12.20.18 Flashcards
Which of the following statements is true regarding an accountant’s working papers?
The accountant owns the working papers but generally may not disclose them without the client’s consent or a court order.
A member’s working papers, including any analyses and schedules prepared by the client at the request of the member, are the member’s property, not the client’s. However, a member in public practice ordinarily must not disclose confidential client information contained in the working papers without the client’s specific consent. Exceptions to this principle include compliance with a subpoena or summons or with applicable laws and regulations.
In pursuing a CPA firm’s quality control objectives, a CPA firm may maintain records indicating which partners or employees of the CPA firm were previously employed by the CPA firm’s clients. Which quality control element is this procedure most likely to satisfy?
Relevant ethical requirements.
CPA firms should avoid situations in which third parties might question the firm’s independence. Thus, they should adhere to the independence and other principles established by the AICPA Code of Professional Conduct and the requirements of regulators and other authorities (QC 10).
Fact Pattern: A CPA firm was purchased by a public company. The acquirer performs other professional services and has banking, insurance, and brokerage subsidiaries. The owners and employees became employees of a subsidiary. Also, the previous owners formed a new CPA firm that provides attest services. It leases employees, offices, and equipment from the parent, which also provides advertising, billing, and collection services.
In the alternative practice structure (APS) of which the new firm is a part, covered members are closely aligned with other persons and entities. Who is subject to the same independence rules as covered members?
An employee leased by the firm from the parent.
The independence rules ordinarily apply in their entirety only to the persons and entities included in the definition of a covered member: (1) the traditional firm (the new firm), (2) its owners, (3) individuals employed or leased by the new firm, and (4) entities controlled by such persons. The independence rules also apply in their entirety to (1) direct superiors of a partner or manager who is a covered member and (2) entities within the APS subject to significant influence by a direct superior.
When a PCAOB auditing standard indicates that an auditor “could” perform a specific procedure, how should the auditor decide whether and how to perform the procedure?
By exercising professional judgment in the circumstances.
Words such as “must” and “should” indicate unconditional responsibilities and presumptively mandatory responsibilities, respectively. Words such as “might” and “could” indicate that the auditor has a responsibility to consider a matter. Thus, (s)he is expected to use professional judgment.
According to the PCAOB, an accounting firm’s independence is least likely to be impaired if the firm
Has an audit client that employs a former firm professional.
Firm independence is impaired by a client’s employment of a former firm professional that could adversely affect the audit unless safeguards are established. Pre-change safeguards include removal from the audit of those negotiating with the client, and post-change safeguards include possibly modifying the audit plan.
Must a CPA in public practice be independent in fact and appearance when providing the following services?
Compilation of personal financial statements:
Preparation of tax return:
Compilation of a financial forecast:
No
No
No
CPAs in public practice must be independent in fact and appearance when providing attestation services. Attestation services provide assurances about assertions and include audits, examinations, reviews, and applying agreed-upon procedures.
Which of the following violates the AICPA’s Code of Professional Conduct?
A member shares offices with another member. Their joint letterhead implies that a partnership exists when each member is in fact practicing individually.
Two CPAs who are in fact not in partnership should not use a letterhead showing both names. Such a representation is misleading. Furthermore, some courts have held that such an arrangement may be a de facto partnership, and the individual CPAs may be liable for the obligations of the de facto partnership and of the de facto partners.
Which of the following assertions is most closely related to the audit objective to verify that all sales have been recorded?
Completeness.
The completeness assertion is evaluated to determine that all transactions and events that should have been recorded in the financial statements were recorded.
During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits?
The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit.
It is unlawful for (1) any officer or director of an issuer to do any act (2) to fraudulently influence, coerce, manipulate, or mislead any auditor performing an audit if (3) the purpose is to render the financial statements materially misleading. The CFO is not excused by failure to affect the audit.
According to the profession’s ethical standards, which of the following events may justify a departure from an established accounting principle?
New Legislation:
Evolution of a new form of business transaction:
Yes
Yes
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. New legislation and the evolution of a new form of business transaction are events that may justify departure from an established accounting principle.
A CPA who performs primary actuarial services for a nonissuer client normally is precluded from expressing an opinion on the financial statements of that client if the
CPA prepared an actuarial report using assumptions not approved by the client.
A member must evaluate the effect on his or her independence of performing nonattest services. The member should not assume management responsibilities for the attest client. A nonattest service impairs independence if it involves the performance of an appraisal, valuation, or actuarial service using significant assumptions not determined or approved by the client.
The General Standards Rule does not require a member to
Provide assurance about prospective financial statements.
Guidance for assurance on prospective statements is provided by AT-C 305, Prospective Financial Information.
A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARSs) when
Assisting in adjusting the books of an account:
Consulting on accounting matters:
No
No
SSARSs apply to the professional responsibilities of accountants who prepare, compile, or review the unaudited financial statements or financial information of a nonpublic entity. Unlike a compilation, a preparation does not require the accountant to (1) determine whether (s)he is independent or (2) issue a report. The service allows an accountant to use software to generate financial statements. However, merely assisting in their preparation is a bookkeeping service (AR-C 70). The objective of a compilation is to assist management in presenting financial information in the form of financial statements. But the accountant does not undertake to obtain or provide any assurance on them (AR-C 80). The objective of a review is to obtain limited assurance that no material modifications should be made for the statement to conform with the applicable financial reporting framework (AR-C 90). Neither assisting in adjusting the books of account nor consulting on accounting matters is a preparation, compilation, or review. Moreover, consulting services are governed by the Statement on Standards for Consulting Services, not SSARSs.
What standards are applicable for a compilation of the historical financial statements of a nonissuer?
Statements on Standards for Accounting and Review Services (SSARSs).
SSARSs apply to engagements to prepare, compile, and review historical financial information of nonissuers. They also apply to certain prospective, pro forma, and other historical financial information.
Which of the following statements best describes the primary purpose of Statements on Auditing Standards (SASs)?
They are generally accepted auditing standards.
Generally accepted auditing standards are defined as SASs. The Code of Professional Conduct requires members who perform professional services to comply with standards promulgated by bodies designated by the AICPA Council. Thus, an AICPA member who performs an audit of a nonissuer must comply with SASs promulgated by the Auditing Standards Board (ASB).
