwth another organization that performs other professional services.
## Footnote
Independence rules apply
109
What are alternative practice structures (APS)?
When a CPA firm is closely aligned iwth another organization that performs other professional services.
## Footnote
Independence rules apply
110
What are alternative practice structures (APS)?
When a CPA firm is closely aligned iwth another organization that performs other professional services.
## Footnote
Independence rules apply
111
In an APS are direct supervisors of covered members subject to the same independence rulse as covered members?
Yes
112
When is independence impaired in an APS for indirect superiors (including a spouse or dependents)?
If they have material financial interest in an attest client of the firm that offers atttest services, or they have significant influence over an attest client.
113
How do unpaid fees owned by an attest client impair independence?
Unpaid fees may result in self-interest, undue influence or advocacy threats to independence.
114
How might accepting gifts or entertainment from an attest client during the period of the engagement impair independence?
Accepting a gift or entertainment may create undue influence or selfe-interest threats to independence.
115
When does offering or accepting a gift from an attest client impair independence?
1. A member's firm or member of the engagement team (or someone who can influence the engagement) accepts a gift with a value clearly significant to the recipient.
2. A covered member's acceptance from an attest client of entertainment that is unreasonable in the circumstances.
3. Offereing a gift or entertainment to an attest client during the period of engagement that is reasonable in the circumstances impairs independence.
## Footnote
Whether the gift or entertainment is reasonable depends on such factors as its nature, the occasion, its cost or value, and whether it was directly associated with the conduct of business.
116
When does offering or accepting a gift from an attest client impair independence?
1. A member's firm or member of the engagement team (or someone who can influence the engagement) accepts a gift with a value clearly significant to the recipient.
2. A covered member's acceptance from an attest client of entertainment that is unreasonable in the circumstances.
3. Offereing a gift or entertainment to an attest client during the period of engagement that is reasonable in the circumstances impairs independence.
## Footnote
Whether the gift or entertainment is reasonable depends on such factors as its nature, the occasion, its cost or value, and whether it was directly associated with the conduct of business.
117
What are the general standards issued by the PCAOB and relevant AICPA committes and boards?
1. Undertaked only those services that the member can reasonably expect to complete with professional competence.
2. Exercise due professional care when performing professoinal services.
3. Adequately plan and supervise performance of professional services.
4. Obtain sufficient relevant data to provide a reasonable basis for conclusions or recommendations in relation to any professional service.
118
What is the standard of competence?
A member should complete professional services according to professional standards and with reasonable care and diligence.
119
What is competence?
The member has the technical qualifications and ability to supervise and evaluate the work. It relates to knowledge of standards, techniques, and technical subject matter and to the ability to exercise sound judgement.
## Footnote
In some cases, additional research and consultation is a normal part of performing services. However, if a member cannot gain sufficient competence, (s)he should suggest the engagement of someone competent.
120
What is competence?
The member has the technical qualifications and ability to supervise and evaluate the work. It relates to knowledge of standards, techniques, and technical subject matter and to the ability to exercise sound judgement.
## Footnote
In some cases, additional research and consultation is a normal part of performing services. However, if a member cannot gain sufficient competence, (s)he should suggest the engagement of someone competent.
121
Do the general standards apply to consulting services?
Yes
122
When is a member required to comply with the standards rule?
If they perform professional services.
123
What are considered professional services?
1. Audits, reviews, and compliations of financial statements
2. Engagements involving special considerations, ex - special purpose frameworks
3. Attestation engagements other than traditional audits and reviews, such as engagements to report on
A. Performance agreed-upon procedures
B. Intenal control over financial reorting
C. Compliance with statutes, regulations, or contracts
D. Financial forecasts or projections
4. Tax services
5. Consulting Services
6. Valuation Services
7. Personal financial planning services
124
A material departure from an accounting principle issued by an AICPA-designated standdards setter prevents a member from?
1. Expressing an opinion (or stating affirmatively) that the financial statements (or other financial data) of any entity are presented in conformity with GAAP
2. Stating that they are not aware of any material modifications that should be made to conform with GAAP (the member cannot provide limited assurance.
125
Who issues GAAP?
1. The Financial Accounting Standards Board (FASB)
2. The Governmental Accounting Standards Board (GASB)
3. The International Accounting Standards Board (IASB)
4. The Federal Accounting Standards Advisory Board (FASAB)
126
How does the accounting principles rule apply to members?
It applies to all members, whether or not in public practice, regarding any affirmative statement about conformity with GAAP.
127
If the departure from an accounting principle has a material effect on the financial statements or data as a whole can the member provide assurance?
