Flashcards in Professional Responsibilities Deck (77):
What are broad categories of safeguards that mitigate or eliminate threats to independence?
- Safeguards created by the profession, legislation, or regulation
- Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements
- Safeguards implemented by the attest client
Sarbanes Oxley Act
- Strengthen penalties for corporate fraud
- CPA consulting activities are restricted by Sox
- Sox created the PCAOB
- Sox eliminates a significant portion of the accounting profession's self regulation, largely through responsibilities assigned to the PCAOB
Who is considered a covered member?
-Individuals on the audit team, all partners in the practice office in which the audit is performed, overall partner in charge of firm are covered members
Note partners in another office who do not work on the audit are not considered covered members.
-no partner in the office may have a direct financial interest in the client
- a covered member's spouse may be employed by an attest client provided he/she is not employed in a key position
- partner in charge of the audit practice could influence the engagement and is a covered member
- a manager that provides ten hours or more of nonattest services to the client is considered a covered member (ex: tax services)
When can a CPA disclose confidential client info without consent?
- a review of the CPA's professional practice by a state CPA society
- an inquiry from the professional ethics division of the AICPA
- a court ordered subpoena or summons
Note that a CPA cannot disclose info the IRS without client's consent.
When can a commission be received?
A commission/contingent fee may be received providing it is not from a client for which the CPA provides any of the following services 1) audit or review of FS, 2) compilation of FS expected to be relied upon by a third party, 3) examination of prospective financial info. Also, a contingent fee cannot be accepted for preparing an initial or amended tax return.
What roles for the auditor are not allowed by the AICPA Code?
Cannot serve as promoter of a client's securities, board member, or general counsel.
The auditor CAN serve as an advisor to client's board of trustees and not be in violation.
What advertising is allowed and not allowed under rule 502?
Allows - advertising of services offered and fees, experience, and % of staff with CPA certificates
Not allowed - advertising including an indication that the firm has a close relationship with several tax court judges
What auditing standards does the Department of Labor follow?
DOL conducts most of its financial and performance audits following Government Auditing standards, including audits of compliance with laws, evaluation of economy and efficiency of operations, and evaluation of effectiveness in achieving program results.
DOL administers the audit requirements of ERISA (Employee Retirement Security Act of 1974) with respect to employee benefit plans.
DOL does not tie to Sox or GAAS
DOL rules apply to independence from the plan and the plan sponsor.
Who owns the CPAs working papers?
The working papers are the sole property of the CPA and can be made available to third parties under certain cases (eg litigation)
What is the CPA allowed to retain until paid?
If fees for the engagement are unpaid, the CPA can retain supporting records which he prepared but cannot keep client prepared records (eg the GL).
For the PCAOB and SEC, what if the auditor prepares the FS AND audits them for a client?
Auditor is not independent.
What services can and cant be provided for a nonissuer attest client?
CAN be done and still maintain independence - perform data processing, record transactions approved by mgmt, prepare FS
CANNOT be done - mgmt functions such as signing payroll checks - impairs independence
INTL: When are contingent fees acceptable?
Only if appropriate safeguards are established to prevent impairment of independence
INTL+AICPA: Disclaimer of opinion allowed if multiple properly disclosed uncertainties in the FS?
Both allow disclaimer of opinion in those cases
What are types of threats to independence?
- Self review, familiarity (close relationship with client), undue influence, financial self-interest (financial interest in client)
Note that public interest threat is not a threat.
How can an auditor exercise due professional care?
The principle of due care requires the member to observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge responsibility to the best of the member's ability. Ex: critically review the judgment exercised by those assisting in the audit.
Note that an auditor is not required to examine all corroborating evidence supporting mgmt's assertions, but to examine evidence on a scope basis based on consideration of materiality and level of risk assessed.
When is an auditor's independence impaired?
Interpretation 101-5 prohibits joint closely held investments that are material to the auditor.
