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CPA Review - AUD > CPAExcl 11-Independence > Flashcards

CPAExcl 11-Independence Flashcards

1
Q

Describe the provisions in Rule 102 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A

In the performance of any professional service, a member: shall maintain objectivity and integrity, shall be free of conflict of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

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2
Q

List the ways in which conflicts of interest can be resolved.

A

They can be solved by:

  1. Full disclosure, and
  2. Client consent.
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3
Q

Describe an example of a conflict of interest according to the AICPA’s Interpretation 102-2.

A

A CPA performing a professional service has a significant relationship with another person, entity, product, or service that could be viewed as impairing the CPA’s objectivity.

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4
Q

What must an auditor do to avoid subordinating judgment when disagreeing with a supervisor regarding proper audit procedures?

A
  1. Need do nothing further if upon reflection the member concludes that the F/S as proposed represent an acceptable alternative and don’t misrepresent facts;
  2. Alert the appropriate level of management if upon reflection the member concludes that the F/S could be materially misstated; and
  3. Consider resigning and communicating with regulatory authorities if problem is not addressed.
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5
Q

Give an example of a potential conflict of interest.

A

Providing tax or financial planning services for several members of a family who may have opposing interests.

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6
Q

How do the provisions of the American Institute of Certified Public Accountants (AICPA) Standard of Planning and Supervision apply to practitioners performing professional services?

A

The American Institute of Certified Public Accountants (AICPA) Standard of Planning and Supervision requires the practitioner to adequately plan and supervise the performance of professional services.

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7
Q

What does an agreement with a practitioner to perform professional services imply?

A

The member practitioner has the necessary competence to perform those services according to professional standards, applying his or her knowledge and skill with reasonable care and diligence, but the member does not assume a responsibility for infallibility of knowledge or judgment.

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8
Q

List the general standards regarding audits that are promulgated by the American Institute of Certified Public Accountants (AICPA).

A
  1. Professional Competence;
  2. Due Professional Care;
  3. Planning and Supervision;
  4. Sufficient Relevant Data.
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9
Q

What steps should be taken when departing from Generally Accepted Accounting Principles (GAAP)?

A
  1. Disclose Departure;
  2. Disclose approximate effects of departure; and
  3. Explain why GAAP compliance would mislead.
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10
Q

Under what two circumstances may an auditor depart from Generally Accepted Accounting Principles (GAAP)?

A
  1. New legislation;

2. New form of business transaction.

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11
Q

Describe the provisions in Interpretation 203-1 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A

CPAs are allowed departure from SFAS only when results of SFAS will be misleading.

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12
Q

List the circumstances under which a CPA may disclose client confidences.

A

They may be disclosed when:

  1. Client consents;
  2. GAAP requires disclosure;
  3. Enforceable subpoena;
  4. Ethical examination;
  5. Peer review;
  6. Other members of firm “need to know.”
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13
Q

Describe the public authority exception regarding contingent fees.

A

A fee is not regarded as contingent if fixed by the courts or other public authorities.

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14
Q

List the exceptions to which federal tax preparers’ privileges are not honored as outlined in the Internal Revenue Code (IRC) Section 7525.

A
  1. Criminal matters;
  2. Matters not before the IRS or federal courts in cases brought by or against U.S.;
  3. Tax advice on state or local matters;
  4. Written tax shelter advice.
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15
Q

Describe the provisions in Rule 301 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A

A member in public practice shall not disclose any confidential client information without the specific consent of the client.

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16
Q

Define “variable fees”.

A

Fees that may vary depending on various factors, including the complexity of services rendered.

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17
Q

List the features of “accountant-client privilege” in states where such privileges are recognized.

A
  1. Protects client, not CPA;
  2. Waivable by client;
  3. Waiver as to part is waiver as to all.
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18
Q

List the types of safeguards in the conceptual framework outlined in the Principles of the Code of Professional Conduct.

A
  1. Professional, Legislative, or Regulatory;
  2. Client Safeguards;
  3. Firm Safeguards, such as quality control.
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19
Q

To what type of work does the American Institute of Certified Public Accountants (AICPA) rules apply?

A

The rules apply to attest work.

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20
Q

List the four major areas of concern related to independence under the Principles of the Code of Professional Conduct.

A
  1. Employment Ties;
  2. Financial Ties;
  3. Consulting;
  4. Family Ties.
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21
Q

List the types of activities to which independence rules do not apply under the Principles of the Code of Professional Conduct.

A
  1. Tax Work;

2. Consulting.

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22
Q

What activities are included in the category of attest work?

