AUD 2 Professional Responsibilities and Ethics Flashcards
(99 cards)
1
Q
One of the most comprehensive sets of rules and codes of ethics related to accountants are largely based on the ________________ .
A
One of the most comprehensive sets of rules and codes of ethics related to accountants are largely based on the AICPA Code of Professional Conduct.
2
Q
In addition to the AICPA Code of Professional Conduct, a CPA will consider the ethical requirements of all applicable bodies and agencies, which may include:
A
In addition to the AICPA Code of Professional Conduct, a CPA will consider the ethical requirements of all applicable bodies and agencies, which may include:
- State societies
- State boards of accountants and related regulatory agencies
- The SEC, PCAOB, GAO, and DOL
- Taxing authorities
3
Q
The AICPA Code of Professional Conduct (the Code) is organized in 4 parts:
A
The AICPA Code of Professional Conduct (the Code) is organized in 4 parts:
- The Preface (applicable to all members)
- Part 1 – Members in Public Practice
- Part 2 – Members in Industry
- Part 3 – Other Members
4
Q
The AICPA Code of Professional Conduct (the Code) is organized in 4 parts:
- The Preface (applicable to all members)
- Part 1 – Members in Public Practice
- Part 2 – Members in Industry
- Part 3 – Other Members
A
The AICPA Code of Professional Conduct (the Code) is organized in 4 parts:
- The Preface (applicable to all members)
• 0.100 – Overview of the code of Professional Conduct
• 0.200 – Structure and Application of the AICPA code
• 0.300 – Principles of Professional Conduct
• 0.400 – Definitions
• 0.500 – Nonauthoritative Guidance
• 0.600 – New, Revised, and Pending Interpretations and Other Guidance
2. Part 1 – Members in Public Practice • 1.000 – Introduction • 1.100 – Integrity and Objectivity • 1.200 – Independence • 1.300 – General Standards • 1.310 – Compliance With Standards • 1.320 – Accounting Principles • 1.400 – Acts Discreditable • 1.500 – Fees and Other Types of Remuneration • 1.600 – Advertising and Other Forms of Solicitation • 1.700 – Confidential Information • 1.800 – Form of Organization and Name
3. Part 2 – Members in Industry • 2.000 – Introduction • 2.100 – Integrity and Objectivity • 2.300 – General Standards • 2.310 – Compliance With Standards • 2.320 – Accounting Principles • 2.400 – Acts Discreditable
- Part 3 – Other Members
• 3.100 – Introduction
• 3.400 – Acts Discreditable
5
Q
AICPA Code of Professional Conduct (the Code)
When a CPA has multiple professional roles, the highest and most ________ level of standards should be applied.
A
AICPA Code of Professional Conduct (the Code)
When a CPA has multiple professional roles, the highest and most restrictive level of standards should be applied.
6
Q
Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.
This topic also describes how certain terms are interpreted in a section related to drafting conventions.
• Rules requiring a member to consider something are requiring the CPA to _____ about the matters being addressed.
A
Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.
This topic also describes how certain terms are interpreted in a section related to drafting conventions.
• Rules requiring a member to consider something are requiring the CPA to think about the matters being addressed.
7
Q
Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.
This topic also describes how certain terms are interpreted in a section related to drafting conventions.
• Rules requiring a member to evaluate something are requiring the CPA to ______ a matter’s significance.
A
• Rules requiring a member to evaluate something are requiring the CPA to measure a matter’s significance.
8
Q
Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.
This topic also describes how certain terms are interpreted in a section related to drafting conventions.
• Rules requiring a member to determine something are requiring the CPA to ______ a conclusion related to a matter or make a decision in relation to it.
A
• Rules requiring a member to determine something are requiring the CPA to establish a conclusion related to a matter or make a decision in relation to it.
9
Q
Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.
This topic also describes how certain terms are interpreted in a section related to drafting conventions.
- Rules requiring a member to consider something are requiring the CPA to _____ about the matters being addressed.
- Rules requiring a member to evaluate something are requiring the CPA to ______ a matter’s significance.
- Rules requiring a member to determine something are requiring the CPA to ______ a conclusion related to a matter or make a decision in relation to it.
A
- Rules requiring a member to consider something are requiring the CPA to think about the matters being addressed.
- Rules requiring a member to evaluate something are requiring the CPA to measure a matter’s significance.
- Rules requiring a member to determine something are requiring the CPA to establish a conclusion related to a matter or make a decision in relation to it.
10
Q
• Rules requiring a member to consider something are requiring the CPA to _____ about the matters being addressed.
A
• Rules requiring a member to consider something are requiring the CPA to think about the matters being addressed.
11
Q
• Rules requiring a member to evaluate something are requiring the CPA to ______ a matter’s significance.
A
• Rules requiring a member to evaluate something are requiring the CPA to measure a matter’s significance.
12
Q
• Rules requiring a member to determine something are requiring the CPA to ______ a conclusion related to a matter or make a decision in relation to it.
A
• Rules requiring a member to determine something are requiring the CPA to establish a conclusion related to a matter or make a decision in relation to it.
13
Q
Principles embedded in the AICPA Code of Professional Conduct
In the preamble, it reminds CPAs of their _______ of self-discipline exceeding the simple compliance with applicable laws and regulations;
__________s to the public, to clients, and to colleagues;
and a commitment to act with ____ despite the possibility of personal sacrifice that may result.
A
Principles embedded in the AICPA Code of Professional Conduct
In the preamble, it reminds CPAs of their responsibility of self-discipline exceeding the simple compliance with applicable laws and regulations;
responsibilities to the public, to clients, and to colleagues;
and a commitment to act with honor despite the possibility of personal sacrifice that may result.