No
## Footnote
There are exceptions
128
What are the exceptions regarding providing assurance about conformity with GAAP despite a material departure?
1. The member must be able to demonstrate that, due to unusual circumstances, the financial statements or data would have been misleading without a departure from GAAP. They must describe:
- The departure
- Its approximate effects, if practicable
- The reasons compliance with the principle would be misleading
2. Events that may justify departures from established accounting principles are new legislation or evolution of a new form of business transaction
## Footnote
An unusual degree of materiality or conflicting industry practices ordinarily does not justify departures
128
What are the exceptions regarding providing assurance about conformity with GAAP despite a material departure?
1. The member must be able to demonstrate that, due to unusual circumstances, the financial statements or data would have been misleading without a departure from GAAP. They must describe:
- The departure
- Its approximate effects, if practicable
- The reasons compliance with the principle would be misleading
2. Events that may justify departures from established accounting principles are new legislation or evolution of a new form of business transaction
## Footnote
An unusual degree of materiality or conflicting industry practices ordinarily does not justify departures
129
What are the exceptions regarding providing assurance about conformity with GAAP despite a material departure?
1. The member must be able to demonstrate that, due to unusual circumstances, the financial statements or data would have been misleading without a departure from GAAP. They must describe:
- The departure
- Its approximate effects, if practicable
- The reasons compliance with the principle would be misleading
2. Events that may justify departures from established accounting principles are new legislation or evolution of a new form of business transaction
## Footnote
An unusual degree of materiality or conflicting industry practices ordinarily does not justify departures
130
What is the confidential client informaton rule?
A member in public practice must not disclose confidential client information without the client's consent.
131
What does the confidential client information rule not apply to?
1. Professional obligations under the Compliance with Standards Rule and the Accounting Principles Rule
2. The duty to comply with a valid subpoena or summons or with applicable laws the regulations
3. An official review of the member's professional practice
4. The member's right to initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body.
132
If a member discloses confidential client information as a result of a validly issued and enforceable subpoena and does not want to violate the Confidential Client Information Rule and is not required to notify the client, what should the member do?
They may want to consult legal counsel and the state board of accountancy.
133
What is the Acts Discreditable Rule?
A member must not commit an act that is discreditable to the profession.
134
What are considered client-provided records?
Accounting or other records, including hardcopy and electronic reproductions of such records, belonging to the client that were provided to the member by, or on behalf of, the client.
135
What are working papers?
Working papers are the member's property and need not be made available to the client or others unless required by statute, regulation, or contract.
136
What are member's work products?
Items (ex- tax returns) that the member was engaged to prepare.
137
When can member's work products be withheld?
1. Fees are due
2. The work product is incomplete
3. The member is complying with professional standards (ex - withholding an audit report until issues are resolved)
4. Litigation exists regarding the engagement or the member's work
138
What are member-prepared records?
Records that the member was not specifically engaged to prepare.
## Footnote
Without them, the client's financial information is incomplete.
139
What are member-prepared records?
Records that the member was not specifically engaged to prepare.
## Footnote
Without them, the client's financial information is incomplete.
140
What are member-prepared records?
Records that the member was not specifically engaged to prepare.
## Footnote
Without them, the client's financial information is incomplete.
141
What are examples of member-prepared records?
1. Journal entries
2. Supporting Schedules and documents prepared as part of an engagement
## Footnote
These should be provided to the client unless fees are due.
142
What are examples of member-prepared records?
1. Journal entries
2. Supporting Schedules and documents prepared as part of an engagement
## Footnote
These should be provided to the client unless fees are due.
143
How long does a member have to compy with a client's request for records?
45 days
144
If a member who is not an owner is terminated, can they retain client files?
No, they may not take or retain originals or copies from the firm's client files or proprietary information without permission.
145
What happens if a court or administrative agency makes a final determination that a member has violated an antidiscrimination law?
They are deemed to have committed an act discreditable.
146
If a member makes a material departure from the requirements of a governmental body and the applicable financial reporting framework, is that an act discreditable?
Yes, unless the member discloses the reasons.
147
In a governmental audit failure to follow applicable audit standards, guides, procedures, statutes, rules, and regulations is considered?
An act discreditable to the profession unless the report discloses the failure and the reasons.
148
In a governmental audit failure to follow applicable audit standards, guides, procedures, statutes, rules, and regulations is considered?
An act discreditable to the profession unless the report discloses the failure and the reasons.
149
Is a member's solicitation or knowing disclosure of CPA examination questions or answers without permission an act discreditable?
