Professional Responsibilities

Question 1

1. Code is applicable to all AICPA members.
2. Compliance depends primarily on members’ understanding and voluntary actions and secondarily on reinforcement by peers, public opinion, and disciplinary proceedings.
3. Possible disciplinary proceedings include from joint trial board panel admonishment, suspension for up to 2 years, expulsion, or acquittal.

Answer 1

1. Code of Professional Conduct - General

Question 2

4. Code provides minimum levels of acceptable conduct relating to all services provided by CPAs unless wording of a standard specifically excludes some members. For example, some standards do not apply to CPAs in public practice
5. Structure of Code goes from very generally worded to standards to more specific and operational rules.

Answer 2

1. Code of Professional Conduct - General

Question 3

1. Members should exercise sensitive professional and moral judgments in all their activities.
2. Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.
3. Accounting profession’s public consists of clients, credit grantors, governments, employers, investors, business and financial community, and others.

Answer 3

2. Code of Professional Conduct - Principles

Question 4

4. An accountant should consider public interest (collective well-being of the community).
5. Members should perform all professional responsibilities with the highest sense of integrity.
6. Integrity can accommodate the inadvertent error and honest difference of opinion but cannot accommodate deceit or subordination of principle.

Answer 4

2. Code of Professional Conduct - Principles

Question 5

7. Integrity is measured in terms of what is right and just and requires a member to observe principles of objectivity, independence, and due care.
8. Member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. Also should be independent in fact and appearance when providing auditing and other attestation services.
9. Objectivity imposes obligation to be impartial, intellectually honest, and free of conflicts of interest.

Answer 5

2. Code of Professional Conduct - Principles

Question 6

10. Members should protect integrity of their work, maintain objectivity, and avoid any subordination of their judgment.
11. Members in public practice require maintenance of objectivity and independence. Attest services require independence in fact and appearance.
12. Members not in public practice are unable to maintain appearance of independence but should maintain objectivity. Should also remain objective and candid in dealings with members in public practice.

Answer 6

2. Code of Professional Conduct - Principles

Question 7

13. Member should observe profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.
14. Competence is derived from both education and experience.
15. Each member is responsible for assessing his or her own competence and for evaluating whether education, experience, and judgment are adequate for the responsibility taken.

Answer 7

2. Code of Professional Conduct - Principles

Question 8

16. Members should have in place appropriate internal quality control procedures for services rendered, determine whether scope and nature of other services provided to an audit client would create a conflict of interest in performance of audit, and assess whether activities are consistent with role as professionals.
17. Conceptual framework describes the risk-based approach to analyzing independence that is used by the AICPA Professional Ethics Exectuive Committee.
18. A member is not independent if there is an unacceptable risk to the member’s independence. Risk is unacceptable if the relationship would compromise the member’s professional judgement

Answer 8

2. Code of Professional Conduct - Principles

Question 9

19. Using this conceptual framework, members should review and identify threats to independence. Types of threats include:
20. Self-review threat: Reviewing evidence that results from the member’s own work
21. Advocacy threat: Actions promoting the client’s interests or position

Answer 9

2. Code of Professional Conduct - Principles

Question 10

22. Adverse interest threat: Actions or interests between the member and the client that are in opposition
23. Familiarity threat: Members having a close or longstanding relationship with client or knowing individuals or entities who performed nonattest services for the client
24. Undue influence threat: Attempts by a client’s management to coerce the member or excessive influence over the member

Answer 10

2. Code of Professional Conduct - Principles

Question 11

25. Financial self-interest threat: Potential benefit to a member from a financial interest in, or some financial relationship with an attest client.
26. Management participation threat: Assuming the role of management or performing management functions for the client.
27. Members should either eliminate risk or use safeguards against impairing independence. Safeguards include: Safeguards created by the profession, legislation, or regulation, or safeguards implemented by the client or the firm.