14
Q
Principles embedded in the AICPA Code of Professional Conduct:
R P I O D S
A
Principles embedded in the AICPA Code of Professional Conduct :
- Responsibilities
- Public Interest
- Integrity
- Objectivity and Independence
- Due Care
- Scope and Nature of Services
15
Q
____________s – Requires the application of sensitive professional and moral judgment at all times and cooperation with other members of the profession to improve the art of accounting, to maintain the public’s confidence in the profession, and to carry out the profession’s responsibility for self-governance.
A
Responsibilities
Requires the application of sensitive professional and moral judgment at all times and cooperation with other members of the profession to improve the art of accounting, to maintain the public’s confidence in the profession, and to carry out the profession’s responsibility for self-governance.
16
Q
_____ Interest
Requires a commitment to professionalism and acting in a manner that serves the _____ interest and honors the trust that the ____ has in the accounting profession.
The ____ interest is the collective well-being of the community of people and institutions that are served by the accounting profession, which requires the accountant to act with integrity when confronted by conflicts among various stakeholders and perform services applying integrity, objectivity, and due professional care.
A
Public Interest
Requires a commitment to professionalism and acting in a manner that serves the public interest and honors the trust that the public has in the accounting profession.
The public interest is the collective well-being of the community of people and institutions that are served by the accounting profession, which requires the accountant to act with integrity when confronted by conflicts among various stakeholders and perform services applying integrity, objectivity, and due professional care.
17
Q
_______
Requires that the highest level of ______ be applied through the CPA’s honesty and candor, within the constraints of client confidentiality, and an unwillingness to subordinate service or the public trust to personal gain or advantage.
A
Integrity
Requires that the highest level of integrity be applied through the CPA’s honesty and candor, within the constraints of client confidentiality, and an unwillingness to subordinate service or the public trust to personal gain or advantage.
18
Q
Objectivity and __________
Requires _________ , both in fact and in appearance, when performing auditing and other attestation services, for which standards require _________, and that the CPA remain free of conflicts of interest and exercise impartiality and intellectual honesty in the performance of all professional services.
A
Objectivity and Independence
Requires independence, both in fact and in appearance, when performing auditing and other attestation services, for which standards require independence, and that the CPA remain free of conflicts of interest and exercise impartiality and intellectual honesty in the performance of all professional services.
19
Q
________
Requires compliance with technical and ethical standards while continuing to endeavor to improve the CPA’s competence and quality of services, which is accomplished through a commitment to learning throughout the CPA’s professional life, and diligence in the provision of professional services enabling performance to the best of the CPA’s ability.
_________ also requires a CPA to remain competent and to understand the limitations to that competence, which may result in consultation or the referral of services, and to adequately plan and supervise all professional activities for which the CPA is responsible.
A
Due Care
Requires compliance with technical and ethical standards while continuing to endeavor to improve the CPA’s competence and quality of services, which is accomplished through a commitment to learning throughout the CPA’s professional life, and diligence in the provision of professional services enabling performance to the best of the CPA’s ability.
Due care also requires a CPA to remain competent and to understand the limitations to that competence, which may result in consultation or the referral of services, and to adequately plan and supervise all professional activities for which the CPA is responsible.
20
Q
Scope and _____ of Services
Requires the CPA to evaluate whether or not services can be performed in a manner consistent with the principles of the Code by practicing in a firm with appropriate quality control policies and procedures commensurate with the services being performed; making certain that services performed for an audit client do not create a conflict of interest; and that activities in which the CPA participates are appropriate for members of the CPA profession.
A
Scope and Nature of Services
Requires the CPA to evaluate whether or not services can be performed in a manner consistent with the principles of the Code by practicing in a firm with appropriate quality control policies and procedures commensurate with the services being performed; making certain that services performed for an audit client do not create a conflict of interest; and that activities in which the CPA participates are appropriate for members of the CPA profession.
21
Q
Principles embedded in the AICPA Code of Professional Conduct :
A
Principles embedded in the AICPA Code of Professional Conduct :
- Responsibilities
- Public Interest
- Integrity
- Objectivity and Independence
- Due Care
- Scope and Nature of Services
22
Q
Only the AICPA Code of Professional Conduct is ___________ and that guidance provided by the staff of the Professional Ethics Division of the AICPA is nonauthoritative guidance.
A
Only the AICPA Code of Professional Conduct is authoritative and that guidance provided by the staff of the Professional Ethics Division of the AICPA is nonauthoritative guidance.
23
Q
AICPA Code of Professional Conduct
The conceptual framework approach involves a 3-step process:
- Identify ________s
- Evaluate the __________ of identified threats
- Identify and apply ________s
A
AICPA Code of Professional Conduct
The conceptual framework approach involves a 3-step process:
- Identify threats
- Evaluate the significance of identified threats
- Identify and apply safeguards
24
Q
_______ threats that may interfere with the CPA’s ability to remain in compliance with the Code.
The CPA may, for example, be considering entering into a relationship that is not prohibited but that raises the possibility of a conflict of interest.
The existence of one or more threats does not necessarily indicate that the CPA is in violation of the Code, but requires that the threat or threats be evaluated.
A
Identify threats that may interfere with the CPA’s ability to remain in compliance with the Code.
The CPA may, for example, be considering entering into a relationship that is not prohibited but that raises the possibility of a conflict of interest.
The existence of one or more threats does not necessarily indicate that the CPA is in violation of the Code, but requires that the threat or threats be evaluated.
25
Evaluate the ________ of identified threats, both individually and in the aggregate, to determine if they are at an acceptable level.
A threat is considered to be at an acceptable level when a reasonable and informed third party would conclude that the Code was not violated.
Evaluate the significance of identified threats, both individually and in the aggregate, to determine if they are at an acceptable level.
A threat is considered to be at an acceptable level when a reasonable and informed third party would conclude that the Code was not violated.
The evaluation will consider qualitative and quantitative factors and should take into account existing safeguards that are in place and may reduce the threat to an acceptable level.
26
Identify and apply ________s to those threats that are not at an acceptable level.