Yes
150
What are examples of acts discreditable due to negligence?
1. Making materially false and misleading entries in the financial statements or records
2. Failing to correct materially false and misleading statements
3. Signing a document with materially false and misleading information
151
Is failure to file a tax return or pay tax an act discreditable?
Yes, failing to comply with laws regarding timely filing of personal or firm tax returns, or timely payment of taxes collected for others is an act discreditable.
152
Regulators may prohibit regulated entities from entering into certain kinds of indemnification and limitation of liability agreements in connection with attest services, what happens if a member fails to comply with such prohibitions?
It is an act discreditable
## Footnote
regulators may also prohibit members from providing services under such agreements.
152
Regulators may prohibit regulated entities from entering into certain kinds of indemnification and limitation of liability agreements in connection with attest services, what happens if a member fails to comply with such prohibitions?
It is an act discreditable
## Footnote
regulators may also prohibit members from providing services under such agreements.
153
Regulators may prohibit regulated entities from entering into certain kinds of indemnification and limitation of liability agreements in connection with attest services, what happens if a member fails to comply with such prohibitions?
It is an act discreditable
## Footnote
regulators may also prohibit members from providing services under such agreements.
154
What is a false, misleading, or deceptive act?
A member promotes or markets his or her professional services, makes claims about their experience or qualifications in a false, misleading, or deceptive manner has committed an act discreditable.
## Footnote
Representations about CPA licensure or other professional certification must comply with the requirements of the appropriate official bodies. Use of the CPA credential must be in accordance with the accountancy laws, rules, and regulations in the jurisdictions where the member practices.
154
What is a false, misleading, or deceptive act?
A member promotes or markets his or her professional services, makes claims about their experience or qualifications in a false, misleading, or deceptive manner has committed an act discreditable.
## Footnote
Representations about CPA licensure or other professional certification must comply with the requirements of the appropriate official bodies. Use of the CPA credential must be in accordance with the accountancy laws, rules, and regulations in the jurisdictions where the member practices.
155
What is a false, misleading, or deceptive act?
A member promotes or markets his or her professional services, makes claims about their experience or qualifications in a false, misleading, or deceptive manner has committed an act discreditable.
## Footnote
Representations about CPA licensure or other professional certification must comply with the requirements of the appropriate official bodies. Use of the CPA credential must be in accordance with the accountancy laws, rules, and regulations in the jurisdictions where the member practices.
156
What is the advertising and other forms of solicitation rule?
A member in public practice must not seek to obtain clients by false, misleading, or deceptive advertising or other forms of solicitation. Solicitation through coercion, overreaching, or harassing conduct is prohibited.
157
How can members use designations?
A designation may be used on letterhead only when all partners or shareholders have the AICPA-awarded designation. However, the individual members holding the designation may use it after their names.
158
What are examples of prohibited activities (false, misleading, or deceptive acts)?
1. Creating false or unjustified expectations of favorable results
2. Implying the ability to influence any court, regulatory agency, etc.
3. Representing that specific services will be performed for a stated fee when it is likely at the time that the fees will be substantially increased and the client is not advised of the possibility.
4. Other representations that would cause a reasonable person to misunderstand or be deceived.
159
What are examples of prohibited activities (false, misleading, or deceptive acts)?
1. Creating false or unjustified expectations of favorable results
2. Implying the ability to influence any court, regulatory agency, etc.
3. Representing that specific services will be performed for a stated fee when it is likely at the time that the fees will be substantially increased and the client is not advised of the possibility.
4. Other representations that would cause a reasonable person to misunderstand or be deceived.
160
How is obtaining clients through third parties permitted?
The member must determie that the third party's promotional efforts were within the Advertising and Other Forms of Solicitation Rule.
## Footnote
Members must not do through others what they are prohibited from doing themselves.
161
How is obtaining clients through third parties permitted?
The member must determie that the third party's promotional efforts were within the Advertising and Other Forms of Solicitation Rule.
## Footnote
Members must not do through others what they are prohibited from doing themselves.
162
How is obtaining clients through third parties permitted?
The member must determie that the third party's promotional efforts were within the Advertising and Other Forms of Solicitation Rule.
## Footnote
Members must not do through others what they are prohibited from doing themselves.
163
What are contingent fees?
They are established as part of an agreement under which the amount of the fee is dependent upon the finding or result.
164
When are fees not considered contingent?
1. They are fixed by public authorities (ex - courts)
2. In tax matters, they are based on the results of judicial proceedings or the findings of governmental agencies
165
What professional services are members in public practice restricted from performing for contingent fees?
