Known misrepresentations of facts include:
(1) knowingly making materially false and misleading entries in financial statements or records,
(2) failing to make corrections in materially false or misleading statements or records when the member has such authority, or
(3) signing a document with materially false and misleading information.
The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectivity. Objectivity in the Code refers to a CPA’s ability
to maintain an impartial attitude on all matters that come under the CPA’s review. Objectivity is a state of mind, a quality that lends itself to a member’s services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.
The risk-based approach evaluates the risk that:
a CPA is not independent or is perceived by a reasonable and informed third party with knowledge of all relevant information as not independent. That risk must be reduced to an acceptable level to establish independence. Risk is acceptable when threats are acceptable. They may be acceptable because of the types of threats and their potential effect. Moreover, threats may be sufficiently mitigated or eliminated by safeguards. Threats are acceptable when it is not reasonable to expect that they will compromise professional judgment.
An auditor is not independent if:
(1) has a direct (or material indirect) investment in an entity,
(2) the entity has an investment in the client that is material to the entity, or
(3) the entity can exercise significant influence over the client.
What kind of loans are permitted from a financial institution client?
(1) auto loans and leases collateralized by the automobile,
(2) loans of the cash surrender value under terms of an insurance policy,
(3) borrowings fully collateralized by cash deposits at the same financial institution (e.g., passbook loans), and
(4) credit cards and overdraft reserve accounts with an aggregate balance not paid currently of $10,000 or less.
(5) The client sponsors an employee benefit plan in which the auditor participates.
True or False: Owning several shares of the bank’s common stock does not impair independence
FALSE: Even an immaterial direct financial interest impairs independence.
If a cousin is a CFO of a client, is your independence impaired?
No. A close relative (sibling, parent, or nondependent child) in a key position impairs independence. A cousin is not considered a close relative.
Explain impairment on independence if audit fees from last year are still not paid.
Audit fees that are long past due take on the characteristics of a loan. Independence is impaired if billed or unbilled fees for client services rendered more than 1 year prior to the report date remain unpaid when the current year’s report is issued.
A former partner or professional employee of the firm who is employed by or associated with an attest client in a key position impairs the firm’s independence unless:
the former partner does NOT participate or appear to participate in, and is not associated with, the firm, regardless of compensation. For example, such activity may be by consulting, use of an office, or inclusion in membership lists.
Is a CPA’s independence impaired if the auditor’s checking account, which is fully insured by a federal agency, is held at a client financial institution?
NO, not impaired. Moreover, uninsured amounts do not impair independence if they are immaterial.
When is independence impaired if litigation involvement exists?
Independence is not necessarily impaired when the CPA is a co-defendant with the client. However, cross-claims filed by the co-defendants AGAINST EACH other may impair independence. For example, the client may allege that the CPA was negligent, or the CPA may allege that the client’s management committed fraud. In these circumstances, the interests of the client and the CPA are opposed, and independence may be impaired.
Adams is the executive partner of Adams & Co., CPAs. One of its smaller clients is a large nonprofit charitable organization. The organization has asked Adams to be on its board of directors, which consists of a large number of the community’s leaders. Membership on the board is honorary. Adams & Co. would be considered to be independent?
The member is independent if
(1) the position is purely honorary,
(2) it is identified as such in all letterheads and externally circulated materials in which (s)he is named as a director or trustee, and
(3) (s)he does not vote or participate in management functions.
Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance?
A. A distinguishing mark of a profession is its acceptance of responsibility to the public.
B. A requirement for a profession is to establish ethical standards that stress primarily a responsibility to clients and colleagues.
C. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character.
D. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.
Answer (A) is correct.
According to the Principles section of the AICPA Code of Professional Conduct, “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. A distinguishing mark of a profession is acceptance of its responsibility to the public.”
The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and also a
Set of specific, MANDATORY rules describing minimum levels of conduct a member must maintain.
The AICPA Code contains Principles and Rules. The principles are goal-oriented. The rules provide more specific guidance. The principles call for an unswerving commitment to honorable behavior but are not mandatory. The AICPA bylaws require members to adhere to the Rules. Those who fail to comply with the rules may face disciplinary action.
A CPA should undertake only those services that (s)he reasonably expects to complete with professional competence and should exercise due professional care in performing those services. Additional research or consultation with others may be necessary to gain sufficient competence to complete a service in accordance with professional standards. But what about obtaining specialty accreditation?
