Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

AUD mine > AUD 1 > Flashcards

AUD 1 Flashcards

1
Q

3 major parts of

professional code of conduct

A
  • Members in public practice (MIPPs)
  • Members in business (MIBs)
  • Other members (OMs)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

6 principles of professional conduct

A
  1. Responsibility
  2. Public Interest
  3. Integrity
  4. Objectivity & Independence
  5. Due Care
  6. Scope & Nature of Services
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

RESPONSIBILITY principle

General/3 actions

A

exercise professional and moral judgments, cooperate to:

  • improve the art of accounting
  • maintain the public’s confidence, and
  • carry out the profession’s special responsibilities for self-governance
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

PUBLIC INTEREST principle

3 obligations

A
  1. act in a way that will serve the public interest,
  2. honor the public trust, and
  3. demonstrate a commitment to professionalism.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

INTEGRITY principle

2 points

A

Integrity is measured in terms of what is right and just

members should always ask “Am I doing what a person of integrity would do?”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

OBJECTIVITY and INDEPENDENCE principle

3 points

A

A member should

  • maintain objectivity and
  • be free of conflicts of interest

Objectivity is a state of mind” that requires: impartiality, intellectual honesty, and freedom from conflicts of interest.

Independence: applies only to MIPPs (auditing, in fact/appearance) *but all members performing all services must act w/ objectivity and integrity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

DUE CARE principle

(3 actions)

2 definitions

A

A member should (to the best of the member’s ability)

  1. observe the profession’s technical and ethical standards,
  2. improve competence and the quality of services, and
  3. discharge professional responsibility.

COMPETENCE requires a commitment to continued learning

DUE CARE entails

  • Adequate planning of engagements
  • Supervision of professional activities for which members are responsible
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

SCOPE and NATURE OF SERVICES principle

3 min actions

A
  1. Practice in firms w/ good internal quality control procedures
  2. determine whether the scope/nature of services would create a conflict of interest,
  3. assess whether a contemplated activity is consistent with their role as professionals.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

PARTNER EQUIVALENT

A

Not a partner, but EITHER has

  • ultimate responsibility for the conduct of an attest engagement or
  • authority to bind the firm to conduct an attest engagement

**so would have to live up to the same standards that a partner would have to

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

PUBLIC PRACTICE consists of the performance of…

A
  • professional services (e.g., audit, tax, consulting) for a client by a member or the member’s firm.
  • Government audits
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

3 main steps to applying conceptual framework

A
  1. Identify threats. (7)
  2. Evaluate the significance of the threats –> acceptable level?
  3. Identify and apply safeguards. (3)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

CATEGORIES of THREATS (7)

To integrity/objectivty

A
  1. Adverse interest (lawsuit)
  2. Advocacy (objectivity)
  3. Familiarity (employ relative/friend)
  4. Management participation (helps manage)
  5. Self-interest (financial pressure)
  6. Self-review (own work)
  7. Undue Influence (threats of w/hold work)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

SAFEGUARDS to threats in applying Conceptual Framework (3)

A
  • Safeguards created by the profession, legislation, or regulation.
  • Training, standards, reviews, legislations, licensing, resources
  • Safeguards implemented by the client.
  • Management have knowledge/experience/ethical
  • Policies for compliance, fair reporting, ethics
  • Governance, audit committee
  • Safeguards implemented by the firm.:
  • Leadership emphasizing compliance, public interest
  • Policies and procedures
  • Quality control system
  • Rotation of senior personnel
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

CONFLICTS of INTEREST

  • Evaluation
  • 2 types
  • How to REDUCE to acceptable level
A

In evaluating possible conflicts of interest, members should ask:

Would a reasonable and informed third party conclude that a conflict exists?

2 types

  1. Client A vs Client B: Between interests of two clients
  2. Firm/members vs Client: Between interests of client on one hand and firm and/or its members on the other.

REDUCE to acceptable levels

  1. full disclosure to client
  2. client consents
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

DIRECTOR POSITION

  • What threat
  • 2 actions
A

Objectivity

2 Actions:

  1. Apply Conceptual Framework to determine whether the threat is unacceptably high.
  2. Preferable to serve as a consultant to board NOT joining board
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

GIFTS and ENTERTAINMENT

  • What threat (2)
  • Violations (2)
  • Final determination
A

Objectivity and Integrity

Violation presumed if

  1. violate the member’s or client’s policies or applicable laws and regulations and
  2. The member knows or is reckless in not knowing of the violation.

FINAL

  • If no rules are violated, then determine if “REASONABLE in the circumstances.”
  • Reasonable based on *nature, occasion, cost/value, if assoc w/ conduct of business
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

PREPARATION and REPORTING INFO

3 examples of violations

A
  1. made or allowed material or misleading entries in FS or records
  2. not corrected misstatements when had authority
  3. signed, permitted, or directed another to sign misleading docs
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What is SUBORDIATION of JUDGMENT

And proper procedure

A

If disagree w/ superior but still do what superior wants

Procedure

  1. Evaluate if threat is at an unacceptable level, if would result in a material misrepresentation or legal violation.
    • If no, then no further action
    • If yes, discuss the matter with the supervisor, and go over head if nec
  2. If not addressed up mgt chain, then invoke the following safeguards:
    • Look for any additional requirements for reporting differences of opinion w/in firms policies and procedures
    • Determine if is a duty to report to external authorities.
    • Consult legal counsel.
    • Fully document the situation.
  3. If cannot be reduced to an acceptable level, consider quitting the firm and try to eliminate exposure to subordination of judgment.
    • Consider quitting (not required but allowed to)
    • Doesn’t discharge all obligations, such as to report to regulatory authorities or an external auditor.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

CLIENT ADVOCACY

  • When allowed
  • threats
A
  1. NO if doing attest work clients.
  2. YES if providing nonattest services (ie: tax work, advisory)

should not threaten OBJECTIVITY or INTEGRITY:

  • exceed performance stds
  • exceed reasonable practice
  • compromise credibility
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

THIRD-PARTY SERVICE PROVIDER (TSP)

  • Threats
  • Permitted activities
  • Safeguards
A

Threats:

  • objectivity
  • integrity.