Immaterial indirect financial interests are allowed
Auto loans collateralized by auto are allowed
Mortgage loans that existed at Jan 1, 1992 were grandfathered and are not considered an impairment of the auditor's independence.
What actions by a CPA are discreditable to the profession?
Not allowed - discriminatory employment practices, commiting felony, fraud - knowingly signing a false tax return
CPA is allowed for valid business reasons to refuse a request by another CPA to allow review of working papers.
INTL: When must a letter of audit inquiry be sent to the client's lawyer?
Under intl audit standards, a lawyer's letter is only required when the auditor assesses a related risk of material misstatement.
Disclosure of info
CPA is prohibited from disclosing confidential info learned in the course of an engagement. Cannot tell another client about that client - eg if going concern issues.
When providing what services does a CPA have to be independent in fact and appearance?
An accountant need be independent only when providing attestation services. An accountant need not be independent to provide compilations (eg forecast) or prepare tax returns.
When can a CPA firm disclose the names of its clients without the client's permission
A CPA may disclose client names unless disclosure releases confidential info, such as info that would suggest that the client may be experiencing financial difficulties.
Who issues International Standards on Auditing
They are issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants.
Which standards require the confirmation of AR
PCAOB and ASB standards require confirmation, IAS does not. IAS leaves it to auditor's judgment as to whether it is performed.
What are the General Accountability Office (GAO) audits?
GAO's mission is in support of Congress of USA. GAO conducts operational audits and reports results to congress.
They often include standards beyond those of GAAS.
GAO standards do not allow personnel working on nonattest engagements to also work on the audit.
Based on the Yellow book
What family relationships can impair CPA's independence?
Ex: if father is in key position
It is ok if cousin has immaterial investment or close relative has material but CPA is not aware.
Board consists of 5 members. SEC oversees the PCAOB.
The board has the responsibility to discipline CPA firms that audit public companies and the responsibility to develop independence standards for CPA firms that audit public companies.
Compared to the AICPA code of professional conduct, the rules of the International Code of Ethics for Professional Acountants..
Has fewer definitive prohibitions, international standards are less restrictive.
Sox prohibits the performance of which services for audit clients by auditors of public companies?
Prohibits bookkeeping, appraisal services, and mgmt functions.
However, tax prep services are not prohibited.
High risk areas are emphasized.
Inspections may include consideration of such aspects of practice mgmt.
What happens if accountant has an direct financial interest in the client
Independence is considered impaired if any direct financial interest in the enterprise is acquired so accountant cannot perform review or audit.
When can a member disclose confidential client info?
- A member may disclose client info in conjunction with arbitration proceedings relating to the client, to a professional liability carrier, may use a records retention agency.
Note that a member may NOT disclose client info in conjunction with a bankruptcy.
What are the three types of impairments in GAO standards?
Independence standards of GAO have impairment by personal, external, and organizational.
When is it unethical when auditor has client records?
Retention of client records after a demand is made for them is considered an ethical violation.
What does the Code of Professional conduct require objectivity and freedom from conflicts of interests in?
In performing of ALL services (incl all professional services)
What do ISA apply to?
Apply to publicly traded companies, private businesses, AND govt entities. (not just foreign publicly traded companies)
What can result in automatic expulsion of a CPA from the AICPA?
The CPA certificate is revoked by state board
CPA is convicted of felony
CPA intentionally did not file his personal tax return as required by federal law
What is not a violation of ethical standards?
All not violations
In tax matters, fees can be determined based on the judicial proceedings - are not regarded as contingent.
A CPA can disclose confidential info when selling his practice to another CPA.
CPAs are expected to modify their report in appropriate situations. - ex: issuing modified report explaining failure to follow a govt regulatory agency's standards when conducting attest services for a client
In which standards are section titles included in audit report?
Section titles are included in IAS but not in PCAOB format audit reports.
What are examples of ethical violations?
If fees charged are false, misleading, or deceptive.
Omission of a caution statement as to achievability on forecasts.
Audit fee payment if late - when is deadline
Pmt is required prior to issuance of the subsequent ear audit report.
