AUD CH 2 - Professional Responsibility & Ethics Flashcards Preview

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