M6 - Professional standards and ethics

Question 1

What are the 6 principles of the AICPA Professional conduct

Answer 1

a. Responsibilities
b. Public interest
c. Integrity
d. Objectivity and independence
e. Due care
f. Scope and nature of services

Question 2

When is independence impaired under the AICPA code of professional conduct?

Answer 2

a. Direct financial interest— If a member has a direct financial interest with attestation clients without regard to materiality
b. Direct financial interest— If a member has a material indirect financial interest in the client
c. If a member or a member’s immediate family member has a loan to or from the client
d. If a member accepts more than a token gift
e. If a member is an employee of or makes management decisions on behalf of the client
f. If the client is overdue more than one year in the payment of profession fees to the member or
g. If there is actual or threatened litigation between the member and client

Question 3

Under AICPA when is independence impaired by employment relationships?

Answer 3

Independence is impaired when:

1) An individual who was formerly employed by the client participates on the engagement team or is in a position to influence the engagement when the engagement covers any period of his or her former employment the client
2) An immediate family member of close relative is employed in a key position by the client
3) A partner or professional employee leaves the firm and is employed by the client in a key position, unless the individual is no longer in a position to influence or participate in a firm’s business decisions and the amounts due to the individual are immaterial to the firm

Question 4

Under AICPA, what independence rules apply to close relatives?

Answer 4

the member’s independence is impaired when the close family member is:
1) employed by a client in a key position (except for covered members who provide only non-attest services to a client)
2) aware that the close relative has a financial interest in the client that either
A) was material to the relative’s net worth or
B) enables the relative to exercise significant influence over the client

Question 5

What is an act that is discreditable to the profession?

Answer 5

a. Retaining client records after the client demands their return
b. Harassment
c. Failing to follow applicable standards or procedures in government audits
d. Negligence in preparing financial statements
e. Failure to timely file a personal or firm tax return
f. Failure to follow regulatory requirements
g. Promotion or marketing of the member’s ability to provide professional services or making claims about the members’ experience or qualifications in a manner that is false, misleading, or deceptive
h. Making claims about the member’s experience or qualifications in a manner that is false, misleading or deception
i. Members who employment relationship is terminated and takes or retains originals or copies from the firm’s client file or proprietary information without the firm’s permission
j. Disclosing confidential information obtained from a prospective client or non-client
k. Solicitation or disclosure of CPA examination questions or answers

Question 6

According to AICPA, a departure from GAAP may be justified under what circumstances?

Answer 6

a departure from GAAP may be justified only if compliance with GAAP would cause the financial statements to be misleading

Question 7

According to the AICPA code of professional conduct, in what circumstances must a CPA disclose confidential client information without the consent of the client

Answer 7

A CPA must disclose confidential information without client consent under the following circumstances:

1) it is necessary to comply with a valid subpoena or summons
2) As part of a quality review of the CPAs professional practices authorized by the AICPA
3) In response to any inquiry made by the ethics division or the trial board of the AICPA, or by a duly constituted investigative body of a state CPA society

Question 8

When are contingent fees prohibited?

Answer 8

1) Audits of financial statements
2) Reviews of financial statements
3) Examinations of prospective financial information
4) Preparing an original or amended tax return or claim for a tax refund

Question 9

According to the AICPA code of professional conduct, when are contingent fees permitted?

Answer 9

1) For compilations of financial statements expected to be used by third parties only if the member includes a statement that the member is note independent
2) Fees are not regarded as being contingent when they are fixed by courts or other public authorities or in tax matters, if they are based on the results of court proceedings or the findings of governmental agencies

Question 10

Explain the conceptual framework approach utilized by the AICPA code of professional conduct

Answer 10

the approach requires entities to:

1) Identify threats to compliance with fundamental principles
2) Evaluate the significance of the threat
3) Apply safeguards to eliminate threats or reduce threats to an acceptable level

Question 11

What are the different threats related to the conceptual framework?

Answer 11

a. Adverse interest threat
b. Advocacy threat
c. Familiarity threat
d. Management participation threat
e. Self-interest threat
f. Self-review threat
g. Undue influence threat

Question 12

Define and provide an example of an adverse interest threat

Answer 12

The threat that a member will not act with objectivity because the member’s interests are opposed to the client or employing organization interests.
For example, a member experiences an adverse threat if he or she is commencing litigation against the client / employing organization

Question 13

Define and provide examples of advocacy threat

Answer 13

a. A member endorses a clients services or products
b. Member gives or fails to give information that the member knows will unduly influence the conclusions reached by an external service provider or other third party
c. A member promotes the attest client’s securities as part of an initial public offering

Question 14

Define and provide examples of familiarity threat

Answer 14

A threat that due to long or close relationships with the client or employing organization, a member will become to accepting of the product or service and or too sympathetic to the client’s or employing organizaitons interests.
For example: a member experiences familiarity threat when a close friend is employed by the client

Question 15

Define and provide examples of management participation threat?