A
  1. Audit or review of F/S;
  2. Compilation of F/S expected to be used by third parties; or
  3. Examination of prospective financial information.
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23
Q

Who are considered to be in a Position to Influence (PTI) as outlined in the Principles of the Code of Professional Conduct?

A

Those who:

  1. Evaluate the performance or recommend compensation of attest engagement partner (AEP);
  2. Directly supervise the AEP and all successively senior levels;
  3. Consult with team during engagement;
  4. Provide quality control or other oversight.
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24
Q

List the “covered members” outlined in the Principles of the Code of Professional Conduct.

A
  1. Team Members;
  2. Those in a Position to Influence (PTI) team members;
  3. Other Partners in the Office (OPIOs);
  4. Ten-Hour People;
  5. The Firm;
  6. Any entity controlled by the above.
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25
Q

Define “Financial Interest”.

A

An ownership interest in an equity or a debt security issued by an entity (including options and derivatives).

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26
Q

Does entertainment provided by a client to the auditor impair independence?

A

Not necessarily. Independence is not impaired if entertainment provided by the client is “reasonable under the circumstances.”

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27
Q

What client action can cause independence to be impaired?

A

The client having an unpaid bill from the audit from the previous 12 months.

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28
Q

Under the Principles of the Code of Professional Conduct, what type of financial interest impairs independence?

A
  1. Direct and Material;
  2. Indirect and Material;
  3. Direct and Immaterial;
  4. But not: Indirect and Immaterial.
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29
Q

List the type of permitted loans from financial institution clients that will not impair independence.

A
  1. Grandfathered;

2. Certain de minimis loans that are small and collateralized.

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30
Q

What type of lease does not violate independence rules?

A

Operating lease.

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31
Q

Under what conditions can non-covered members create independence problems?

A

They can create problems if they:

Are partners or professional employees of the firm, who
Own more than 5% of audit client’s stock or hold certain key positions.

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32
Q

Do gifts from a client to the auditor impair independence?

A

Not necessarily. While gifts can impair independence, independence is not impaired if the value is “clearly insignificant.”

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33
Q

Does a blind trust preserve independence?

A

No. A blind trust does not preserve independence.

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34
Q

Independence is impaired if audit firm employee is approached by client regarding a job, unless what actions are taken?

A

Required actions by audit firm employee:

  1. Person promptly reports such offer; and
  2. Removes self from engagement until offer is rejected.
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35
Q

List some independence safeguards if a client employee moves to the audit firm.

A

Client employee

  1. Cannot be on team or PTI;
  2. Can be OPIO or 10-hour person if dissociate from client.
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36
Q

What independence safeguards need to be in place by an audit firm if a former employee accepts a position with a client?

A

Former employee cannot be in a position to influence accounting firm’s operations or financial policies or participate or appear to participate in firm’s affairs.
Amounts due former employee from firm not variable; ongoing attest team considers appropriateness of modifying engagement procedures; firm assesses whether existing team members can continue to be skeptical; firm reviews subsequent attest engagement if person went to client within one year.

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37
Q

What is the cooling off period as defined under Sarbanes-Oxley?

A

It is one year for lead partner, concurring partner, or team member who provides more than 10 hours of work.

38
Q

Under what circumstances can a covered member audit a charity and remain on the Board of Directors of said charity?

A
  1. Position is purely honorary;
  2. Position is identified as honorary;
  3. Contributes no more than use of name; and
  4. Does not vote or participate in management affairs.
39
Q

What client relationships should a covered member avoid to ensure independence is not impaired?

A

Covered members should not be:

  1. Trustees of trust with financial interest in client;
  2. Trustee of client pension fund;
  3. Director of client;
  4. Officer of Client;
  5. Promoter of Client stock;
  6. Voting trustee of client.
40
Q

List the actions auditors should avoid in order to preserve independence.

A
  1. Performing management functions;
  2. Making management decisions;
  3. Appearing to do these things;
  4. Taking custody of client assets.
41
Q

List the activities forbidden by Sarbanes-Oxley for public company audit clients.

A

Bookkeeping or other services related to the accounting records of financial statements
Financial information systems design and implementations
Appraisal or valuation services, fairness opinions, or contributions-in-kind reports
Actuarial services
Internal audit outsourcing services
Management functions or human resources
Broker or dealer, investment adviser, or investment banking services
Legal and expert services unrelated to audit.

42
Q

List some examples of improper consulting activities that an auditor can partake in on behalf of an audit client.

