Chapter 19 Flashcards
(18 cards)
The newly reorganized AICPA Code of Professional Conduct is organized as follows:
- A preface (Principles of Conduct) that is applicable to all CPAs (Lofty – NOT enforceable), and three “Parts (Rules of Conduct – Enforceable).”
- Part 1 applies to CPAs in public practice.
- Part 2 applies to CPAs who are working in business but who are not working as auditors that issue assurance reports on which the public will rely.
- Part 3 of the Code applies to CPAs who are neither functioning as an auditor nor in business.
Are the following enforceable or not?
- Principles of conduct
- Rules of conduct
- Interpretations of rules of conduct
- Principles of Conduct – not enforceable (because they are theoretical and lofty)
- Rules of Conduct – enforceable
- Interpretations of Rules of Conduct - not specifically enforceable, but an auditor who departs from them has the burden of justifying such departures.
What are the 6 Principles (all CPAs - not enforceable)?
A. Responsibilities: In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.
B. The public interest: Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism.
C. Integrity: To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.
D. Objectivity and independence: A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.
E. Due care: A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.
F. Scope and nature of services: A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.
What is Part 1: Rules of Conduct (enforceable)?
- Integrity and objectivity
- Independence
- General standards
- Compliance with standards
- Accounting principles
- Acts discreditable
- Contingent fees
- Commissions and referral fees
- Advertising and other forms of solicitation
- Confidential client information
- Form of organization and name
- *look at notes for more in depth**
What is Rule 101?
- Independence
- A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by council.
- It applies to: audits, review services, & audits of prospective financial statements.
- It does not apply to: ax returns and management services.
For financial interests, what is prohibited?
- Covered members are prohibited from DIRECT financial interest (equity or debt securities)
- Covered members are prohibited from INDIRECT MATERIAL financial interests
a. Materiality determined in relation to person’s wealth
b. Loan exceptions: (Auto loans, Fully collateralized by cash, Credit card balance <= $10,000, Home mortgages, Fully secured loans, and Immaterial loans.
Who is considered a covered member?
- Individuals on the engagement team
- Individuals in positions to influence engagement team (supervisors, evaluators)
- A PARTNER or MANAGER who provides non-attest services to client
- A PARTNER in the office of the responsible partner
- The firm
- The employee benefits plans of the firm
- An entity that can be controlled by one or more covered members
- Immediate Family (Spouse, spousal equivalent, dependent child)
- Close Family (Parent, sibling, non-dependent child) (IF MATERIAL)
- Unless covered member is unaware - Former practitioners if either:
- Held out as associate of firm
- Activities likely to cause others to believe still active.
Covered members cannot:
- Be directors , officers, managers, or employees of client
- Underwriter, voting trustee, promoter, trustee of pension fund
- Hold a key position of influence (Includes immediate and close family)
Covered members can be:
Honorary directors of non-profit organizations.
Independence prohibits:
- Lawsuits
- Intent to start a lawsuit
- Cross-claims with significant risk of material loss
Bookkeeping is:
- Not allowed for audits of public companies
- Allowed for PRIVATE companies as long as:
a. Client accepts full responsibility for financial statements
b. CPA does not assume role of management:
- Consumate transactions
- Have custody of assets
- Exercise authority
- Prepare source documents
c. CPA follows audit standards
Unpaid fees
- Independence impaired if fees unbilled or unpaid for > one year
- Unpaid fees from client in bankruptcy does not violate
Network of firms:
A network of firms is required to be independent (of the client) if:
- Common brand name
- Common control, etc.
The AICPA’s PRP consists of two types of reviews:
- System reviews - firms that perform audits and related accounting work
- Engagement reviews - CPA firms that don’t perform audits or similar engagements, but perform other accounting work such as reviews and compilations.
A firm’s system of quality control is designed to…
Provide the firm with reasonable assurance that the firm and its personnel comply with professional, legal, and regulatory requirements and that the partners issue appropriate reports (SQCS 8.12).
A firm’s system of quality control is tailored to…
- Firm’s size
- The nature of its practice
- Its organization
- Cost-benefit considerations
SQCS No. 8 identifies the following six elements of quality control
- Human resources
- Ethical requirements
- Acceptance and continuance of entity relationships and specific engagements
- Leadership responsibilities for quality in the firm (“tone at the top”)
- Monitoring
- Engagement performance
What is the PCAOB inspection program for accounting firms that audit public companies?
Registered firms that issue more than 100 audit reports for public companies per year are subject to an annual inspection, while those firms that regularly issue more than 1 but less than 100 audit reports in a year must be inspected at least once every three years.