Answer 11

2. Code of Professional Conduct - Principles

Question 12

28. Member in public practice shall be independent in the performance of professional services as required by standards.
29. Independence is impaired if a covered member during the engagement period:
30. Had or was committed to acquire any direct or material position in the client; Was a trustee of any trust or executor or administrator of any estate if such estate or trust was committed or had any indirect material position in the client

Answer 12

2. Code of Professional Conduct - Principles

Question 13

31. Had a joint closely held investment that was material to covered member; or had any loan not covered specifically by section 101-5 to or from client, any officer or director of the client, or any individual owning 10% or more of client’s outstanding equitable securities or ownership interests
32. A partner or or professional employee of the firm, his or her immediate family, or any group of such people acting together owner 5% or more of the client’s outstanding equitable securities or ownership interests;
33. During the period covered by financial statements or during professional engagement, a partner or employee of firm was associated with client as director, officer, or other title as member of management, promoter, underwriter, or voting trustee, or trustee for any pension or profit-sharing trust of client.

Answer 13

2. Code of Professional Conduct - Principles

Question 14

34. A covered member’s immediate family is subject to Rule 101 and its interpretations and rulings.
35. An indiviual in a covered member’s immediate family was employed by client in a postion other than key position.
36. An individual in the immediate family of one of the following covered members participated in a retirement, savings, compensation, or similar plan that is sponsored by a client.

Answer 14

2. Code of Professional Conduct - Principles

Question 15

37. For materiality purposes under Rule 101, the financial interests of the covered member and immediate family should be as aggregated.
38. Independence would be impaired if an individual participating on attest engagement has close relative who had a key position at client, financial interest in client that the individual or partner knows or has reason to believe was material to the close relative or enabled the close relative to exercise significant influence over the client.
39. An individual in a position to influence the attest engagement or any partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement has a close relative who had a key position at client, financial interest in client that the individual or partner knows or has reason to believe was material to the close relative or enabled the close relative to exercise significant influence over the client.

Answer 15

2. Code of Professional Conduct - Principles-

Question 16

40. Independence is only impaired if a reasonable person aware of all relevant facts relating to a situation would conclude that there is an unacceptable threat to independence .
41. A covered member is an individual on the attest engagement, an individual in a position to influence the attest engagement, or a partner or manager who provides nonattest services to the attest client beginning once he or she provides ten hours of nonattest services within any fiscal year and ending on the later of the date the firm signs the report on the financial statements for the fiscal year during which those services were provided or he or she no longer expects to provide ten or more hours of nonattest services to the client on a recurring basis.
42. A partner in the office which the lead attest engagement partner primarily practices in connection with the attest engagement, The firm, including the firm’s employee benefits plans, or an entity whose operating, financial, or accounting policies can be controlled by an of the individuals or entities described or any above acting together.

Answer 16

2. Code of Professional Conduct - Principles

Question 17

43. An individual in position to influence attest engagement is one who evaluates the performance or recommends the compensation of the attest engagement partner, directly supervises or manages the attest engagement partner, including all successively senior levels above that individual through the firm’s chief executive,
44. Consults with the attest engagement team regarding technical or industry-related issues specific to the engagement, or participates in or oversees, at all successively senior levels, quality control activities, including internal monitoring with respect to the specific engagement.
45. Period of the engagement period begins when a member signs either an initial engagement letter or other agreement to perform attest services or begins to perform attest engagement for a client whichever is earlier.

Answer 17

2. Code of Professional Conduct - Principles

Question 18

46. Period lasts for entire duration of professional relationship and ends with the formal or informal notification either by the member or the client of termination of professional relationship or by the issuance of a report whichever is later.
47. A key position is one in which an individual has primary responsibility for significant accounting functions that support material components of the financial statement, has primary responsibility for preparation of financial statements, or has the ability to exercise influence over the contents of the financial statements, including when individual is member of board of directors or similar governing body.
48. A close relative is a parent, sibling, or nonindependent child. Immediate family is a spouse, spousal equivalent, or dependent (whether or not related).

Answer 18

2. Code of Professional Conduct - Principles

Question 19

49. A firms independence is considered to be impaired if a partner or professional employee leaves the firm and is subsequent employed by or associated with a client in a key position unless all of these conditions are met:
50. Amounts due to the former partner or professional employee for his or her previous interest in the firm and unfunded benefits are not material to the firm and the amounts of payments are fixed, the former partner or employee is not in a position to influence the accounting firms operating or financial policies, the former partner or employee is not associated with the firm,
51. The ongoing attest engagement team consideres the risk of reduced audit effectiveness resulting from the fact that the partner or employee has prior knowledge of the audit plan, the firm assesses whether the existing attest engagement team members have appropriate experience and stature to deal with former employee if significant interaction was to occur, and subsequent attest engagement is reviewed to determine whether the team members maintained the appropriate level of skepticism when evaluating the representations of the former employee.
52. When a CPA performs nonattest services for a client, independence may or may not be impaired. This interpretation requires compliance with regulatory independence rules by regulators such as SEC, General Accounting Office, and Department of Labor.