A
  1. Authorizing, executing or consummating a transaction on client’s behalf;
  2. Preparing source documents evidencing occurrence of transactions;
  3. Taking custody of client assets;
  4. Supervising client employees’ normal recurring activities;
  5. Reporting to board on management’s behalf;
  6. Establishing or maintaining internal controls.
43
Q

Define “close relatives” (as defined for independence purposes).

A
  1. Parent;
  2. Sibling;
  3. Nondependent child.
44
Q

Define “immediate family members” (as defined for independence purposes).

A
  1. Spouse;
  2. Spousal equivalent;
  3. Dependents (whether or not related).
45
Q

Define “key positions” (as defined for independence purposes).

A
  1. Primary responsibility for significant accounting functions;
  2. Primary responsibility for preparation of F/S;
  3. Ability to exercise influence over contents of F/S.
46
Q

Describe the provisions of Interpretation 501-2 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A

Discrimination (on basis of race, color, religion, sex, age, or national origin) and harassment (sexual and other forms) are discreditable acts.

47
Q

Describe the provisions of Interpretation 501-4 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A

Negligently making (or permitting or directing another to make) false or misleading journal entries is a discreditable act.

48
Q

List the actions that an auditor may take when a client requests a return of their records.

A
  1. Return client-provided records w/in 45 days;
  2. May keep client records prepared by CPA if bill not paid;
  3. May keep supporting records if bill not paid;
  4. CPA’s working papers need not be turned over.
49
Q

Describe the provisions of Interpretation 501-6 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A

Soliciting or knowingly disclosing the May 1996 or later Uniform CPA Examination questions and/or answers without the written authorization of the AICPA is a discreditable act.

50
Q

List the five discreditable acts outlined in Rule 501 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A

(1) Discrimination and Harassment in Employment Practices; (2) Failure to Follow Standards and/or Procedures or Other Requirements in Governmental Audits; (3) Negligence in the Preparation of Financial Statements or Records; (4) Failure to Follow Requirements of Governmental Bodies, Commissions, or Other Regulatory Agencies in Performing Attest or Similar Functions; (5) Solicitation or Disclosure of CPA Examination Questions.

51
Q

List some examples of false, misleading or deceptive acts.

A
  1. Creating false or unjustified expectation of favorable results;
  2. Implying the ability to influence a court or agency;
  3. Estimating a fee knowing that the amount charged will likely be much higher.
52
Q

What action is prohibited by Rule 502 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct?

A

Solicitation by coercion, over-reaching or harassment.

53
Q

Describe the provisions of Interpretation 502-2 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A

CPAs may normally engage in accurate advertising (“commercial speech”).

54
Q

Under what circumstances are commissions prohibited?

A

When member also performs:

  1. Audit or review of a financial statement; or
  2. Compilations to be used by third parties; or
  3. Examination of prospective financial information.
55
Q

Under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct, what actions should be taken by the member regarding commission or referral fees?

A

Accepting a permitted commission or referral fee must be disclosed to the client.

56
Q

Under what circumstances are contingent fees prohibited?

A

Contingent fees are prohibited for performing:

  1. Any work for attest client;
  2. Preparation of tax return or refund;
  3. Correcting an omission in original return.
57
Q

Describe the provisions of Interpretation 502-2 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A
  1. Member may own interest in separate business that performs nonaudit services for clients;
  2. If member controls the separate business, entity must comply with Code of Professional Conduct;
  3. If member does not control the separate business, Code applies to member but not to the entity.
58
Q

Describe the provisions of Interpretation 505-3 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A
  1. Majority of financial interests in attest firm must be owned by CPAs;
  2. If CPAs who own the attest firm remain financially responsible, public interest will be considered protected.
59
Q

Describe the provisions in Rule 505 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

A

A member may practice public accounting only in a form of organization (proprietorship, partnership, professional corporation, limited liability company, limited liability partnership, etc.) permitted by state law whose characteristics conform to AICPA resolutions.

60
Q

For what type of service is compensation prohibited for auditors of public companies?

A

Compensation for selling nonaudit services is prohibited.

61
Q

What does the acronym PCAOB stand for?

A

Public Company Accounting Oversight Board.

62
Q

Who hires, compensates, and fires auditors of public companies?

A

The audit committee (composed entirely of independent directors) performs these actions.

63
Q

Is a public company required to rotate audit firms?

A

Sarbanes-Oxley does not require a public company to rotate audit firms.

64
Q

List the services that CPAs may not provide to public company audit clients.

A

Bookkeeping or other services related to the accounting records of financial statements;
Financial information systems design and implementations;
Appraisal or valuation services, fairness opinions, or contributions-in-kind reports;
Actuarial services;
Internal audit outsourcing services;
Management functions or human resources;
Broker or dealer, investment adviser, or investment banking services;
Legal services and expert services unrelated to audit.