Answer 15

The threat that a member will take on the role of client management or otherwise assume management responsibilities
examples .
a. A member serves as an officer or a director of the attest client
b. A member accepts responsibility for designing, implementing, or maintaining internal controls

Question 16

Define and provide examples of self-interest threat

Answer 16

The threat that a member could benefit financially or otherwise from an interest in or relationship with a client or employing organization or persons associated with the client or employing organization

examples:
a. A member serves as an officer or a director
b. A member is eligible for a profit or other performance related bonus at the employing organization

Question 17

Define and provide examples of self-review threat

Answer 17

The threat that a member will not appropriately evaluate 1) the results of a previous judgement made 2) a service performed or supervised by the member or 3) that the member will rely on that service in forming a judgment as part of another service
Examples:
a. The member performs bookkeeping services for a client
b. Member performs an internal audit procedure at the employing organization the member reviews work that he or she previously performed in a different position

Question 18

Define and provide examples of undue influence threat

Answer 18

The threat that a member will subordinate his or her judgement to an individual associate with a client or employing organization or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, of attempts to coerce of exercise excessive influence over the member
Examples:
a. Client indicates that it will not award additional engagements to the firm if the firm continues to disagree with the client on an accounting or tax matter
b. A member is pressured to become associated with misleading information
c. The attest clients management pressures the member to reduce necessary audit procedures in order to reduce audit fees

Question 19

What is an issuer and who establishes standards for audit reports of issuers?

Answer 19

a. Issuer- filing company

b. Standard setter- PCAOB

Question 20

Title 1 of the SOX of 2002 requires that registered firms must adhere to what auditing standards

Answer 20

• audit workpapers must be maintained for 7 years
• a concurring or second partner review is required for each audit report
• the audit report must describe the scope of the testing of the issuer’s internal controls

Question 21

SOX Title II- services that cannot be provided

Answer 21

a. Bookkeeping
b. Financial information systems design and implementation
c. Appraisal and valuation services
d. Actuarial services
e. Management functions and HR functions
f. Internal audit outsourcing services
g. Investment-related services
h. Legal services
i. Expert services unrelated to the audit
j. (SEC Regulation contains the same rules)

Question 22

Under SOX Title II and SEC Regulation S-X what must be preapproved by the audit committee?

Answer 22

a. All auditing services and permitted non-audit services (including tax services) must be preapproved by the audit committee of the issuer

Question 23

What are audit partner rotation rules under SOX Title II and SEC Regulation S-X?

Answer 23

a. Both SOX require rotation of lead and concurring partner every 5 years
i. Lead and concurring partners subject to five year “time out” period
b. Additional partners- rotate off 7 years
i. Two year time out
c. Required to disclose the name of the engagement partner

Question 24

What must be reported by the auditor to the audit committee under SOX Title II and SEC Regulation S-X?

Answer 24

a. Critical accounting policies and procedures used
b. Alternative accounting treatments discussed with management, the ramifications of alternatives, and the treatment of preferred by the auditor
c. Material written communication between the auditor and management

Question 25

Cooling off period under SOX II and SEC Reg S-X

Answer 25

a. 1 year
b. Cannot have employed an issuers CEO, CFO, Controller, CAO or other employee in a financial reporting oversight role during the one year preceding audit

Question 26

Under the SEC principles of independence, a client relationship or a service provided to an audit creates an independence issue when

Answer 26

a. Creates mutual or conflicting interest between the auditor and client
b. Results in the auditor acting as management or an employee of the audit client
c. Places the auditor in a position of auditing his or her own work
d. Makes the auditor an advocate for the audit client

Question 27

According to the SEC what independence rules apply to spouses and dependents

Answer 27

a. Has an accounting role or financial reporting oversight role with the SEC audit client
b. Owns more than 5% of a client’s equity securities or controls the client

Question 28

What are PCAOB tax related independence rules/

Answer 28

a. Cannot provide confidential or aggressive tax transactions to audit clients
b. Tax services to corporate officers of audit clients or their immediate family members
c. Audit committee must preapprove tax services and related fees

Question 29

What are the ethics principles under generally accepted government auditing standards?

Answer 29

1. Serving public interest
2. integrity
3. objectivity
4. proper use of governmental information, resources, and positions
5. professional behavior

Question 30

What are the general characteristics of independence under GAGAS?

Answer 30

a. Independence of mind

b. Independence in appearance

Question 31

What are the four steps in evaluation of auditor independence under GAGAS?

Answer 31

1. Identification of threats to independence
2. Evaluation of the significance of threats identified both individually and in the aggregate
3. Application of safeguards necessary to eliminate threats to reduce them to an acceptable level
4. conclude if safeguards are adequate to eliminate or appropriately reduce the threat

Question 32

List the seven threats to auditor independence under GAGAS

Answer 32

a. Self-interest threat
b. Self-review threat
c. Bias threat
d. Familiarity threat
e. Undue influence threat
f. Management participation threat
g. Structural threat

Question 33

GAGAS- determine whether a non-audit service would create a threat to independence

Answer 33

Consideration of management’s ability to effectively oversee the non-audit service to be performed. Auditor should determine

i. That the audited entity has designated an individual who possesses suitable skill, knowledge, or experience and
ii. That the individual understands the services to be performed sufficiently to oversee them.