Permitted:

  • Mere administrative support (e.g., record storage, software application hosting, authorized e-file transmittal services)

Safeguards if substantive services outsourced,

  1. notify client before any confidential info provided to TSP
  2. if the client objects, the member should:
    • Not outsource, or
    • Decline the engagement
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

GENERAL STANDARDS (4)

A
  1. Professional competence
  2. Due professional care (not nec perfect)
  3. planning and supervision
  4. sufficient reasonable data
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

COMPETENCE

2 requirements

A
  1. member or his/or her staff has appropriate technical qualifications and
  2. the member can supervise and evaluate quality of work performed.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Departure from GAAP allowed

  • 3 exceptions
  • 2 not allowed
  • When permitted
A

Exceptions

  1. if following GAAP would mislead (b/c new events w/o GAAP)
  2. new legislation
  3. evolution of new form of business

Not justified

  1. unusual degree of materiality
  2. conflicting business practice

PERMITTED: when other accounting principles apply

  • Foreign country
  • Prescribed by contract
  • Required by law or regulatory agency
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

DISCREDITABLE ACTS examples

A
  • Discrimination
  • Exam questions
  • Failure to file/pay tax
  • Negligence
  • Material departure from audit stds
  • Confidential info
  • False promoting/mkting
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

4 categories of RECORDS

Treatment when client requests

A
  1. Client provided
    • delivered upon request, even if bill not paid
  2. Member prepared (not engaged to prepare)
    • upon request, unless unpaid bill
  3. Member’s work products (deliverable, tax return)
    • upon request, unless:
      • 1) unpaid,
      • 2) incomplete,
      • 3) due to prof stds on audit issues,
      • 4) litigation
  4. Working papers (for purpose of engagement, by both member and client)
    • members property, not required

Delivery w/in 45 days

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

CONTINGENT FEE

  • Def
  • exclusions
A

fee established for the performance of any service pursuant to an arrangement in which

  1. no fee will be charged unless a specified finding or result is attained, or
  2. the amount of the fee is otherwise dependent upon the finding or result of such service

Exclusions

  1. fixed by court/authorities
  2. for tax based on judicial proceedings/govt agency
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

When is CONTINGET FEE not allowed

A

for any service performed if also provide these attest services:

  • audit/review of FS
  • compilation of FS used by 3rd party if lack of independence NOT disclosed
  • An examination of prospective financial information.
  • Nor prep an original or amended tax return or claim for a tax refund for any client, even nonattest clients. *exceptions: test cases, representing for reviews
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

COMMISSIONS and REFERRAL FEES

  • When permitted
  • 3 exceptions
A

Attest clients – prohibited

Nonattest clients – permitted,

  • must disclose in writing

Exceptions

  1. member spouse if activities separate from member practice (b/c no signif involvement)
  2. reselling product to a client (b/c obvious making money)
  3. mark up cost of 3rd party services (b/c obvious making $)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

ADVERTISING

  • Responsibilities
  • When is it discreditable act
A

For

  • own promotions AND
  • for 3rd parties asked to provide services

Discreditable if false, misleading or deceptive (to a reasonable person), including

  • false expectations
  • imply ability to influence court etc
  • mislead cost of services
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

CONFIDENTIAL INFO

  • Def
  • General rule
  • 2 discreditable acts
A

Proprietary info that is not known to public and obtained due to work provided

Gen Rule

  • MIPP not disclose confidential client info

Discreditable acts

  1. disclose w/o permission
  2. use for personal benefit

**confidentiality duty survives the employment relationship

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

DISCLOSURE of Confidential Info

  • Allowed (3)
  • Responsibilities (4)
A

Allowed

  1. The client consents.
  2. Permitted by law and authorized by the employer.
  3. Required by law for subpoena and reporting violations

may have responsibility or right to disclose the information (if legally permitted) to:

  1. Initiate an ethics complaint with AICPA, or other board
  2. Protect member’s professional interests in legal proceedings
  3. Comply with professional standards and other ethics requirements
  4. Report potential concerns regarding questionable accounting, auditing, or other matters to the employer’s confidential complaint hotline or those charged with governance
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

MIPP Independence

  • Threats
  • safeguards
A

Threats – same 7 as for integrity/independence

  1. Adverse interest (lawsuit)
  2. Advocacy (objectivity)
  3. Familiarity (employ relative/friend)
  4. Management participation (helps manage)
  5. Self-interest (financial pressure)
  6. Self-review (own work)
  7. Undue Influence (threats of w/hold work)

Safeguards – same 3

  1. Profession, legislation, regulation
  2. Attest client
  3. Firm
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

MIPP Independence

  • 4 relationships
A
  1. Financial
  2. Employment
  3. Family
  4. Consulting
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Time Period for Independence rules

A

Periods

  1. covered by FS
  2. of the professional engagement
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

10 hr person

A

Partner, partner equivalent or mg who provides > 10 hr of NONATTEST services to attest client w/in any fiscal year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

OPIO

A

OTHER PARTNER IN OFFICE

Partner/equivalent in the SAME OFFICE as the lead attest engagement partner/equiv of attest engagement

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

COVERED MEMBERS 6 types

A
  1. on attest team
  2. PTI = Position to influence
  3. 10 hr person
  4. OPIO = other partner in office
  5. the FIRM, incl EE benefit plans
  6. any other ENTITY whose policies can be controlled by any of other 5, or 2+ individuals if acting together
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

NETWORK FIRM

A

Cooperate to enhance capabilities to provide services and share 1+:

  • Common brand name
  • Common control
  • Profits/costs
  • Common business strategy
  • Professional resources
  • Common quality control policies/procedures
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

POPE

A

Partners or professional employees

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

AFFILIATE of client

  • Problem
  • Examples
A

Independence if covered member has relationship w/ affiliate of client

Examples

  • Subsidiary = entity that client can control
  • Parent = entity in which client has direct/material financial interest
  • Entity that controls client AND client is material to the entity
  • Sister entity of client if both are material to parent
  • Trustee that controls a client that is not an investment company
  • Sponsor of a single ER EE benefit plan client
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

REISSUED REPORTS

  • Def
  • Ok/not ok
A

If independent when first issued audit report, may reissue or consent to incorporate by reference, even in no longer independent

  • NOT OK: new procedures that require updating/dual dating the original report
  • OK: assess effect of NEW facts on original report -
    • ask successor auditors -
    • read subsequent FS
    • do other procedures
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