In some cases, a single ________ may eliminate more than one threat while, in others, it may require several __________s to reduce a single threat to an acceptable level.
In cases where _________s cannot be implemented to reduce the threat or threats to an acceptable level, providing those specific professional services would result in the member’s compliance with the Code being compromised, the member should determine if declining or discontinuing the service or resigning from the engagement would be appropriate.
Identify and apply safeguards to those threats that are not at an acceptable level.
In some cases, a single safeguard may eliminate more than one threat while, in others, it may require several safeguards to reduce a single threat to an acceptable level.
In cases where safeguards cannot be implemented to reduce the threat or threats to an acceptable level, providing those specific professional services would result in the member’s compliance with the Code being compromised, the member should determine if declining or discontinuing the service or resigning from the engagement would be appropriate.
27
There are 7 categories of threats:
1. Self-R____
2. Adv_____
3. A____ Interest
4. Fam_____
5. U____ Influence
6. S___ - Interest
7. M________ Participation
There are 7 categories of threats:
1. Self-Review
2. Advocacy
3. Adverse Interest
4. Familiarity
5. Undue Influence
6. Self-Interest
7. Management Participation
They are not mutually exclusive in that a single threat may fall under more than one category. Threats are evaluated both individually and in the aggregate.
28
There are 7 categories of threats:
1. S
2. A
3. A
4. F
5. U
6. S
7. M
There are 7 categories of threats:
1. Self-Review
2. Advocacy
3. Adverse Interest
4. Familiarity
5. Undue Influence
6. Self-Interest
7. Management Participation
They are not mutually exclusive in that a single threat may fall under more than one category. Threats are evaluated both individually and in the aggregate.
29
The threat of _____-______ exists when the accountant performs some form of evaluation of matters that were previously influenced by the accountant’s judgment
The _____-______ threat is the threat that the accountant will assume a level of reliability without performing an appropriate level of testing or other due diligence.
There are 7 categories of threats:
1. Self-Review
The threat of self-review exists when the accountant performs some form of evaluation of matters that were previously influenced by the accountant’s judgment, such as when an accountant is performing an attest service in relation to a client’s financial statements when the accountant’s firm performed bookkeeping services for that client.
The self-review threat is the threat that the accountant will assume a level of reliability without performing an appropriate level of testing or other due diligence.
30
An _______ threat exists when the accountant’s actions effectively promote a client’s interests or position.
There are 7 categories of threats:
2. Advocacy
An advocacy threat exists when the accountant’s actions effectively promote a client’s interests or position.
This would be the case if the accountant is:
* Providing forensic accounting services to the client in a conflict with third parties.
* Providing investment advice for an officer, director, or shareholder holding 10% or more of the client’s shares.
* Promoting or underwriting the client’s securities, or acting as a registered agent for the client.
* Endorsing the products or services of a client.
It does not result from testifying as a fact witness or defending the results of a professional service performed for the client.
31
The threat of an _______ ________ exists when the interests of the client are in conflict with the interests of the accountant, which may inhibit the accountant from applying objectivity.
There are 7 categories of threats:
3. Adverse Interest
The threat of an adverse interest exists when the interests of the client are in conflict with the interests of the accountant, which may inhibit the accountant from applying objectivity.
This would be the case, for example, if the client and the accountant were involved in, or anticipating, litigation against each other.
32
The threat of _________ results from a close and longstanding relationship with a client, potentially causing the accountant to become too sympathetic to the client’s interests or too trusting of the client’s work or products.
There are 7 categories of threats:
4. Familiarity
The threat of familiarity results from a close and longstanding relationship with a client, potentially causing the accountant to become too sympathetic to the client’s interests or too trusting of the client’s work or products.
Examples of the types of relationships that create a familiarity threat include:
* The spouse, a family member, or a close friend of an engagement team member is employed by the client.
* The member has a close and significant business relationship with an officer, director, or significant shareholder of the client.
* Senior firm personnel have a long-standing relationship with the client.
33
The threat of _____ _________ results from attempts by management or others to exercise an excessive amount of influence over the accountant.
There are 7 categories of threats:
5. Undue Influence
The threat of undue influence results from attempts by management or others to exercise an excessive amount of influence over the accountant.
This may involve:
* A client’s threat to replace the accountant as a result of a disagreement.
* A client exerting pressure to limit an engagement to reduce fees.
34
The threat of ____ - ________ occurs when the accountant has the opportunity to obtain a potential benefit from an interest in, or another relationship with, a client.
Example:
• The accountant enters into an arrangement that involves a contingent fee rather than one that is predetermined.
There are 7 categories of threats:
6. Self-Interest
The threat of self-interest occurs when the accountant has the opportunity to obtain a potential benefit from an interest in, or another relationship with, a client.
This would be the case if:
* The accountant has a financial interest in the client, the value of which may be affected by the results of the service being performed.
* The accountant enters into an arrangement that involves a contingent fee rather than one that is predetermined.
* The accountant relies excessively on the fees earned from the client.
35
The threat of __________ ___________ occurs when the accountant takes on the role of management for the client or performs management functions on behalf of the client.
There are 7 categories of threats:
7. Management Participation
The threat of management participation occurs when the accountant takes on the role of management for the client or performs management functions on behalf of the client.
Assuming management responsibilities will generally impair a member’s independence in relation to a client but will not necessarily, otherwise, indicate a violation of the Code.
A member may still perform professional services for such a client provided the services do not require the accountant to be independent.
The performance of management functions does not impair independence as long as the member is not assuming management responsibility.
The accountant may, for example, design a client’s system of internal control provided the client takes responsibility for all decisions involving the allocation or use of resources and the general requirements for the performance of nonattest services in section 1.295 of the Code, discussed later in this chapter, have been met. This includes designating someone from the client’s organization, preferably a member of senior management, who will take responsibility for the services performed by the CPA.