ISA allow the audit opinion to assert that the FS...
present fairly OR give a true and fair view
What are ethical violations
1 - purchase another CPA practice and charge % of fees accruing from clients over 3 years
2 - receive a % of amounts invested by clients in a tax shelter with client approval
3 - has CPA firm and is president of corp that provides data processing for public
4 - formed an association with 2 other CPAs and called it Adam, Betts, and Associates
1 - is acceptable - this contingent pmt is not prohibited
2 - contingent fees may NOT be received for any services provided to audit clients
3 - Violation as CPA participates in a separate business which offers clients services rendered by CPAs
4 - Can confuse public as to the nature of the actual relationship - PROHIBITED
What is the time horizon for a going concern consideration under IAS?
ISA standard - At least 12 months from the date of the audit report NOT from date of FS
Under Sox what does auditor give opinion on for an integrated audit?
Includes both an opinion on FS and internal control over financial reporting.
When is independence impaired under AICPA and SEC?
Consider example where CPA posted GL and maintained financial records of corp. He has recorded JEs and made closing entries.
SEC considers independence impaired when a CPA posts the GL. AICPA does not consider independence impaired.
What investment by a CPA in a corporate client is an indirect financial interest?
An investment held through a regulated mutual fund - indirect investment when stock of company is in fund.
Note that an investment held through participation in an investment club represents a direct financial interest as does an investment held in a blind trust or retirement plan.
Which body issues which standards?
AICPA Auditing standards board - statements on auditing standards
International Auditing and Assurance Standards Board - International Standards on Auditing (ISAs), note there is also a series titles International Standards on Assurance Engagements.
What is a violation regarding client confidential info?
-Releasing financial info to a local bank with the approval of mail clerk
- Allowing PCAOB inspector to review working papers without client permission
- Responding to an enforceable subpoena
- Faxing a tax return to a loan officer at the request of the client
Only the first one is a violation. Need to have approval of mgmt, a mail clerk is not sufficient.
What defines the auditor's responsibility to the profession?
The AICPA Code of Professional Conduct outline the profession's rules of conduct and auditor's responsibility to the procession.
Federal laws only outline auditor responsibility to the public.
Note that the Statements on Auditing Standards (SAS) are interpretations of GAAS.
The principles AND rules of the code of professional conduct and the interpretations all provide guidance to CPAs in meeting their professional obligations.
When must a CPA firm have an annual inspection from the PCAOB?
CPA firms that audit more than 100 issuers per year must have an annual PCAOB inspection.
When is CPA independence impaired?
When there is a material indirect financial interest or a direct financial interest, it is impaired.
Note that social matters would not impair such as membership to a country club.
What must a CPA firm do before it can participate in the prep of an audit report of a company registered with the SEC?
CPA firm must register with the PCAOB. Note membership in the AICPA, FASB and SEC do not register CPA firms.
Who can be engaged to do the work of governmental auditing?
There are designated govt auditors at local, state, and federal levels that do govt audits.
CPAs may also go them. If they do, 24 of 80 hours of the continuing education requirement every 2 years must related to govt auditing.
What do International Standards on Auditing require that US does not on audit reports?
IAS require identification of the location of the auditor's office that performed the audit in the audit report.
Sox: what are rules on retention and partner in charge?
Audit working papers are retained for 7 years
Partner in charge of audit is limited to 5 years
PCAOB - how many board members? requirements?
Responsible for which standards? What inspection results are pubic/not?
There are 5 board members, only 2 can be CPAs.
Responsible for standards of attestation, audit, QC, NOT accounting.
Their inspection results are made public with the exception of the CPA firm's QC results
When can CPAs depart from GASB>
Only when results of the standard would be misleading such as new legislation and a new form of business transaction.
What should CPA do if they disagree with supervisor on a significant accounting matter?
Require that accountants consider consulting legal counsel, determining other communication responsibilities, and documenting his understanding. Should also consider whether additional requirements exist under his firm's internal policies.
What impairs independence?