ALTERNATIVE DISPUTE RESOLUTION (ADR)

  • problem
A

Engagement letters may require

  • If initiated, binding arbitration is sufficiently similar to litigation to create material adverse interests and impair independence
  • Apply conceptual framework
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

UNPAID FEES

  • Def
  • Rule
  • exemption
A

Fees are unpaid even if:

  • unbilled
  • client issued a note rec

Rule:

  • MIPP may NOT sign current yr audit report if unpaid fees from > 1yr prior

Exemption

  • If client in bankruptcy, rule NOT apply
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

financial interests

  • when is independence impaired and
  • NOT impaired
A

Impaired

  • covered member has/committed to acquire any DIRECT (whether material or not) or any MATERIAL INDIRECT financial interest in an attest

NOT Impaired

  • Only if interests are both INDIRECT and IMMATERIAL
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

FINANCIAL INTEREST

Def

A

Includes ownership (or obligation to obtain ownership) in

  • equity
  • debt
  • Derivatives issued by entity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

FINANCIAL INTEREST

Direct (3) vs Indirect

A

DIRECT - An interest:

  1. Owned directly (even if managed by others)
  2. Under one’s control (even if managed by others)
  3. Beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary either:
  • Controls the intermediary, or
  • Has the authority in investment decisions.

INDIRECT An interest beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary neither:

  1. Controls the intermediary, nor
  2. Has the authority to supervise or participate in its investment decisions.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

BENEFICIAL OWNERSHIP

  • Def
A

Individual or entity is NOT the record owner but has a RIGHT to some or all of the underlying benefits of ownership, such as to:

  • Direct the voting
  • Dispose of the interest
  • Receive its economic benefits
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

FINANCIAL INTEREST rules apply to…

A

Covered members Independence

If POPE is not covered member, that person, immediate family, or group acting together can NOT own MORE THAN 5% of client’s ownership interest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

UNSOLICITED FINANCIAL INTERESTS

How to maintain independence

A

Gift

If CM rec/learn of gift, that is EITHER

  • direct interest
  • material indirect interest

Independence not impaired if

  • dispose of interest ASA practable (no later than 30d after knowledge/right to dispose it) AND
  • not participate on attest engagement team after learning of and before disposing of

If not yet has right to dispose, independence not impaired if

  • member not participate on team (after learning/before disposing
  • interest is NOT material to member
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

MUTUAL FUNDS

  • Types of ownerships
A

DIRECT- interest in fund itself

INDIRECT – own 5% or less of outstanding shares of diversified mutual fund

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

MUTUAL FUNDS

  • When independence impairments
A

NOT impaired

  • Immaterial AND indirect

IMPAIRED If

  • Own > 5% of diversified fund’s shares
  • Ownership in undiversified fund
  • Must evaluate fund’s underlying investments for any MATERIAL INDIRECT interests
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

IFMs

A

Immediate family members

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

SELF DIRECT

  • Examples, Re: investments
A
  • covered member is a TRUSTEE of retirement plan and SUPERVISES its investments
  • covered member PARTICIPATES in retirement plan and can DIRECT investments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

RETIREMENT, SAVINGS, COMPENSATION

  • Direct/indirect
A

DIRECT (impair indep even if immaterial)

Covered member or IFM can

  1. SELF DIRECT investments into plan or
  2. participate in plans investment decisions

INDIRECT Covered member or IFM

  1. do NOT self direct or participate in investment decision
  2. underlying investments are NOT MATERIAL
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

DEFINED BENEFIT PLAN

  • Re: independence
A

Covered members do not HOLD interest in investments

  • b/c amt rec’d not dependent on performance of investments

UNLESS covered member or IFM are trustees/investment decision,

  • then impairs EVEN if IMMATERIAL
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

EMPLOYEE STOCK OPTION PLAN

A

INDIRECT While beneficially owned by covered member

DIRECT When has right to dispose of them

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

PARTNERSHIPS

(2 types: direct/indirect)

A

GENERAL partner Authority to influence investments, so DIRECT for:

  1. partnership itself
  2. underlying investments

LIMITED Partner

  1. limited partnership is DIRECT
  2. underlying investments INDIRECT
  • dependent on if LP has authority in investment decisions or ability to replace GPs
58
Q

LIMITED LIABILITY COMPANIES

  • 2 types
  • Direct/indirect
A

MEMBER-MANAGED

  • Like partnerships and treated same way

AGENT-MANAGED

  • interests in investments are INDIRECT
  • *unless have authority to control LLC or investment decisions
59
Q

TUITION PLANS

  • 2 types
  • direct/indirect
A

529 PLANS *buying tuition credits

  • Direct in plan
  • Indirect in underlying inv

SAVINGS PLAN

  • Direct in both plan and investments b/c decide which sponsor’s 529 plan to invest and which firms plan will invest in
60
Q

TRUSTS

  • 3 positions: direct/indirect
A

Issue of CM in firm and trust/estate invests in client shares

  1. TRUSTEE
    • ok to serve as trustee or executor
    • problems:
      • makes investment decisions for trust/estate
      • trust/estate wants to acquire >10% client
      • value of trust/estate ownership of client >10% of total assets of trust/estate
  2. GRANTOR
    • If CM is grantor, investments are DIRECT if any true:
      • ability to amend/revoke trust
      • authority to control trust
      • ability to supervise/participate in trust inv decisions
      • underlying trust inv ultimately revert to CM
  3. BENEFICIARY
    • General
    • interest in trust is DIRECT
    • underlying investments is INDIRECT

EXEPTION

  • If control trust or can make investment decision is DIRECT

BLIND TRUST

  • Investments ultimately revert to grantor,
  • has right to amend/revoke and investments,
  • BOTH are DIRECT
61
Q

EMPLOYEE BENEFIT PLAN (EBP)

A
  • CM participates in plant that is client or sponsored by one
  • Independence is impaired.
  • 2 exceptions
  1. is EE of govt org that sponsors EBP and required by law to audit the plan, then OK if all:
    • required to participate in plan
    • plan offered to all EE in comparable positions
    • CM is not director, officer, EE etc of plan
    • has no influence/control over investment strategy and mgt of plan
  2. if was assoc w/ client, but is no longer
62
Q

