AICPA Code of Professional Conduct

Question 1

Responsibilities Principles

Answer 1

1. Exercise sensitive, moral, and professional judgment 2. Cooperate with each other 3. Maintain the public’s confidence 4. Carry out the profession’s special responsibilities for self-governance

Question 2

Public Interest Principles

Answer 2

1. Serve the public interest - Public consists of clients, credit grantors, governments, employers, investors, and the business and financial community 2. Honor the public trust 3. Demonstrate a commitment to professionalism

Question 3

Integrity Principles

Answer 3

1. Perform all professional responsibilities with the highest sense of integrity 2. Be honest and candid within the constraints of client confidentiality 3. Service and the public trust should not be subordinated to personal gain and advantage 4. In the absence of specific rules or in the face of conflicting opinions, a member should test decisions and deeds by asking: a. Am I doing what a person of integrity would do? b. Have I retained my integrity? 5. Integrity also requires a member to observe the principles of objectivity and independence, and of due care

Question 4

Objectivity and Independence Principle

Answer 4

1. Objectivity is a state of mind, a quality that lends value to a member’s services a. It is a distinguishing feature of the profession b. It imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest 2. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services - In providing all other services, a member should maintain objectivity and avoid conflicts of interest 3. Members not in public practice (i.e., not independent) have the responsibility of maintaining objectivity in rendering professional services

Question 5

Due Care Principle

Answer 5

The quest for excellence is the essence of due care. Due care requires a member to: 1. Observe the profession’s technical and ethical standards 2. Strive continually to improve competence and the quality of services 3. Discharge professional responsibility to the best of the member’s ability

Question 6

Due Care Principle: Competency

Answer 6

1. Each member should strive to achieve a level of competence that will assure achievement of the high level of professionalism - Competence represents the attainment and maintenance of a level of understanding and knowledge that enables a member to render services with facility and acumen 2. Each member is responsible for assessing his or her own competence of evaluating whether education, experience, and judgment are adequate for the responsibility to be assume

Question 7

Due Care Principle: Diligence

Answer 7

Members should be diligent in discharging responsibilities to clients, employers, and the public 1. Diligence imposes the responsibility to: a. Render services promptly, carefully, and thoroughly b. Observe applicable technical and ethical standards 2. Due care requires a member to plan and supervise adequately any professional activity for which they are responsible

Question 8

Scope and Nature of Services Principle

Answer 8

1. When defining the scope and nature of any service, a member should always observe the Code a. Integrity requires that service and the public trust not be subordinated to personal gain and advantage b. Objectivity and independence require that members be free from conflicts of interest in discharging professional responsibilities c. Due care requires that services be provided with competence and diligence
   AICPA Code of Professional Conduct: Preface, Including Preamble and Principles

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2. Members must be satisfied that they are meeting the spirit of the principles. Members should: a. Practice in firms that have internal quality control procedures to ensure that services are competently delivered and adequately supervised b. Determine whether the scope and nature of other services provided to an audit client would create a conflict of interest in the performance of the audit c. Assess whether an activity is consistent with their role as professionals

Question 9

Conceptual Framework

Answer 9

In the absence of a rule or interpretation that addresses a particular relationship or circumstance, a member in public practice should apply the conceptual framework approach to evaluate whether a reasonable and informed third party would conclude that there is a threat to the member’s compliance with the rules that is not at an acceptable level.

Question 10

Acceptable level

Answer 10

A level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member’s compliance with the rules is not compromised

Question 11

Threats

Answer 11

Relationships or circumstances that could compromise a member’s compliance with the rules

Question 12

Conceptual Framework Step 1

Answer 12

Step 1: Identify threats—Determine whether a relationship or circumstance creates one or more threats

The existence of a threat does not necessarily mean that the member is in violation of the rules.