36
S________ are controls that eliminate or reduce threats, ranging from prohibitions against circumstances that create threats to procedures that counteract the potential risk associated with a threat.
Safeguards are controls that eliminate or reduce threats, ranging from prohibitions against circumstances that create threats to procedures that counteract the potential risk associated with a threat.
Safeguards are considered effective if they eliminate a threat or reduce it to an acceptable level.
37
Safeguards eliminate or reduce ______s.
Safeguards eliminate or reduce threats.
38
Safeguards ________ or reduce threats.
Safeguards eliminate or reduce threats.
39
There are a number of factors that determine if safeguards are likely to be effective.
Example:
There are a number of factors that determine if safeguards are likely to be effective.
* circumstances surrounding the situation,
* whether threats are identified properly,
* whether safeguards are designed appropriately,
* who applies the safeguards and who are subject to them, and
* how they are applied and the consistency with which they are applied.
40
Certain safeguards are imposed on the accountant by requirements of the profession, or by legislation or regulation.
Examples:
Certain safeguards are imposed on the accountant by requirements of the profession, or by legislation or regulation.
Examples include:
* Education, training, and continuing professional education (CPE) requirements
* Professional standards, combined with monitoring and disciplinary processes and external reviews of the firm’s quality control
* Legislation
* Requirements related to competency and experience
41
Other safeguards result from client characteristics or policies.
These, which act in combination with other safeguards, might include:
Safeguards result from client characteristics or policies might include:
* Client personnel with an appropriate combination of skill, knowledge, and experience to oversee professional services provided by the accountant
* A tone at the top that emphasizes a commitment to fair reporting, compliance with laws and regulations, and ethical conduct
* Client governance related to the accountant’s services that is structured and designed for appropriate decision making, oversight, and communication
* Policies limiting the client’s use of the accountant for services that impair independence, encourage noncompliance with ethical requirements, or would not serve the public interest
42
Safeguards may be implemented by the firm.
Examples:
Safeguards may be implemented by the firm.
These may be many and varied, including:
• Leadership that stresses the importance of ethical behavior and acting in the interest of the public
• Policies and procedures designed to:
o Implement and monitor quality control
o Monitor compliance with firm policies
o Monitor the firm’s reliance on revenues from a single client
* Training and timely communication of firm policies and procedures
* Designating an appropriate individual from senior management to oversee the firm’s quality control
* Disciplinary policies designed to encourage compliance with policies and procedures, and to empower staff to communicate noncompliance
* Discussing independence and ethics with the client’s audit committee or the client’s governance, and establishing policies and procedures for independence-related communication
* Disclosing to the audit committee the nature of services being provided and their related fees
* Consulting with interested third parties
* Rotation of senior attest engagement personnel
* Use of another firm to re-perform and take responsibility for portions of engagements
43
Safeguards eliminate or ______ threats.
Safeguards eliminate or reduce threats.
44
Another safeguard that can be initiated by the firm would be to establish a _________ function.
It would be staffed with experts in accounting, auditing, independence, or other relevant issues.
They would assist the attest engagement team in assessing issues that are highly technical, require a great deal of judgment, or for which there is no guidance.
They would also assist the engagement team in resisting undue pressure from the client when there are disagreements regarding those matters.
Another safeguard that can be initiated by the firm would be to establish a consultation function.
It would be staffed with experts in accounting, auditing, independence, or other relevant issues.
They would assist the attest engagement team in assessing issues that are highly technical, require a great deal of judgment, or for which there is no guidance.
They would also assist the engagement team in resisting undue pressure from the client when there are disagreements regarding those matters.
45
E____ conflicts may arise as a result of various circumstances, but most relate to a circumstance where internal or external pressures create obstacles that interfere with following an appropriate course of action; where conflicts arise in applying relevant professional and legal standards.
Ethical conflicts may arise as a result of various circumstances,
but most relate to a circumstance where internal or external pressures create obstacles that interfere with following an appropriate course of action;
where conflicts arise in applying relevant professional and legal standards,
such as when reporting suspected fraud may be a violation of client confidentiality rules; or some combination of these.
46
Ethical Conflicts
A CPA should consider ________ with others within their employing firm or organization before taking a course of action.
When conflicts remain unresolved, it is likely that the CPA will be in violation of one or more rules and the CPA should consider whether it is appropriate to continue a relationship with the engagement team, assignment, client, firm, or employer.
Ethical Conflicts
A CPA should consider consulting with others within their employing firm or organization before taking a course of action.
If a course of action is not effective and an ethical conflict is not resolved, regardless of whether consultation occurred or not, the accountant should consider consulting with others or obtaining advice from a professional body or from legal counsel.
When conflicts remain unresolved, it is likely that the CPA will be in violation of one or more rules and the CPA should consider whether it is appropriate to continue a relationship with the engagement team, assignment, client, firm, or employer.
47
In performance of any professional service, a member shall maintain objectivity and ______, avoid conflicts of interest, and not knowingly misrepresent facts or subordinate their judgment to others.
In performance of any professional service, a member shall maintain objectivity and integrity, avoid conflicts of interest, and not knowingly misrepresent facts or subordinate their judgment to others.
48
_______ of interest arise when a CPA is performing professional services related to a matter for two or more clients with________ting interests or when the interests of the CPA or the CPA’s firm ______ with those of the client.
Conflicts of interest arise when a CPA is performing professional services related to a matter for two or more clients with conflicting interests or when the interests of the CPA or the CPA’s firm conflict with those of the client.
49
Before accepting an engagement or a relationship, the CPA should evaluate a potential conflict of interest by identifying:
Before accepting an engagement or a relationship, the CPA should evaluate a potential conflict of interest by identifying:
* The relationships among parties involved and the natures of their relevant interests, which may change during the course of the engagement; and
* The nature and implications of the service being provided.
50
Safeguards may reduce the threat of a conflict of interest to an _________ level.
Safeguards may reduce the threat of a conflict of interest to an acceptable level.
