AUD - Ethics, Professional Responsibilities, and General Principles

Question 1

6 key principles of the Code of Professional Conduct

Answer 1

1. Responsibilities principle
2. Public Interest principle
3. Integrity principle
4. Objectivity and Independence principle
5. Due care principle
6. Scope and nature services principle

Question 2

Responsibilities principle

Answer 2

AICPA members should exercise sensitive professional and moral judgment in all their activities

This principle imposes a continuing responsibility on members to cooperate w/each other to:

1. improve the art of accounting
2. Maintain the public’s confidence
3. Carry out the profession’s special responsibilities for self-governance

Question 3

Public Interest principle

Answer 3

Members should accept the obligation act in a way that will

• Serve public interest
• Honor the public trust
• Demonstrate a commitment to professionalism

Question 4

Integrity principle

Answer 4

Perform all professional responsibilities w/the highest sense of integrity

Question 5

Objectivity and Independence principle

Answer 5

Maintain objectivity and be free of conflicts of interest in discharging professional responsibilities

Question 6

Due care principle

Answer 6

A member should

• Observe the profession’s technical and ethical standards
• Strive continually to improve competence (i.e. continued professional education)
• Perform professional obligations to the best of your ability

Question 7

Scope and nature of services principle

Answer 7

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

At the minimum, members should:

• Practice in firms that have good internal quality control procedures
• Use their individual judgment to determine whether the scope and nature of services provided to an audit client would create a conflict of interest
• Individually assess whether a contemplated activity is consistent w/their role as professionals

Question 8

3 main steps to applying the Conceptual Framework (MIPPs)

Answer 8

1. Identify threats
2. Evaluate the significance of the threats
3. Identify and apply safeguards

Sometimes, the Code of Professional Conduct rules and interpretations don’t provide a clear answer to a particular situation -> in these instances, members should always apply the threats-and-safeguards Conceptual Framework

Question 9

7 broad categories of threats

Answer 9

1. Adverse interest threats
2. Advocacy threats
3. Familiarity threats
4. Mgmt participation threats
5. Self-interest threats
6. Self-review threats
7. Undue influence threats

Question 10

Adverse interest threats

Answer 10

Examples:

• Client sues/threatens to sue the firm

Question 11

Advocacy threats

Answer 11

Examples:

• Member provides forensic accounting services to client in lawsuit w/3rd party
• Firm acts as investment advisor, underwriter, promotor, or registered agent for a client

Question 12

Familiarity threats

Answer 12

Examples:

• Member’s spouse or other relatives or close friend is employed by the client
• Former firm partner joins client in a key position

Question 13

Management participation threats

Answer 13

Examples:

• Member takes on the role of client management

Question 14

Self-interest threats

Answer 14

Examples:

• Member has a financial interest in a client that may be affected by outcome of professional services the firm is providing
• Firm relies excessively on revenue from single client

Question 15

Self-review threats

Answer 15

Examples:

• Member relies on work product of own firm
• Member does client’s bookkeeping
• Partner in firm was an officer or director of client

Question 16

Undue influence threats

Answer 16

Examples:

• Client threatens to fire firm or to w/hold future business unless firm accedes to client’s wishes
• Client’s major shareholders threatens to withdraw/terminate a professional service unless the member reaches desired conclusion

Question 17

3 kinds of safeguards exist

Answer 17

• Safeguards created by profession, legislation, or regulation (e.g. professional standards and threat of disciple; license requirements; ethics education and training requirements)
• Safeguards implemented by the client (e.g knowledgeable/experienced managers, appropriate ethics policies or governance structures etc.)
• Safeguards implemented by the firm (e.g. strong leadership that emphasizes compliance, effective internal disciplinary system etc)

Question 18

A covered member who owns less than 5% of a diversified mutual fund has an…

Answer 18

immaterial and indirect interest in the underlying securities and therefore independence is not impaired.

Question 19

In evaluating possible conflicts of interest, members should ask:

Answer 19

Would a reasonable and informed third party conclude that a conflict exists?

