AUD CH 2 - Professional Responsibility & Ethics Flashcards Preview

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Flashcards in AUD CH 2 - Professional Responsibility & Ethics Deck (83):

What happens if the CPA does not adhere to the AICPA code of conduct (ET)?

The State Board of accountancy in his or her statement is suspended or revoked CPAs license

- if felony or fraudulently filing a tax return, The AICPA can expel the member


Purpose of the financial statement audit

To express an opinion on financial statements of client


Do the 10 GAAS always stay the same?

Standards themselves are always the same but the specifics procedures needed To fulfill the standards will vary for each engagement


What is independence according to rule 101?

AICPA ability to act with integrity and objectivity.

Independent means you, your spouse, Dependent kids, or dependent relatives

- Should be maintained in both fact and appearance


What is fact of independence?

State of mind


What is Appearance of independence?

how independence appears to the public


What are some reasons for lack of independence?

1. Any direct financial Interest in the client (Immediate family, 10%+)

2. Any material indirect financial interest In the client (Close family)

3. More than one year of on these outstanding (paid before issue of current Year report)

4. Covered members are not independent (must be Independent)

5. Loan from client (exceptions apply)

6. Material litigation involving the Credibility of accountant Or management

7. Accepts more than just a token gift

8. Capital lease with client

9. Immediate/close family member employed position the client

10. FINAL responsibility for journal entries (prep of adj.'s are OK/client must review)

11. Take the role of management responsibilities

12. Information systems DIM (OTS software is OK, chart of accounts OK)

13. Appraisal, valuation, and actuarial services when material

14. Internal audit assistance services ('outsourcing')... (within normal scope of I/A is OK)


Covered members

- Must be independent

- All partners in the office

- Partners or managers who provide non-attest services to be attest client

- All members of the Audit engagement Team


What are some Circumstances that Will not impair independence?

1. Consulting (not OK under PCAOB)

2. Litigation (immaterial to both sides & do not involve trust)

3. Loans (exceptions)

4. Unpaid audit fees (current year only)

5. Operating lease

6. Social club membership

7. Checking or savings account, CD or Money market account


Type of loans that will not impair Independence?

1. Financial institution loans

2. Car loan/lease Collateralized by vehicles

3. Life insurance loan

4. Compensating balance Love (Fully collateralized by cash deposits)

5. Credit cards and Overdraft protection (

6. Grandfathered loans (Normal lending Practices, Current on all payments, Not modified from the original Loan agreement)

7. Loans fully collateralized by cash balances


Services were Independence is not Required

1. Taxes

2. Consultation

3. Compilations (when lack of Independence is indicated)


Procedures required before an Auditor takes employment with an audit client?

*Independent standards Board

1. Inform audit firm of conversations with client about possibility

2. Immediately be removed from the Audit

3. After removed, the audit firm let's review the work performed by the other (Ensure professional Skepticism)


Procedures required after the Auditor takes employment with an audit client?

1. Audit firm must consider modifying the audit plan

2. Assure remaining audit team is objective

3. The next annual audit must be separately reviewed By an audit firm professional uninvolved in the audit

(Lose client For 1 year)


Procedures required when the monitor was previously employed by audit client?

* Independence will be impaired if the audit covers any period during which the member was employed by the client

1. Any member most fully disassociated from the client

- Terminate relationships

- Dispose of any direct or material indirect financial interest

- Collecting or paying any loans (Except grandfathered loans)

- exiting from all employee benefit programs (Except legally required and paid for by member)

- Liquidating or transferring all the vested Benefits (Unless significant penalties would result)


What are the Three conditions for providing non-attest services without impairing Independence?

1. Not assuming management responsibilities

2. Client has agreed to responsibilities, oversee service, eval/accept results

3. Established understanding the client (documented in writing)

-Objectives, Services, Client responsibilities Accepted, CPA Responsibilities, Engagement limitations

* Providing advice and answering Client questions is OK (normal Relationship)


What are the effects of the CPA reporting to the audit committee on behalf of management regarding the internal audit function?

Impairs the independence of the Firm


What is the approach used by the accountant to Evaluate Independence?

A Risk-based approach

1. Identify and evaluate Threats independence

2. Determine if safeguards are effective Against threats

3. If Safeguards do not eliminate or sufficiently Mitigate any Threats, Independence is considered Impaired


When is integrity and objectivity required?

Rule 102: performance of any professional service

- Avoid conflicts of interest & Not knowingly misrepresent facts Or Subordinate judgment


What must internal Auditor maintain when assisting The external auditor?

Competence and objectivity

(Independence is not required)


What are the general standards and When do they apply?

- Rule 201: For all professional engagements

- Competency, Due professional care, Adequately plan/supervise, Reasonable basis for conclusions/Recommendations


When are you unable to provide positive or negative Assurance?

Material GAAP Departures

*Unless when following GAAP is misleading

- May depart without modifying report Is new legislation or a new form of business transaction exists


What are the exceptions For revealing client information with client permission?

