2.1 Flashcards
During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits?
The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit.
It is unlawful for (1) any officer or director of an issuer to do any act (2) to fraudulently influence, coerce, manipulate, or mislead any auditor performing an audit if (3) the purpose is to render the financial statements materially misleading. The CFO is not excused by failure to affect the audit.
A violation of the profession’s ethical standards most likely occurred when a CPA in public practice
Expressed an unmodified opinion on the Year 2 financial statements when fees for the Year 1 audit were unpaid.
Audit fees that are long past due take on the characteristics of a loan. Independence is impaired if billed or unbilled fees, or a note arising from the fees, for client services rendered more than 1 year prior to the current year’s report date, remain unpaid when the current year’s report is issued. However, this ruling does not apply if the client is in bankruptcy. Moreover, long overdue fees do not preclude the CPA from performing services not requiring independence.
Which of the following best describes the effect of a contingent fee arrangement on the auditor’s independence?
The contingent fee arrangement impairs independence.
A fee is contingent if it is dependent on a finding or a result. A member in public practice cannot perform certain services for a contingent fee without impairing independence, e.g., (1) audits or reviews of financial statements, (2) an examination of prospective financial information, (3) certain tax services, and (4) a compilation that reasonably might be used by a third party that does not disclose the lack of independence in the report.
The General Standards Rule does not require a member to
Provide assurance about prospective financial statements.
Guidance for assurance on prospective statements is provided by AT-C 305, Prospective Financial Information.
During the course of an audit, an auditor required additional research and consultation with others. This additional research and consultation is considered to be
An appropriate part of the professional conduct of the engagement.
The Code of Professional Conduct states that in many cases additional research and consultation with others may be necessary during an engagement. The auditor should not undertake the engagement unless (s)he has or expects to gain the knowledge to complete the audit with professional competence.
Ann Covington, CPA, has been asked to perform a consulting services engagement concerning the analysis of a potential merger. She has little experience with the industry involved. What is her most appropriate action?
Accept the engagement and perform additional research or consult with others to obtain sufficient competence.
The CPA may accept the engagement but should conduct research or consult with others to obtain a sufficient level of knowledge about the subject of the engagement. An AICPA member should undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence.
A registered public accounting firm is conducting an audit of an issuer and initiated its current-year audit on January 1, Year 3. Many of the firm’s former auditors are now employed by the client. Under which of the following circumstances may the firm perform the audit?
The client’s CFO was the lead partner on the audit until December 31, Year 1.
Independence of the accounting firm is impaired if a former partner or professional employee of the firm is subsequently employed or associated with an attest client in a key position. However, independence is not impaired if the person is no longer associated or active with the CPA firm and any retirement compensation is fixed. A CPA firm is independent if the former lead partner did not participate in any capacity in the audit of the issuer during the year before the beginning of the audit.
Each of the following broker-dealer relationships impairs auditor independence with respect to a broker-dealer issuer audit client except
The auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation.
Under SEC Independence Standards, an accountant is not independent when (1) the accounting firm, (2) any covered person in the firm, or (3) any of the covered person’s immediate family members has any brokerage or similar accounts maintained with a broker-dealer that is an audit client if (1) the accounts include any asset other than cash or securities or (2) the value of the assets in the accounts exceeds the amount that is subject to a Securities Investor Protection Corporation advance for those accounts. Thus, a cash balance in a brokerage account that is fully insured under the Securities Investor Protection Act (SIPA) does not impair independence.
Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients’ express permission?
A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.
A member shall not disclose confidential client information without the client’s consent unless it is disclosed to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, or (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his or her name confidential information. If no exception applies, client confidentiality has been violated.
When is the independence of the CPA auditor of a client company’s financial statements most likely to be impaired because of involvement in litigation?
Shareholders of the client bring a class action against the client, its management, and the CPA. The CPA files a cross-claim against management alleging fraud.
Independence is not necessarily impaired when the CPA is a co-defendant with the client. However, cross-claims filed by the co-defendants against each other may impair independence. For example, the client may allege that the CPA was negligent, or the CPA may allege that the client’s management committed fraud. In these circumstances, the interests of the client and the CPA are opposed, and independence may be impaired.
The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a
Set of specific, mandatory rules describing minimum levels of conduct a member must maintain.
The AICPA Code contains Principles and Rules. The principles are goal-oriented. The rules provide more specific guidance. The principles call for an unswerving commitment to honorable behavior but are not mandatory. The AICPA bylaws require members to adhere to the Rules. Those who fail to comply with the rules may face disciplinary action.
When a former partner of a registered public accounting firm who left the firm 2 years ago accepts a financial reporting oversight role at an issuer audit client, the independence of the registered public accounting firm is considered impaired unless which of the following is true?
The former partner has no remaining capital balance in the registered public accounting firm.
PCAOB Interim Independence Standards apply to audits of issuers. They include the AICPA’s prior Conduct Rule 101, Independence, and related rulings and interpretations as of April 16, 2003, to the extent not superseded or amended. According to these PCAOB interim standards, a firm’s independence may be impaired with respect to a client if a partner or professional employee leaves the firm and is subsequently employed by or associated with that client in a key position. However, independence is not impaired if, among other things, amounts due to the former partner or professional employee for (1) his or her previous interest in the firm and (2) unfunded, vested retirement benefits are not material to the firm. This assumes that the underlying formula used to calculate the payments remains fixed during the payout period. Retirement benefits also may be adjusted for inflation, and interest may be paid on amounts due. Moreover, the former partner or professional employee must not be in a position to influence the accounting firm’s operations or financial policies. Under SEC independence standards, a registered public accounting firm is not independent if a former partner, principal, shareholder, or professional employee is in an accounting role or a financial reporting oversight role at an issuer audit client. But independence is not impaired if the individual (1) does not influence the accounting firm’s operations or financial policies, (2) has no capital balances in the accounting firm, and (3) has no financial arrangement with the accounting firm other than one providing for regular payment of a fixed dollar amount (not dependent on the revenues, profits, or earnings of the accounting firm). PCAOB rules require compliance with the SEC rules if they are more restrictive.
The AICPA Code of Professional Conduct is violated if a CPA accepts a fee for services and the fee is
Payable after a specified finding is attained in a review of financial statements.
A contingent fee is dependent on a specified finding. The Code prohibits contingent fees (1) for the audit or review of a financial statement, (2) for a compilation if a third party is reasonably expected to use the financial statement and the report does not mention the member’s lack of independence, (3) for an examination of prospective financial information, and (4) for the preparation of original or amended tax returns or claims for tax refunds. However, contingent fees may be accepted for other services.
Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance?
A distinguishing mark of a profession is its acceptance of responsibility to the public.
According to the Principles section of the AICPA Code of Professional Conduct, “Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. A distinguishing mark of a profession is acceptance of its responsibility to the public.”
Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer’s audit committee?
Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.
Before accepting an initial engagement under PCAOB standards, a registered public accounting firm must (1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence; (2) discuss with the audit committee the effects of those relationships on the independence of the firm if it becomes the auditor; and (3) document the substance of the discussion. At least annually for each issuer audit client, a registered public accounting firm must (1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence; (2) discuss with the audit committee the effects of those relationships on the independence of the firm; (3) document the substance of the discussion; and (4) affirm to the audit committee in writing that the firm is independent.
