2.2 Flashcards
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.
In which of the following circumstances would a CPA who audits XM Corporation lack independence?
The CPA and XM’s president each owns 25% of FOB Corporation, a closely held company.
Independence is impaired if, during the period of the professional engagement, “a covered member had a joint, closely held investment that was material to the covered member.” A joint, closely held investment by the member and the client (or its officers, directors, or an owner with significant influence) enables them to control the investee entity or property.
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.
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.
According to the PCAOB, an accounting firm is most likely to be independent of its audit client if
The firm recommended an aggressive tax position to the client that is more likely than not to be legally allowed.
A firm is not independent of its audit client if, during the audit and engagement period, it provides any nonaudit service related to marketing, planning, or expressing an opinion in favor of the tax treatment of aggressive tax-position transactions for the purpose of tax avoidance. However, this Rule does not apply if the tax treatment is at least more likely than not to be allowable under tax law.
A CPA who is not in public practice is obligated to follow which of the following rules of conduct?
Integrity and 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.
A violation of the profession’s ethical standards would most likely have occurred when a CPA in public practice
Serves on a municipal board of income tax appeals, discloses that status to concerned parties, participates as a board member in a tax appeal involving a client, but does not receive the client’s consent for such action.
If the significant relationship creating a conflict of interest is disclosed to and consent is obtained from all appropriate parties, the Integrity and Objectivity Rule does not prohibit performance of the professional service. (But disclosure and consent do not eliminate an impairment of independence.) The failure to secure the client’s consent therefore means that the arrangement could be viewed as impairing the CPA’s objectivity.
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.
In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?
A member whose practice is primarily bankruptcy discloses a client’s name.
A member shall not disclose confidential client information without the client’s consent unless it is disclosed to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, or (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. In a bankruptcy case, the implication that a client is in financial difficulty may make his or her name confidential information. If no exception applies, client confidentiality has been violated.
According to the ethical standards of the profession, which of the following acts is generally prohibited for a member in public practice?
Accepting a commission for recommending a product to an audit client.
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 (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.
Page, CPA, has T Corp. and W Corp. as audit clients. T Corp. is a significant supplier of raw materials to W Corp. Page also prepares individual tax returns for Time, the owner of T Corp., and West, the owner of W Corp. When preparing West’s return, Page finds information that raises going-concern issues with respect to W Corp. May Page disclose this information to Time?
No, because the information is confidential and may not be disclosed without West’s 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.
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.
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.
Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?
An investment held through a regulated mutual fund.
Independence is impaired if, during the period of the professional engagement, a covered member had a direct or material indirect financial interest in the client. Ownership of fund shares is a direct financial interest in the fund. Underlying investments in the fund are indirect interests.
According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent?
Employment of the CPA’s spouse as a client’s director of internal audit.
With certain exceptions, the immediate family (spouse, spousal equivalent, or dependent) of a covered member (e.g., an individual on an attest engagement team) is subject to the Independence Rule. One exception is permitted for the employment by the client of an individual in the covered member’s immediate family. However, this exception does not apply if the employment was in a key position. A director of internal audit holds a key position.