Question 13

Conceptual Framework Step 2

Answer 13

Step 2: Evaluate significance of the threat(s) 1. Determine whether a threat is at an acceptable level, considering both: a. Qualitative and quantitative factors, and b. The extent to which existing safeguards already reduce the threat to an acceptable level 2. If a member concludes that the threat is not at an acceptable level, proceed to Step 3

Question 14

Conceptual Framework Step 3

Answer 14

1. Identify and apply safeguards to eliminate the threat or reduce it to an acceptable level 2. The effectiveness of safeguards will vary, depending on the circumstances a. One safeguard may eliminate or reduce multiple threats b. Conversely, multiple safeguards may be needed to eliminate or reduce one threat 3. In some cases, an identified threat may be so significant that no safeguard will eliminate the threat or reduce it to an acceptable level - Under such circumstances, the member should determine whether to decline or discontinue the professional services or resign from the engagement

Question 15

Adverse Interest Threat

Answer 15

The threat that a member will not act with objectivity because the member’s interests are opposed to the client’s interests 1. The client has expressed an intention to commence litigation against the member 2. A client or officer, director, or significant shareholder of the client participates in litigation against the firm 3. A subrogee asserts a claim against the firm for recovery of insurance payments made to the client 4. A class action lawsuit is filed against the client and its officers and directors and the firm and its professional accountants

Question 16

Advocacy Threat

Answer 16

The threat that a member will promote a client’s interests or position to the point that their objectivity or independence is compromised 1. A member provides forensic accounting services to a client in litigation or a dispute with third parties 2. A firm acts as an investment adviser for an officer, a director, or a 10 percent shareholder of a client 3. A firm underwrites or promotes a client’s shares 4. A firm acts as a registered agent for a client 5. A member endorses a client’s services or products

Question 17

Familiarity Threat

Answer 17

The threat that, due to a long or close relationship with a client, a member will become too sympathetic to the client’s interests or too accepting of the client’s work or product 1. A member’s immediate family, close relative, or close friend is employed by the client 2. A former partner or professional employee joins the client in a key position and has knowledge of the firm’s policies and practices for the professional services engagement 3. Senior personnel have a long association with a client 4. A member has a significant close business relationship with an officer, a director, or a 10 percent shareholder of a client

Question 18

Management Participation Threat

Answer 18

The threat that a member will take on the role of client management or otherwise assume management responsibilities, such as may occur during an engagement to provide nonattest services

Question 19

Self-Interest Threat

Answer 19

The threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client 1. The member has a financial interest in a client, and the outcome of a professional services engagement may affect the fair value of that financial interest 2. The member’s spouse enters into employment negotiations with the client 3. A firm enters into a contingent fee arrangement for a tax refund claim that is not a predetermined fee 4. Excessive reliance exists on revenue from a single client

Question 20

Self-Review Threat

Answer 20

The threat that a member will not appropriately evaluate the results of a previous judgment made, or service performed or supervised by the member, and that the member will rely on that service in forming a judgment as part of another service 1. The member relies on the work product of the member’s firm 2. The member performs bookkeeping services for a client 3. A partner in the member’s office was associated with the client as an employee, an officer, a director, or a contractor

Question 21

Undue Influence Threat

Answer 21

The threat that a member will subordinate their judgment to an individual associated with a client, or any relevant third party, due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member 1. The firm is threatened with dismissal from a client engagement 2. The client indicates that it will not award additional engagements to the firm if the firm continues to disagree with the client on an accounting or tax matter 3. An individual associated with a client or any relevant third party threatens to withdraw or terminate a professional service unless the member reaches certain judgments or conclusions

Question 22

Safeguards

Answer 22

Actions or other measures that may eliminate a threat or reduce a threat to an acceptable level
1. Safeguards created by the profession, legislation, or regulation 2. Safeguards implemented by the client - It is not possible to rely solely on safeguards implemented by the client to eliminate or reduce significant threats to an acceptable level 3. Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements

Question 23

Professional Safeguards

Answer 23

Safeguards created by the profession, legislation, or regulation 1. Training and continuing education requirements on independence and ethics 2. Professional standards and the threat of discipline 3. External review of a firm’s quality control system 4. Legislation establishing prohibitions and requirements for a firm or a firm’s professional employees 5. Competency and experience requirements for professional licensure

