Ethics, Professional Responsibilities, and General Principles Flashcards
(125 cards)
1
Q
What should a member do if, after discussing a disagreement with superiors, she believes the matter is serious and is not going to be resolved as it should?
A
1.Determine whether the organization’s internal policies have any additional requirements for reporting differences of opinion. 2.Determine whether she is responsible for reporting to third parties. 3.Consult legal counsel. 4.Document the facts, principles, and conversations.
2
Q
What are two circumstances that do not justify departure from generally accepted accounting principles (GAAP)?
A
1.An unusual degree of materiality 2.Conflicting industry practice
3
Q
Under what two circumstances may an auditor depart from generally accepted accounting principles (GAAP)?
A
- New legislation 2. New form of business transaction
4
Q
Name the four categories of records in the records request rules.
A
1.Client-provided records 2.Member-prepared records 3.Member’s work products 4.Working papers
5
Q
How long do accountants have to produce records after a client has requested them?
A
45 days, absent unusual circumstances
6
Q
Which type of records should be promptly delivered to the client even if the client has not paid its bill?
A
Client-provided records
7
Q
Which type of record necessarily belongs to the member and almost always need not be produced upon request?
A
Working papers
8
Q
List four circumstances when work products may be withheld from a requesting client.
A
1.Fees are due for the specific work product. 2.The work product is incomplete. 3.To comply with professional standards. 4.If threatened or outstanding litigation exists.
9
Q
What two conditions must be present for a member’s spouse to be able to charge a commission or referral fee in connection with the member’s attest client?
A
- The spouse’s activities are separate from the member’s. 2. The member is not significantly involved in the spouse’s activities.
10
Q
List at least two exceptions to the general rule that members may not disclose client confidences without specific consent of the client.
A
Any of these exceptions: 1.To comply with valid summons or subpoena 2.As part of AICPA or state review of a member’s practice 3.To initiate or respond to a complaint from AICPA or state board 4.To initiate, pursue, or defend a lawsuit
11
Q
Besides their own, whose advertising might members be responsible for?
A
That of third parties for whose customers or clients the member renders services
12
Q
When outsourcing work, what two things should a member do before disclosing confidential information to a third-party service provider?
A
1.Contractually bind the third-party service provider to maintain confidentiality and ensure that the third-party service provider has proper procedures in place. 2.Obtain specific consent from the client for the disclosure.
13
Q
When is it not permissible to disclose the name of a member’s client?
A
When to do so would disclose confidential information
14
Q
Name three characteristics that firms might share if they are in a network.
A
One or more of these: 1.Common control among the firms 2.Profits or costs 3.Common business strategy 4.Significant portions of professional resources 5.Common quality control policies and procedures
15
Q
A firm may not designate itself as “Members of the AICPA” unless what condition applies?
A
All its CPA owners are members of the AICPA.
16
Q
Who in a CPA firm may use the designation “partner”?
A
Only partners
17
Q
When a member has invested in a separate business providing accounting services, what is the key determinant of whether the separate business’s owners and professional employees must all comply with the code?
A
Whether the member controls the separate business
18
Q
If the code and its interpretations do not resolve an independence issue, what should a member do?
A
Apply the Conceptual Framework.
19
Q
During which two time periods must a firm be independent of an attest client?
A
1.The period covered by the financial statement 2.The period of the professional engagement
20
Q
In which four areas are threats to independence concentrated?
A
1.Financial interests 2.Family relationships 3.Employment relationships 4.Nonaudit services
21
Q
An entity that can control a client and an entity that a client can control are examples of what?
A
Affiliates
22
Q
Fill in the blank: Even if an auditor has appropriate relationships with an attest client, it may run into trouble if it has financial, consulting, employment, or family relationships with __________?
A
An affiliate of the client
23
Q
What happens if an attest team receives significant help from employees of another, nonindependent firm?
A
Independence is impaired.
24
Q
A member may not sign a current-year audit report if the client has not paid fees due for how long?
A
One year.
25
Fill in the blank: Engagement letters may allow the use of __________ to resolve disputes?
Alternative dispute resolution
26
What can covered members do regarding a reissue of an audit report for a client for whom they are no longer independent?
1.Make inquiries of successor auditors. 2.Read subsequent financial statements. 3.Undertake other procedures necessary to assess the effect of subsequently discovered facts on the original report.
27
Auditors may not hold a client harmless from what?