DEPOSITORY ACCOUNTS

  • Independence of firm/individual
A

FIRM

  • Ok if remote likelihood bank will experience financial difficulties

INDIVIDUAL

  • OK if and of 3 conditions met:
    1. amt is fully insured (FDIC up to 250K)
    2. uninsured amts not material to CM
    3. uninsured amts are material, but reduced to immaterial w/in 30d
63
Q

BROKERAGE ACCOUNTS

  • Independence of CM
A

IMPAIRS independence

UNLESS both:

  1. client’s services rendered under clients NORMAL terms, procedures, requirements
  2. CM assets at risk are immaterial to CM’s net worth

**risk of loss is if CLIENT might become insolvent/commit fraud, NOT just market value decline

64
Q

INSURANCE POLICIES

  • independence
A

Problem is if policy offers investment option AND have either:

  • ability to select underlying investments
  • authority to supervise/participate in inv decision AND invested in attest client
65
Q

LOANS

  • 4 general independence problems
A

CM loans or borrows from

  1. Attest client
  2. Its officers/directors
  3. 10% holder
  4. Client is not a lending institution
66
Q

LOANS:

client is LENDING INSTITUTION

A

If to CM or IFM, independence NOT impaired if any:

  • an immaterial unsecured loan
  • home mortgage
  • secured loan

AND all safeguards are met:

  1. normal lending procedures, terms, requirements
  2. loan was before lending inst became client, or was sold to client
  3. loans are kept current, no alteration to maturity date, interest rate etc
  4. estimated fair value of collateral equals/exceeds outstanding balance
  5. deficit not material to CM net worth

Also if loan is current and fully collateralized by

  • car
  • cash surrender value of an insurance policy
  • cash deposits at same bank

OR aggregate outstanding from CC and overdraft reserve accounts is equal/less $10K

67
Q

LEASES

2 types: independence

A

CAPITAL / FINANCE lease

  • Lease to own, impairs indep

OPERATING lease

  • Not impair if all:
    1. meets GAAP criteria for operating lease
    2. term/conditions are comparable w/ similar leases
    3. amts paid are in accordance w/ terms of lease
68
Q

BUSINESS RELATIONSHIPS

  • 2 types: independence
A

COOPERATIVE

  • w/ client to provide services to 3rd party
  • Problem b/c creates:
    • obligations between them
    • ssume responsibilities for other’s activities/results
    • authority to act as other’s agent

JOINT CLOSELY HELD INVESTMENTS

  • OK: both client and CM own stock of widely held public company
  • NOT OK:
    • both own material stakes in small company
    • CM and officer of client jointly buy an asset
69
Q

FAMILY RELATIONSHIPS

  • 2 categories
A

IMMEDIATE FAMILY MEMBERS (IFM)

  • Spouse
  • Spousal equiv
  • dependents

CLOSE RELATIVES

  • Parents
  • Siblings
  • Nondependent children
70
Q

IMMEDIATE FAMILY MEMBERS

  • 3 General rule of independence
  • 3 exceptions
A

General rules

  1. IFM of CM must comply w/ same independence rule as CM
  2. May not work for or own financial interests in client, UNLESS both indirect and immaterial
  3. IFM cumulatively may not own > 5% of attest client

EXCEPTIONS

  1. work for attest client, just not in KEY POSITION
  2. participate in Employee Benefit Plan, when client IS the plan, as long as plan is offered to all similar EE, not in governance of plan, not mgt of investment decisions
  3. participate in EBP, w/ financial interests in client, even if direct/material, as long as:
    • not on team, PTI, OPIO
    • must participate in EBP
    • if has choice, must dispose of inv w/in 30d
71
Q

CLOSE RELATIVES (CR)

A
  • Restrictions are looser than IFM
  • Independence is impaired if
    1. CM is audit team member, PTI, or OPIO
    2. CR is either
      • key position w/ client
      • financial interest in client that is material or allows signif influence
72
Q

POPEs

  • Not allowed
A

Partners and professional employees

Not allowed: serve in mgt role for attest client

  • director, officer, EE, promoter
  • underwriter
  • trustee
73
Q

POPE

  • Permitted employment relationships
A
  1. PROFESSER AT CLIENT/COLLEGE
    • not key position
    • part-time or non-tenure
    • not participate in EBP of school unless required
    • not on attest team or in PTI
  2. GOVERNMENT AUDITOR
    • Indep of org as long as HEAD of org
      • directly elected by votors
      • apptd by or confirmed by legislative body
  3. HONORARY DIRECTOR/TRUSTEE of NFP or ADVISORY BOARD
    • clearly honorary
    • no voting rights/mgt role
  4. MEMBER OF GOVERNMENTAL ADVISORY COMMITTEE
    • Ok b/c just studying possibilities
  5. CAMPAIGN TREASURER
    • Cant audit campaign or unit candidate will head
    • Can audit political party of candidate
  6. MEMBER OF FEDERATED FUND RAISING ORG
    • Can’t audit if org controls charity
    • If not control, conservatively apply conc framework
74
Q

FORMER EMPLOYMENT or ASSOCIATION w/ attest client

  • Independence
A
  • Independence is IMPAIRED if participate as attest team member or PTI of engagement that COVERS AND TIME period when was EE or assoc by client
  • If only PIO or 10hr, then not impaired if dissociate from client
75
Q

DISSOCIATION

  • 5 steps
A

Includes all 5 steps

  1. cease to participate in health/welfare benefits unless client is legally required and CM pays 100% of cost
  2. cease to participate in all EBP by liquidating/transferring vested amts at earliest time
  3. dispose of any direct/material indirect financial interest
  4. collect/repay loans to/from client
  5. assess other relationships for other threats
76
Q

SUBSEQUENT EMPLOYMENT (consideration)

  • Independence concerns, general
  • Necessary actions
A

Attest team member or PTI considers employment w/ client

Impaired unless

  1. reports consideration/offer to firm
  2. removes self from engagement until offer rejected or position no longer sought

Other CM learns of team member or PTI not taken steps,

  • CM should alert the firm, to consider how to provide reasonable assurance person acted properly

Not for OPIO or 10hr people

77
Q

SUBSEQUENT EMPLOYMENT (goes to work for client)