Additional research or consultation with others may be necessary to gain sufficient competence to complete a service in accordance with professional standards. However, professional standards DO NOT require specialty accreditation, although many CPAs choose to specialize in specific services.
In general, strict compliance with accounting principles is required. However, the Accounting Principles Rule recognizes that, due to unusual circumstances, adhering to GAAP may cause financial statements to be misleading. Would new legislation and evolution of a new form of business transaction justify a departure from an established accounting principle?
New legislation and the evolution of a new form of business transaction are events that may justify departure from an established accounting principle.
Under the Accounting Principles Rule, a CPA who performs services that require representations of conformity with promulgated GAAP because the statements would be misleading without the departure is required to describe:
(1) departure,
(2) effects of the departure and
(3) reasons compliance would result in misleading financial statements.
But this requirement applies only if the effect on the statements or data is material.
Examples of unusual circumstances that permit a departure from promulgated GAAP are:
(1) new legislation or
(2) the evolution of a new form of business transaction. But determination of what constitutes unusual circumstances is normally a matter of professional judgment.
Generally, can a name of a client be disclosed?
Yes, the names of clients generally may be disclosed, unless disclosure would suggest that the client may be experiencing financial difficulties.
To which of the following parties may a CPA partnership provide its audit documentation, without being lawfully subpoenaed or without the client’s consent?
A. The IRS.
B. Any surviving partner(s) on the death of a partner.
C. A CPA before purchasing a partnership interest in the firm.
D. The FASB.
Answer (B) is correct.
Audit documentation may be disclosed to another partner of the accounting firm without the client’s consent because such information has not been communicated to outsiders. A partner of the CPA has a fiduciary obligation to the client not to disclose confidential information without consent.
A member in public practice cannot disclose confidential client information without the client’s consent. The only exceptions are:
(1) in response to an enforceable subpoena;
(2) a review of the CPA’s professional practice;
(3) a discharge of professional obligations; and
(4) a response to an inquiry made by the professional ethics division, trial board of the AICPA, or an investigative or disciplinary body of a state society or board of accountancy.
A contingent fee is established as part of an agreement under which the amount of the fee is dependent upon the finding or result. Fees are not deemed to be contingent if:
A contingent fee is established as part of an agreement under which the amount of the fee is dependent upon the finding or result. Fees are not deemed to be contingent if fixed by courts or other public authorities, or in tax matters, if they are based on the results of judicial proceedings or the finding of governmental agencies.
Is this acceptable? An accountant is the sole shareholder in a professional accountancy corporation and uses the designation “and company” in the firm title.
no: A firm name may not be misleading. The designations “and Company,” “and Associates,” or “& Co.” are misleading when a member is a sole owner because they may be interpreted to mean more than one owner.
The Commissions and Referral Fees Rule prohibits a member in public practice from recommending any product or service to a client when the firm performs what type of service?
(1) an audit or review of financial statements,
(2) a compilation of a financial statement that is reasonably expected to be used by a third party if the report does not disclose the CPA’s lack of independence, or
(3) an examination of prospective financial information for that client.
With respect to records in a CPA’s possession, the Code of Professional Conduct provides that:
Extensive analyses of inventory prepared by the client at the auditor’s request are working papers that belong to the auditor and need not be furnished to the client upon request.
A member’s working papers include, among other items, audit programs, analytical review schedules, statistical sampling results, analyses, and schedules prepared by the client at the request of the member. Working papers are the property of the member and need not be provided to the client unless required by (1) statute, (2) regulation, or (3) contract.
Retention of client-provided records after demand is made for them by the client is an:
act discreditable to the profession and a violation of the Code. Even if the state in which a member practices grants a lien on certain records, this ethical standard is applicable.
A CPA serving as a bank director should not be concerned with:
The compatibility of serving as a bank director and the possibility of soliciting clients.The Code of Professional Conduct does not prohibit solicitation of clients. Solicitation is permitted if it is not false, misleading, or deceptive.
The profession’s ethical standards most likely are violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the
A. CPA would not be independent.
B. Fee was a competitive bid.
C. Actual fee would be substantially higher.
D. Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.
Answer (C) is correct.
The Code prohibits forms of solicitation that are false, misleading, or deceptive. A representation that specific services will be performed for a stated fee, when it is likely at the time that the actual fee will be substantially higher, is a prohibited form of solicitation.