Liability arising from fraud by the client's management
28
What exception applies when a member can sign a current-year audit report even though the client has not paid its bill for more than a year?
The client is in bankruptcy.
29
Define "financial interest."
Ownership, or an obligation to obtain ownership, in equity, debt, or derivatives issues by an entity
30
What types of financial interest do not impair independence?
Indirect and immaterial.
31
When does beneficial ownership occur?
When an individual or entity is not the record (legal) owner but has a right to some or all of the benefits underlying ownership, as in the beneficiary of a trust or an estate
32
What types of financial interests impair independence?
-Direct and material -Direct and immaterial -Indirect and material
33
If a covered member learns that he has inherited the securities of an attest client, what should the member do?
Sell the securities as soon as practicable but definitely within 30 days
34
Under what two conditions will a covered member not lose independence when she learns she has been named in a will to receive securities of an attest client when her aunt dies at some unspecified time in the future?
1.When she is not a team member 2.When the amount of securities is not material to her.
35
What is the ownership cutoff that will disqualify a firm if its partners and professional employees who are not covered members own stock in an audit client?
5%
36
Is a covered member more or less likely to have an independence problem if he owns shares in an undiversified mutual fund rather than a diversified one?
More likely
37
Allocated shares held in an employee stock option plan are considered indirect interests of the covered members participating in the plan until what happens?
The members gain the right to dispose of the shares; then the shares become direct interests.
38
If covered members or their immediate family members participate in their retirement fund's investment decisions, their interest in underlying securities is likely to be what?
Direct
39
A covered member who owns shares in a mutual fund has what kind of interest in the fund?
Direct
40
A covered member who owns shares in a mutual fund has what kind of interest in the fund's underlying securities?
Indirect
41
Under what three circumstances could a covered member get into independence trouble when asked to be executor of an estate?
1.The covered member has authority to make investment decisions. 2.More than 10% of the estate's assets are in the client's stock. 3.The estate owns more than 10% of the client's stock.
42
A general partner's interest in the investments of the general partnership is what?
Direct
43
Why are the owners of 529 accounts used for savings deemed to have a direct financial interest in both the plans and their investments?
Because they can determine before investing which firms the plan has invested in
44
Name two conditions under which a covered member who as grantor sets up a trust would have direct interests in its underlying investments.
Any two of these conditions: If: 1.The covered member has the ability to amend or revoke the trust. 2.The covered member has the authority to control the trust. 3.The covered member has the ability to supervise or participate in the trust's investment decisions. 4.The underlying trust investments ultimately will revert to the covered member as grantor.
45
What two forms of management do limited liability corporations tend to have?
Member management and agent management
46
Name the three safeguards necessary to ensure that joint participation with an attest client in a joint venture will not impair independence.
1.Separate agreements govern participation of the firm and the client. 2.Neither assumes responsibilities for the other's activities or results. 3.Neither has the authority to act as the other's agent or representative.
47
From which entities should a covered member generally not borrow?
An attest client, its officers and directors, or any 10% shareholder
48
Name two types of loans a covered member may have without impairing independence.
Any of these: -Auto loans collateralized by the vehicle -Loans fully collateralized by the cash surrender value of insurance policy -Passbook or similar collateralized loans -Credit card or overdraft amounts up to $10,000
49
Which kind of real estate lease is most likely to lead to an independence problem?
Capital leases
50
What is a "key position" that an immediate family member may not occupy with an attest client?
A position with: (1) primary responsibility for significant accounting functions that support the financial statement; (2) primary responsibility for preparing the financial statement; or (3) ability to exercise influence over contents of the financial statement (such as directors, C-level officers, director of internal audit, or similar positions)
51
Under what conditions will a financial interest of a close relative of a team member impair independence?
If either the team member knows or has reason to know the financial interest is material to the close relative, or if the financial interest enables the close relative to exercise significant influence over the attest client.
52
May a close relative of another partner in the office hold a key position with an attest client?
No.
53
Which type of covered member has no restrictions on close relatives?
10-hour people
54
Immediate family members cumulatively may not own more than what percentage of an attest client?
5%
55
Name three "close relatives."
Parents, siblings, and nondependent children
56
If an officer of an attest client leaves the client and joins the firm, which position might the person occupy that would inevitably impair independence?
Team member or someone in a position to influence
57
Name three prohibited positions that partners or professional employees may not hold with an attest client.
