Flashcards in AICPA and PCAOB Red book Sinason Deck (34):
What is professional ethics code?
The code tells individuals and the public what the profession expects and provides a means of enforcement of standards of conduct.
What are the 6 principles of professional conduct?
Responsibilities-members should exercise sensitive professional and moral judgments in all their activities.
The public interest- Members should service the public interest, honor the public trust, and demonstrate commitment to professionalism.
Integrity-Members should perform all professional responsibilities with the highest sense of integrity.
Objectivity and independence-A member should maintain objectivity and be free of conflicts of interest. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.
Due Care-A member should observe technical and ethical standards, strive to improve, and act to the best of their ability.
Scope and nature of services-A member in public practice should observe the principles of the code of professional conduct in determining the scope and nature of services to be provided.
Anytime you are issuing an opinion you need to be:
What is a covered member?
Are the firm's professionals closely connected to the audit engagement and the firm's owners who are located in the office where the lead engagement partner practices.
All attest engagement team members
Partners or managers who provides non-attest services
A partner in the engagement office
A person or entity in a position to influence the testing, judgments, or decisions during an audit.
Covered members are prohibited from having any:
Financial interest in clients that could affect their audit judgment (independence in fact) or would appear to others to have an influence on their judgment (independence in appearance)
A covered member cannot have what kind of interest in the client?
Any direct financial interest is prohibited
Indirect financial interest are allowed up to the point of materiality.
What is considered immediate family?
covered member spouse
immediate family member are subject to the same provisions as a covered person. No direct financial or material indirect financial interest in a client.
What is a close relative?
parent, nondependent child
A covered member's close relatives cannot have ownership or control of an audit client or employment with an audit client.
In general, a prohibited activity is any that would force the CPA to either act in the capacity of:
management or as an advocate for management
Independence is impaired if a CPA serves on an organization's board of directors. Exceptions:
A member can be a honorary director of a not for profit organization (charity hospitals, fund drives, symphony orchestra societies) if:
The position is purely honorary
The CPA is identified as an honorary director on letterheads and other literature
the only form of participation is the use of the CPA's name, and
The CPA does not vote with the board or participate in management functions.
Is independence impaired if there is a litigation issue between the auditor and client?
Litigation between the client and the auditor is an independence issue.
What are permitted loans that do not impair independence?
Auto loans and leases collateralized by the automobile
Insurance policy loans based on policy surrender value
Loans collateralized by cash deposits at the same financial institution
Credit card balances and cash advances of $10,000 or less.
if a covered member has what kind of financial interest, he is considered to impair independence?
Direct or materially indirect financial interest.
What is a cooperative arrangement and is it prohibited for independence?
A cooperative arrangement exists when a member's firm and a client jointly participate in a business activity- Material cooperative arrangements with clients are prohibited.
What is a direst superior?
Include those persons so closely associated with a partner or manager who is a covered member, that such persons can directly control the activities of such partner or manager.
What is an indirect superior?
one or more levels above persons included in direct Superior. Generally, this would start with persons in an organization structure to whom Direct Superiors report and go up the line from there. Indirect Superiors are not connected with partners and managers who are covered members through direct reporting relationships; there always is a level in between.
Think about control. The rule of thumb is that if the covered member controls the investment in any ways, it is generally considered a:
What is the 3 step risk based approach to evaluate whether the practice or relationship poses an unacceptable risk to a CPA's independence?
1: identifying and evaluating threats to independence
2. determining whether safeguards eliminate or sufficiently mitigate the identified threats and,
3. determining whether independence is impaired.
What are the different threats?
Familiarity threat: CPAs having a close of longstanding relationship with a client
Adverse interest threat: CPAs acting in opposition to clients
Undue influence threat: attempts to coerce or otherwise influence the CPA member (Gifts)
Self-review threat: CPAs reviewing their own work
Financial self interest threat: CPAs having financial relationship with a client
Management participation threat: CPAs taking on the role of client management or otherwise performing management functions.
Advocacy threat: CPAs promoting a client's interest or position.
In the performance of any professional service, a member shall maintain _____ and ________, shall be free of ______________________, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
An accountant cannot except an engagement for which he or she does not have sufficient competence to complete. But what is the exception?
But can obtain that competence through education, hiring of personnel with expertise, or contracting a specialist.
Members shall not express opinions or negative assurance on FSs unless they are:
in conformity with GAAP.
A member may disclose confidential info without the client's permission in what situations?
Compliance with applicable laws (responding to a subpoena)
Discharge of CPA's professional responsibilities
Ethics investigation (of a CPA)
Peer review of PCAOB investigation of public accounting firm practices.
Accountants can permit other accountants to review confidential audit documentation and other info about clients in connection with arrangements to sell or merge an accounting practice.
What is a contingent fee?
A contingent fee is a fee established for the performance of any service in an arrangement in which no fee will be charged unless a specific finding or result is attained or the fee otherwise depends on the result of the service. Normally cannot charge a contingent fee.
What are some acts discreditable to the profession?
Withholding a client's books and records.
Being found guilty of discrimination by a court of administrative agency.
Failing to follow government audit standards and guides in governmental audits.
Failure to follow the requirements of regulatory bodies.
Soliciting or disclosing CPA exam questions and answers.
Failing to file tax return or remit payroll and other taxes.
Making, or permitting other to make, false and misleading entries in records and FSs.
A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is:
false, misleading, or deceptive.
Members in public practice may not accept commissions for:
Members in public practice may not accept commissions for recommending or referring any product or service to a client, or for any product or service provided by a client, for whom the member performs an audit, review, compilation, or examination of prospective statements.
What is the rule for referral fees?
fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.
A firm may not designate itself as "member of the AICPA" unless:
unless all of its CPA owners are members of the institute.
What is the rule of the rotation of partners?
The lead and concurring or reviewing partner must rotate every 5 years (5 year time out)
Other partners must rotate every 7 years (2 year time out)
What is a safeguard?
a measure taken to protect someone or something or to prevent something undesirable.
Compare key audit partner time on and time off for PCAOB and IS:
PCAOB 5 years on, 5 years time out
IS 7 years on, 2 years time out.
Rule of Conduct 102, indicates that when a CPA is acting as an expert witness, s/he should not act as an advocate but should give his/her position based on:
objectivity. The expert witness does this based on specialized knowledge, training, and expertise.