CPAExcl 11-Independence

Question 1

Describe the provisions in Rule 102 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

Answer 1

In the performance of any professional service, a member: shall maintain objectivity and integrity, shall be free of conflict of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

Question 2

List the ways in which conflicts of interest can be resolved.

Answer 2

They can be solved by:

1. Full disclosure, and
2. Client consent.

Question 3

Describe an example of a conflict of interest according to the AICPA’s Interpretation 102-2.

Answer 3

A CPA performing a professional service has a significant relationship with another person, entity, product, or service that could be viewed as impairing the CPA’s objectivity.

Question 4

What must an auditor do to avoid subordinating judgment when disagreeing with a supervisor regarding proper audit procedures?

Answer 4

1. Need do nothing further if upon reflection the member concludes that the F/S as proposed represent an acceptable alternative and don’t misrepresent facts;
2. Alert the appropriate level of management if upon reflection the member concludes that the F/S could be materially misstated; and
3. Consider resigning and communicating with regulatory authorities if problem is not addressed.

Question 5

Give an example of a potential conflict of interest.

Answer 5

Providing tax or financial planning services for several members of a family who may have opposing interests.

Question 6

How do the provisions of the American Institute of Certified Public Accountants (AICPA) Standard of Planning and Supervision apply to practitioners performing professional services?

Answer 6

The American Institute of Certified Public Accountants (AICPA) Standard of Planning and Supervision requires the practitioner to adequately plan and supervise the performance of professional services.

Question 7

What does an agreement with a practitioner to perform professional services imply?

Answer 7

The member practitioner has the necessary competence to perform those services according to professional standards, applying his or her knowledge and skill with reasonable care and diligence, but the member does not assume a responsibility for infallibility of knowledge or judgment.

Question 8

List the general standards regarding audits that are promulgated by the American Institute of Certified Public Accountants (AICPA).

Answer 8

1. Professional Competence;
2. Due Professional Care;
3. Planning and Supervision;
4. Sufficient Relevant Data.

Question 9

What steps should be taken when departing from Generally Accepted Accounting Principles (GAAP)?

Answer 9

1. Disclose Departure;
2. Disclose approximate effects of departure; and
3. Explain why GAAP compliance would mislead.

Question 10

Under what two circumstances may an auditor depart from Generally Accepted Accounting Principles (GAAP)?

Answer 10

1. New legislation;

2. New form of business transaction.

Question 11

Describe the provisions in Interpretation 203-1 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

Answer 11

CPAs are allowed departure from SFAS only when results of SFAS will be misleading.

Question 12

List the circumstances under which a CPA may disclose client confidences.

Answer 12

They may be disclosed when:

1. Client consents;
2. GAAP requires disclosure;
3. Enforceable subpoena;
4. Ethical examination;
5. Peer review;
6. Other members of firm “need to know.”

Question 13

Describe the public authority exception regarding contingent fees.

Answer 13

A fee is not regarded as contingent if fixed by the courts or other public authorities.

Question 14

List the exceptions to which federal tax preparers’ privileges are not honored as outlined in the Internal Revenue Code (IRC) Section 7525.

Answer 14

1. Criminal matters;
2. Matters not before the IRS or federal courts in cases brought by or against U.S.;
3. Tax advice on state or local matters;
4. Written tax shelter advice.

Question 15

Describe the provisions in Rule 301 under the American Institute of Certified Public Accountant’s (AICPA) Code of Professional Conduct.

Answer 15

A member in public practice shall not disclose any confidential client information without the specific consent of the client.

Question 16

Define “variable fees”.

Answer 16

Fees that may vary depending on various factors, including the complexity of services rendered.

Question 17

List the features of “accountant-client privilege” in states where such privileges are recognized.

Answer 17

1. Protects client, not CPA;
2. Waivable by client;
3. Waiver as to part is waiver as to all.

Question 18

List the types of safeguards in the conceptual framework outlined in the Principles of the Code of Professional Conduct.

Answer 18

1. Professional, Legislative, or Regulatory;
2. Client Safeguards;
3. Firm Safeguards, such as quality control.

Question 19

To what type of work does the American Institute of Certified Public Accountants (AICPA) rules apply?

Answer 19

The rules apply to attest work.

Question 20

List the four major areas of concern related to independence under the Principles of the Code of Professional Conduct.

Answer 20

1. Employment Ties;
2. Financial Ties;
3. Consulting;
4. Family Ties.

Question 21

List the types of activities to which independence rules do not apply under the Principles of the Code of Professional Conduct.

Answer 21

1. Tax Work;

2. Consulting.

Question 22

What activities are included in the category of attest work?

Answer 22

1. Audit or review of F/S;
2. Compilation of F/S expected to be used by third parties; or
3. Examination of prospective financial information.

