What engagements are covered by the AICPA Code of Professional Conduct?
- Covers all professional engagements and is the minimum standard of conduct
- Member should additionally follow specific standards for a specific engagement
What must an accountant have under the AICPA Code of Professional Conduct?
- No Conflicts of Interest
- No known misrepresentations of facts
- No outsourcing of judgment
What are threats and safeguards to independence?
- Safeguards > Threats - Independence
- Threats > Safeguards - No Independence
What are the threats to independence?
- Self-Review (Auditing own work)
- Advocate of the Client
- Adverse Interest (Lawsuit against Client)
- Too familiar with Client - could impair the appearance of Independence to public
- Undue influence on Client - On Board of Directors- exception being an Honorary board position
What are the Safeguards to independence?
Offset the threats
Safeguards are created by:
- Legislation (SOX)
- Client (Audit Committee)
- Accounting Firm (Policies)
What are the characteristics of a Covered Member?
- On the engagement team
- have Significant influence on Audit such as: Reviewing Partner
- Managing Partner in CPA Firm
- Firm Personnel who does more than 10 hours of non-attest work (Income Taxes)
- Partner sharing office with another Partner who oversees an engagement
- Financial Interest in Client by Covered Member (Auditor on Engagement)
What are the requirements for a Covered Member?
- No direct financial interest
- No Material indirect financial interest
- Firm personnel who are not Covered Members cannot own more than 5% of stock
- Covered Member's immediate family cannot own more than 5% of stock or be employed in Key positions.
- If Covered member is aware of this- it will impair independence.
- Cannot make management decisions.
- All requirements apply during the period of the professional engagement- and as long as they are a client.
What happens when a Covered Member disagrees with a Supervisor?
- If Supervisor's position is still GAAP/GAAS- defer to Supervisor
- If Supervisor's position is not GAAP/GAAS, report to higher levels of management
- If management ignores you- consider leaving the firm
When is independence required?
- Attestation Engagement
What are the requirements for Non-attest engagements?
- Agreement must be in writing.
- Independence not required
- Must state if you are not independent
Which standards apply to consulting engagements?
Statements on Standards for Consulting Services (SSCS)
- Due Care
- Planning & Supervision
- Obtain Sufficient Data
- Serve Client Interest
- written or oral agreement
- communicate with client.
List some common consulting engagements.
- Advisory Services
- Transaction Services
- Management Consulting
- Implementation Services
What is the rule concerning contingent fees for a covered member?
- Not allowed if Member also performs services where independence is required
- Commissions or referral fees for Covered Members are not allowed
- Example - Audit firm gets a commission for recommending to Client that they implement a new A/P System...NOT Allowed
- If a firm performing non-attest work doesn't also perform Covered Member services (aka - Independence not required)- then Firm can get a commission on referring products/services- but they must disclose to the ClientTax Preparation - Payment according to refund amount is disallowed
When are contingent fees allowed?
When fees are structured relative to judicial proceedings.
IRS audit- or filing an amended tax return subject to tax case with a different taxpayer.
How should recommendations and suggestions by a covered member to a client be handled?
- Client must carry them out - covered member cannot perform management functions.
- Client must assign someone of competence to oversee the non-attest engagement and CPA must be satisfied that this has occurred.
What are the requirements for Personal Financial Planning Engagements?
- Must have definite objectives
- Must have specific procedures planned
- Must have a basis for recommendations
- Must have recommendations communicated
- Must have action steps to implement
When is a GAAP departure appropriate?
Departure from GAAP is appropriate if GAAP would cause Financial Statements to be misleading
- then it must be explained/disclosed.
When may a covered member disclose confidential information?
Member may disclose confidential info when client isn't following GAAP
If they receive a subpoena
- CPAs are not Attorneys- so there is no CPA-Client privilege
What is the effect of not returning all client-provided documents upon request?
This is an act discreditable.
You MUST return all documents the client gives you even if they don't pay their bill.
- If you create a document- however- like a work paper- you are not required to give the client a copy of papers you created if they haven't paid their bill
- They are the firm's work papers- but are still confidential!
What are the rules with respect to CPA firm names?
CPA firm names must not be misleading.
- If partner dies- remaining partner has two years to change name if partnership dissolved.
- If partner dies and more than one partner still remains (i.e. 1 dies and you still have 2 or more partners...you don't need to change the name)
- All Partners/Shareholders must be members of the AICPA in order to hold themselves out as members of the AICPA.
- Non-CPAs can be owners- but 2/3 of Ownership must be CPAs.
- Non-CPA owner must not be involved with the accounting- and is still bound by AICPA code of conduct- must maintain CPE requirements and have Bachelor's degree.
What is the consequence of disclosing CPA exam material post-1996?
It is an Act Discreditable.
What are the consequences for a CPA who commits an Act Discreditable?
- Licenses are granted at the State level
- If State revokes certificate- AICPA Ban
- Felony Conviction- AICPA Ban
- Prepares Fraudulent Tax Return- AICPA Ban
- Intentionally failing to file return- AICPA Ban
- SEC can get involved with discipline
What are the functions of the PCAOB?
- Monitors CPA Firms who audit SEC clients
- All SEC Audit firms must register
- Issues standards for firms to follows, usually stricter than AICPA standards
When is independence impaired under PCAOB standards?
- If Client pays a contingent fee (i.e. based on outcome)
- With Marketing or Planning engagements
- Aggressive Tax Strategies
- Firm does tax work for Client employee involved with audit oversight or their family
Who must approve non-audit work performed by a firm for a client?
- Client Audit Committee must approve non-audit work performed by Firm
- Firm must disclose any potential independence issues to Audit Committee
Which organization is in charge of determining if federal funds are being misappropriated?
GAO - Government Accountability Office
What rules must auditors follow for governmental audits?
Auditors must follow both GAAS and GAS aka the Yellow Book
- Materiality threshold is usually lower
- More detail is required on working papers
- More stringent CPE rules and requirements - 24 hours of continuing education must be related to governmental auditing every 2 years
- Compliance with Regulations is a requirement of the Audit Report