12.21.18 Flashcards
In connection with the element of monitoring, a CPA firm’s system of quality control ordinarily should provide for the maintenance of
Documentation to demonstrate compliance with its policies and procedures.
Monitoring relates to providing reasonable assurance that policies and procedures related to the system of quality control are relevant, adequate, operating effectively, and complied with. The objectives of monitoring these policies and procedures are to evaluate (1) compliance with professional standards and legal requirements, (2) the design and effectiveness of the quality control system, and (3) whether appropriate reports are issued. Documentation of monitoring includes procedures, evaluations, deficiencies, and the bases for taking or not taking further action. Documentation of all elements of quality control should be retained for a period of time sufficient to enable those performing monitoring procedures and a peer review to evaluate the extent of the firm’s compliance with its quality control standards, or for a longer period if required by law or regulation (QC 10).
A CPA who is not in public practice is obligated to follow which of the following rules of conduct?
Integrity & objectivity.
Under the Integrity and Objectivity Rule, all members must maintain objectivity and integrity, be free of conflicts of interest, not knowingly misrepresent facts, and not subordinate his or her judgment to others when performing professional services.
According to the ethical standards of the profession, which of the following acts generally is prohibited?
Retaining client-provided records after the client has demanded their return.
Retention of client-provided records after the client has demanded their return is an act discreditable to the profession. Even if the state in which a member practices grants a lien on certain records, the ethical standard still applies.
According to the AICPA Code of Professional Conduct, which of the following records must a CPA return to the client when requested?
Client-provided records, even if fees are due to the CPA for the engagement and are unpaid.
Under the Acts Discreditable Rule, client-provided records must be returned after a client request without exception even if fees are due. Client-provided records are the client’s accounting or other records, including hardcopy and electronic reproductions, that were provided to the member by, or for, the client.
A CPA is permitted to disclose confidential client information without the consent of the client to
I. Another CPA firm if the information concerns suspected tax return irregularities
II. A state CPA society voluntary peer review board
II only.
Under the Confidential Client Information Rule, a CPA may reveal confidential information without the client’s permission for a state board- or state society-sponsored peer review. Identifying information revealed to the review team is precluded from disclosure. However, a CPA may not disclose information to another CPA firm without the client’s permission or unless pursuant to a valid subpoena.
According to the AICPA Code of Professional Conduct, which of the following actions by a CPA most likely involves an act discreditable to the profession?
Retaining client records after the client demands their return.
Client-provided records are “accounting or other records belonging to the client that were provided to the member by or on behalf of the client.” This interpretation prohibits the retention (after a demand is made for them) of client-provided records, including reproductions of such records, to enforce payment or for any other purpose. Such an act is deemed to be discreditable to the profession.
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.
Independent auditing can best be described as
A discipline that enhances the degree of confidence that users can place in financial statements.
The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework (e.g., GAAP, cash basis, etc.). An auditor’s opinion enhances the degree of confidence that users can place in financial statements.
According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?
Seeking a private lettering.
A contingent fee is dependent upon the finding or result. Fees are not considered to be contingent in tax matters if based on the results of judicial proceedings or the findings of government agencies. A fee is based on the findings of government agencies if the member can show a reasonable expectation at the time of the fee arrangement of substantive consideration by an agency with respect to the client. Thus, a contingent fee is allowed for representation of a client who is obtaining a private-letter ruling. A private letter ruling is a conclusion by the IRS for an individual taxpayer.
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.
Independence is not impaired when
A bank subsidiary in the consolidated group provides asset custody services in the ordinary course of business to an attest client of the new CPA firm.
Other entities in the consolidated group and their employees may not be (1) promoters, (2) underwriters, (3) directors, (4) officers, or (5) voting trustees of an attest client. However, with these exceptions, indirect superiors and other consolidated entities may provide services to an attest client that a member could not without impairing independence. For example, a bank’s provision of trustee and asset custody services in the ordinary course of business does not impair independence if the bank is not subject to the independence rules in their entirety (e.g., because it is not significantly influenced by a direct superior).
Fenn & Co., CPAs, has time available on a computer that it uses primarily for its own internal recordkeeping. Aware that the computer facilities of Delta Equipment Co., one of Fenn’s audit clients, are inadequate for the company’s needs, Fenn offers to maintain on its computer certain routine accounting records for Delta. If Delta were to accept the offer and Fenn were to continue to function as independent auditor for Delta, Fenn most likely would be in violation of
SEC, but not AICPA, provisions pertaining to auditors’ independence.
Under the Sarbanes-Oxley Act of 2002 and the SEC rules issued under it, performing bookkeeping or accounting services for a public company audit client impairs the independence of the audit firm. The major exception to this rule is for results that are not subject to audit. The AICPA view is that the firm ordinarily may retain its independence while keeping client accounting records, provided certain requirements are met. For example, when providing bookkeeping services, independence is not impaired if the member (1) records transactions for which management has approved the account classifications, (2) posts coded transactions to the general ledger, (3) prepares financial statements based on the trial balance, (4) posts client-approved entries to the trial balance, or (5) proposes entries or other changes in the financial statements if they are reviewed by the client and its management understands their nature and effects. However, (1) determining or changing entries, account codings or classifications for transactions, and other accounting records without client approval; (2) authorizing or approving transactions; (3) preparing source documents; and (4) making changes in source documents without client approval are activities that impair independence. The application of these inconsistent positions seldom causes conflict because large clients, which are the most likely to report to the SEC, usually have their own accounting and computer systems and need not request these services from their auditors. Moreover, the SEC rules apply to publicly traded companies only.
Among other things, the Integrity and Objectivity Rule prohibits knowing, material misrepresentation in the preparation and presentation of financial statements and records. A member of the AICPA violates this element of the rule when (s)he
Knowingly makes false and misleading journal entries in the records if some are material.
Knowing, material misrepresentation in the preparation and presentation of financial statements and records includes (1) 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.
Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?
Releasing financial information to a local bank with the approval of the client’s mail clerk.
The Confidential Client Information Rule states, “A member in public practice shall not disclose any confidential client information without the specific consent of the client.” The consent of the client was not obtained because a mail clerk is not the client. A client is (1) a person or entity that engages the CPA to perform services or (2) a person or entity with respect to which the services are performed.
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
As long as Adams does not perform or give advice on management functions of the organization.
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 best describes the reason an independent auditor reports on financial statements?
The company preparing the statements and the persons using the statements may have different interests.
Management and financial statement users may have an adversary relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.