Question 24

Client Safeguards

Answer 24

Safeguards implemented by the client that would operate in combination with other safeguards (see Code for more examples) 1. The client’s personnel have suitable skills, knowledge, or experience to make managerial decisions, and consult third-party resources as needed 2. The tone at the top emphasizes the client’s commitment to fair financial reporting and compliance with the applicable laws, rules, regulations, and corporate governance policies 3. Policies and procedures are in place which address ethical conduct and compliance with applicable laws, regulations, rules, and corporate governance policies

Question 25

Firm Safeguards

Answer 25

Safeguards implemented by the firm (see Code for more examples) 1. Firm leadership that stresses the importance of complying with the rules and the expectation that engagement teams will act in the public interest 2. Policies and procedures that are designed to implement and monitor engagement quality control 3. Documented policies regarding the identification of threats to compliance with the rules, the evaluation of the significance of those threats, and the identification and application of safeguards that can eliminate identified threats or reduce them to an acceptable level

Question 26

Effectiveness of Safeguards

Answer 26

The effectiveness of a safeguard depends on many factors, including: 1. The facts and circumstances specific to a particular situation 2. The proper identification of threats 3. Whether the safeguard is suitably designed to meet its objectives 4. Who applies the safeguard 5. The parties who will be subject to the safeguard 6. How the safeguard is applied 7. How the safeguard interacts with a safeguard from another category 8. The consistency with which the safeguard is applied

Question 27

Direct financial interest

Answer 27

Direct financial interest is ownership in the entity/client, i.e., common stock, preferred stock, or convertible debt. Direct financial interest is prohibited by the AICPA Conceptual Framework for Independence (ET 1.210.010): the independence of an accountant who holds a direct financial interest in a client or in a nonclient investee of a client is deemed to be impaired. There is no exception to this rule (e.g., even securities held in a blind trust are considered to be a direct financial interest). (ET 1.245.020)

Materiality is irrelevant; any direct financial interest, even one share, is considered to impair independence.

Question 28

List the five Integrity and Objectivity Threats

Answer 28

1. Conflict of Interest (e.g., providing certain professional services; director positions)
2. Gifts and Entertainment
3. Preparing and Reporting Information (e.g., knowing misrepresentations in the preparation
   of financial statements; subordination of judgment)
4. Client Advocacy
5. Use of a Third-Party Service Provider

Question 29

Example of Conflicts of interest threats

Answer 29

1. Providing corporate finance services to a client seeking to acquire an audit client of the firm,
   when the firm has obtained confidential information during the course of the audit that may
   be relevant to the transaction
2. Advising two clients at the same time who are competing to acquire the same company when
   the advice might be relevant to the parties’ competitive positions
3. Providing services to both a vendor and a purchaser who are clients of the firm in relation to
   the same transaction
4. Preparing valuations of assets for two clients who are in an adversarial position with respect
   to the same assets
5. Representing two clients at the same time regarding the same matter who are in a legal
   dispute with each other, such as during divorce proceedings or the dissolution of a partnership

Question 30

Direct position threat

Answer 30

When a member serves as a director of an entity, such as a bank, the member’s fiduciary responsibilities to the entity may create threats to compliance with the Integrity and Objectivity Rule.
- It would be more appropriate for the member to serve as a consultant to the board; the
member could limit activities to those that do not threaten the member’s compliance with
these rules.

Question 31

Gifts and Entertainment Threat

Answer 31

1. For purposes of this interpretation, a client includes the client, an individual in a key position
   with the client, or an individual owning 10 percent or more of the client’s outstanding equity
   securities or other ownership interests
2. Threats are at an acceptable level when gifts or entertainment are reasonable in the circumstances. A member should consider the following:
   a. The nature of the gift or entertainment
   b. The occasion giving rise to the gift or entertainment
   c. The cost or value of the gift or entertainment
   d. The nature, frequency, and value of other gifts and entertainment offered or accepted
   e. Whether the entertainment was associated with the active conduct of business directly
   before, during, or after the entertainment
   f. Whether other clients also participated in the entertainment
   g. The individuals from the client and member’s firm who participated in the entertainment

