Chapter 2 -- Professional Standards Flashcards
Section 2.1: Code of Professional Conduct
What are the six principles of the AICPA Code of Professional Conduct?
“RIP-SOD”
Responsibilities
Integrity
Public Interest
Scope and nature of Service
Objectivity and Independence
Due Care
Section 2.1: Code of Professional Conduct
What is included in the AICPA Code of Professional Conduct?
- General ethical principles that are aspirational in character
- Set of specific, mandatory rules describing minimum levels of conduct a member must maintain
Section 2.1: Code of Professional Conduct
What are the threats in independence?
- Adverse Interest Threat
- Advocacy Threat
- Familiarity Threat
- Management Participation Threat
- Self-Interest Threat
- Self-Review Threat
- Undue Influence Threat
Section 2.1: Code of Professional Conduct
What is adverse interest threat?
The CPA is working against the client
Examples
* Is the client, or a officer, director or shareholder of the client, suing the Auditor?
* A claim is filed against the firm to get back insurance payments made to the client
* A lawsuit filed against the client, its officers and directors, and the auditor firm
Section 2.1: Code of Professional Conduct
What is advocacy threat?
The auditor is more interested in the client’s interest or position that would impair their independence
Examples
* Performing forensic accounting services to the client who is in litigation
* Acting as an investment adviser for an officer, director or 10% shareholder of the client
* Underwriting or promoting a client’s shares
* Act as a registered agent for the client
* Endorses a client’s service or products
Section 2.1: Code of Professional Conduct
What is familiarity threat?
- The auditor has a long or close relationship with the client
- The auditor becomes too sympathetic to the client’s interest or accepts the client’s work without performing due diligence
Example
* An auditor’s immediate family or close relative is employed by the client
* An auditor’s friend is employed by a client
* A former employee of the audit firm is employed by the client in a key position
* The auditor has a close relationship with the office, director of a 10% shareholder of the client
Section 2.1: Code of Professional Conduct
What is management participation threat?
- The auditor will act on behalf of the client or assume client’s management responsibilities
- The auditor cannot be act as the CEO of the company
Section 2.1: Code of Professional Conduct
What is self-interest threat?
The auditor benefits with a client or persons associated with client
Examples
* The auditor has a financial interest in the client, and the audit will have an affect on the fair value of the company
* The auditor’s spouse enters into employment negotiations with the client
* The auditor’s firm has a contingent fee arrangement with the client
* The majority of the auditing firm’s revenue is based on the financial health of the client
Section 2.1: Code of Professional Conduct
What is self-review threat?
- If the auditor performed the work, then there is no need to review it.
- The auditor may rely on the service performed when forming a judgement as part of the audit
Example
* The auditor creates the financial statements and then audits them in the same period.
* The auditor does bookkeeping for the client
* A partner in the auditor’s firm is also associated with the client’s company as an employee, officer, director or contractor
Section 2.1: Code of Professional Conduct
What is undue influence threat?
The client threatens to fire the firm because of a disagreement over accounting principles
Section 2.2: Independence
What is the difference between Independence of mind and Independence of appearance?
- Independence of mind allows the auditor to act with integrity, exercise objectivity and professional skepticism, and being free from bias.
- Independence in appearance is how the auditor is viewed by third parties.
Section 2.2: Independence
What is an APS?
An alternative practice structure is a relationship between firms licensed to provide Attest Services and firms providing Non-Attest Services.
Section 2.4: Professional Standards
What does an auditor report when the financial statements do not comply to GAAP and the departure is warranted, and the effects on the financial statements is material?
- The departure
- The approximate effects for the departure
- The reasons compliance would result in misleading financial statements
Section 2.4: Professional Standards
How is reporting when the financial statements are not GAAP because they would be misleading?
If the information that is reported will be material, then the auditor includes the following information in the report (“DAR”):
* Departure
* Approximate effects of the departure (if practicable)
* Reasons compliance would result in misleading financial statements.
Section 2.6: Other Responsibilities
What services cannot have contingent fee arrangement?
- Audits or reviews of financial statements
- An examination of prospective financial information
- Certain tax services
- Compilation that reasonably might be used by a third party that does not disclose lack of independence in the report