Question 20

2 main types of conflicts

Answer 20

1. Between interests of 2 clients
2. Between interests of client on one hand and firm and/or its members on the other

Question 21

If an actual conflict is identified by any member…

Answer 21

engagements should be refused or terminated if risk violation is unacceptably high

Question 22

Objectivity is threatened when a member serves as a

Answer 22

client entity’s director

At best, it is preferable to serve as a mere consultant to a client’s board

Question 23

Objectivity and integrity are threatened if the client (including its officers, directors, and 10% shareholders)…

Answer 23

give gifts or entertainment to the firm or its members (or vice versa)

Question 24

If members have a disagreement w/a superior over how to record potential earnings (or some other issue), the member is not…

Answer 24

supposed to simply do what the superior wants and subordinate their judgment

Question 25

In an event of conflict, evaluate whether...

Answer 25

the threat is at an **unacceptable level**, which occurs if the position taken would result in a material misrepresentation or legal violation. If the threat is **not significant**, then nothing further needs to be done

Question 26

If, after discussion w/people up the chain, the member is still worried that the right thing isn't going to be done, in no particular order, invoke the following safeguards:

Answer 26

* Determine whether the organization's policies and procedures have any additional requirements for reporting differences of opinion * Determine whether there is a duty to report to external authorities * Consult legal counsel * Fully document the situation

Question 27

Members doing attest work may not

Answer 27

advocate for their attest clients

Question 28

Outsourcing work to 3rd party service providers (TSPs) can

Answer 28

threaten objectivity or integrity However, there is no problem if the TSPs provide **only administrative support** (i.e record storage, software application hosting etc.)

Question 29

If substantive services are outsourced, member should

Answer 29

notify clients, preferably in writing, before any confidential information is provided to TSPs

Question 30

General Standards that apply to members

Answer 30

1. Take on jobs **only if** you can reasonably expect to complete them w/**professional competence** 2. **You need not be perfect** but should always exercise **due professional care** when providing professional services 3. Always **adequately plan and supervise** your provision of professional services 4. Never present conclusions/recommendations without **sufficient relevant data** to support them

Question 31

Client-provided records should be...

Answer 31

delivered to the client at the client's request, even if the client has not paid its bill to the member

Question 32

**Member-prepared records** related to a completed and issued work product should be...

Answer 32

delivered to the client at the client's request, **except** that they may be withheld if fees are due for that specific work product

Question 33

Members shall not receive contingent fees for...

Answer 33

**any service** performed for a client for whom he/she performs any attest services (i.e. financial statement audit or review, financial statement compilation) A member shall not prepare original/amended tax return for a contingent fee In other words, primarily avoid contingent fees

Question 34

Referral fees and commissions are...

Answer 34

prohibited for **attest clients** for n**on-attest clients**, they are permitted (but must be disclosed in writing)

Question 35

Member cannot own

Answer 35

**more than 5%** of client's ownership interests **w/out impairing independence**

Question 36

If a member owns 5% or less of outstanding shares of a diversified mutual fund, the interest in the underlying investments of the fund are to be held...

Answer 36

**immaterial and indirect financial interests** -\> they do not impair independence

Question 37

Firms may maintain depository accounts at a bank that is an attest client if they conclude that.

Answer 37

the likelihood is remote that the bank will experience financial difficulties.

Question 38

Immediate family members include

Answer 38

spouses, spousal equivalents, and dependents

Question 39

close relatives include

Answer 39

parents, siblings, and nondependent children

Question 40

Immediate family members **cumulatively may not own**

Answer 40

**more than 5%** of an attest client

Question 41

A covered member's immediate family member **may work for an attest client**, **just not in a "key position" (**any position related to exercising influence over financial statements)

Question 42

The auditor obtains an **understanding of internal control** and the flow of documents related to the entity's transactions primarily through:

Answer 42

1. inquiry of appropriate personnel 2. observation of client activities 3. review of relevant documentation (client's accounting manuals, prior-year's audit documentations [working papers] etc.)

