MIPP - Financial Interests Flashcards
(48 cards)
is independence impaired if covered member has or is committed to acquire any direct, material or not, or any material indirect interest in an attest client
yes.
However, independence is not impaired if interests are both indirect and immaterial
define financial interest
includes ownership or an obligation to obtain ownership in equity, debt, or derivatives issued by an entity
define direct financial interest
- interest owned directly (even if managed by others)
- interest under one’s control (even if managed by others)
- beneficially owned through an investment vehicle, estate, trust or other when the beneficiary either: control intermediary, or has authority to supervise or participate in investment decision
define indirect financial interest
an interest beneficially owned through investment vehicle, estate, trust or other intermediary when beneficiary neither:
- controls the intermediary, nor
- has the authority to supervise or participate in its investment decision
define beneficial ownership
occurs when an individual or entity is not the record owner but has a right to some or all of the underlying benefits of ownership, such as to:
- direct the voting
- dispose of the interest
- receive its economic benefits
do rules about financial interests apply to covered members?
apply only to covered members, however even if a partner or professional employee of a firm is not a covered member, that person (and his or her immediate family, or any group of such persons acting together) cannot own more than 5% of client’s ownership interests without impairing independence
is independence impaired, if covered members receive or learn they will receive an unsolicited financial interests in an attest client (perhaps through gift or inheritance) that is either a direct interest or a material indirect interest
independence will not be impaired if they dispose of the interest as soon as practicable but not later than 30 days after having both knowledge of the interest and gaining the right to dispose of it, and do not participate on the attest engagement team after learning of the interest and before disposing of it
how is independence impaired with respect to mutual funds
Direct interest in MF = own shares
indirect interest in investments = <5% of diversified
Verify material indirect if:
- > 5% diversified
- owns diversified shares
unsolicited financial interests, if covered members receive or learn they will receive an unsolicited financial interest in an attest client (perhaps through gift of inheritance) that is either direct interest or a material indirect investment, will independence be impaired?
independence will not be impaired if they, dispose of interest as soon as practicable but not later than 30 days after having both knowledge of interest and gaining the right to dispose it, and do not participate on the attest engagement team after learning of the interest and before disposing of it.
general partnership - is general member’s investments in partnership or partnership’s investments direct or indirect?
a general partner has authority to influence investments, so a general partner’s financial interests in both the partnership itself and its underlying investments are direct
limited partnership - general partner’s authority
direct/indirect in
1. partnership
2. investment
general partner has authority to influence investments so a general partner’s financial interests in both the limited partnership itself and and its investments are direct
limited partner's interest in the limited partnership and in its underlying investments is... direct/indirect in 1. partnership 2. investment 3. if agent managed
direct, but usually he will not have influence over its investments so this partner’s financial interest in its investments will be indirect
if limited liability company is agent managed, then member are more like limited partners and their interests in investments are viewed as indirect unless the members have the authority to control the limited liability company or to supervise or participate in its investments
prepaid tuition plans
direct/indirect interest in
1. plan
2. investments
owners of a 529 account used to prepay tuition have a direct interest in the plan but only an indirect interest in investments. owners of such plans essentially buying tuition credits. the state has an obligation to provide the education regardless of the investments performance
savings plans
direct/indirect interest in
1. plan
2. investments
owners of these accounts have a direct financial interest in both the plan and its investments because they may decide in which sponsors 529 savings plan to invest and can determine before investing which firms the plan will invest in
trusts and estates. the fact that a covered member is asked to serve as trustee of a trust or executor of an estate… independence issue?
does not create an independence problem it an attest client’s shares are covered by the trust or estate. however there is a problem if
- covered member has ability to make investment decisions for trust or estate
- trust or estate owns or is committed to acquiring more than 10% of attest client’s ownership interest, or
- value of trust’s or estate’s ownership interest in the client exceeds 10% of its total assets
if a covered member acts as a grantor to set up a trust, it’s investments are direct financial interests if any of the following are true
- covered members has ability to amend or revoke trust
- covered member has authority to control the trust
- covered member has ability to supervise or participate in trust’s investment decisions
- underlying trust investments ultimately will revert to covered member as grantor
if a covered member is a beneficiary of trust, then covered member’s interest is direct/indirect in
- plan
- investments
direct and his/her interest in trust’s underlying investments is indirect, unless covered member controls trust or supervises or participates in its investment decisions, in which case interest becomes direct
blind trust - because investments ultimately will revert to grantor who typically retains right to amend or revoke, both blind trust and its underlying investments are considered to be…
direct financial interests of the grantor
is covered member’s independence impaired if he participates in employee benefit plans sponsored by attest client
independence is imapired if a covered member participates in EBP that is an attest client or sponsored by one
what are two independence exceptions for covered members with respect to EBP
- when covered member is employee of a gov org that sponsors ebp and covered member is required by law to audit the plan, then it is acceptable to do so if all apply:
- covered member is required to participate in plan as condition of employment
- plan is offered to all employees in comparable positions
- covered member is not director, officer, employee, promoter
- covered member has not influence or control over investment strategy, benefits or other mgt activities - when covered member formerly was associated with attest client but is no longer, then independence is not impaired
firms may maintain depository accounts at a bank that is attest client if they
conclude the likelihood is remote that the bank will experience financial difficulties
individual covered members may maintain depository accounts in attest client if any of three conditions are met
- balance in depository account is fully insured
- any uninsured amounts were not material to covered member’s worth
- if uninsured accounts are considered material, they are reduced to an immaterial amount within 30 days of becoming material
brokerage accounts - covered member’s brokerage account at an attest client broker dealer would - impair independence?
would not impair independence only if both apply:
- attest client’s services were rendered under attest client’s normal terms, procedures, and requirements
- any covered member’s assets subject to to risk of loss are immaterial to covered member’s net work
- in determining risk of loss, the questions is not whether the assets’ market value might decline but whether the client might become insolvent or commit fraud. protection by regulators and insurance are relevant factors in determining risk of loss
is an insurance policy a financial interest?
insurance policy is not a financial interest unless it offers an investment option
- if there is an investment option, there would still not be an independence problem if covered member bout policy under normal terms and conditions, unless
- covered member had the ability to select policy’s underlying investments
- covered member had the authority to supervise or participate in investment decision and covered member invested in attest client