A

Independence impaired if POPE goes to work for client in KEY position, unless all:

  1. amts due former EE for ownership interest/vested retirement is NOT material to firm
  2. former EE not in PTI firms operations/financial policies
  3. former EE not participate in firm’s business and not assoc, even not appear to
  4. ongoing attest team considers MODIFYING audit procedures
  5. if former EE takes key position w/in 1 yr and has significant interaction w/ attest team, firm should review engagement to ensure appropriate skepticism maintained
78
Q

SARBANES-OXLEY (SOX)

ONE-YEAR COOLING OFF PERIOD

A

Stricter rules for public companies

ONE YEAR PERIOD Year preceding the beginning of audit

  • Applies to lead partner, concurring partner, 10-hr person
  • Requires 1 yr cooling off period before work for client in financial oversight position
    • CEO, CFO, controller, chief accountant, prep FS

If former audit EE violates rules, i_ndependence is impaired_

79
Q

OTHER associations (4)

  • Independence concerns
A

SOCIAL CLUB member

  • No concern if just member

TRADE ASSOICATION

  • Impaired if assoc is client or POPE is employed/assoc in important role

COMMON INTEREST REALTY ASSOC (CIRA)

  • CM buy interest in condo, coop etc
  • Firm can audit assoc if
    • assoc similar to local govt (public safety, maint, utilities)
    • CM annual assessment is not material to either assoc or CM
    • liquidation of assoc or assets not result in distrib to CM
    • assoc’s creditors not allowed to recover from CM’s assets is assoc became insolvent

CREDIT UNION

  • CM only able to join irrespective of professional services provided
80
Q

GIFTS and ENTERTAINMENT

Independence concerns

A

GIFT

  • Not impaired if CLEARLY INSIGNIFICANT

ENTERTAINMENT

  • Only if reasonable in the circumstances, includes:
    • nature of gift/entertainment
    • occasion
    • cost/value
    • cumulative effect
    • if assoc w/ active conduct of bus
    • if other attest clients also participated
    • which client and firm EE participated
81
Q

LITIGATION (actual or threatened)

  • 4 types
  • Indep concerns
A

BETWEEN CLIENT AND MEMBER

  • If either are in threatened or actual positions of material adverse interests
    • minor dispute is ok
    • not ok if re: deficiencies in firm work or fraud of client mgt

BY CLIENT SECURITY HOLDERS

  • Claim securities fraud, etc of BOTH client and firm, not nec impair indep b/c united front
  • not ok if cross claims bet client vs firm and is SIGNIF risk that material settlement

OTHER 3RD PARTY LITIGATION

  • Lenders who might sue firm/client, same as security holders

FINAL RESOLUTION of LITIGATION

  • Eliminates indep threat and reduces to acceptable level
82
Q

Who governs provision

NONAUDIT SERVICES (NAS)

A

CODE

  1. Private (non public) company audit/attest clients
  2. Public non-attest clients SOX Public attest clients

SOX

  • Public attest clients
83
Q

4 Example COMMUNICATIONS not NAS

  • (no indep problems)
A
  1. Selecting/applying accounting standards/policies/disclosure requirements
  2. Appropriateness of client’s methods in accounting/financial reporting
  3. Adjusting entries proposed for client mgt to consider
  4. Form/content of FS
84
Q

NAS concern for AUDIT independence

  • Even w/ small services
A
  • Total NAS involvement w/ client becomes so extensive is constitutes performing separate service
  • Even if each is individually small
85
Q

Management Responsibilities

  • Def
  • Ex of Impermissible activities
A

Management responsibilities involve

  • leading and directing an entity,
  • including making significant decisions regarding the acquisition, deployment, and control of human, financial, physical, and intangible resources

IMPERMISSABLE ACTS

  • Setting policy or strategic direction
  • Directing or accepting responsibility for client EE (except internal auditors)
  • Authorizing transactions
  • Prep source docs for evidence of transaction
  • Have custody of client’s assets
  • Reporting to governance on behalf of mgt
  • Serving as agent, registrar, counsel
  • Accepting responsibility for prep of FS
  • Accepting responsibility for internal controls
86
Q

Non Audit Services

  • SAFEGUARDS so Independence NOT impaired
A

ALL 3 must be met

  1. CLIENT AGREES ensure their mgt is ultimately their own. Member must determine
    • client assumes all mgt responsibilities
    • client has an EE who is knowledgeable to
      • oversee attest service,
      • evaluate adequacy of services
      • accept responsibility for results of services 2)
  2. Member/firm NOT assume mgt responsibilities (above) and client will
    • be able to meet criteria above
    • make informed judgement of member’s NAS
    • accept responsibility for making decisions that are responsibility of mgt
  3. member establish and DOCUMENT in writing this understanding, re:
    • objectives of engagement
    • services to be performed
    • clients acceptance of responsibilities
    • member’s responsibilities
    • any limitations on engagement
87
Q

Permitted NAS if safeguards for independence met

A

Member may

  • Provide advice / recommendations to assist mgt in performing functions / make decisions
  • Attend Board mtgs as nonvoting advisor
  • Interpret FS, forecasts, other analyses
  • Provide mgt w/ advice on plans, strategies, relationships
88
Q

SOX limits NAS

  • Type of companies
  • 3 actions not allowed
  • Services not allowed
  • NOT prohibited
A

MIPPs not provide certain NAS to audit clients that are PUBLIC companies

3 key actions NOT allowed

  1. Audit own work
  2. Advocate for client
  3. Service as manager

Services NOT allowed

  • Bookkeeping related to accounting records of FS
  • Fin Info systems design
  • Appraisal, valuation, actuarial services
  • Internal audit
  • Mgt or HR
  • Broker, dealter, investor
  • Legal services unrelated to audit
  • Other PCAOB not allowed

NOT prohibited

  • Providing tax services *
  • as long as firm NOT
  • contingent fee
  • provide mkt, planning, opinion services for confidential or aggressive interpretation of tax law
  • provide tax service to members of mgt who serve in oversight role for client (or their IFM) SPRINT RULE
89
Q

General CODE guidance for NAS

Impair/not impair independence

A

IMPAIR

  • Management or monitoring

NOT impair

  • Just making recommendations
90
Q

INTERNAL AUDIT

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Assess for compliance w/ mgt policies
  • ID opportunities for improvement
  • Recommend improvement for mgt to consider