Question 43

"other member" means

Answer 43

CPA who is retired or unemployed

Question 44

3 different ways that an auditor might document the understanding of internal control

Answer 44

1. Flow charts of transaction cycles 2. Internal control questionnaires 3. Narrative write-ups (written memos that describe the important control-related activities in the transaction cycles under consideration)

Question 45

reliance

Answer 45

reliance means the same thing as to **assess control risk at less than the max level** for the purposes of accepting a somewhat higher level of detection risk

Question 46

Members **shall not** receive **contingent fees for any service** performed for a client for whom he/she performs any of the following **attest services**

Answer 46

1. Financial statement audit 2. Financial statement review 3. A financial statement compilation reasonably expected to be used by a 3rd party that doesn't disclose a lack of independence, or 4. An examination of prospective financial information

Question 47

Immediate family members may work for audit clients, **but they may not serve key positions (i.e. general counsel)**

Question 48

Which of the following is a "self review" threat to member independence?

Answer 48

A: An engagement team member prepares invoices for the attest client The team member would be **reviewing his or her own work**, hence this is a "self review" threat.

Question 49

Kate has a very unusual auditing situation. An unusual transaction has created a situation where following GAAP seems problematic. Kate needs advice. Which of the following is true as Kate considers how to handle the situation?

Answer 49

A: To depart from GAAP, Kate needs to **demonstrate** that following GAAP would mislead investors, and then **describe** the departure, its approximate effects, and the reason why compliance would mislead

Question 50

Bill Fling, CPA, has posted the general ledger and has maintained the financial records of Wing Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries. Which of the following best summarizes the AICPA and SEC views as to the following question: Is audit independence impaired?

Answer 50

AICPA: No SEC: Yes

Question 51

**A manager that provides 10 hours or more of nonattest services to the client is considered a covered member.**

Question 52

Neither SOX nor the PCAOB prohibit preparation of an audit client's original return

Question 53

CPAs **need not be independent** when providing **tax and management advisory services**

Question 54

A member in public practice **may not** sign a current year audit report if it has unpaid fees from the client for services provided more than 1 year prior, **but an exception arises when the client files for bankruptcy.**

Question 55

A CPA may not disclose information to the IRS without the client’s consent.

Question 56

Referral fees and commissions are prohibited for **attest clients**

Question 57

Operating leases, **if proper conditions are met,** do not impair independence.

Question 58

**Partners and professional employees**, rather than “covered members” are the focus of the independence rules for employment relationships

Question 59

Because Murple has **both induced** the TSP (3rd party service provider) to promise to keep the information confidential and assured himself that the TSP can do so, this disclosure is permitted.

Question 60

An exception to the profession's independence requirements exists for a cash balance in a brokerage account that is fully insured by an organization such as the Securities Investor Protection Corporation.

Question 61

Keith worked directly under the CFO at Burnett Corporation. He has decided that he'd like to return to public accounting where he used to work, and he accepts an offer at the Beard CPA Firm. Beard audits Burnett. Which of the following is true?

Answer 61

Answer: Keith need not worry about independence issues as long as he joins Beard as another partner in office (OPIO) AND follows all 5 steps to complete dissociation from Burnett

Question 62

Accounting and consulting services do not normally impair independence because the member's role is advisory in nature.

Question 63

All members must adhere to the Integrity and Objectivity Rule Independence only applies to members in public service/practice (MIPP)

Question 64

An accountant **need not be independent** to provide **compilation services or prepare tax returns.**

Question 65

professional standards require payment prior to issuance of the subsequent year audit report.

Question 66

Members in business

Answer 66

Members in business are members who are employed or engaged on a contractual or volunteer basis in an executive, staff, governance, advisory, or administrative capacity in such areas as industry, the public sector, education, the not-for-profit sector and regulatory or professional bodies.. Basically staff accountants, internal auditors, and other accountants **not engaged in public practice** **Thus, members in business don't have to worry about independence rules**