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AUD > 2 - I: MIPPs Independence Rules > Flashcards

2 - I: MIPPs Independence Rules Flashcards

1
Q

What must a member do when the Code does not resolve independent issues?

A

Turn to Conceptual Framework

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2
Q

What are four areas that threat independence?

A

Financial relationships, employment relationships, family relationships, consulting relationships.

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3
Q

What are time periods a member must follow independence rules?

A

The period covered by the financial stmt.

The period of the professional engagement.

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4
Q

What are four categories of covered members who must comply with the independence rule for financial interest?

A

An individual on the attest engagement team (team member).
An individual in a position to influence the engagement (PTI).
A partner, partner equivalent, or manager who provides more than 10 hrs of non attest services to the attest client within any fiscal year (10 hr person).
A partner or partner equivalent in the office in which the lead attest engagement partner or equivalent practice in connection with attest engagement (OPIO-other partner in office).
The firm, including the firm’s employee benefit plans.
An entity whose operating, financial, or accounting policies can be controlled by 1-5.

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5
Q

Can members of another firm work in a manner similar to internal auditors without creating an independence problem for the attest engagement?

A

Yes, as long as the firm complies with AU-C Section 610 (rules for the proper relationships between internal and external auditors)

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6
Q

Can a covered member reissue a previously audited report or consent to its incorporation by reference when they are no longer independent? What are actions acceptable?

A

Yes, as long as no new work that is considered to be a new audit is done.
Making inquiries to successor, reading subsequent financial stmts, taking other procedures necessary to assess the effect of new facts on the original report.

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7
Q

Is is ok for the engagement letter to indemnify members from the client’s knowing misrepresentations?

A

Yes.

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8
Q

Can a member sign a current-year audit report if it has unpaid fees for service provided more than one year prior?
Can this be changed if a member does not bill or client issues a note?

A

No.

No.

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9
Q

What is an exception to unpaid fees?

A

Client in bankruptcy

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10
Q

Is independence impaired when a CM is committed to acquire any direct (whether or not material) or any material indirect financial interest in an attest client?

A

Yes.

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11
Q

When is independence not impaired regarding financial interest?

A

When interest is both indirect and immaterial

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12
Q

What is financial interest?

A

Ownership (or obligation to obtain) in equity, debt/derivatives issued.

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13
Q

What are two keys to define direct financial interest?

A

Owned directly.

Have control.

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14
Q

What is the ownership rule for a partner or professional employee (or their immediate family) of a firm engaged in attest service?

A

Can’t own more than 5% of a client’s ownership interest.

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15
Q

Is independence impaired for a covered member if receive or learn they will receive unsolicited financial interests?

A

No as long as they dispose of the interest as soon as practicable but within 30 days after having both knowledge and the right to dispose.
Or do not participate on the attest engagement team.

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16
Q

When is the interest in mutual fund direct if a CM owns shares? When is it indirect?

A

Interest in fund itself.

Interest in underlying investments if own less than 5%.

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17
Q

When does a CM must determine financial interest is material regarding mutual funds?

A

If a CM owns more than 5% of a diversified fund’s shares or a financial interest in an undiversified fund.

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18
Q

When is CM’s interest direct regarding retirements, savings, compensation?

A

Self-direct investments or have the ability to supervise or participate in the plan’s investment decision.

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19
Q

When is the independence threatened regarding a defined benefit plan?

A

When CM or their IMF are trustee or have the ability to supervise or participate in the plan’s investment decisions.

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20
Q

Is the financial interest direct or indirect in case of general partners?

A

Direct because GP has authority to influence decision.

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21
Q

Is the financial interest direct or indirect in case of agent-managed LLC?

A

Indirect unless the member has the authority.

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22
Q

When is independence threatened in case of trust and estates?

A

When the trust/estate owns or is committed to acquire more than 10% of client’s equity ownership even if you don’t have authority..
The value of the trust’s/estate’s holdings in the attest client exceeds 10% of total assets.

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23
Q

When is the interest direct in case of grantor? When is it indirect?

A

Ability to amend or revoke the trust.
Authority to control.
Ability to supervise/participate.
Underlying trust investments will ultimately revert to CM.
When none of these factors exist - indirect.

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24
Q

Is blind trust as well as underlying investments direct or indirect?

A

Direct because investments will revert to the grantor who retains the right to revoke or amend the trust.

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25
Q

Does participation in employee benefit plan treat the independence? Direct?

A

Yes, yes.

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26
Q

What are the exceptions to employee benefit plan?