Maintaining separate engagement teams, for example, with clear policies and procedures for maintaining confidentiality may be an adequate safeguard to reduce the threat of a conflict of interest to a reasonable level when the conflict arises from performing services for two or more clients with conflicting interests related to the subject matter of the engagements.
51
Serving as a director on the board of an entity may create a ______ of interest if the entity, such as a bank, enters into or considers transactions with the CPA’s clients.
Serving as a director on the board of an entity may create a conflict of interest if the entity, such as a bank, enters into or considers transactions with the CPA’s clients.
The member may consider limiting the relationship to a consulting arrangement, excluding transactions that may involve the CPA’s clients.
If, however, the CPA does serve as a director, threats and safeguards should be evaluated to make certain that threats are at an acceptable level.
52
When a conflict of interest does exist, even when threats are reduced to an acceptable level, the accountant is required to _________ the nature of the conflict to clients and others affected by it and to obtain their consent for the performance of the professional services.
When a conflict of interest does exist, even when threats are reduced to an acceptable level, the accountant is required to disclose the nature of the conflict to clients and others affected by it and to obtain their consent for the performance of the professional services.
53
Offering gifts or entertainment to a client or accepting gifts or entertainment from a client may create various ______s to the CPA’s compliance with the Code, including ______s associated with self-interest, familiarity, and undue influence.
Offering gifts or entertainment to a client or accepting gifts or entertainment from a client may create various threats to the CPA’s compliance with the Code, including threats associated with self-interest, familiarity, and undue influence.
54
Threats cannot be reduced to an ________ level when the offer or acceptance of gifts is in violation of member or client policies or applicable laws, rules, or regulations if the member is aware of the violation or is unaware due to recklessness.
Threats cannot be reduced to an acceptable level when the offer or acceptance of gifts is in violation of member or client policies or applicable laws, rules, or regulations if the member is aware of the violation or is unaware due to recklessness.
55
Threats may be reduced to an ________ level when gifts or entertainment are reasonable in the circumstances when considering such factors as the nature of the item, the occasion giving rise to it, the cost, and other facts and circumstances surrounding it.
Threats may be reduced to an acceptable level when gifts or entertainment are reasonable in the circumstances when considering such factors as the nature of the item, the occasion giving rise to it, the cost, and other facts and circumstances surrounding it.
56
Preparing and Reporting Information
The information should not be presented in a manner intended to ______, nor should there be omissions that cause the information to be _____ing.
The information should not be presented in a manner intended to mislead, nor should there be omissions that cause the information to be misleading.
57
A supervisor may take a position that the member believes is not in compliance with standards, represents a material misstatement of facts, or violates applicable laws or regulations.
In such cases, threats cannot be reduced to an acceptable level and the member should:
The member should:
* Discuss concerns with the supervisor.
* Discuss concerns with an appropriate higher level of management within the member’s organization when the difference of opinion cannot be resolved through discussion with the supervisor.
• If the member concludes that appropriate actions are not taken, the member should follow certain safeguards to reduce or eliminate the threats to an acceptable level:
o Consult with an appropriate professional organization or body.
o Determine if the member’s organization has internal policies and procedures for reporting differences of opinion.
o Determine whether the member is responsible for communicating with third parties, such as regulatory agencies, keeping confidentiality requirements in mind.
o Consult with legal counsel.
o Document an understanding of the facts, the matters involved, and the conversations held, identifying the parties with which they were held.
If threats can be reduced to an acceptable level, the member will discuss conclusions with the other party and take no further action.
58
Upon a conclusion that no safeguards can eliminate the threats or reduce them to an acceptable level, the member should not be willing to continue to be associated with the information.
(meaning)
"Leave the firm"
Upon a conclusion that no safeguards can eliminate the threats or reduce them to an acceptable level, the member should not be willing to continue to be associated with the information,
consider whether it is appropriate to continue in a relationship with the organization and should take steps to eliminate exposure to having subordinated judgment.
59
A member should neither yield to such pressure resulting in a breach to the Code nor exert pressure on others such that a breach may result.
Pressure may relate to any combination of:
A member should neither yield to such pressure resulting in a breach to the Code nor exert pressure on others such that a breach may result.
Pressure may relate to any combination of:
• Conflicts of interest;
• Presentation or suppression of information;
• Performing tasks without an appropriate level of competence or due care;
• Advancing the interests of those with financial interests; and
• Gifts and entertainment.
60
If the member concludes that the pressure would result in a breach, there are a number of safeguards that may be considered.
The member might:
If the member concludes that the pressure would result in a breach, there are a number of safeguards that may be considered.
The member might:
• Try to resolve the matter by discussing it with the individual exerting the pressure.
• Discuss the matter with a supervisor or parties at a higher level, such as management, internal and independent auditors, or members of those charged with governance.
• Request a change in responsibilities, removing the member from the influence of the party exerting the pressure.
• Expose the matter using the mechanisms within the organization, such as whistleblower policies.
• Consult with legal counsel.
61
If the member determines that the _______ to breach cannot be eliminated, the member should not undertake, or should cease undertaking, the activity that would result in the breach and consider whether to remain involved in a relationship with the organization.
If the member determines that the pressure to breach cannot be eliminated, the member should not undertake, or should cease undertaking, the activity that would result in the breach and consider whether to remain involved in a relationship with the organization.
The member should also document an understanding of the facts, the matters involved, the conversations held, identifying the parties with which they were held, and how the matters were addressed.
62
When performing certain nonattest services for a client, such as tax or consulting services, the member may be in position to act as an _______ for the client in supporting the client’s position on accounting or financial reporting issues to other engagement team members or to standard setters or regulators.
These services may pose threats to the member’s ability to comply with the integrity and objectivity rules that should be evaluated.
Client Advocacy
When performing certain nonattest services for a client, such as tax or consulting services, the member may be in position to act as an advocate for the client in supporting the client’s position on accounting or financial reporting issues to other engagement team members or to standard setters or regulators.