Any of these positions: director, officer, employee, promoter, underwriter, voting trustee, trustee for any pension or profit-sharing trust of the client's, or any equivalent position
58
Who in an attest firm may not hold prohibited employment positions with an attest client?
Partners or professional employees
59
If a partner or professional employee serves on a citizen's advisory committee studying possible changes in the form of a county government, may the firm still audit the county?
Yes.
60
Under what condition may a partner or professional employee be a director of an organization that receives funding from a foundation that exists solely to raise funds for the organization and audit the foundation?
The directorship is clearly honorary.
61
When do independence concerns arise when an attest client employee joins an attest firm?
When the person was employed as an officer, director, promoter, underwriter, voting trustee, or trustee for a pension fund or profit-sharing fund of the client (or an equivalent position)
62
Under what conditions might a director leaving an attest client join a firm as an other partner in the office or a 10-hour person?
The director dissociates fully from the client.
63
Which three safeguards need to be in place so that a partner or professional employee may serve as a director of a nonprofit?
1.The position is clearly honorary. 2.The position is represented as honorary. 3.The partner or professional employees may not vote or take a management role.
64
If a covered member learns that a person in a position to influence has received an offer from an attest client, what should he or she immediately do?
Alert the firm
65
Which types of covered members are limited in their ability to consider going to work for an attest client?
Team members and those in positions to influence
66
What time period is important in determining whether a firm employee may go to work for an attest client in a key position?
One year
67
What two things should a person in a position to influence do after receiving an offer of employment from an attest client?
1.Promptly report the offer to his or her firm. 2.Leave the engagement until a decision is made.
68
What type of job with an attest client creates an independence problem for a firm when taken by one of its partners or professional employees?
A "key position."
69
Member of a Trade Association-Independence is impaired when.
A covered member belongs to a trade association that is an attest client. If a partner or professional employee is employed by or associated with a trade association in an important role (director, trustee, etc.), independence is again impaired.
70
Give an example of a common interest realty association
Any of these: condominium, cooperative, homeowners' association, planned unit development, timeshare development
71
What is the test to determine whether gifts impair independence?
Clearly insignificant (to the recipient)
72
Which types of covered members may receive gifts from an attest client without particular worry about independence?
Others partners in the office and 10-hour people
73
Can litigation by nonshareholder third parties create independence problems?
Yes
74
What kind of threat to independence can be created by litigation filed by an attest client against its outside auditor?
Adverse interest threat
75
What is the test to determine whether entertainment impairs independence?
Reasonable in the circumstances
76
Name two kinds of communications between auditors and their clients that would not be considered nonaudit services.
Any communications about: (1) the client's selection and application of accounting standards or policies and financial statement disclosure; (2) the appropriateness of the client's methods used in accounting and financial reporting; (3) adjusting journal entries; and (4) the form or content of the financial statement.
77
Fill in the blank: In performing nonaudit services, members must never assume attest clients' \_\_\_\_\_\_\_\_\_\_\_\_\_\_.
Management responsibilities
78
Briefly summarize the general requirements that must always be met before members may perform nonaudit services for attest clients.
The client must agree to assume all management and evaluative responsibilities. The member must not do so. The member and client must establish these agreements in writing.
79
Why should covered members monitor the total amount of their nonaudit services?
To ensure that it doesn't become so extensive that it constitutes performing a separate service, even though no specific boundaries in any area have been breached
80
Name two nonaudit services that a member may perform for an attest client if the general requirements are met.
Any of the following: (1) provide advice, research materials, and recommendations to assist management in making decisions; (2) attend board meetings as a nonvoting advisor; (3) interpret financial statements, forecasts, and so on; or (4) provide management with advice regarding its potential plans, strategies, or relationships.
81
May a member serve as a benefit plan fiduciary for an attest client?
No.
82
May a member post client-coded transactions to an attest client's general ledger?
Yes.
83
May a member present business risk considerations to the attest client's board of directors on management's behalf?
No.
84
May a member assist managers of an attest client in analyzing the effects of proposed transactions?
Yes.
85
May a member hire or terminate an attest client's employees?
No.
86
May a member serve as an expert witness for an attest client in litigation not relevant to the audit?
No.
87
May a member design, develop, install, and/or integrate an attest client's information system if that system is unrelated to the client's financial statements and accounting records?
Yes.
88
May a member determine which, if any, recommendations for improving internal control systems should be implemented by an attest client?
No.
89
May a member execute transactions to buy or sell securities for an attest client?
No.
90
May a member sign and file a tax return on behalf of an attest client's management if authorized by management?