1. Valid subpoena or court order

2. Inquiry but AICPA Trial Board

3. Quality control peer-reviewed program

-No professional Courtesy

-Will not take copies of client files when leaving the firm


When are you able to accept contingent Fees?

For income tax return examination Or amended Income tax returns claiming refund

BUT fee must be FIXED (Not a percentage)


When are you unable to accept contingent Fees?

- Audits

- Reviews

- Compilations (General use & Independent)

- Examination prospective financial statements

- Original or Amended tax return (examination/amended for refund OK)


What are Acts Discreditable?

- Retaining client records to enforce payment

- Deliberate underbidding

- Negligence

- Filing a fraudulent tax return

- Committing a felony

- Complying to all requirements of government bodies, Regulations, GAAP/GAAS (& PCAOB if public)

- Solicitation or disclosure of CPA exam questions and answers


When are commissions and referral fees Acceptable?.


1. Non-attest Engagement client


2. Payment only disclosed client

(No commission if required To be independent)


When confirmed designate itself as members of the AICPA?

CPA OWNERS must be members of the AICPA


What characteristics are Required from the Auditor for a consulting service?

Integrity and objectivity

& General Standards (TiPPaCanoe)

(Independence is not Required)


Where the general standards of the consulting profession?

1. Professional competence (T)

2. Due professional care (P)

3. Planning & supervision (P)

4. Sufficient relevant data ©

5. Client interest (I&O)

6. Understanding With client

7. Communication with the client


The types of consulting services

1. Advisory

2. Implementation

3. Product

4. Technical Assistance in implementing a new IT system


What don't the Statements on valuation services cover?

1. Audits, compilations, and reviews

2. Client-provided/ 3rd Party provided values

3. Value economic damages

4. Mechanical Computations that do not involve the application of valuation approaches


What does the performance of a valuation service require?

- Professional competence

- Objectivity

- Disclosure of potential conflicts of interest

- Understanding with the Client

- Disclosure of limitations In the report


What it is issued for valuation service?

1. Detailed or summary report for a valuation Engagement

2. Calculation report For a calculation engagement


When may a tax practitioner recommend the tax return position?

Reasonable basis for the Position & Appropriately disclosed


The financial services modernization act of 1999

Prohibits financial institutions from sharing private personal information to non-Affiliated third parties without prior notice to the client

*OK To share with other Financial institutions and its affiliates


Who is the owner of working papers (Audit documentation)?

The accountant (Not the client) But still required to remain confidential


Privilege statute

Allows the accountants refused to honor a court subpoena (certain states)

*May not be used to the accountant has already provided some information requested In the subpoena


What is the effect of Sarbanes-Oxley On Quality peer-reviewed programs?

Eliminated self regulation (PCAOB Now performs) --- PUBLIC ONLY

- If more than 100 Audit reports annualy, inspection annually

- If less than 100 Audit reports annually, inspection at least every 3 years


What are the PCAOB fines for the individual violator?


- If intentional. $750,000


What are the PCAOB Fines for the entity level?

$2 million

- If intentional, $15 million


What services to Audit clients are acceptable under PCAOB?

Tax services if pre-approved by the audit committee and disclosed as SEC

*all other Services May be performed for non-audit clients or to private companies


What was the CEO and CFO certify Under PCAOB?

1. They reviewed the report

2. Does not contain any untrue statement Or omission Of material fact

3. Fairly presented (Financial position results of operations)Gio

4. DIM (within 90 days prior to report)

5. Conclusions as to the effectiveness of internal control


How long must a firm keep workpapers under PCAOB?

Seven years


How often is the audit partner be rotated Under PCAOB?

Five years


When is the SEC allowed To de-list any issuer?

Noncompliance with title III - Corporate responsibility


What are the signing officers required to disclose to Auditors and Audit committee?

1. Significant deficiencies in the design and operation of internal controls

2. Any fraud that involves management Or employees involved in internal controls


Private securities litigation Reform act of 1995

1. Audit tests to detect RIG (related party, Illegal Acts, Going Concern doubts)

2. Quick Notice of illegal acts unless clearly inconsequentia (auditor to board to SEC – 1 day each)l


What is the penalty for security fraud By CPAs and audit clients?

Up to 10 years in prison


Corporate and criminal fraud accountability act of 2002

Significant influence On the auditors professional environment concerning the detection Of fraud

- Working papers seven years

- Felony to destroy or create documents Knowingly

- Whistleblower protection

- Security Fraud claims (Five years from fraud, or Two years after fraud discovered)

- Up to 10 years for securities fraud


What portion of the PCAOB inspections report Is not made available to the public?

Quality control system criticisms unless the firm does not address issues within 12 months


Engagement quality review (EQR)

Required for each PCAOB AUDIT, Performed by an associated person Of the firm

- Discussions with the engagement team

- Reviewing documentation

- Concurring approval revisions


Audit procedures

Risk assessment procedures, test of controls, and substantiative tests


I – Inquiry

C – Confirmation

O – Observation

R – Recalculation

R - Reperformance

I – Inspection Of Tangible assets

I – Inspection (Examination) Of records or documents

A – Analytical procedures



International standards Board for Accountants

- Created the code of ethics for Professional accountants (The Code)


Code of Ethics for professional accountants

The Code

- More conceptual nature And has fewer provisions In the code of professional conduct (AICPA – ET)


What are the IESBA parts?