These services may pose threats to the member’s ability to comply with the integrity and objectivity rules that should be evaluated.
63
___________ is the ability to act with integrity and objectivity and applies to a covered member and to the member’s immediate family, including the member’s spouse or spousal equivalent, and all dependents, whether related or not.
Independence is the ability to act with integrity and objectivity and applies to a covered member and to the member’s immediate family, including the member’s spouse or spousal equivalent, and all dependents, whether related or not.
64
A covered member would be:
A covered member would be any of the following:
* A member of an attest engagement team or an individual in a position to influence the attest engagement
* A partner, partner equivalent, or manager providing more than 10 hours of nonattest services to the attest client within a fiscal year
* A partner or partner equivalent in the same office in which the lead engagement partner for the attest engagement practices
* The firm and its employee benefit plan
* An entity under the control of any one of the other covered members described and two or more of those individuals or entities acting together
* With agreed-upon procedure engagements only, covered members may be limited to those participating in or directly supervising the engagement, and individuals consulting with the engagement team on technical or industry-related issues.
65
A covered member:
| • Must maintain independence for certain engagements (ERAS)
A covered member:
• Must maintain independence for certain engagements (ERAS)
o Examinations − Audits
o Reviews - Conclusions
o Agreed-upon procedure engagements leading to findings
o Special reports
```
• Need not be independent for:
o Taxes
o Consultations
o Preparation engagements
o Compilations (when a lack of independence is indicated)
```
• Independence should be maintained in both:
o Fact – State “of mind”
o Appearance – How it appears to the public
66
Independent
Attest Function = ?
```
Independence required for:
• Audit – ?
• Review – ?
o Taxes – ?
o Compilation – ?
o Preparation eng’s − ?
o Consultation – ?
```
Attest Function = Must be Independent
```
Independence required for:
• Audit – Yes
• Review – Yes
o Taxes – No
o Compilation – No
o Preparation eng’s − No
o Consultation – No
```
67
When events, circumstances, or conditions that might impair independence are not addressed directly in the Code, the member is required to apply the conceptual ________ approach, applied in the same manner as the conceptual __________ approach related to the Code itself.
When events, circumstances, or conditions that might impair independence are not addressed directly in the Code, the member is required to apply the conceptual framework approach, applied in the same manner as the conceptual framework approach related to the Code itself.
68
Threats to ____________ are considered to be at an acceptable level when a reasonable and informed third party, aware of the relevant information, would conclude that the member’s independence is not impaired.
Conceptual Framework Approach
Threats to independence are considered to be at an acceptable level when a reasonable and informed third party, aware of the relevant information, would conclude that the member’s independence is not impaired.
As a result, the member will focus on the appearance of independence when applying the conceptual framework.
69
Threats to independence include:
* A______ Interest
* A_______
* F_____ty
* M_________ Participation
* S___ - Interest
* S___ - Review
* U____ Influence
Threats to independence include:
* Adverse Interest
* Advocacy
* Familiarity
* Management Participation
* Self-Interest
* Self-Review
* Undue Influence
70
Threats to independence include:
* A______
* A_______
* F______
* M_________
* S___ - _____
* S___ - _____
* U____ ______
Threats to independence include:
* Adverse Interest
* Advocacy
* Familiarity
* Management Participation
* Self-Interest
* Self-Review
* Undue Influence
71
Threats to independence
What is adverse interest threat?
• Adverse interest threat
When a member’s interests are in opposition to the clients, such as when they are involved in, or anticipating, litigation, the member may not act objectively.
72
Threats to independence
What is advocacy threat?
• Advocacy threat
A member may compromise independence when promoting a client’s position, depending on the degree to which the member promotes it.
This may be the case when the member is promoting the client’s securities in an initial public offering, serving as an expert witness on behalf of the client, or representing the client in tax court or elsewhere.
73
Threats to independence
What is familiarity threat?
• Familiarity threat
A long relationship with a client may make a member sympathetic to a client’s interests or accepting of the client’s work or product, such as when there has been a history of work that has been essentially error-free in the past.
The degree to which this occurs may cause a threat to the member’s independence, particularly when an immediate family member or close relative holds a key position with the attest client; a partner of the firm, or the equivalent, has been on the engagement team for the attest engagement for an extended period of time; or a member of the engagement team’s firm has recently been a director or officer of the attest client or has a close friend in a key position.
74
Threats to independence
What is management participation threat?
• Management participation threat
A member who serves as an officer or director of an attest client; accepts responsibility for the design, implementation, or maintenance of internal control for an attest client; or hires, supervises, or terminates employees of the attest client, creates a management participation threat to independence.
An auditor, for example, may decide to ignore a significant deficiency in internal control when the auditor’s firm has accepted responsibility for their design and implementation of internal control.
When this is the case, of course, the accountant would not be independent since accepting responsibility for the design and implementation of internal control involves assuming a management responsibility.
Doing so raises the management participation threat to an unacceptable level in relation to independence. In such a case, no safeguards would be able to reduce the threat to an acceptable level.
75
Threats to independence
What is self-interest threat?
• Self-interest threat
When a member may benefit from an interest in, or relationship with, an attest client, a self-interest threat to independence is created.
The benefit may be financial or nonfinancial, including a direct financial interest or material indirect financial interest in an attest client;
a loan from the client, an officer or director, or a significant shareholder of the attest client;
an excessive reliance on fees from a single attest client;
or a material joint venture or business arrangement with an attest client.
76
Threats to independence
What is self-review threat?
• Self-review threat
When a member or the member’s firm performs nonattest services for an attest client, there is the possibility that either the member will not test the information with an appropriate level of due diligence, or may overlook an error or other discrepancy to preserve the reputation of the firm and the relationship with the client, creating a self-review threat to the member’s independence.