A

A CM is a government employee, required to participate in the plan, the plan is offered to everyone, CM not associated with plan any other way, CM has no influence.
A CM used to be associated with the client, but met requirement of disassociation.

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27
Q

When is it ok to audit a bank in which the firm has depository accounts? For individual?

A

has remote likelihood that the bank will experience financial difficulties.
I: The balance is fully insured, uninsured amounts are not material to the CM’s worth, material uninsured accounts are reduced to an immaterial amount within 30 days.

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28
Q

When is it ok to audit broker?

A

The attest client’s service were rendered under the client’s normal terms, procedures and requirements.
CM’s assets subject to the risk of loss are immaterial (insured factors matters).

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29
Q

When is it ok to audit insurance?

A

When there is an investment option, but CM bought the policy under normal terms and conditions.

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30
Q

Who would be a problem as a CM’s lender?

A

Attest client, its officers/directors, 10% share holders, especially when client is not a lending institution.

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31
Q

What are the five requirements that independence is not impaired when the attest client is a lending institution?

A

Normal lending procedures, terms, requirements.
The loan obtained before the engagement loan sold to an attest client.
Loan kept current and not changed.
Estimated FV of the collateral for a mortgage or other secured loan equals or exceeds the balance.
If there is a deficit in the value of collateral, can’t be material.

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32
Q

Which kinds of loans are ok?

A

immaterial unsecured loan, a home mortgage, secured loan

33
Q

What are four types of loans that does not impair independence even if it’s from the attest client?

A

Auto loans/leases collateralized by the car.
Loans fully collateralized by the cash surrender value of an ins policy.
Loans fully collateralized by cash deposits.
Aggregate outstanding balances from credit card and overdraft reserve account of $10,000 or less.

34
Q

Is capital lease a cause for impaired independence?

A

Yes

35
Q

When is operating lease ok?

A

The lease meets the definition of operating lease under GAAP.
The terms and conditions comparable with other leases.
All amounts paid in accordance with the term of the lease.

36
Q

Is cooperative venture with an attest client ok?

A

No.

37
Q

What are three requirements for working for a 3rd party who also hired the attest client?

A

There are separate contracts and no obligations between CM firm and client.
Neither assume responsibilities of other.
Neither has authority to act as other’s agent.

38
Q

Is it ok for a firm and attest client to own the stock of a widely-held public company?

A

Yes.

39
Q

Is it ok for both the firm and client to own material stakes in a small company?

A

No

40
Q

Is it ok for a CM and an officer of an attest client jointly purchase a vacation home?

A

No

41
Q

Who are immediate family members?

A

Spouses, spousal equivalents, dependents

42
Q

Who are close relatives?

A

Parents, siblings, nondependent children

43
Q

Does IFMs need to follow independence rule?

A

Yes

44
Q

What’s the threshold of IMFs ownerships of an attest client?

A

Cumulative less than 5%

45
Q

Can IMF work for an attest client? What are exceptions?

A

Yes.
Can’t work for key positions:
Primary responsible for significant account functions - FS
Primary responsible for the preparation of FS
Has influence over the content of FS.

46
Q

Is it ok for IFM to participate in an employee benefit plan that is an attest client sponsored? Requirements?

A

Yes.
The plan offered to everyone.
IFM doesn’t serve in governance.
IFM doesn’t have ability or authority.

47
Q

What are 3 requirements for IFM to hold direct financial interest or material indirect financial interest through employee benefit plan?

A

CM is not on the attest team or PTI (can be 10 hr person or OPIO).
Such investment is unavoidable of such participation.
If the plan creates an option to invest in non attest client, IFM should do so and dispose attest client’s shares within 30 days.

48
Q

When would independence impaired for close relatives for team member?

A

Close relative holds key position for an attest client’s company.
CR has a financial interest in the attest client (material OR significant influence over the client).

49
Q

When would independence impaired for CR for PTI or OPIO?

A

Holds key position.

Financial interest: material AND significant influence.

50
Q

Is there any restrictions on CR of 10 hr person?

A

No

51
Q

Is lack of independence allowed for compilation service? What about complication of prospective FS?
Requirement?

A

Yes.
Yes.
Disclose.

52
Q

Is specialists team member?

A

No

53
Q

Can non attest services provided to an attest client that is public company? For non public company?

A

No.

Yes: valuation services as long as amounts not material.

54
Q

What are roles that partners or professional employees (POPEs) of attest firms can’t work?

A

Director, officer, employee, promoter, underwriter, voting trustee, trustee for any pension or profit-sharing trust of the clients, or in any equivalent positions.

55
Q

Can POPEs work as adjunct faculty members at an education institution that is an attest client? What are the safeguards (all must apply)?