Question 23

Who are considered to be in a Position to Influence (PTI) as outlined in the Principles of the Code of Professional Conduct?

Answer 23

Those who:

1. Evaluate the performance or recommend compensation of attest engagement partner (AEP);
2. Directly supervise the AEP and all successively senior levels;
3. Consult with team during engagement;
4. Provide quality control or other oversight.

Question 24

List the “covered members” outlined in the Principles of the Code of Professional Conduct.

Answer 24

1. Team Members;
2. Those in a Position to Influence (PTI) team members;
3. Other Partners in the Office (OPIOs);
4. Ten-Hour People;
5. The Firm;
6. Any entity controlled by the above.

Question 25

Define "Financial Interest".

Answer 25

An ownership interest in an equity or a debt security issued by an entity (including options and derivatives).

Question 26

Does entertainment provided by a client to the auditor impair independence?

Answer 26

Not necessarily. Independence is not impaired if entertainment provided by the client is "reasonable under the circumstances."

Question 27

What client action can cause independence to be impaired?

Answer 27

The client having an unpaid bill from the audit from the previous 12 months.

Question 28

Under the Principles of the Code of Professional Conduct, what type of financial interest impairs independence?

Answer 28

1. Direct and Material; 2. Indirect and Material; 3. Direct and Immaterial; 4. But not: Indirect and Immaterial.

Question 29

List the type of permitted loans from financial institution clients that will not impair independence.

Answer 29

1. Grandfathered; | 2. Certain de minimis loans that are small and collateralized.

Question 30

What type of lease does not violate independence rules?

Answer 30

Operating lease.

Question 31

Under what conditions can non-covered members create independence problems?

Answer 31

They can create problems if they: Are partners or professional employees of the firm, who Own more than 5% of audit client's stock or hold certain key positions.

Question 32

Do gifts from a client to the auditor impair independence?

Answer 32

Not necessarily. While gifts can impair independence, independence is not impaired if the value is "clearly insignificant."

Question 33

Does a blind trust preserve independence?

Answer 33

No. A blind trust does not preserve independence.

Question 34

Independence is impaired if audit firm employee is approached by client regarding a job, unless what actions are taken?

Answer 34

Required actions by audit firm employee: 1. Person promptly reports such offer; and 2. Removes self from engagement until offer is rejected.

Question 35

List some independence safeguards if a client employee moves to the audit firm.

Answer 35

Client employee 1. Cannot be on team or PTI; 2. Can be OPIO or 10-hour person if dissociate from client.

Question 36

What independence safeguards need to be in place by an audit firm if a former employee accepts a position with a client?

Answer 36

Former employee cannot be in a position to influence accounting firm's operations or financial policies or participate or appear to participate in firm's affairs. Amounts due former employee from firm not variable; ongoing attest team considers appropriateness of modifying engagement procedures; firm assesses whether existing team members can continue to be skeptical; firm reviews subsequent attest engagement if person went to client within one year.

Question 37

What is the cooling off period as defined under Sarbanes-Oxley?

Answer 37

It is one year for lead partner, concurring partner, or team member who provides more than 10 hours of work.

Question 38

Under what circumstances can a covered member audit a charity and remain on the Board of Directors of said charity?

Answer 38

1. Position is purely honorary; 2. Position is identified as honorary; 3. Contributes no more than use of name; and 4. Does not vote or participate in management affairs.

Question 39

What client relationships should a covered member avoid to ensure independence is not impaired?

Answer 39

Covered members should not be: 1. Trustees of trust with financial interest in client; 2. Trustee of client pension fund; 3. Director of client; 4. Officer of Client; 5. Promoter of Client stock; 6. Voting trustee of client.

Question 40

List the actions auditors should avoid in order to preserve independence.

Answer 40

1. Performing management functions; 2. Making management decisions; 3. Appearing to do these things; 4. Taking custody of client assets.

Question 41

List the activities forbidden by Sarbanes-Oxley for public company audit clients.

Answer 41

Bookkeeping or other services related to the accounting records of financial statements Financial information systems design and implementations Appraisal or valuation services, fairness opinions, or contributions-in-kind reports Actuarial services Internal audit outsourcing services Management functions or human resources Broker or dealer, investment adviser, or investment banking services Legal and expert services unrelated to audit.

Question 42

List some examples of improper consulting activities that an auditor can partake in on behalf of an audit client.

Answer 42

1. Authorizing, executing or consummating a transaction on client's behalf; 2. Preparing source documents evidencing occurrence of transactions; 3. Taking custody of client assets; 4. Supervising client employees' normal recurring activities; 5. Reporting to board on management's behalf; 6. Establishing or maintaining internal controls.