Answer 19

2. Code of Professional Conduct - Principles

Question 20

53. Individuals should not perform management functions or make management decisions for attest clients. Independence is not impaired if nonattest services are performed prior to the period of the professional engagement and relate to any period before current audit.
54. Independence not ordinarily impaired regarding attest communications including: Client’s selection and application of accounting policies and discloses, Appropriateness of client’s accounting methods, Adjusting journal entries member prepares or proposes, or form or content of financial statements.
55. When nonattest services are provided, client must assume all management responsibilities, and oversee the service by designating an individual who possesses suitable skill, knowledge and/or experience,

Answer 20

2. Code of Professional Conduct - Principles

Question 21

56. Evaluate adequacy and results, accept responsibility for results, and establish and maintain internal controls.
57. Must establish in writing understanding with client regarding: engagement objectives, services to be performed, client’s acceptance of its responsibilities, CPA’s responsibilities, and any limitation of the engagement.
58. Independence is impaired by the performance of the appraisal, valuation, and actuarial services if the results are material to the financial statements and the service involves a significant degree of subjectivity.

Answer 21

2. Code of Professional Conduct - Principles

Question 22

59. Performance of internal audit services for a client impairs independence unless the client understands its responsibility for internal control and designates an officer to manage the internal audit function. Sarbanes-Oxley Act of 2002 places additional restrictions on nonattest services for public company audits
60. CPA who is a director of a nonprofit organization where board is large and representative of community leadership is not lacking independence if position is purely honorary, position identified as honorary on external materials, CPA participation restricted to use of name, and CPA does not vote or participate in management affairs.
61. Independence is not impaired by certain “grandfathered” and other loans from financial institution clients.

Answer 22

2. Code of Professional Conduct - Principles

Question 23

62. “Grandfathered” loans that are permitted that were obtained prior to Jan 1, 1992 under standards then in effect, from a financial institution for which independence was not required and institution then became attest client, obtained from an institution and then sold to an attest client, or obtained by a CPA prior to becoming a member of CPA firm of which the financial institution was an attest client.
63. Other loans permitted include automobile loans and leases collateralized by automobile, loans of surrender value under an insurance policy, borrowings fully secured by cash deposits at same financial institution, and aggregate outstanding balances from credit card and overdraft accounts that are reduced to $10,000 on a current basis.

Answer 23

2. Code of Professional Conduct - Principles

Question 24

64. Litigation by client security holders does not impair unless material client-CPA cross-claims develop.
65. Generally, auditor of a material fund type, fund account group, or component unit of entity that should be disclosed in notes of general-purpose financial statements but is not auditing primary government, should be independent with respect to those financial statement and primary government. Also should be independent if, although funds and accounts are separately immaterial, they are material in the aggregate.
66. Independence is impaired if during professional engagement or while expressing an opinion member’s firm had any material cooperative arrangement with client.

Answer 24

2. Code of Professional Conduct - Principles

Question 25

67. Joint participation with client is not a cooperative arrangement if all 3 following conditions are met: Participation of firm and client are governed by separate agreements. 2) Neither firm nor client assumes responsibility for the other. 3) Neither party is an agent for the other
68. If firm is organized in an alternative practice structure, in which attest function is part of larger organization that leases staff to attest function, independence provisions must be adhered to by all staff and management on attest engagement and every individual that is a direct supervisor of attest partners or managers
69. Financial interest is an ownership interest in an equity or a debt security issued by an entity, including derivatives directly related to the interest.

Answer 25

2. Code of Professional Conduct - Principles

Question 26

70. A direct financial interest is one owned directly by individual or entity, under control of individual or entity, or beneficially owned through investment vehicle of individual or entity
71. A firm member of a network of firms is required to be independent of financial statement audit and review clients of the other members of the network for such clients for which the use of an audit report is not restricted.
72. Financial interests in, or other relationships with, affiliates of a financial statement attest client may impair independence with respect to that client.