Close relative working for the client
A gift of a token amount does not impair
Preparing tax return is not a service that impairs
A joint financial investment must be material to impair, and this would generally not occur with respect to a retirement plan
When does a loan from client not impair independence? CPA obtains loan in June 2008 and pays in full in Dec 2009 when client asks to audit on April 2009 for year end Dec 2009.
Independence was not required at the time the loan was obtained, and since it is fully secured, it is grandfathered. If it was only fully secured, it would impair.
International Auditing Standards
Do not require an audit of internal control
Do not allow reference to division of responsibilities in the audit report
Are based on a risk assessment approach
Do not require obtaining an attorney's letter
Audit report modification for a change in accounting principles is not required
Audit reports must include the location where the auditor practices (city, country)
What is CPA allowed to provide a) where independence required, b) where independence not required c) not provide
a) independence reqd - audit, review, opinion on following basis other than GAAP, agreed upon procedures, limited or reasonable assurance
b) not required - compile, calculate taxes and fill out tax forms, ex: design a new payroll system and base billings on their savings for next 3 years
What is allowed and not allowed for CPA to provide?
Allowed - can implement an off the shelf accounting package as well as audit for non public, can also prepare corporate tax return as well as audit, can prepare bookkeeping services (if does not prep/post/determine JE, authorize transactions, prepare/modify source docs), can provide financial info systems design and implementation assistance if no attest services for that company
Not allowed - providing actuarial services related to certain liabilities as well as auditing for public and non public, cannot provide tax planning for corporate executives of audit client, cannot serve on board of directors of company even if no attest services are provided (public company)
Link the standards to what they address
Code of Professional Conduct (on whether a contingent fee may be billed to a client, if an investment of a CPA impairs his independence with client)
PCAOB - for audit of public company
Statements on Auditing Standards - interim review of quarterly FS of nonpublic audit client
Statements on QC standards - enrolled in practice monitoring system
SSARS (accounting and review) - nonpublic review or compilation
Statements on Standards for Attestation Engagements (SSAE) - examining financial forecast, reporting on client pro forma FS
Statements on Standards for Consulting Services - advisory services engagement
PCAOB can establish what type of standards
Attestation, ethical, auditing, and quality control standards to public companies
PCAOB adopted the Statements on Auditing Standards of the Auditing Standards Board, the AICPA's Attestation Standards, and the AICPA's Quality Control standards.
Note that they did not adopt the AICPA's Accounting and Review Services Standards as they only apply to nonpublic companies.
International Auditing and Assurance Standards Board pronouncements address
Reviews (FS), quality control, audits, other assurance and related engagements.
Note IAASB is a board under IFAC
What is the required length of tie under Sox that a former member of an audit engagement must wait before accepting an offer of employment from the company as CEO, CFO, chief accounting officer, or controller?
One annual period / one audit period, then it can be accepted
When can a CPA charge fees that are contingent upon finding a specific result?
Fees that are fixed by courts, or other public authorities, or in tax matters if based on the results of judicial proceedings are allowed under rule 302 of AICPA.
What happens when there is a principal auditor and a component/other auditor involved?
Under IAS, the auditor of group FS may not refer to or include the auditor's report of the component auditor.
What must a CPA follow if not in public service?
Need not adhere to the independence standard but must adhere to the objectivity standards.
What are the section titles in an international audit report?
Who publishes what
AICPA - Journal of Accountancy, Accounting Trends and Techniques, Industry Audit Guides
SEC - Financial Reporting Releases
What must auditors involved in govt audits follow?
Must comply with BOTH GAS established by GAO, and GAAS by AICPA.
Which standards can be used for an audit of FS of a nonpublic US company that plans to use the FS in a foreign country?
Can use either an audit following Auditing Standards Board OR International Auditing Standards.
What statements can the AICPA enforce under AICPA code of professional conduct?
Statements on Auditing Standards
Statements on Standards for Accounting and Review Services
Statements on Standards for Valuation Services
Statements on Standards for Consulting Services