1. An audit or review of a financial statement
2. A compilation of a financial statement if the member might reasonably expect that a third party will use the statement, and the report does not disclose the lack of independence
3. An examination of prospective financial information (a financial forecast or projection)
## Footnote
The member also must not receive a contingent fee from a client for which the member performs any of those services.
166
What professional services are members in public practice restricted from performing for contingent fees?
1. An audit or review of a financial statement
2. A compilation of a financial statement if the member might reasonably expect that a third party will use the statement, and the report does not disclose the lack of independence
3. An examination of prospective financial information (a financial forecast or projection)
## Footnote
The member also must not receive a contingent fee from a client for which the member performs any of those services.
167
What professional services are members in public practice restricted from performing for contingent fees?
1. An audit or review of a financial statement
2. A compilation of a financial statement if the member might reasonably expect that a third party will use the statement, and the report does not disclose the lack of independence
3. An examination of prospective financial information (a financial forecast or projection)
## Footnote
The member also must not receive a contingent fee from a client for which the member performs any of those services.
168
A member in public practice cannot prepate what items for a contingent fee?
1. An original tax return
2. An amended tax return
3. A claim for a tax refund
169
Can a member's spouse provide services to the member's attest client for a contingent fee?
Yes, if the spouse's activities are separate from the member's practice and the member is not significantly involved. However, a conflict of interest may exist.
170
If a member provides investment advisory services for an attest client for a percentage of the investment portfolio, doeas this violate the Contingent Fees Rule?
Yes, except when certain detailed safeguards are met.
171
Does providing investment advisory services to the owners, officers, or empoyees of an attest client violate the Contingent Fees Rule?
No, however the member should consider the possible conflict of interest and also the Confidential Client Information Rule.
172
Are contingent fees allowed for representation of a client in an examination by a revenue agent or in connection with obtaining a private letter ruling?
Yes
173
What is the Commissions and Referral Fees Rule?
Prohibited commissions are those received when a member in public practice recommends or refers:
1. to a client any product or service
2. any product or service to be supplied by a client
and also performs for that client:
1. an audit
2. a review
3. a compilation reasonably expected to be used by a third party if the member's lack of independence is not dislcosed
4. an examination of prospectibe financial information (PFI)
174
Can a member's spouse receive a commission for referring products or services to or from a client for whom the member has performed an audit, review, compilation, or examination of PFI?
Yes
175
If a member recommends or refers a related product or service, how should permitted commissions be handled?
They must be disclosed in writing to any person or eneity to whome the member recommends or refers a related product or service.
176
Referral fees are not considered commissions, when are they permitted?
If dislcosed in writing to the client
177
What are examples of referral fees that are permitted?
1. acceptance of a referral fee for recommending or referring any srevice of a CPA to anyone
2. payment of a referral fee to obtain a client
178
What are examples of referral fees that are permitted?
1. acceptance of a referral fee for recommending or referring any srevice of a CPA to anyone
2. payment of a referral fee to obtain a client
179
What is the Form of Organization and Name Rule?
A member in practice may practice public accounting in a form of organization allowed by law or regulation that conforms with resolutions of the AICPA Council. The firm name must not be misleading.
180
What is the Form of Organization and Name Rule?
A member in practice may practice public accounting in a form of organization allowed by law or regulation that conforms with resolutions of the AICPA Council. The firm name must not be misleading.
181
When can a firm designate itself as "members of the AICPA"?
Only if all CPA owners are members.
182
When can a firm designate itself as "members of the AICPA"?
Only if all CPA owners are members.
183
According to a Counsil resolution, if a firm holds itself out as CPAs or performs attest services, it must have certain characteristics. The attest services for this purpose consist of?
1. audits under SASs
2. reviews under SSARSs
3. examinations, reviews, or agreed-upon procedures under SSAEs
4. engagements under PCAOB standards
184
According to a Counsil resolution, if a firm holds itself out as CPAs or performs attest services, it must have certain characteristics. What are the required characteristics?
1. CPAs own a majority of the firm's financial interests and voting rights
2. A CPA must be responsible for all services
3. A nonCPA owner must be active as a member of the firm or its affiliates
4. NonCPA owners cannot hold themselves out as CPAs
5. A member must not knowingly permit a person they have the ability to control to do what is prohibited to the member by the Code - the member may also be responsible for the acts of such a person who is an associate in the public practice.
6. NonCPA owners are not eligible to be AICPA members unless they meet the requirements for membership
7. Owners must, at all times, be the beneficial owners of the equity attributed to them - If an owner ceases to be actively engaged as a member of the firm or its affiliates, their ownership should be transferred to the firm or other qualified owners within a reasonable time.
