Ethics, independence and prof. responsibility Flashcards
(10 cards)
Generally accepted government auditing standards use which of the following terms to describe a professional requirement to comply with a standard or document the justification for not doing so?
A. Explanatory requirement.
B. Conditional requirement.
C. Unconditional requirement.
D. Presumptively mandatory requirement.
D. Presumptively mandatory requirement.
A presumptively mandatory requirement is one that is generally expected to be complied with in all situations to which it applies. In rare circumstances, however, an auditor may depart from a presumptively mandatory requirement if the required procedure would be ineffective. In such cases, the auditor must document the reason for the departure and how an alternate procedure was used to achieve the objective of the presumptively mandatory requirement. By contrast, an unconditional requirement is one from which an auditor may never deviate (Choice C).
A presumptively mandatory requirement is indicated by use of the word “should” in auditing standards; an unconditional requirement is indicated by use of “must” or “is required to.” This is true of generally accepted government auditing standards (GAGAS), as well as standards for issuers(PCAOB standards) and nonissuers(GAAS).
(Choices A and B) Auditing standards do not use the terms “explanatory requirement” or “conditional requirement” in this context.
Things to remember:
A presumptively mandatory requirement is one that is generally expected to be complied with where applicable and is indicated by use of the word “should” in auditing standards. An auditor may depart from a presumptively mandatory requirement if the required procedure would be ineffective but must document the justification for doing so. Unconditional requirements are indicated by use of the words “must” or “is required” in auditing standards.
For financial statement audits, generally accepted government auditing standards (GAGAS) incorporate the Statements on Auditing Standards (SAS) issued by the AICPA. GAGAS prescribe additional standards that require reporting on
The scope oftesting of internal control
The scope of testing oncompliance with laws and regulations
A. Yes Yes
B. Yes No
C. No Yes
D. No No
A. Yes Yes
Generally accepted government auditing standards (GAGAS) are issued by the U.S. Government Accountability Office and apply in addition toGAAS (ie, SAS) where required by law. GAGAS audits are often performed on government agencies and entities receiving assistance from or serving under contract with federal, state, or local governments.
In addition to providing an opinion on the financial statements, GAGAS requires that a report on a financial statement audit:
Describe the scope of testing on both internal control and the entity’s compliance with laws, regulations, contracts, and grants.
State whether the testing was sufficient to form an opinion on compliance or internal control, although there is no requirement to provide the opinion.
Identify significant deficiencies or material weaknesses in internal control and suspected instances of noncompliance discovered during the audit.
Things to remember:
Generally accepted government auditing standards (GAGAS) require supplemental reporting standards in addition to GAAS. For example, a GAGAS audit report includes the scope of testing on both internal control and compliance with laws, regulations, contracts, and grants.
At a confidential meeting, an audit client informed a CPA about the client’s illegal insider-trading actions. A year later, the CPA was subpoenaed to appear in federal court to testify in a criminal trial against the client. The CPA was asked to testify to the meeting between the CPA and the client. After receiving immunity, the CPA should do which of the following?
A. Take the Fifth Amendment and not discuss the meeting.
B. Cite the privileged communications aspect of being a CPA.
C. Discuss the entire conversation including the illegal acts.
D. Discuss only the aspects of the conversation relating to the audit report or procedures performed.
C. Discuss the entire conversation including the illegal acts.
Rules surrounding the confidentiality of client information form a central part of the AICPA Code of Professional Conduct. Any client information that is not available to the general public must be kept confidential, with limited exceptions.
However, CPAs are also required to comply with all applicable laws. A CPA must fully comply with a valid subpoena, even if it means divulging confidential client information. In most jurisdictions, CPA-client communications don’t have a legally enforceable privilege like attorney-client communications (Choice B). This is because CPA-client relationships aren’t based on CPAs representing clients in adversarial proceedings as attorney-client relationships are.
Other exceptions to the confidentiality rule allow the release of client information to defend against a lawsuit or ethics complaint or to comply with a quality control peer review.
(Choice A) The Fifth Amendment protects against forced self-incrimination. Because the CPA has already been granted immunity, the amendment would not provide justification for refusing to answer questions.
(Choice D) Absent a legal justification to remain silent (eg, attorney-client privilege), those subpoenaed to testify must answer all questions about which they have knowledge. A CPA has no such justification.
Things to remember:
CPAs are generally prohibited from divulging confidential client information. They are required, however, to fully comply with a valid subpoena, even if it means divulging confidential information.
Which of the following is proper activity within the Code of Professional Conduct?
A. Shandy, who is on the audit team for client ABC Co., also has a background in real estate appraisal. ABC would like Shandy to be its expert witness in a lawsuit that involves the value of real estate that ABC owns.
B. Kiron, who is on the audit team for client DEF Co., also has a law license. DEF would like Kiron to represent it in a breach of contract action against XYZ Co.