Question 43

Define "close relatives" (as defined for independence purposes).

Answer 43

1. Parent; 2. Sibling; 3. Nondependent child.

Question 44

Define "immediate family members" (as defined for independence purposes).

Answer 44

1. Spouse; 2. Spousal equivalent; 3. Dependents (whether or not related).

Question 45

Define "key positions" (as defined for independence purposes).

Answer 45

1. Primary responsibility for significant accounting functions; 2. Primary responsibility for preparation of F/S; 3. Ability to exercise influence over contents of F/S.

Question 46

Describe the provisions of Interpretation 501-2 under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct.

Answer 46

Discrimination (on basis of race, color, religion, sex, age, or national origin) and harassment (sexual and other forms) are discreditable acts.

Question 47

Describe the provisions of Interpretation 501-4 under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct.

Answer 47

Negligently making (or permitting or directing another to make) false or misleading journal entries is a discreditable act.

Question 48

List the actions that an auditor may take when a client requests a return of their records.

Answer 48

1. Return client-provided records w/in 45 days; 2. May keep client records prepared by CPA if bill not paid; 3. May keep supporting records if bill not paid; 4. CPA's working papers need not be turned over.

Question 49

Describe the provisions of Interpretation 501-6 under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct.

Answer 49

Soliciting or knowingly disclosing the May 1996 or later Uniform CPA Examination questions and/or answers without the written authorization of the AICPA is a discreditable act.

Question 50

List the five discreditable acts outlined in Rule 501 under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct.

Answer 50

(1) Discrimination and Harassment in Employment Practices; (2) Failure to Follow Standards and/or Procedures or Other Requirements in Governmental Audits; (3) Negligence in the Preparation of Financial Statements or Records; (4) Failure to Follow Requirements of Governmental Bodies, Commissions, or Other Regulatory Agencies in Performing Attest or Similar Functions; (5) Solicitation or Disclosure of CPA Examination Questions.

Question 51

List some examples of false, misleading or deceptive acts.

Answer 51

1. Creating false or unjustified expectation of favorable results; 2. Implying the ability to influence a court or agency; 3. Estimating a fee knowing that the amount charged will likely be much higher.

Question 52

What action is prohibited by Rule 502 under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct?

Answer 52

Solicitation by coercion, over-reaching or harassment.

Question 53

Describe the provisions of Interpretation 502-2 under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct.

Answer 53

CPAs may normally engage in accurate advertising ("commercial speech").

Question 54

Under what circumstances are commissions prohibited?

Answer 54

When member also performs: 1. Audit or review of a financial statement; or 2. Compilations to be used by third parties; or 3. Examination of prospective financial information.

Question 55

Under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct, what actions should be taken by the member regarding commission or referral fees?

Answer 55

Accepting a permitted commission or referral fee must be disclosed to the client.

Question 56

Under what circumstances are contingent fees prohibited?

Answer 56

Contingent fees are prohibited for performing: 1. Any work for attest client; 2. Preparation of tax return or refund; 3. Correcting an omission in original return.

Question 57

Describe the provisions of Interpretation 502-2 under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct.

Answer 57

1. Member may own interest in separate business that performs nonaudit services for clients; 2. If member controls the separate business, entity must comply with Code of Professional Conduct; 3. If member does not control the separate business, Code applies to member but not to the entity.

Question 58

Describe the provisions of Interpretation 505-3 under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct.

Answer 58

1. Majority of financial interests in attest firm must be owned by CPAs; 2. If CPAs who own the attest firm remain financially responsible, public interest will be considered protected.

Question 59

Describe the provisions in Rule 505 under the American Institute of Certified Public Accountant's (AICPA) Code of Professional Conduct.

Answer 59

A member may practice public accounting only in a form of organization (proprietorship, partnership, professional corporation, limited liability company, limited liability partnership, etc.) permitted by state law whose characteristics conform to AICPA resolutions.

Question 60

For what type of service is compensation prohibited for auditors of public companies?

Answer 60

Compensation for selling nonaudit services is prohibited.

Question 61

What does the acronym PCAOB stand for?

Answer 61

Public Company Accounting Oversight Board.

Question 62

Who hires, compensates, and fires auditors of public companies?

Answer 62

The audit committee (composed entirely of independent directors) performs these actions.

Question 63

Is a public company required to rotate audit firms?

Answer 63

Sarbanes-Oxley does not require a public company to rotate audit firms.

Question 64

List the services that CPAs may not provide to public company audit clients.