Answer 26

2. Code of Professional Conduct - Principles

Question 27

73. Employment of a partner or professional staff member of a CPA firm with an educational institution does not impair the firm’s independence with respect to the institution.
74. In performance of any professional service, a member shall a) maintain objectivity and integrity, b) avoid conflicts of interest, and c) not knowingly misrepresent facts or subordinate judgment.
75. Knowingly making or permitting false and misleading entries in an entity’s financial statements or records is a violation.

Answer 27

2. Code of Professional Conduct - Principles

Question 28

76. A conflict of interest may occur if a member performing a professional service has a significant relationship with another person, entity, product, or service that could be viewed as impairing the member’s objectivity.
77. When a member deals with his/her employer’s external accountant, the member must be candid and not knowingly misrepresent facts or knowingly fail to disclose material facts.
78. If a member and his/her supervisor have a disagreement concerning the preparation of financial statements or the recording of transactions, the member should 1) allow supervisor’s position if that position is an acceptable alternative with authoritative support and/or does not result in a material misstatement, 2) report the problem to higher levels in firm if position could cause material misstatements, 3) or consider quitting firm if no action is taken.

Answer 28

2. Code of Professional Conduct - Principles

Question 29

79. Those involved in educational services such as teaching full or part time at a university, teaching professional education courses, or engaged in research and scholarship are subject to Rule 102.
80. Sometimes members are asked by clients to act as advocates in support of clients’ position on tax services, consulting services, accounting issues, or financial reporting issues. Member is still subject to Rule 102.

Answer 29

2. Code of Professional Conduct - Principles

Question 30

81. PCAOB adopted the AICPA Code of Professional Conduct as its interim standards on April 16, 2003. They have adopted additional standards since. These standards apply to public accounting firms registered with the PCAOB when they are auditing an issuer (a public company).
82. A registered public accounting firm is not independent of its audit client if the firm provides any service or product to the client for a contingent fee or commission or receives from the client a contingent fee or commission.
83. Also not independent if public accounting firm provides any nonaudit service to the client related to marketing, planning, or opining in favor of a confidential transaction or aggressive tax position transaction.

Answer 30

2. Code of Professional Conduct - Principles

Question 31

84. A registered public accounting firm must communicate with the audit committee all relationships between the firm and the audit client that may reasonably be thought to bear on independence.
85. Members cannot provide positive or negative assurance that financial statements are in conformity with GAAP if statements contain departures from GAAP having a material effect on statements taken as a whole except when unusual circumstances would make financial statements following GAAP misleading.
86. When unusual circumstances require a departure from GAAP, CPA must disclose in report the departure, its effects (if practicable) and reasons why compliance would result in a misleading statement.

Answer 31

2. Code of Professional Conduct - Principles

Question 32

87. Member in public practice shall not disclose confidential information without client consent except for compliance with Rule 202 and 203 obligations, compliance with enforceable subpoena or summons, AICPA review of professional practice, or initiating complaint or responding to inquiry made by a recognized investigative or disciplinary body.
88. A member who is considering selling his/her firm or merging with another CPA may allow that CPA to review confidential client information without the specific consent of the client.
89. A member in public practice shall not perform a contingent fee any services when the member’s firm also performs auditing or reviews of financial statements, compilations when the member is independent and expects that a 3rd party may use the financial statements, or examinations of prospective financial information.

Answer 32

2. Code of Professional Conduct - Principles

Question 33

90. Member shall also not prepare an original or amended tax return for a contingent fee for any client.
91. A member shall not commit an act discreditable to the profession.
92. A member in public practice shall not accept a commission for recommending a product or service to a client when the member or member’s firm also performs auditing or reviews of financial statements, compilations when the member is independent and expects that a 3rd party may use the financial statements, or examinations of prospective financial information.

Answer 33

2. Code of Professional Conduct - Principles

Question 34

93. A member who receives a commission shall disclose that fact to the client. A member who receives a referral fee for recommending or referring any service of a CPA to any person or who pays a referral fee to obtain a client, shall disclose that fee to the client
94. A member in public practice who participates in the operation of a separate business that performs accounting, tax, etc. services must observe all of the Rules of Conduct. A member not otherwise in public practice must observe the Rules of Conduct if the member holds out as a CPA and performs for a client any professional services included in public accounting.
95. The sharing of a common brand name of common initials of a group of CPA firms within a network would not be considered misleading, provided the firm is a network firm.