C. Indira, a tax professional who provides tax advice to client JKL Co., also is a practicing lawyer. JKL would like Indira to represent JKL in an insurance dispute with Trinity Insurance Co.
D. Donkle, who is on the audit team for client QRS, also has substantial experience in tax and has been asked by QRS to represent it in a tax matter in front of the IRS.
C. Indira, a tax professional who provides tax advice to client JKL Co., also is a practicing lawyer. JKL would like Indira to represent JKL in an insurance dispute with Trinity Insurance Co.
Correct! Members not doing attest work may advocate for their nonattest clients, but should avoid advocacy that is unduly zealous and might undermine their credibility as objective professional service providers.
Independence standards of the GAO for audits in accordance with generally accepted government auditing standards describe various threats to independence. Which of the following threats addresses lack of independence due to reporting lines?
A. Undue influence threat.
B. External threat.
C. Bias threat.
D. Structural threat.
D. Structural threat.
GAO ethical standards incorporate the GAGAS conceptual framework approach to independence. This framework identifies seven threats to independence. These threats are similar to but not exactly like those identified in the AICPA’s conceptual framework for independence.
The threat presented by an auditor’s reporting lines (ie, who the auditor reports to) is the structural threat. This threat arises when the auditor reports to the auditee instead of a governing body and can jeopardize both the auditor’s work performance and objectivity.
(Choice A) The undue influence threat refers to external influences or pressures that could impact the auditor’s judgments.
(Choice B) External threats arise from factors outside an entity (eg, the undue influence threat).
(Choice C) The bias threat stems from the auditor’s possible lack of objectivity due to political, ideological, or social convictions.
Things to remember:
The GAGAS conceptual framework for independence identifies seven threats to independence. The structural threat arises when the auditor reports to the auditee instead of a governing body.
Which of the following is a direct financial interest?
A. One owned directly by the covered member (even if managed by others)
B. One beneficially owned by the covered member through an investment vehicle, estate, trust, or intermediary when the beneficiary neither controls the intermediary nor has authority to supervise or participate in its investment decisions
C. An interest where the individual is not the record owner but has a right to some or all of the underlying benefits of ownership
D. An interest owned by others and not under one’s control
A. One owned directly by the covered member (even if managed by others)
The answer has directly in it, come on.
Which of the following scenarios adheres to the independence rules for an auditor of a federally regulated employee benefit plan?
A. An accountant who was employed to maintain records for a federally regulated employee benefit plan resigned to accept a position with the plan’s audit firm in Year 12. The accountant rendered an opinion on the plan’s Year 13 F/S.
B. An auditor is on the team auditing a federally regulated employee benefit plan and simultaneously serves as a trustee of the plan. The auditor has clearly disclosed the trustee relationship.
C. Two accountants formed an accounting firm where one accountant maintains financial records for a federally regulated pension plan and the other accountant audits the plan. Both accountants are careful never to talk business about the pension plan.
D. An accounting firm audits a federally regulated employee benefit plan. The firm also employs actuaries who provide services to estimate future plan benefit expenses but do not participate in the audits.
A. An accountant who was employed to maintain records for a federally regulated employee benefit plan resigned to accept a position with the plan’s audit firm in Year 12. The accountant rendered an opinion on the plan’s Year 13 F/S.
I guess the full year audit cycle doesn’t have to do with independence or it isn’t relevent for a benefit plan.
Employee benefit plans are regulated by the Department of Labor’s (DOL’s) Employee Benefits Security Administration (EBSA). Statutory law provides that an accountant must be independent to render an opinion on a plan’s F/S and required schedules.
The DOL rules outline three types of relationships that impair an accountant’s or accounting firm’s independence:
Committing to acquire or having direct or indirect material financial interest in the plan during the period of the engagement, at the date of the opinion, or during the period covered by the F/S
Maintaining financial records for the plan and subsequently rendering an opinion on those records (Choice C)
Having employment ties with the plan during the same period, including serving as a plan sponsor, promoter, underwriter, investment advisor, voting trustee, director, officer, or employee (Choice B)
Independence is not impaired when an accountant resigns from and no longer maintains records for a federally regulated employee benefit plan in one year and audits the plan’s F/S in subsequent years.
(Choice D) Services provided to a plan by actuaries who are employed by the firm auditing the plan may constitute a prohibited transaction that can impair independence. If the individuals are associated with but not employed by the accounting firm, independence is not impaired.
Things to remember:
An accounting firm’s independence is impaired when the firm maintains financial records for a federally regulated employee benefit plan and renders an opinion on the plan’s F/S. Independence may also be impaired when an accountant has employment ties to or financial interests in the plan.
Which of the following situations does not create a likely independence problem?