Question 32

Preparing and Reporting Threat

Answer 32

Two threats face a member in the preparing and reporting of information:
1. Knowing misrepresentations in the preparation of financial statements or records
a. Makes, permits, or directs another to make materially false and misleading entries in an
entity’s financial statements or records
b. Fails to correct an entity’s financial statements or records that are materially false and
misleading
c. Signs, permits, or directs another to sign a document containing materially false and
misleading information
2. Subordination of Judgment

Question 33

Client Advocacy Threat

Answer 33

An advocacy threat may exist when a member is engaged to perform nonattest services, such as
tax and consulting services, that involve acting as an advocate for the client or to support a
client’s position on accounting or financial reporting issues either within the firm or outside the
firm with standard setters, regulators, or others.

Question 34

Use of a Third-Party Provider Threat

Answer 34

Clients might not have an expectation that a member would use a third-party service provider to
assist the member in providing professional services.
1. Therefore, before disclosing confidential client information to a third-party service provider,
the member should inform the client, preferably in writing, that the member may use a
third-party service provider.
2. If the client objects, the member either should not use the third-party service or should
decline to perform the engagement.

Question 35

General Standards Rule

Answer 35

A member shall comply with the following standards:
1. Professional Competence: Undertake only those professional services that the member or
firm can reasonably expect to be completed with professional competence
2. Due Professional Care: Exercise due professional care in the performance of professional
services
3. Planning and Supervision: Adequately plan and supervise the performance of professional
services
4. Sufficient Relevant Data: Obtain sufficient relevant data to afford a reasonable basis for
conclusions or recommendations in relation to any professional services performed

Question 36

Acts Discreditable Rule

Answer 36

1. A member shall not commit an act discreditable to the profession
2. Examples:
   a. Discrimination or harassment in employment practices
   b. Soliciting or disclosing CPA exam questions or answers
   c. Failure to file a tax return or pay a tax liability
   d. Negligence of preparation of financial statements or records
   e. Confidential information obtained from employment or volunteer activities
   f. False, misleading, or deceptive acts in promoting or marketing professional services

Question 37

Records Request

Answer 37

1. Working papers are the member’s property, and the member is not required to provide such
   information to the client
2. A member should return client-provided records in the member’s custody or control to the
   client at the client’s request
   − A member should comply with the client’s request as soon as practicable but no later
   than 45 days after the request is made
3. Member’s work products should be provided to the client; however, work products may be
   withheld if:
   a. Fees are due to the member for the specific work product
   b. The work product is incomplete
   c. For purposes of complying with professional standards (for example, withholding an
   audit report due to outstanding audit issues)
   d. Threatened or outstanding litigation exists concerning the engagement or member’s
   work

Question 38

Unpaid Fees Rule

Answer 38

. Existence of unpaid fees may create self-interest, undue influence, or advocacy threats to
independence
− If a covered member has unpaid fees from an attest client for any previously rendered
professional service provided more than one year prior to the date of the current year
report, independence is impaired
2. Includes fees that are unbilled or a note receivable arising from such fees

Question 39

Contingent Fee(s) Rule

Answer 39

1. Contingent fee is one in which the fee is dependent upon a finding or result of a service
2. Not allowed to charge fees based on results of:
   a. Audit or review
   b. Compilation when no lack of independence disclosed and reasonably expected that a
   third party will use the financial statements
   c. Examination of prospective financial information
3. Cannot charge a contingent fee on tax return
   − Exception: If fixed by courts or other public authorities, or determined by judicial
   proceedings or agency finding

Question 40

Commissions and Referral Fees Rule

Answer 40

1. May not receive a commission for any of the following:
   a. Recommend or refer to a client any product or service
   b. Recommend or refer any product/service supplied by client
   c. In any circumstance where there is an audit, review, compilation when lack of independence is not disclosed, or examination of prospective financial information
2. Must disclose commission or referral situations to the client when not prohibited by the
   situations listed above

Question 41

Confidential Client Information Rule

Answer 41

1. Cannot disclose without specific consent of client
2. Exceptions:
   a. In response to a subpoena or summons
   b. To comply with laws or regulations
   c. As part of professional practice review by AICPA, state society, or state licensing authority
   d. As part of disciplinary hearing or ethics investigation

Question 42

Material Indirect Financial Interest

Answer 42

Material indirect financial interest is involvement, other than direct ownership (i.e., ownership of common or preferred stock or convertible debt), that exceeds 5% of the member’s net worth. Independence is deemed to be impaired. The concept of materiality is relevant to the consideration of indirect financial interests. A “member” is considered to include the member, his firm, and family members.