IMPAIR

  • Performing ongoing monitoring or control activities that affect executions of transactions
  • Routine operations in client bus process
  • Mgt relies on member’s work for assertions on effectiveness of controls
  • Deciding what changes to internal control for improvement
  • Report to board on behalf of mgt for internal audit
91
Q

APPRAISAL, VALUATION, ACTUARIAL SERVICES

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Low subjectivity services
  • Nonfinancial stmt services

IMPAIR

  • Results material to FS and high subjectivity
92
Q

BENEFIT PLAN ADMIN

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Communicate summary plan data to trustee
  • Advise mgt of impact
  • Process transactions initiated by participants
  • Prep account valuations and participant stmts

IMPAIR

  • Make policy decisions for client
  • Interpret plan for participant w/o mgt
  • Make disbursements on plan’s behalf
  • Take custody of plan assets
  • Serve as plan fiduciary
93
Q

BOOKKEEPING, PAYROLL, AND OTHER DISBURSEMENTS CODE

  • guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Record mgt approved transactions in ledger
  • Prep FS using client’s trial balance info
  • Post client approved JE to trial balance
  • Propose JE
  • Generate unsiged checks
  • Transmit client approved payroll/disbursement info to fin inst chosen by client

IMPAIR

  • Make changes to accounting records w/o client
  • Approve client transactions
  • Prep/make changes to source docs
  • Accept responsibility to authorize pmts, sign checks
  • Approve vendor invoices for pmts
94
Q

BUSINESS RISK CONSULTING

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Assist mgt in assessment of risk control process
  • Recommend plan

IMPAIR

  • Make risk decisions
  • Present to board for mgt
95
Q

CORPORATE FINANCE CONSULTING

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Assist in devel strategies,
  • ID sources of capital
  • Assist mgt in analyzing effect of proposed transactions
  • Advise in negotiations
  • Draft offering docs

IMPAIR

  • Commit to transaction
  • Consummate transaction
  • Act as promoter, underwriter, guarantor of client’s securities
  • Act as distritbutor of offering docs
  • Maintain custody of client’s securities
96
Q

EXECUTIVE OR EE SEARCH

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Recommend specs
  • Solicit, screen, recommend candidate using client criteria
  • Advise ER on EE hiring and benefits

IMPAIR

  • Hire/terminate client EE
  • Commit client to EE comp/benefits
97
Q

FORENSIC ACCOUNTING SERVICES

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Expert for large group where client is <20% of members/voters,
  • NOT lead plaintiffs, and no sole decision making power to select witness
  • Fact witness
  • Litigation consulting: providing advice to client (not expert witness)
  • Litigation consult: mediator

IMPAIR

  • Expert witness for client
  • Litigation consult: trier of fact, court appt expert or arbitrator
98
Q

INFO SYSTEMS DESIGN, IMPLEMENTATION, INTEGRATION

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Install off shelf fin info system
  • Assist in set up chart of accounts and FS format
  • Design, develop, install info system not financial
  • Training/instruction to EE on info/control system
  • Network maint

IMPAIR

  • develop fin info system
  • signif mod to source code of fin info system
  • supervise daily operation of Fin Info system
  • operate client’s network
99
Q

INVESTMENT (advisory or mgt)

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Recommend allocation invesmt asset classes
  • Perform BK of client portfolio
  • Review portfolio managed by other to see if meet client objectives
  • Transmit investment selection to broker

IMPAIR

  • Make inv decisions
  • Execute transactions
  • Take custody of assets
100
Q

TAX SERVICES

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

  • Prep tax return
  • Transmit tax return to authority
  • Transmit pmt
  • Signing and filing tax return if authorized
  • Representing client before tax authority

IMPAIR

  • Represent in court for tax dispute
101
Q

HOSTING SERVICES

  • CODE guidance for NAS (impair/not impair independence)
A

NOT IMPAIR

IMPAIR

  • Hosting website/other nonfin info system
  • Keeping electronic data on client behalf
  • Business continuity or disaster recovery provider
102
Q

MEMBERS in BUSINESS (MIBs)

  • def
A

members who are

  • employed or engaged on a contractual or volunteer basis
  • in an executive, staff, governance, advisory, or administrative capacity
  • in such areas as industry, the public sector, education, the not-for-profit sector and regulatory or professional bodies.

This would include staff accountants, internal auditors, and other accountants not engaged in public practice.

103
Q

What Rules do MIBs have to follow

A
  • NOT have to worry about independence rules
  • MUST follow other guidelines for MIPPs (objectivity, integrity, etc)

The Conceptual Framework for MIBs generally tracks that of MIPP

104
Q

What threats id’d for MIPPs also apply to MIBs

A

6 of 7 for MIPP

  1. adverse interest threats,
  2. advocacy threats,
  3. familiarity threats,
  4. self-interest threats
  5. self-review threats, and
  6. undue influence threats.

Management participation isn’t an issue, b/c likely working at a company

105
Q

MIBs examples of threats

  • ADVERSE INTEREST
  • ADVOCACY
A

ADVERSE INTEREST

  • Close relative is investor in ERs closest competitor
  • Has sued ER

ADVOCACY

  • Financing depends on info MIB includes in prospectus
  • Gives/not give info that unduly influence 3rd party
106
Q

MIBs ex of threat

  • FAMILIARITY
  • SELF-INTEREST
A

FAMILIARTY

  • Long relationship w/ 3rd party and stop reviewing quality of 3rd party work
  • Hires relative
  • Accepts gifts from firm that sells goods to ER

SELF-INTEREST

  • Close relative owns stock in ER
  • Eligible for performance related bonus, value is affected by their decisions
107
Q

MIBs ex of threats

  • SELF-REVIEW
  • UNDUE INFLUENCE
A

SELF-REVIEW

  • Internal auditor accepts work she previously performed before promotions
  • Accepts work that self performed that will be basis for providing another prof service

UNDUE INFLUENCE

  • Pressured to become assoc w/ misleading info
  • Deviate from company policy
  • Change conclusion on tax/accounting position
108
Q