Yes.
91
What is a "member in business"?
An accountant who works for a company or a government agency (such as an internal auditor) who is not working as a member in public practice
92
Where do the Conceptual Framework's safeguards come from regarding members in business?
1.The profession, legislation, or regulation 2.Their employer
93
The code sets out seven threats for members in public practice but only six for members in business. Which is not a threat for members in business?
Management participation threat
94
In interacting with their firm's external auditor, what should members in business do?
Be candid and not mislead
95
Which area of professional responsibility worries members in public practice but not members in business?
Independence
96
An undue influence threat to integrity and objectivity would arise if MIBS were pressured to:
1.Become associated with misleading information, or 2.Deviate from company policy, or 3.Change a conclusion regarding an accounting or tax provision, or 4.Hire an unqualified individual
97
What is the main thing that "other members" are expected to do?
Not commit discreditable acts
98
Give two examples of "other members."
An unemployed member A retired member
99
What does FROR mean?
Financial Reporting Oversight Role
100
Who are FRORs?
People who can or do exercise influence over the contents of financial statements or anyone who prepares them. Ex:directors, CEOs, presidents,CFOs, COOs, general counsel, treasurers or other equivalent positions
101
Types of tax transactions that may not be serviced for a public company audit client.
Confidential, and Aggressive
102
Forms of compensation that get a public company audit firm in trouble.
Contingent fees, and commissions
103
List the three steps to obtaining approval from audit committee to provide permissible NAS.
1.Describe 2.Discuss 3.Document
104
Number of companies audited to require annual PCAOB inspection for a firm.
100
105
What does the acronym "GAO" stand for?
Government Accountability Office
106
What does the acronym "AO" stand for?
Auditing organization
107
List the types of audit impairments that are the focus of the Government Accountability Office.
-Personal impairments -External impairments -Organizational impairments
108
What audits do the Government Accountability Office guidelines apply to?
Of: -Government entities -Entities that receive government grants
109
What requirements does the Government Accountability Office outline regarding the assessing of impact that nonaudit services have on the audit?
-Auditing organizations must not provide nonaudit services that involve performing management functions or making management decisions.nd -Auditing organizations 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.
110
What general issues do the Government Accountability Office address?
\>Independence \>Ethical principles -Public interest -Integrity -Objectivity \>Proper use of government information, resources, and position \>Professional behavior
111
What does the acronym "ERISA" stand for?
Employee Retirement Income Security Act
112
What does the acronym "EBSA" stand for?
Employee Benefits Security Administration
113
What two primary independence concerns do the Department of Labor independence rules address?
1.Financial ties 2.Employment ties
114
What does the acronym "DOL" stand for?
Department of Labor
115
What is the auditor's primary role?
To provide an impartial (independent) assessment of the reliability of management's financial statements
116
Define "generally accepted accounting principles (GAAP)."
The standards by which the quality of the financial statements is judged
117
What is meant by generally accepted auditing standards (GAAS) under the clarified auditing standards?
The Statements on Auditing Standards issued by the AICPA's Auditing Standards Board
118
Who is primarily responsible for the fairness of an entity's financial statements?
Management. The financial statements are the representation of management.
119
List some benefits of an audit to a private company (also known as a nonissuer).
-More favorable cost of capital -Insights into adequacy of internal controls -Benchmark an entity's performance with other similar entities
120
In the U.S., who issues auditing standards applicable to audits of governmental entities?
U.S. Government Accountability Office (GAO)
121
In the U.S., who issues auditing standards applicable to audits of public companies (also known as issuers)?
Public Company Accounting Oversight Board (PCAOB)
122
In the U.S., who issues auditing standards applicable to audits of private companies and other entities known as nonissuers?
AICPA's Auditing Standards Board
123
List the three objectives of Internal Control
1.Reliability of Financial Reporting 2.Operational Efficiency/Effectiveness 3.Compliance with Law and Regulations ~We have IC so that our financials are reliable, our operations efficient, and so we don't go to jail.~
124
List the five components of Internal Control
1. Control Environment 2. Risk Assessment 3. Control Activities 4. Information and Communication 5. Monitoring
125
What are the policies and procedures that help management carry out Control Activities in each transaction cycle?
S-C-A-R-E S-Segration of Duties C-Controls (Physical Controls) A-Authorization R-Reviews (Performance Reviews) Budget vs. Forecast E-EDP/IT (Information Processing)