77
Threats to independence
What is undue influence threat?
• Undue influence threat
is the threat that the member will subordinate judgment to a third party as a result of a third party’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence;
or to someone associated with the attest client due, perhaps, to a threat to replace the member or the member’s firm over a disagreement, pressure to reduce procedures as a means of reducing fees, or receiving gifts from the attest client or related parties.
78
• A_____ ______ threat
When a member’s interests are in opposition to the clients, such as when they are involved in, or anticipating, litigation, the member may not act objectively.
Threats to independence:
• Adverse interest threat – When a member’s interests are in opposition to the clients, such as when they are involved in, or anticipating, litigation, the member may not act objectively.
79
• A_______ threat
A member may compromise independence when promoting a client’s position, depending on the degree to which the member promotes it.
This may be the case when the member is promoting the client’s securities in an initial public offering, serving as an expert witness on behalf of the client, or representing the client in tax court or elsewhere.
Threats to independence:
• Advocacy threat – A member may compromise independence when promoting a client’s position, depending on the degree to which the member promotes it.
This may be the case when the member is promoting the client’s securities in an initial public offering, serving as an expert witness on behalf of the client, or representing the client in tax court or elsewhere.
80
• F________ threat
A long relationship with a client may make a member sympathetic to a client’s interests or accepting of the client’s work or product, such as when there has been a history of work that has been essentially error-free in the past.
Threats to independence:
• Familiarity threat – A long relationship with a client may make a member sympathetic to a client’s interests or accepting of the client’s work or product, such as when there has been a history of work that has been essentially error-free in the past.
The degree to which this occurs may cause a threat to the member’s independence, particularly when an immediate family member or close relative holds a key position with the attest client; a partner of the firm, or the equivalent, has been on the engagement team for the attest engagement for an extended period of time; or a member of the engagement team’s firm has recently been a director or officer of the attest client or has a close friend in a key position.
81
• M_______ ___________ threat
A member who serves as an officer or director of an attest client; accepts responsibility for the design, implementation, or maintenance of internal control for an attest client; or hires, supervises, or terminates employees of the attest client, creates a management participation threat to independence.
Threats to independence:
• Management participation threat – A member who serves as an officer or director of an attest client; accepts responsibility for the design, implementation, or maintenance of internal control for an attest client; or hires, supervises, or terminates employees of the attest client, creates a management participation threat to independence.
An auditor, for example, may decide to ignore a significant deficiency in internal control when the auditor’s firm has accepted responsibility for their design and implementation of internal control.
When this is the case, of course, the accountant would not be independent since accepting responsibility for the design and implementation of internal control involves assuming a management responsibility.
Doing so raises the management participation threat to an unacceptable level in relation to independence. In such a case, no safeguards would be able to reduce the threat to an acceptable level.
82
• S___ - ______ threat
When a member may benefit from an interest in, or relationship with, an attest client, a ____ - _____ threat to independence is created. The benefit may be financial or nonfinancial.
Threats to independence:
• Self-interest threat – When a member may benefit from an interest in, or relationship with, an attest client, a self-interest threat to independence is created.
The benefit may be financial or nonfinancial, including a direct financial interest or material indirect financial interest in an attest client; a loan from the client, an officer or director, or a significant shareholder of the attest client; an excessive reliance on fees from a single attest client; or a material joint venture or business arrangement with an attest client.
83
• S___ - ______ threat
When a member or the member’s firm performs nonattest services for an attest client, there is the possibility that either the member will not test the information with an appropriate level of due diligence, or may overlook an error or other discrepancy to preserve the reputation of the firm and the relationship with the client, creating a ____ - _____ threat to the member’s independence.
Threats to independence:
• Self-review threat – When a member or the member’s firm performs nonattest services for an attest client, there is the possibility that either the member will not test the information with an appropriate level of due diligence, or may overlook an error or other discrepancy to preserve the reputation of the firm and the relationship with the client, creating a self-review threat to the member’s independence.
84
• ____ _________ threat
It is the threat that the member will subordinate judgment to a third party as a result of a third party’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence;
or to someone associated with the attest client due, perhaps, to a threat to replace the member or the member’s firm over a disagreement, pressure to reduce procedures as a means of reducing fees, or receiving gifts from the attest client or related parties.
Threats to independence:
• An undue influence threat is the threat that the member will subordinate judgment to a third party as a result of a third party’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence;
or to someone associated with the attest client due, perhaps, to a threat to replace the member or the member’s firm over a disagreement, pressure to reduce procedures as a means of reducing fees, or receiving gifts from the attest client or related parties.
85
The covered member should consider any _____s to independence that the covered member knows of or has reason to believe may be created by the interests or relationships of other firms within the network.
The covered member should consider any threats to independence that the covered member knows of or has reason to believe may be created by the interests or relationships of other firms within the network.
86
A firm is considered to be part of a n_____ of firms if the firms cooperate to enhance their ability to provide professional services through cross referrals and other means and has one or more of the following additional characteristics:
A firm is considered to be part of a network of firms if the firms cooperate to enhance their ability to provide professional services through cross referrals and other means and has one or more of the following additional characteristics:
* A common brand name or initials that are part of the firm name
* Common control through ownership or management
* Sharing of profit and costs
* Collaboration to create a common business strategy that member firms are held accountable for implementing
* Sharing of significant professional resources, such as systems and staff
* Uniform quality control policies monitored and enforced by the association
87
A c_____ member may also be part of an alternative practice structure (APS), which is required to comply with independence rules;
is required to be organized in a form allowed by applicable laws, rules, and regulations; and
is required to comply with the rules in the Code related to the form of an organization and its name.
A covered member may also be part of an alternative practice structure (APS), which is required to comply with independence rules;
is required to be organized in a form allowed by applicable laws, rules, and regulations; and
is required to comply with the rules in the Code related to the form of an organization and its name.