Answer 64

Bookkeeping or other services related to the accounting records of financial statements; Financial information systems design and implementations; Appraisal or valuation services, fairness opinions, or contributions-in-kind reports; Actuarial services; Internal audit outsourcing services; Management functions or human resources; Broker or dealer, investment adviser, or investment banking services; Legal services and expert services unrelated to audit.

Question 65

In the event the American Institute of Certified Public Accountants rules conflict with the Public Company Accounting Oversight Board rules, which rule should the practitioner follow?

Answer 65

The Public Company Accounting Oversight Board (PCAOB).

Question 66

Who must be rotated under Sarbanes Oxley?

Answer 66

1. Lead audit partner and reviewing partner (5-on/5-off); | 2. Other partners playing a significant role (7-on/2-off).

Question 67

On what firms must the Public Company Accounting Oversight Board (PCAOB) perform annual audits?

Answer 67

Firms with 100 or more public company audits.

Question 68

List the standards that the Public Company Accounting Oversight Board (PCAOB) is responsible for establishing.

Answer 68

1. Auditing; 2. Quality Control; 3. Ethics; 4. Independence.

Question 69

What governmental body oversees the Public Company Accounting Oversight Board (PCAOB)?

Answer 69

The Securities and Exchange Commission (SEC).

Question 70

List the Public Company Accounting Oversight Board's basic functions.

Answer 70

1. Registering public accounting firms; 2. Setting up standards; 3. Inspecting public accounting firms; 4. Investigating violations; 5. Enforcing compliance.

Question 71

What does the acronym GAO stand for?

Answer 71

Government Accountability Office.

Question 72

List the types of audit impairments that are the focus of the Government Accountability Office.

Answer 72

1. Personal Impairments; 2. External Impairments; 3. Organizational Impairments.

Question 73

What does the acronym AO stand for?

Answer 73

Auditing Organization.

Question 74

What audits do the Government Accountability Office guidelines apply to?

Answer 74

Audits of: 1. Government entities; 2. Entities that receive government grants.

Question 75

What general issues do the Government Accountability Office address?

Answer 75

1. Independence; 2. Ethical Principles; * Public Interest; * Integrity; * Objectivity. 3. Proper use of government information, resources & position; 4. Professional Behavior.

Question 76

What requirements does the Government Accountability Office outline regarding the assessing of impact that nonaudit services have on the audit?

Answer 76

1. Auditing Organizations (AOs) must not provide nonaudit services that involve performing management functions or making management decisions; and 2. AOs must not audit their own work or provide nonaudit services in cases where the nonaudit services are significant to the subject matter of the audit.

Question 77

What two primary independence concerns do the Department of Labor independence rules address?

Answer 77

1. Financial ties; | 2. Employment ties.

Question 78

What does the acronym DOL stand for?

Answer 78

Department of Labor.

Question 79

What does the acronym ERISA stand for?

Answer 79

Employee Retirement Income Security Act.

Question 80

What does the acronym EBSA stand for?

Answer 80

Employee Benefits Security Administration.

Question 81

What does the acronym IESBA stand for?

Answer 81

International Ethics Standards Board for Accountants.

Question 82

What is the role of the International Federation of Accountants?

Answer 82

It is the global voice for accounting profession.

Question 83

List the fundamental principles of the International Federation of Accountants (IFAC) code.

Answer 83

1. Integrity; 2. Objectivity; 3. Professional Competence; 4. Due Care; 5. Confidentiality; 6. Professional Behavior.

Question 84

What does the acronym PAPPS stand for?

Answer 84

Professional Accountants in Public Practice.

Question 85

What does the acronym PABS stand for?

Answer 85

Professional Accountants in Business.

Question 86

List the categories of threats to independence outlined in the International Federation of Accountants (IFAC) code.

Answer 86

1. Self-Interest Threats; 2. Self-Review Threats; 3. Advocacy Threats; 4. Familiarity Threats; 5. Intimidation Threats.

Question 87

What is the role of the Professional Ethics Executive Committee (PEEC)?

Answer 87

The Professional Ethics Executive Committee monitors the International Federation of Accountants' activities and gives the U.S. input to International Ethics Standards Board for Accountants (IESBA).

Question 88

List two types of safeguards against threats to Independence.

Answer 88

1. Created by profession, legislation or regulation 2. Present in the workplace * Firm-wide * Engagement-specific.

Question 89

How many countries have adopted the International Federation of Accountants code?

Answer 89

Over 100 countries have adopted this code.

Question 90

Define "clearly insignificant" as defined in the International Federation of Accountants (IFAC) code.

Answer 90

Trivial and Inconsequential.

Question 91

What does the acronym IFAC stand for?

Answer 91

International Federation of Accountants.

Question 92

Is the International Federation of Accountants Code (IFAC) rules-based?

Answer 92

No, the International Federation of Accountants Code is principles-based.