A. The Nicholson Accounting Firm audits LMN Corporation. Nicholson’s auditors are swamped, and the firm arranges to borrow Sally, a young auditor working for the Habber Accounting Firm, to join its LMN audit team so that it can finish in a timely manner. Sally has no direct ties to LMN, but Habber’s employee benefit plan directly owns a small number of LMN shares.
B. Sharon is a partner at the Plentiful Accounting Firm. She owns shares of DEF Corporation. Plentiful is about to acquire the Bountiful Accounting Firm. Bountiful has several attest clients, including DEF Corporation.
C. The Seminole Accounting Firm provides various consulting services to GHI Corporation, including information systems services. Seminole operates GHI’s local area network. Gator Accounting Firm plans to acquire Seminole. One of Gator’s attest clients is GHI.
D. The Vital Accounting Firm provides various consulting services to JKL Corporation, including serving as a plan fiduciary for JKL’s employee benefit plan. The Bryl Accounting firm plans to acquire Vital. Bryl provides attest services to JKL Corporation, but plans to “fire” JKL as an attest client before completing the Vital acquisition.
D. The Vital Accounting Firm provides various consulting services to JKL Corporation, including serving as a plan fiduciary for JKL’s employee benefit plan. The Bryl Accounting firm plans to acquire Vital. Bryl provides attest services to JKL Corporation, but plans to “fire” JKL as an attest client before completing the Vital acquisition.
Correct! This situation would have presented an independence problem had Bryl not terminated its attest relationship with JKL before the acquisition. Bryl need not be independent of a company that is no longer an attest client.
City needed temporary assistance preparing period-end financial records when the financial manager resigned. Chiang, CPAs, typically audited City, so City’s mayor engaged Chiang who assigned an employee to temporarily help prepare City’s basic financial records. Once the financial records were prepared, Chiang employees (a group of auditors that were not involved in the preparation of the City’s financial records) performed the audit and found the records fair and accurate. Did this present an independence problem under GAO guidelines regarding nonaudit services?
A. No independence issue exists because this was an emergency situation and Chiang, CPAs, were able to apply appropriate supplemental safeguards to help their client issue fair and accurate financial statements.
B. No independence issue exists because Chiang, CPAs, ensured the employee preparing the financial records (a nonaudit service) was prevented from auditing the financial statements.
C. An independence issue exists that is so severe that it cannot be remedied by application of supplemental safeguards.
D. An independence issue exists but could have been avoided had the employee who helped prepare the financial records left Chiang, CPAs, once the engagement was completed.
C. An independence issue exists that is so severe that it cannot be remedied by application of supplemental safeguards.
Audits of nonfederal governmental agencies should follow generally accepted government auditing standards (GAGAS) (ie, the Yellow Book). GAGAS specifically incorporates the AICPA Code of Professional Conduct (ie, the Code). GAGAS and the Code state that auditors must demonstrate both independence of mind and independence in appearance. Appropriate safeguards should be applied to avoid impairment to independence when significant threats exist.
A self-review threat can significantly impact independence. The Code states that certain self-review threats (eg, the auditor preparing documents that are then used to generate the client’s FS) are so significant that no safeguards can eliminate or appropriately reduce the threat to audit engagement independence.
(Choice A) Although the audit firm (Chiang, CPAs) helped prepare the financial records (ie, a nonattest engagement) to assist City in an emergency, an independence issue exists because the same firm later deemed those records to be fair and accurate.
(Choice B) Assigning different accountants to the nonaudit versus audit engagements with City still presents a self-review threat for Chiang, CPAs, that cannot be eliminated by safeguards.
(Choice D) Even if the Chiang employee who prepared City’s financial records left the firm after this engagement, an independence issue would exist because the F/S audited by other Chiang staff were based on that employee’s work.
Things to remember:
When the same accounting firm prepares financial records used to generate a client’s F/S and then audits those F/S, a self-review threat to independence exists and is so significant that no safeguards can eliminate or appropriately reduce it.
What are the two main types of conflict of interest for members?
A. Conflicts between the interests of two clients and between the interests of a client on one hand and the firm and/or its members on the other.
B. Conflicts between the interests of two clients and between the interests of a client and the government.
C. Conflicts between the interests of a client on one hand and the firm and/or its members on the other and between the interests of a client and the government.
D. Conflicts between the interests of a client on one hand and the firm and/or its members on the other and between a client and a nonclient.
A. Conflicts between the interests of two clients and between the interests of a client on one hand and the firm and/or its members on the other.
Correct! The two types of conflicts of interest are (a) between the interests of two clients so that the member cannot fulfill professional duties to both simultaneously, and (b) between a client and the member and/or the firm so that it would injure the client for the member to serve the interests of the firm and/or himself or herself.
(Choice C) Incorrect. Because the government is not a client in this example, the member does not owe a duty to it and therefore there is no conflict in the second option.