1. Part A - General application (all accountants: Ethics/Threats)

2. Part B - Professional accountants public practice

3. Part C - Professional accountants in business


Blackout Trading

PCAOB Prohibited Securities trading By officers and directors During blackout periods

( between end of the quarter and earnings Report Date)


IESBA Threats to compliance

- Self-interest

- Self-review

- Advocacy

- Familiarity

- Intimidation



International Federation of accountant (established IAASB)



International auditing insurance standards (developed ISA)

Of the IFAC (International Federation of accountants)



International Auditing Standards


Intention of standards issued by the IAASB

Intended as qualitative guidelines against which professional accountants CAN COMPARE their practices and The requirements of the jurisdictions to which the accountants Belong

(Not intended as a Authoritative requirements that are expected to be complied with)



International accounting standards Board (Separate body from IAASB)

- Issues IFRS (International financial reporting standards)


ISA vs US Auditing Standards (AICPA & PCAOB)

Applicable Framework

ISA: Fair presentation OR compliance framework

US: Fair Presentation framework ONLY


ISA vs US Auditing Standards (AICPA & PCAOB)

Professional requirements

ISA: One category required (except in rare cases)

US: 2 Categories (Unconditional & Presumptively Mandatory)


ISA vs US Auditing Standards (AICPA & PCAOB)

Recurring Auditor (Terms of engagement)

ISA: To assess if client need to be reminded

US: Requires to remind Client terms of engagement


ISA vs US Auditing Standards (AICPA & PCAOB)

Predecessor auditor (Terms of engagement)

ISA: Not addressed

US: Addressed Communication with Predecessor


ISA vs US Auditing Standards (AICPA & PCAOB)

Quality-control review

ISA: Required before Report is dated

US: Required before report is released


ISA vs US Auditing Standards (AICPA & PCAOB)

Laws & Regulation (Terms of engagement)

ISA: Requirements when laws and regulations dictate management responsibility

US: Not applicable


ISA vs US Auditing Standards (AICPA & PCAOB)

Copies or extracts (Documentation)

ISA: Not required Documentation

US: Copies or extracts of agreements or contracts required in documentation


ISA vs US Auditing Standards (AICPA & PCAOB)

Document completion (Documentation)

ISA: Within 60 days of report date

AICPA: Within 60 days of report release date

PCAOB: Within 45 days of report release Date


ISA vs US Auditing Standards (AICPA & PCAOB)

Fraud definition

ISA: Includes to obtain illegal and unjust advantage

US: Results in Misstatement in F/S That are the subject of an audit


ISA vs US Auditing Standards (AICPA & PCAOB)

Brainstorming (Fraud)

ISA: Not addressed

US: To address internal and external fraud risk factors (& mgmt override possibility)


Two examples of PCAOB is more restrictive than AICPA

1. Prohibition against Any non-assurance services for an audit client (except tax with approval/disclosure)

2. Requirement to disclose audit and non-audit fees earned



Government accountability office (Agency of Congress)


  • Responsible for investigating how the federal government spends taxpayer money
  • Responsible for setting GAGAS (Yellow Book)



Generally accepted Government auditing standards (Yellow Book)


GAO independence

Included in the general standards

- More restrictive requirements that apply performing an engagement in accordance with GAGAS

- Audit organization and individual Audtior Must be independent (mind & appearance)


Relating to evaluating Independence government auditors are expected to:

1. Identify Threats to independence

2. Evaluate that threats (Individually and collectively)

3. Apply safeguards to eliminate or mitigate to An acceptable level

*similar to AICPA professional Standards


GAGAS Threats to Independence

Yellow Book Threats to Independence

1. Self-interest

2. Self-review (non-assurance svc's)

3. Bias

4. Familiarity

5. Undue influence

6. Management participation

7. Structural


When is an AUDITOR that works with entity that is being audited considered independent? (GAGAS)

All Must apply to the Head of the Audit organization

1. Accountable to the head/governance

2. Reports results to both head and governance

3. Organizationally outside of the staff or line Management function of the audited unit

4. Has access to governance

5. Removed from political process sufficiently to avoid fear of political reprisal



Employee retirement Income security act of 1974

- Enforced by the Department of Labor (DOL)



Independent Qualified Public Accountant

- Required by ERISA to To audit employee benefit plans


AICPA independence vs DOL Independence Requirements

DOL Independence requirements are a bit more restrictive than AICPA Requirements

- "Independence equally important to Professional competence"


Three types of relationships That will impair DOL Independence for auditing benefit plans (ERISA)

1. Having (Or committing to acquiring) Any direct financial interest or any material in direct interest in The plan


2. Acting as the plan sponsor, promoter, underwriter, investment Advisor, voting trustee, Director,, officer, or employee


3. Maintain financial records For the plan


*Applied to the accountant, Accountants firm, period of the engagement, period Covered by the engagement