65
Q

In the event the American Institute of Certified Public Accountants rules conflict with the Public Company Accounting Oversight Board rules, which rule should the practitioner follow?

A

The Public Company Accounting Oversight Board (PCAOB).

66
Q

Who must be rotated under Sarbanes Oxley?

A
  1. Lead audit partner and reviewing partner (5-on/5-off);

2. Other partners playing a significant role (7-on/2-off).

67
Q

On what firms must the Public Company Accounting Oversight Board (PCAOB) perform annual audits?

A

Firms with 100 or more public company audits.

68
Q

List the standards that the Public Company Accounting Oversight Board (PCAOB) is responsible for establishing.

A
  1. Auditing;
  2. Quality Control;
  3. Ethics;
  4. Independence.
69
Q

What governmental body oversees the Public Company Accounting Oversight Board (PCAOB)?

A

The Securities and Exchange Commission (SEC).

70
Q

List the Public Company Accounting Oversight Board’s basic functions.

A
  1. Registering public accounting firms;
  2. Setting up standards;
  3. Inspecting public accounting firms;
  4. Investigating violations;
  5. Enforcing compliance.
71
Q

What does the acronym GAO stand for?

A

Government Accountability Office.

72
Q

List the types of audit impairments that are the focus of the Government Accountability Office.

A
  1. Personal Impairments;
  2. External Impairments;
  3. Organizational Impairments.
73
Q

What does the acronym AO stand for?

A

Auditing Organization.

74
Q

What audits do the Government Accountability Office guidelines apply to?

A

Audits of:

  1. Government entities;
  2. Entities that receive government grants.
75
Q

What general issues do the Government Accountability Office address?

A
  1. Independence;
  2. Ethical Principles;
    • Public Interest;
    • Integrity;
    • Objectivity.
  3. Proper use of government information, resources & position;
  4. Professional Behavior.
76
Q

What requirements does the Government Accountability Office outline regarding the assessing of impact that nonaudit services have on the audit?

A
  1. Auditing Organizations (AOs) must not provide nonaudit services that involve performing management functions or making management decisions; and
  2. AOs must not audit their own work or provide nonaudit services in cases where the nonaudit services are significant to the subject matter of the audit.
77
Q

What two primary independence concerns do the Department of Labor independence rules address?

A
  1. Financial ties;

2. Employment ties.

78
Q

What does the acronym DOL stand for?

A

Department of Labor.

79
Q

What does the acronym ERISA stand for?

A

Employee Retirement Income Security Act.

80
Q

What does the acronym EBSA stand for?

A

Employee Benefits Security Administration.

81
Q

What does the acronym IESBA stand for?

A

International Ethics Standards Board for Accountants.

82
Q

What is the role of the International Federation of Accountants?

A

It is the global voice for accounting profession.

83
Q

List the fundamental principles of the International Federation of Accountants (IFAC) code.

A
  1. Integrity;
  2. Objectivity;
  3. Professional Competence;
  4. Due Care;
  5. Confidentiality;
  6. Professional Behavior.
84
Q

What does the acronym PAPPS stand for?

A

Professional Accountants in Public Practice.

85
Q

What does the acronym PABS stand for?

A

Professional Accountants in Business.

86
Q

List the categories of threats to independence outlined in the International Federation of Accountants (IFAC) code.

A
  1. Self-Interest Threats;
  2. Self-Review Threats;
  3. Advocacy Threats;
  4. Familiarity Threats;
  5. Intimidation Threats.
87
Q

What is the role of the Professional Ethics Executive Committee (PEEC)?

A

The Professional Ethics Executive Committee monitors the International Federation of Accountants’ activities and gives the U.S. input to International Ethics Standards Board for Accountants (IESBA).

88
Q

List two types of safeguards against threats to Independence.

A
  1. Created by profession, legislation or regulation
  2. Present in the workplace
    • Firm-wide
    • Engagement-specific.
89
Q

How many countries have adopted the International Federation of Accountants code?

A

Over 100 countries have adopted this code.

90
Q

Define “clearly insignificant” as defined in the International Federation of Accountants (IFAC) code.

A

Trivial and Inconsequential.

91
Q

What does the acronym IFAC stand for?

A

International Federation of Accountants.

92
Q

Is the International Federation of Accountants Code (IFAC) rules-based?

A

No, the International Federation of Accountants Code is principles-based.

CPA Review - AUD (20 decks)

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