Answer 34

2. Code of Professional Conduct - Principles

Question 35

1. Attest services-Practitioner expresses a conclusion about the reliability of a written assertion that is a responsibility of another party.
2. Consulting services-Practitioner develops the findings, conclusions, and recommendations presented, generally only for the use and benefit of the client. The nature of the work is solely determined by agreement between the practitioner and the client.
3. Performance of consulting services for an attest client requires that the practitioner maintain independence and does not in and of itself impair independence

Answer 35

3. Responsibilities in Consulting Services

Question 36

4. Consulting services-Professional services that employ the practitioner’s technical skills, education, observations, experiences, and knowledge of the consulting process.

Answer 36

3. Responsibilities in Consulting Services

Question 37

1. Personal financial planning engagements are only those that involve developing strategies and making recommendations to assist a client in defining and achieving personal financial goals.
2. When a personal financial planning engagement includes providing assistance in preparation of personal financial statements or financial projections, the CPA should consider applicable provisions of AICPA pronouncements.
3. CPA should document his/her understanding of scope and nature of services to be provided. Engagement should also be adequately planned.

Answer 37

4. Responsibilities in Personal Financial Planning

Question 38

4. Engagement’s objectives form basis for planning engagement. Relevant information includes understanding of client’s goals, financial position, and available resources for achieving goals.
5. External factors ( such as inflation, taxes, etc.) and nonfinancial information (such as different attitudes, risk tolerance, spending habits, etc.) are also relevant information. Relevant information also includes reasonable estimates provided by client’s advisors or developed by CPA.
6. Recommendations should ordinarily be in writing and include summary of client’s goals and significant assumptions and description of any limitations on work performed.

Answer 38

4. Responsibilities in Personal Financial Planning

Question 39

7. If CPA does not provide a service needed to complete an engagement, he/she would restrict scope of engagement and recommend that client engage another adviser. If client declines to engage another adviser, CPA and client may still agree to proceed with engagement.

Answer 39

4. Responsibilities in Personal Financial Planning

Question 40

1. Main functions of PCAOB are to register and conduct inspections of public accounting firms, and set or adopt standards on auditing, quality control, independence, or preparation of audit reports.
2. PCAOB enforces compliance with professional standards, securities laws relating to accountants and audits. They also may regulate nonaudit services CPA firms perform for clients.
3. PCAOB performs investigations and disciplinary proceedings on registered public accounting firms. Also may perform any other duties needed to promote high professional standards and to improve audit quality.

Answer 40

5. Sarbanes Oxley Act - Title 1

Question 41

4. Accounting firms must have second partner review and approve each audit report and must report on an audit of internal control in addition to audit of the financial statements for issuers. Most CPA working papers must be saved for 7 years.

Answer 41

5. Sarbanes Oxley Act - Title 1

Question 42

1. Act lists several specific services categories that the issuer’s public accounting firm cannot legally perform including bookkeeping or other services relating to financial statements or accounting records.
2. The audit partner for the job and the audit partner who reviews the audit can do the audit services for only five consecutive years.
3. The audit firm should report critical accounting policies, alternative treatments of transactions, etc. and other material written communications between the accounting firm and management to the audit committee.

Answer 42

6. Sarbanes Oxley Act - Title 2

Question 43

1. It is unlawful for any officer or director to take any action to fraudulently influence, coerce, manipulate, or mislead any public accountant in the performance of the audit.

Answer 43

7. Sarbanes Oxley Act - Title 3

Question 44

1. In essence, Section 404 led to CPA reporting on client internal control by establishing the following: Management’s responsibility to establish adequate internal control, Management must assess internal control, and CPA’s firm attests to management’s assessment of internal control.
2. Seciton 406 requires every issuer shall report whether it has adopted a code of ethics for senior financial officers.
3. CEOs and CFOs of most large companies are now required to certify financial statements filed with the SEC. They certify that information “fairly rpesents in all material respects the financial statements and result of operations” of the company.

Answer 44

8. Sarbanes Oxley Act - Title 4