A

Yes.
No key position, not on the attest team, not PTI, on part-time and non-tenure basis, not participate in any employee benefit plan sponsored by the school unless required, no management responsibilities.

56
Q

Can POPEs be honorary director or trustee of a NFP organization? Three requirements?

A

Yes.
Clearly honorary position.
Can’t vote, no management role.
All externally circulated materials - “honorary”

57
Q

When POPE is a campaign manager, what are two things they can’t and one thing they can regarding attest engagement?

A

Can’t audit the campaign and the governmental unit which the candidate will head.
Can audit the political party of the candidate.

58
Q

When a POPE serves as a director/officer of a federated fund-raising organization such as United Way, can POPE audit a charity that receives fund from United Way?

A

No if United Way controls the charity.

If doesn’t control - apply conceptual framework.

59
Q

Is it ok for the former employees with key position in the attest client’s firm come and work for the CPA firm? Can they work as OPIO or 10 hr people?

A

OK if they work as non CM.
Not OK to work as team member or PTI during the engagement period.
Yes as long as they dissociate from the client.

60
Q

What is the first step for dissociation?

A

Cease to participate in all employee health and welfare benefit plan sponsored by the attest client unless its required and you pay 100% of costs.

61
Q

What is the second step for dissociation?

A

Cease to participate in all other employee benefit plans by liquidating or transferring all vested benefits at the earliest date permitted by the plan.

62
Q

What is the third step for dissociation?

A

Dispose any direct or material indirect financial interests.

63
Q

Fourth step?

A

Collect or repay any loans.

64
Q

Fifth step?

A

Assess other relationships with the client to determine if they create threats to independence - consider safeguards

65
Q

Is independent impaired when a team member or PTI is considering employment with the attest client?
Unless doing what two things?

A

Yes.
Promptly reports such consideration to the firm.
Remove himself from the engagement until the decision is made.

66
Q

What must a CM do if he finds coworker who had an offer, but did not report?

A

Alert the firm which must consider procedures to provide reasonable assurance of no problems.

67
Q

Is independence impaired when a partner of POPE (professional employee) goes to work for an attest client?

A

Yes.

68
Q

What are exception requirements? (All must be met)

A
  • Amounts due the former employee for previous interest in the firm and for unfunded, vested retirement interest - no material. Formula to calculate pmts fixed.
  • The former employee is not in a position to influence the firm.
  • The former employee does not participate or appear to participate in the firm’s business (even without pay). (appearance: the former employee provide consultation to the firm, the firm provides with office and so on, the name is included in office directory and other things).
  • The team considers modifying the engagement procedures, evaluate if team members have an adequate experience and stature to deal with the former employee.
  • If the former employee joined the client in a key position within one year, the firm must consider if the team members maintained skepticism (consider: the former employee’s position at the firm, the position at the client’s, the nature of services that the employee provided to the attest client.
69
Q

If the employment is with a public company, to who does the rule apply to?

A

Lead partner, concurring partner or any team members with more than 10 hrs.

70
Q

Is cooling period required? How long? Which positions?

A

Yes.
One year preceding the end of audit.
Postions that influence FS.

71
Q

Is independence impaired when a cM belongs to a social club such as a country club that is an attest client?

A

No as long as it’s primarily a social matter.

72
Q

Is independence impaired if a CM belongs to a trade association that is an AC?
What about POPE?

A

Yes.

No. POPE has to be employed or associated with the association in an important role such as director.

73
Q

Is independence impaired if a CM buys an interest in a condominium, cooperative or other CIRA (common interest realty association)? Safeguard requirements (all must be met)?

A

No.
CIRA performs functions similar to local government.
CM’s annual assessment is not material to CIRA or to CM.
The liquidation of CIRA does not go to the CM.
Creditors can’t touch CM’s assets in case of insolvency.

74
Q

Is independence impaired if a CM joins credit union? Requirement?

A

No.

A CM is eligible to join because of individual qualification beside provision of professional services.

75
Q

Is independence impaired if a CM or PTI receives a gift from an attest client? What’s the criteria?

A

Depends.

If the amount is clearly insignificant.

76
Q

Can entertainment be accepted without imparting independence? Requirements?

A

Yes.

Reasonable in circumstances. Same as integrity and objectivity case.

77
Q

Can actual or threatened litigation impair independence?

What about ones by shareholders to both client and firm?

A

Yes if it is material adverse interests. If immaterial and not related to the engagement, ok.
Yes, if client and firm files claims against each other with significant risk.

78
Q

Is independence still impaired after the litigation is settled?

A

No.

AUD (24 decks)

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