The Form of Organization and Name Rule states that a firm may not use the quoted designation “Members of the American Institute of Certified Public Accountants” on its letterhead unless:
The Form of Organization and Name Rule states that a firm may not use the quoted designation unless ALL of its CPA owners are MEMBERS of the AICPA.
A fee is contingent if it is dependent on a finding or a result. A member in public practice cannot perform certain services for a contingent fee without impairing independence:
(1) audits or reviews of financial statements,
(2) an examination of prospective financial information,
(3) certain tax services, and
(4) a compilation that reasonably might be used by a third party that does not disclose the lack of independence in the report.
A member of the AICPA owns an interest in a separate business that performs tax services. If the member does not control the business, who must comply with the Code of Professional Conduct?
The member only. A member in public practice may own an interest in a separate business that performs the services for which standards are established, e.g., if the member, individually or with his or her firm or members of the firm, controls the separate business (as defined by the FASB Codification), the entity and all its owners and employees must comply with the Code. Absent such control, the member, but not the separate business, its other owners, and its employees, would be subject to the Code.
The responsibilities and activities of the PCAOB include:
(1) registering public accounting firms;
(2) overseeing the audit of public companies (issuers) that are subject to the securities laws;
(3) establishing or adopting standards on auditing, quality control, ethics, and independence;
(4) inspecting audit firms every 3 years (1 year if the firm is large) to (a) examine selected audit and review engagements, (b) evaluate the system of quality, and (c) test audit, supervisory, and quality control procedures; and
(5) conducting investigations and disciplinary proceedings involving, and imposing appropriate sanctions upon, registered public accounting firms and associated persons.
Can PCAOB prosecute?
No, cannot prosecute suspected criminal violations by registered public accounting firms.
A cooling-off period of how many years is required before a member of an issuer’s audit engagement team may begin working for the registrant in a key position?
The SEC prohibits a member of an issuer’s audit engagement team from working for the registrant (the issuer) in a key position within 1 year of participating in the audit of that issuer.
According to the Sarbanes-Oxley Act of 2002, what is the maximum number of years an audit partner can perform audit services for an issuer before the auditor rotation is required?
The act requires rotation of the lead audit or coordinating partner and the reviewing partner on audits of issuers every 5 years. But the act does not require rotation of audit firms.
Before accepting an initial engagement under PCAOB standards, a registered public accounting firm must do what in regards to independence?
(1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence;
(2) discuss with the audit committee the effects of those relationships on the independence of the firm if it becomes the auditor; and
(3) document the substance of the discussion. At least annually for each issuer audit client, a registered public accounting firm must (1) describe in writing to the audit committee all relationships between (a) the firm and (b) the client or a person in a financial reporting oversight role that may bear on independence; (2) discuss with the audit committee the effects of those relationships on the independence of the firm; (3) document the substance of the discussion; and
(4) affirm to the audit committee in writing that the firm is independent.
When an immediate family member of a member of the audit team is:
(1) a director or officer of the audit client,
(2) an employee in a position to exert significant influence over the preparation of the client’s accounting records or financial statements, or
(3) in such a position during any period covered by the engagement or the financial statements, the threat to independence can only be reduced to an acceptable level by removing the individual from the audit team.
Staff members are required to be trained and supervised in accordance with auditing standards. However, there is no requirement:
there is no requirement that they have prior experience.
The PCAOB has no injunctive power, but it may institute:
The PCAOB has no injunctive power, but it may institute administrative proceedings. It may seek disassociation of a person from a registered firm, suspension (temporary or permanent) of the firm’s registration, or a penalty of up to $15 million.
Audit committees must have at least one member designated as a financial expert with relevant experience (e.g., as principal financial or accounting officer, a supervisor of such persons, or as an assessor of the preparation or audit of financial statements). A financial expert must:
(1) understand GAAP and financial statements;
(2) be able to assess the general application of GAAP in accounting for estimates, accruals, and reserves;
(3) have experience with financial statements with a breadth and level of complexity comparable to those of the registrant;
(4) understand internal controls and the procedures for financial reporting; and
(5) understand audit committee functions.
Audit teams are required to be independent of the audit client during the engagement period and during which other period:
The period covered by the financial statements.
The PCAOB has the power to:
Inspect large firms annually.
Threats involve self-interest, self-review, familiarity, intimidation, and advocacy. A familiarity threat arises when:
a close or immediate family member of a person on the engagement team is a director of the client.