MIBs

  • SAFEGUARDS
  • Can/cannot use
A

NOT use

  • Safeguards generated by accounting firm

USE

  • Created by prof, legislation, regulation Employer
109
Q

MIBs Integrity and Objectivity

  • Prep/Reporting info….NEVER (3)
A
  1. Make or direct another to make a false entry;
  2. Fail to correct inaccurate financial statements or entries; or
  3. Sign or permit another to sign a document containing materially false information.
110
Q

MIBs Integrity and Objectivity

  • Pressure to Breach the Rules (5)
A

MIBs should neither

  • pressure other members to breach the rules of integrity and objectivity,
  • nor succumb to such pressures themselves

Pressures related

  1. Conflicts of interest
    • Ex: MIB’s brother pressures MIB to select him as a vendor to the MIB’s employer over competing firms
  2. To influence presentation of information
    • Ex: superiors pressure MIB to report misleading financial results to influence investors or to suppress internal audit reports containing adverse findings
  3. Act without sufficient competence or due care
    • Ex: superiors pressure MIB to finish internal audit report without having performed sufficient work or to undertake a task the MIB is not qualified for
  4. Financial interests
    • Ex: CEO pressures MIB to manipulate financial results to indicate that performance targets qualifying the CEO for a bonus have been met
  5. Gifts or entertainment
    • Ex: superiors pressure MIB to offer gifts to a purchasing agent to influence her to buy goods from MIB’s employer rather than competitors
111
Q

MIBs General Standards

A

Must

  • Act with professional competence
  • Exercise due professional care
  • Adequately plan and supervise performance of professional services
  • Have sufficient relevant data to back up any conclusions or recommendations they make

Expected to

  • Comply with applicable standards promulgated by bodies like the Securities and Exchange Commission and Internal Revenue Service
  • Not falsely imply that
    • FS prep/submitting to third parties are in accordance with independence rules when they were not
    • F/S were prepared in accordance w/ GAAP
112
Q

MIBs

Acts Discreditable

A

Same stds as MIPP for defining Discreditable acts, includes:

  • Discrimination and harassment in employment
  • Solicitation or disclosure of CPA Exam questions and answers
  • Failure to file a tax return or pay a tax liability
  • Negligence in preparing financial statement or other records
  • Failure to follow the rules for preparation of financial statements required by agencies like the Securities and Exchange Commission, Federal Communications Commission, and state commissioners
  • Entering into prohibited indemnification agreements and limited liability provisions
  • Disclosing confidential information without the employer’s permission or the application of another recognized exception (such as validly issued subpoena, etc.)
  • Promoting or marketing their firm by use of false, misleading, or deceptive ads Improper (misleading) use of the CPA credential
113
Q

Other Members (OMs)

  • Def
A

unemployed, retired, or otherwise not working in the profession,

  • so most of the code that applies to MIPPs and MIBs does not apply to them
114
Q

OMs

Discreditable Acts

A

at a minimum

  • Discrimination and harassment in employment practices
  • Solicitation or disclosure of CPA Examination questions and answers
  • Failure to file a tax return or pay a tax liability Improper disclosure of confidential information obtained from former employment or previous volunteer work
  • False, misleading, or deceptive acts in promoting or marketing services Improper (misleading) use of the CPA credential
115
Q

SEC rules of Independence

Vs

AICPA

A

Very similar

116
Q

SEC Rules

  • To audit a company
A
  • Registered and in good standing under laws of their state
  • Must be and appear to be independent and capable of exercising objective and impartial judgment
117
Q

SEC rules

Independence primary concern

A

whether a relationship with or provision of a service to an audit client:

  • Creates a conflict of interest for the auditor;
  • Results in the accountant auditing his or her own work;
  • Results in the accountant acting as an audit client’s manager or employee; or
  • Places the accountant in a position of being an advocate for the audit client.
118
Q

Family Relationships AICPA

vs

SEC

  • 2 groups each
A

AICPA: 2 separate circles

  1. IFMs: spouse, spousal equiv, dependents
  2. Close Relatives: parents, siblings, nondependent children

SEC

  1. IFMs – Immediate Family members Spouse, spousal equiv, dependents
  2. CFMs - Close Family Members Includes IFMs and parent, nondependent child, sibling
119
Q

COVERED PERSONS

AICPA vs SEC

A

partners, principals, shareholders, and employees of an accounting firm:

AICPA:

  • Covered members: audit team members, PTIs, 10hour persons, OPIOs, firm itself, entity controlled by first five

SEC:

  • Covered Persons: audit team members, chain of command (PTIs), 10 hour persons, OPIOs (and firm itself, entity controlled by first five, which are not listed, but would be covered)
120
Q

Financial Reporting Oversight Role (FROR)

SEC

A

A role in which a person is in a position to or does exercise influence over the contents of the F/S or anyone who prepares them.

Examples: director, CEO, president, CFO, COO, general counsel, CAO, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position.

121
Q

Audit and Professional Engagement Period

SEC

A

Includes

  • AUDIT PERIOD
    • the period covered by any F/S being audited or reviewed
  • PROFESSIONAL ENGAGEMENT PERIOD
    • BEGINS at the earlier of when the accountant signs an initial engagement letter or begins the audit and
    • ENDS when the audit client or the accountant notifies the SEC that the client is no longer the accountant’s audit client.
122
Q

CHAIN OF COMMAND

SEC

A
  • includes all persons who:
    • supervise or have direct management responsibility for the audit, including at all successively senior levels through the accounting firm’s chief executive;
    • evaluate the performance or recommend the compensation of the audit engagement partner; or
    • provide quality control or other oversight of the audit (PTIs);
  • 10-hr persons
  • OPIOs Other partners in office
123
Q

Investment Rules (Financial Relationships)

  • General Rule
  • SEC
A
  • The accounting firm
  • any of its covered persons or
  • any or their immediate family members (IFMs)

may not have direct investments in an audit client,

  • such as owning stocks, bonds, notes, options, and so on.
124
Q

Direct Investment

  • Def
  • SEC
A

includes one through an intermediary if:

  • The firm, covered persons or IFMs, alone or together, either supervise or participate in the intermediary’s investment decisions, or
  • The intermediary is
    • a nondiversified mutual fund that
    • has invested 20% or more its money in an audit client.
125
Q

Financial Relationships

  • Independence is Impaired
  • SEC
A

Independence is Impaired, if POPE, IFM, CFM:

