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Flashcards in Chapter 3 Deck (54):

A partner’s dependent parent is a 5 percent limited partner in a firm entity. Does the parent’s direct financial interest in the entity impair the firm’s independence?



A partner assigned to a firm’s New York office is married to the president of an entity for which the firm’s Connecticut office performs audit services. If the partner does not perform services out of or for the Connecticut office, cannot exercise significant influence over the engagement, and has no involvement with the engagement, such as consulting on accounting or auditing issues, is the firm’s independence impaired?



An audit partner has a brother who owns a 60 percent interest in an audit entity, which is material to the brother’s net worth. If the partner participates in the audit engagement, but does not know about his brother’s investment, is the firm’s independence impaired?

Yes, even though partner did not know about the investment.


What are the four breakdowns of the Code of Professional Conduct, in order?

Principles-Rules-Interpretations-Ethics Rulings


This section of the Code of Professional Conduct has some correspondence with GAAS



Can an Auditor, for a nonpublic company, counsel on potential expansion plans?



Can an Auditor, for a nonpublic company, search for and interview new personnel?

Yes, just can't hire them.


Can an Auditor, for a nonpublic company, train personnel?

Yes, needed to ensure controls are in place


Can an Auditor, for a nonpublic company, hire new personnel?

No, that is a management decision.


Can an Auditor, for a nonpublic company, supervise the operation of the system?

No. ***Supervision is different from Observation!


Can an Auditor, for a nonpublic company, monitor entity-prepared source documents and make changes in data without entity concurrence?



What are the six principles?

- Responsibilities
- The Public Interest
- Integrity
- Objectivity and Independence
- Due Care
- Scope and Nature of Services


A dependent child, spouse or spousal equivalent, and a dependent parent are considered which category?

Immediate Family


A father, sister, brother, granparent, mother, and independent (grown) child are considered

Close Relatives, not Immediate Family


Niece, nephew, friends, roommates, and cousins are considered

Other Relatives or Friends


In most states, violation of Rules of the AICPA Code of Professional Conduct may result in suspension or revocation of a CPA's license to practice, True or False?

True - Duh


Not all parts of the AICPA Code of Professional Conduct are binding on all CPAs.

False - they ARE all binding


A covered member may have only an immaterial direct financial interest in an audit client, true or false?

False, a covered member can have an indirect financial interest that is smaller than 5%.


What are the purpose of safeguards?

To adequately mitigate threats to independence


Would a CPA be considered independent of a savings and loans association where the CPA has a savings account?



Statements on Auditing Standards are enforceable under the AICPA Code of Professional Conduct. True or False?



Say a CPA audits a company in which he or she previously owned stock. Is this considered a violation of the code?



Is this CPA independent with respect to the client if his or her spouse owns an immaterial direct financial interest in the client?



Can a CPA firm practice in the form of an LLC?

Sure, from book - "The Code of Professional Conduct allows CPAs to practice in any legal business form. This includes the ability to practice as professional corporations, limited liability partnerships (companies), partnerships, or sole practitioners."


Statements of Financial Accounting Standards issued by the FASB are enforceable under the AICPA Code of Professional Conduct. True or False?



Is this CPA independent with respect to the client if his father is a salesman for the client



When performing consulting services, are Independence and objectivity necessary?

Independence is not required, yet objectivity is.


The Code of Ethics of the Institute of Internal Auditors requires that members report to the audit committee of the board of directors. True or False?



If a CPA has started an audit of a nonissuer (nonpublic company) for which last year’s fees have not yet been received, has he or she violated the Code?

No, for a nonpublic company it's ok. If it was a public company, however, then this would impair the auditor's independence if they didn't pay before the issuance of the audit report.


An advantage of a professional corporation opposed to a partnership is that it offers ____ _

certain tax advantages


Advertising is ok as long as it is _______

not false, misleading, or deceptive.


Is this CPA independent with respect to the client if his or her nondependent child owns an immaterial direct financial interest in the client?



Current auditing standards do not allow which of the following types of loans from a financial institution audit client?

Home Mortgage Loans. Borrowings collateralized by cash deposits, loans of surrender value from an insurance policy, and credit card loans (up to a specific limit) are ok.


Rule 101 regards Independence. What are the two types of Independence?

o Independence in Appearance (to an objective third party)
o Independence of Mind (actual independence)


Interpretation 101-1 is about which members can own any direct or material financial interest in the client. Section A says Independence is impaired for Covered Members if

They have a direct or material indirect financial interest, loan, or joint business investment; or served as trustee or administrator of a trust that has material indirect interet


Interpretation 101-1, Section B (for all partners and professional staff) says Independence is impaired if

person owns 5% or more of client's outstanding equity or other ownership interest


Interpretation 101-1. Section C (for all partners and professional staff) says Independence is impaired if

Simultaneously associated with client as a director, officer, employees, promoter, trustee, etc (you wouldn't want the director of a company you are auditing working in the same office as you)


How could Close Relatives affect independence?

If they have a
1. Key position with client or
2. Material financial interest of which accountant has knowledge


SOX Explicitly prohibits the following services for public attest clients

-Financial Systems Designs and Implementation
- Appraisal or valuation service
- Actuarial Service
- Internal audit outsourcing
- Management functions or human resource services
- Investment services
- Legal services and expert services
- Certain tax services


How long must one wait before working for a previous audit client?

One year "cooling off" period according to SOX


Define the audit committee

selected numbr of a member of a comapny's board, usually 3-7, who help auditors remain independent


Other Relatives and Friends, how could they affect independence?

When a reasonable person aware of all facts would conclude that there is an unacceptable threat to independence.


Unpaid client fees to an audit firm are considered an impairment if

They are one year past due, unless client is in bankruptcy


Rule 102 - Integrity and Objectivity, applies to _____ (some or all) members of the AICPA?



Define Rule 301 - Confidential Client Information.

- Member shall not disclose confidential client information without specific consent of said client.

- Auditors should not directly disclose illegal acts unless they have a legal duty
- Must report Fraud, and to BOD and/or SEC if management doesn't take remedial action.
- subpoena or court of law request



Rule 501 - Acts Discreditable - is defined as

Disciplines members who act in a manner damaging to the profession.
- Felonies
- Discrimination/harassment violations
- Violating interpretation 102-1 (knowingly misinterpreting facts)


Rule 201 - General Standards - which ensures competence and due care applies to ____ (some or all) CPA services.



Rule 502 - Advertising and Other Forms of Solicitation says that

Advertising is ok as long as it is not false, misleading, or deceptive


Rule 503 - Commissions and Referral Fees - says

CPA's who do not perform attest and certain other functions are allowed to have these if disclosed to client


Rule 202 - Compliance with Standards by appropriate body, applies to ____ (all or some) CPA services?



Interpretation 102-1 under the Integrity and Objectivity Rule says

members shall not knowingly misrepresent facts


Define Rule 302 - Allowable Contingent Fees

If an accountant prepares the following, they can't use a contingent fee:

- Audit or Review of Statements
- Compilation of statements expected to be used by a third party and does not disclose a lack of independence
- an examination of prospective financial information


Describe how Rule 203, Accounting Principles, differs from Rule 202.

Rule 203 requires CPAs to follow authoritative bodies that issue accounting principles (FASB, GASB, FASAB, IASB). Rule 202 just says that the services must comply by standards by their appropriate body


Rule 505 - Form of Organization and Name says that

- Organization can practice in any legal business form as long as 2/3 of the ownership, voting rights, and control over professional manners must be with CPAs

- Fictitious names are okay as long as not false, misleading, or deceptive (like Rule 502 - Advertising)