185
Can a member own an interest in a separate business that performs the services for which standards are established?
Yes, if the member controls the separate business, the entity and all its owners and professional employees must comply with the Code. If control is absent, only the member is subject to the Code.
186
How does the Form of Organization and Name Rule apply to Alternative Practice STructures (APSs)?
AICPA requirements emphasize that CPAs remain responsible, financially and otherwise, for the attest work performed to protect the public interest. However, in an APS, CPAs may own the majority of financial interest in the attest firm, but substantially all revenues may be paid to another entity for services and the lease of employees, equipment, etc. Given the requirements of state law and the AICPA, if the CPAs who own the attest firm remain financially responsible understate law for the firm's attest work, they are deemed to be in compliance with the financial-interests requirement.
187
When is a firm name misleading?
If it contains a representation likely to cause a reasonable person to misunderstand the legal form of the form, who its owners are, or who its members are. Ex - using the term "company" or "Co." when the firm is not a corporation.
188
What are network firms?
An association of entities that includes one or more public accounting firms. These entities cooperate to enhance the firms' ability to provide services and share at least one of certain specified characteristics.
189
What are the characteristics of a network firm?
- sharing a common brand name or initials as part of the firm name
- common control
- sharing profits or costs
- sharing resources
190
When is sharing a common brand name or initials as part or all of the firm name not misleading?
If the firm is a network firm.
191
What are the responsibilities and activities of the PCAOB?
1. register public accounting firms
2. oversee the audit of public companies (issuers) that are subject to the securities laws
3. establish or adopt standards on auditing, quality control, ethics, and independence
4. inspect audit firms at least every 3 years (each year if the firm audits 100 or more issuers)
5. conduct investigations and disciplinary proceedings involving, and impose appropriate sanctions upon, registered public accounting firms and associated persons
192
What does the PCAOB do in an inspection of audit firms?
1. examine selected audit and review engagements
2. evaluate the system of quality
3. test audit, supervisory, and quality control procedures
193
What is the preapproval of services by audit committees?
Audit committees ordinarily must preapprove the services perfomred by accountants (permissible nonaudit services and all audit, review, and attest engagements.
1. approval must be either explicit or in accordance with detailed policies and procedures
2. if approval is based on detailed policies and procedures, the audit committee must be informed, and no delegation of its authority to management is allowed
194
What is the requirement of issuers to disclose fees?
An issuer must disclose in its proxy statement or annual filing the fees paid to the accountant, for the 2 most recent years, segregated into four categories:
1. audit
2. audit-related
3. tax
4. all other
195
What is the rotation of partners requirement?
The lead and concurring (reviewing) audit partners must rotate every 5 years, with a 5-year time-out period. Other audit partners must rotate every 7 years, with a 2-year time-out.
## Footnote
second partner review and approval of audit reports is required
195
What is the rotation of partners requirement?
The lead and concurring (reviewing) audit partners must rotate every 5 years, with a 5-year time-out period. Other audit partners must rotate every 7 years, with a 2-year time-out.
## Footnote
second partner review and approval of audit reports is required
196
What is the rotation of partners requirement?
The lead and concurring (reviewing) audit partners must rotate every 5 years, with a 5-year time-out period. Other audit partners must rotate every 7 years, with a 2-year time-out.
## Footnote
second partner review and approval of audit reports is required
197
How long must auditors retain their audit working papers?
at least 7 years
198
When are sanctions imposed by the PCAOB regarding record retention?
It is a crime for auditors to fail to maintain all audit or review working papers for at least 5 years. If retention is for more than 5 years but fewer than 7 years, sanctions that are not criminal penalties may be imposed by the PCAOB.
199
Public accounting firms with oone or more public audit clients must register with the pCAOB and be subject to inspection. Registrants must file an annual report with the PCAOB, what is included in the report?
basic information about firm activities
## Footnote
they must also file a special report within 30 days of a reportable event - EX - initiation of legal action against the firm
200
Public accounting firms with oone or more public audit clients must register with the PCAOB and be subject to inspection. Registrants must file an annual report with the PCAOB, what is included in the report?
basic information about firm activities
## Footnote
they must also file a special report within 30 days of a reportable event - EX - initiation of legal action against the firm
201
When must the communications with the audit committee occur?
Before filing the audit report with the SEC
202
What must the firm do before accepting an initial engagement?
Discuss the potential effects of the relationships that may affect independence and document the discussion.
## Footnote
They must also do this annually