Immaterial indirect financial interests are allowed, e.g., ownership of mutual fund shares that hold investments in the entity and limited business transactions with the entity-client. Examples of limited business transactions include having a checking account at the client financial institution that is fully insured by a state or federal government deposit insurance agency. There is no exception to this rule. (ET 1.200.001 and 1.240.010)

Examples of indirect financial interest include the following:

Member is a trustee of any trust or executor or administrator of any estate that has or is committed to acquire any direct or material indirect financial interest in the entity/client
Member has any joint, closely held business investment with the entity or with any officer, director, or principal stockholder thereof
Member holds stock in a bank that holds loans to the client
Ownership of shares of a mutual fund that hold shares of the client
Member has lessor relationship with the client. (ET 1.260.040)
Litigation between the member and the client
Member is owed fees by the client
ET 1.240.010

Question 43

Direct Financial Interest

Answer 43

Direct financial interest is ownership in the entity/client, i.e., common stock, preferred stock, or convertible debt. Direct financial interest is prohibited by the AICPA Conceptual Framework for Independence (ET 1.210.010): the independence of an accountant who holds a direct financial interest in a client or in a nonclient investee of a client is deemed to be impaired. There is no exception to this rule (e.g., even securities held in a blind trust are considered to be a direct financial interest). (ET 1.245.020)

Materiality is irrelevant; any direct financial interest, even one share, is considered to impair independence.

Question 44

Securities Act of 1933

Answer 44

is a federal statute regulating the initial public offering (IPO) and private placement of securities. It creates liability of the seller (the company and all officers, directors, etc. and experts, including accountants, associated with the financial statements and the offering) to all third-party purchasers of the securities. It creates third-party beneficiary liability, eliminates the privity defense, and regulates the initial public offerings of securities through the mails or in interstate commerce by requiring registration of securities and full public disclosure of all material information about the securities and the company. It is designed to protect the unsophisticated investing public.

The basis for a claim against an accountant under this statute is a false statement or omission of a material fact in the audited financial statements. There is no need to prove negligence, fraud, reliance, or even proximate cause. The burden of proof shifts to the accused (i.e., the accountant). Defenses include proof of reasonable investigation (due care) or that the misstatement is not material.

Question 45

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Answer 45

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) gives workers and their families the right to choose to continue group health benefits for limited periods of time under certain circumstances. The circumstances would include involuntary job loss, reduction in hours worked, transition between jobs, divorce, death, and other life events.

Question 46

Section 404 of the Sarbanes-Oxley Act of 2002

Answer 46

requires management to make an assessment of the effectiveness of internal controls over financial reporting.

The registered public accounting firm is to attest to the accuracy of management’s assessment, not to provide a representation of the effectiveness of the internal controls.

Section 404 is not limited to ensuring compliance with laws and regulations. It is also meant to prevent fraudulent financial reporting, which is an ethics and operational issue, not only a legal compliance issue.

The assessment is not designed to detect fraud, but to ensure that there is proper oversight and controls in order to prevent fraud.

Each annual report filed with the SEC must contain an internal control report, which states the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. It also contains an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures. Registered public accounting firms are required to attest to, and report on, the assessment made by management regarding internal control.

Question 47

The Occupational Safety and Health Act (OSHA)

Answer 47

legislation created the Occupational Safety and Health Administration (also OSHA), which develops standards for job health and safety designed to protect employees from occupational injury or illness. OSHA is an example of social regulation.

Primary criticism of OSHA is the use of the “feasibility standard” (workers should be protected from injury or illness “to the extent feasible,”), meaning if it is technologically and economically possible, without regard to the cost-benefit standard.