88
An alternative practice structure (APS) is an organization in which a firm provides a____ services while other professional services are performed by another public or private organization that is closely aligned, such as a CPA firm with a closely aligned consulting entity.
An alternative practice structure (APS) is an organization in which a firm provides attest services while other professional services are performed by another public or private organization that is closely aligned, such as a CPA firm with a closely aligned consulting entity.
Independence rules apply to both covered members and direct superiors in an APS.
* Covered members include employed and leased individuals otherwise having the characteristics of a covered member.
* Direct superiors are covered members who can directly control the activities of an engagement partner or manager.
89
Indirect superiors, those one or more levels above direct superiors, can impair ____________ by
* having a material relationship with an attest client that is prohibited as a financial interest;
* acts as a trustee or executor;
* has a prohibited loan;
Indirect superiors, those one or more levels above direct superiors, can impair independence by
* having a material relationship with an attest client that is prohibited as a financial interest;
* acts as a trustee or executor;
* has a prohibited loan;
* maintains joint closely held investments with the attest client; or
* is involved in any of a variety of specific relationships.
An indirect superior may, however, perform nonattest services that would be prohibited to the firm performing attest services without impairing independence.
90
When an attest firm allows members of another firm which is not independent of an attest client to participate in an attest engagement, threats to independence cannot be reduced to an __________ level and the attest firm’s independence will be impaired.
When an attest firm allows members of another firm which is not independent of an attest client to participate in an attest engagement, threats to independence cannot be reduced to an acceptable level and the attest firm’s independence will be impaired.
Members of the non-independent firm, however, may serve in a capacity similar to that of an internal auditor as long as the firm complies with auditing standards.
91
A member whose __________ becomes impaired after the issuance of a report may reissue the report provided the member or the member’s firm does not perform procedures associated with updating or dual dating the report.
A member whose independence becomes impaired after the issuance of a report may reissue the report provided the member or the member’s firm does not perform procedures associated with updating or dual dating the report.
92
An indemnification clause in an engagement letter, in which an attest client holds the member harmless from liability resulting from knowing misrepresentations by management does not impair __________.
An indemnification clause in an engagement letter, in which an attest client holds the member harmless from liability resulting from knowing misrepresentations by management does not impair independence.
Independence would be impaired, however, if an attest firm indemnifies an attest client from liability arising directly or indirectly from the acts of the attest client.
An alternative dispute resolution clause in an engagement letter would not impair independence.
93
________ would be impaired if an attest firm indemnifies an attest client from liability arising directly or indirectly from the acts of the attest client.
Independence would be impaired if an attest firm indemnifies an attest client from liability arising directly or indirectly from the acts of the attest client.
94
When fees for services that were performed more than one year before the date of the current-year report remain unpaid, this creates a threat to __________ that cannot be reduced to an acceptable level.
Unpaid Fees
When fees for services that were performed more than one year before the date of the current-year report remain unpaid, this creates a threat to independence that cannot be reduced to an acceptable level.
This is true even if the fees have not been billed to the client and if the client has signed a note for the amount owed. This does not apply, however, to unpaid fees due from a client in bankruptcy.
95
When fees for services that were performed more than one year before the date of the current-year report remain unpaid, this creates a threat to independence that cannot be reduced to an __________ level.
When fees for services that were performed more than one year before the date of the current-year report remain unpaid, this creates a threat to independence that cannot be reduced to an acceptable level.
96
A member who possesses or has a commitment to acquire a direct or material indirect financial interest in an attest client creates a ____ - ______ threat that cannot be reduced to an acceptable level and the member’s independence would be impaired.
Financial Interests
A member who possesses or has a commitment to acquire a direct or material indirect financial interest in an attest client creates a self-interest threat that cannot be reduced to an acceptable level and the member’s independence would be impaired.
97
_________ would be impaired, if a partner or professional employee of the firm, including the partner’s immediate family or any group of those individuals acting together, owned more than 5% of an attest client during the period of the attest engagement.
Financial Interests
Independence would be impaired, if a partner or professional employee of the firm, including the partner’s immediate family or any group of those individuals acting together, owned more than 5% of an attest client during the period of the attest engagement.
98
• Threats to independence may be reduced to an acceptable level when a member receives an unsolicited direct or indirect financial interest in an attest client, such as through a gift that is not material to the member, if the member applies two ________s:
1. The financial interest is disposed of within 30 days of learning of the interest, or sooner if practicable; and
2. The member does not participate on the attest engagement team during the period in which the covered member does not have the right to dispose of the financial interest.
Financial Interests
• Threats to independence may be reduced to an acceptable level when a member receives an unsolicited direct or indirect financial interest in an attest client, such as through a gift that is not material to the member, if the member applies two safeguards:
1. The financial interest is disposed of within 30 days of learning of the interest, or sooner if practicable; and
2. The member does not participate on the attest engagement team during the period in which the covered member does not have the right to dispose of the financial interest.
99
• Ownership of shares of a mutual fund constitutes a direct financial interest in the mutual fund.
Ownership of the underlying investments of the mutual fund may be direct or indirect, depending on the proportion of the mutual fund owned by the member and the diversity of the mutual fund’s holdings.
o Ownership of ___% or less of a diversified mutual fund results in an immaterial indirect financial interest in its investments.
o Ownership of more than ____% of a diversified fund, or an ownership interest in an undiversified fund, should be evaluated to determine if the member holds a material indirect interest.
Financial Interests
• Ownership of shares of a mutual fund constitutes a direct financial interest in the mutual fund. Ownership of the underlying investments of the mutual fund may be direct or indirect, depending on the proportion of the mutual fund owned by the member and the diversity of the mutual fund’s holdings.
o Ownership of 5% or less of a diversified mutual fund results in an immaterial indirect financial interest in its investments.
o Ownership of more than 5% of a diversified fund, or an ownership interest in an undiversified fund, should be evaluated to determine if the member holds a material indirect interest.