  • 5% investments: own > 5% of client stock
  • Trust: voting trustee, executor (unless NO authority to make investment decisions)
126
Q

Material Indirect Interests

  • SEC, permits (2)
A

Only interests that are both

  • indirect and
  • immaterial are permitted

It is permitted for these persons to

  • own 5% or less of a diversified investment company,
  • even if the company owns some shares of an audit client.
127
Q

Related Entities

  • Independence concerns
  • SEC
A

Independence is destroyed if the firm, covered persons, or IFMs:

  • Have any direct* or *material indirect investment in an ENTITY that is not an audit client where:
    • An audit client has
      • an investment in that entity that is material to the audit client and
      • has the ability to exercise significant control over that entity, or
    • The entity has
      • an investment in an audit client that is material to that entity and
      • has the ability to exercise significant influence over that audit client.
    • Have any material investment in an entity over which an audit client is able to exercise significant influence; or
    • Have the ability to exercise significant influence over an entity that has the ability to exercise significant influence over an audit client.
128
Q

LOANS

  • SEC, independence concerns
A

Independence is impaired if the firm, its covered persons, or their IMFs have:

  • Loans/Debtor Creditor Relationships
    • Any loan to or from an audit client, its officers or directors, or its 10% owners,
  • Exceptions: may borrow from financial institution under normal procedures/terms:
    • Automobile loans and leases
      • collateralized by the automobile;
    • Loans fully collateralized by the cash surrender value of an insurance policy; cash deposits at the same financial institution; and
    • A mortgage loan
      • collateralized by the borrower’s primary residence
      • provided the loan was not obtained while the covered person was a covered person.
129
Q

Savings and Checking Accounts

  • SEC, independence concerns
A

allowed, but only if

  • Account balance is fully insured ($250K) by FDIC and
  • There is an uninsured balance,
    • the likelihood of the institution and experiencing financial difficulties is remote
130
Q

Credit cards

  • SEC, independence concerns
A

allowed if outstanding credit card balance < $10,000 owed to a lender that is an audit client.

131
Q

Insurance Products

  • SEC, independence concerns
A

only permitted if:

  • The policy was obtained before became a CP, and
  • The likelihood of the insurer becoming insolvent is remote.
132
Q

FROR

  • Def
A

Financial Responsibility or Oversight Role

133
Q

Employment Relationships

  • SEC independence
A

An accountant is not independent if employment relationship with the audit client, includes:

  • Employment at Audit Client of Accountant POPE of accounting firm is EE of audit client or is a member of the board of directors.
  • Employment at Audit Client of Certain Relatives of Accountant A CFM of a covered person is in an accounting role or FROR at an audit client.
  • Employment at Audit Client of Former Employee of Accounting Firm
  • A former POPE at an accounting firm is in an accounting or FROR at an audit client, unless
    • the individual:
      • Does not influence the accounting firm’s operations or financial policies;
      • Has no capital balances in the accounting firm; and
      • Has no financial arrangement with the accounting firm other than one providing for regular payment of a fixed dollar amount
    • The individual has served a one-year “cooling off” period

Does not apply to: persons

  • Provided <10hr of attest services
  • Persons employed by client as a result of merger
  • Persons employed by client as a result of emergency

Is an entire year before the audit cycle begins

134
Q

Business Relationships

  • SEC, independence
A

Impaired if at any time during the audit and professional engagement,

  • the accounting firm or any covered person in the firm
    • has any direct or material indirect business relationship
    • with an audit client or with persons associated with the audit client
    • in a decision-making capacity, such as an audit client’s officers, directors, or substantial shareholders.
  • Exception—An accounting firm or covered persons can
    • provide professional services to an audit client or
    • buy services from a client
    • in the ordinary course of business without an impermissible business relationship arising.
135
Q

Non Audit Services, NAS

  • SEC rules
A

Allowed NAS

  • To a public company that is NOT an audit client
  • A private company that IS an audit client

Not allowed:

  • NAS to public company that is an audit client
    • Bookkeeping services
    • Financial information systems design and implementation
    • Appraisal or valuation services
    • Actuarial services
    • Internal audit outsourcing services
    • Management functions
    • Human resources
    • Broker-dealer, investment adviser, or investment banking services
    • Legal services Expert services unrelated to the audit
136
Q

Partner Rotation

  • SOX mandate
A
  • NO requirements that public companies rotate audit firms.
  • Lead and concurring audit partners must be rotated every 5 years (5 on, 5 off).
  • Other partners providing more than 10 hours of attest services must be rotated every 7 years (7 on, 2 off).
  • There are exemptions for firms with fewer than five public company audit clients and fewer than 10 audit partners.
137
Q

Control of Audit process

  • SEC
A

SOX shifts control of the audit process from the CEO and CFO to the audit committee,

  • auditor is not independent unless these new rules are followed.
  • Both the
    1. audit engagement itself and
    2. provision of permitted NAS are to be preapproved by the audit committee.
138
Q

Quality Controls

  • Firms audit >500 companies
  • SEC
A

quality control system provides such reasonable assurance only if it has the following features:

  • Written independence policies and procedures;
  • An automated system tracking investments of partners and managerial employees that might impair independence;
  • For all professionals, a system that provides timely information about entities from which the accountant is required to maintain independence
  • An annual or ongoing firm-wide training program on independence rules;
  • An annual internal inspection and testing program to monitor adherence to independence rules;
  • Notification to all firm employees of the name and title of the member of senior management responsible for compliance with independence rules; and
  • A disciplinary mechanism to ensure compliance.
139
Q

SOX history of public accounting firm regulation

A

In 2002, Sarbanes-Oxley (SOX)

  • replaced decades of self-regulation by public accounting firms when it
  • created the PCAOB to govern public company audit firms
  • under the supervision of the SEC.
140
Q

PCAOB

  • Regulation responsibilities
A

Public Company Accounting Oversight Board

  • Registers accounting firms that audit public companies
  • Establishes auditing, quality control, ethics, independence, and other standards Inspects firms
  • Also Annual inspections are conducted for firms doing more than 100 audits per year.
    • Inspections occur once every three years for firms auditing fewer companies.
  • Investigates and punishes wrongdoing
141
Q
A

AUD mine (2 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions