AUD 2 Professional Responsibilities and Ethics

Question 1

One of the most comprehensive sets of rules and codes of ethics related to accountants are largely based on the ________________ .

Answer 1

One of the most comprehensive sets of rules and codes of ethics related to accountants are largely based on the AICPA Code of Professional Conduct.

Question 2

In addition to the AICPA Code of Professional Conduct, a CPA will consider the ethical requirements of all applicable bodies and agencies, which may include:

Answer 2

In addition to the AICPA Code of Professional Conduct, a CPA will consider the ethical requirements of all applicable bodies and agencies, which may include:

• State societies
• State boards of accountants and related regulatory agencies
• The SEC, PCAOB, GAO, and DOL
• Taxing authorities

Question 3

The AICPA Code of Professional Conduct (the Code) is organized in 4 parts:

Answer 3

The AICPA Code of Professional Conduct (the Code) is organized in 4 parts:

• The Preface (applicable to all members)
• Part 1 – Members in Public Practice
• Part 2 – Members in Industry
• Part 3 – Other Members

Question 4

The AICPA Code of Professional Conduct (the Code) is organized in 4 parts:

• The Preface (applicable to all members)
• Part 1 – Members in Public Practice
• Part 2 – Members in Industry
• Part 3 – Other Members

Answer 4

The AICPA Code of Professional Conduct (the Code) is organized in 4 parts:

1. The Preface (applicable to all members)
   • 0.100 – Overview of the code of Professional Conduct
   • 0.200 – Structure and Application of the AICPA code
   • 0.300 – Principles of Professional Conduct
   • 0.400 – Definitions
   • 0.500 – Nonauthoritative Guidance
   • 0.600 – New, Revised, and Pending Interpretations and Other Guidance

2. Part 1 – Members in Public Practice
• 1.000 – Introduction
• 1.100 – Integrity and Objectivity
• 1.200 – Independence
• 1.300 – General Standards
• 1.310 – Compliance With Standards
• 1.320 – Accounting Principles
• 1.400 – Acts Discreditable
• 1.500 – Fees and Other Types of Remuneration
• 1.600 – Advertising and Other Forms of Solicitation
• 1.700 – Confidential Information
• 1.800 – Form of Organization and Name

3. Part 2 – Members in Industry
• 2.000 – Introduction
• 2.100 – Integrity and Objectivity
• 2.300 – General Standards
• 2.310 – Compliance With Standards
• 2.320 – Accounting Principles
• 2.400 – Acts Discreditable

4. Part 3 – Other Members
   • 3.100 – Introduction
   • 3.400 – Acts Discreditable

Question 5

AICPA Code of Professional Conduct (the Code)

When a CPA has multiple professional roles, the highest and most ________ level of standards should be applied.

Answer 5

AICPA Code of Professional Conduct (the Code)

When a CPA has multiple professional roles, the highest and most restrictive level of standards should be applied.

Question 6

Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.

This topic also describes how certain terms are interpreted in a section related to drafting conventions.

• Rules requiring a member to consider something are requiring the CPA to _____ about the matters being addressed.

Answer 6

Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.

This topic also describes how certain terms are interpreted in a section related to drafting conventions.

• Rules requiring a member to consider something are requiring the CPA to think about the matters being addressed.

Question 7

Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.

This topic also describes how certain terms are interpreted in a section related to drafting conventions.

• Rules requiring a member to evaluate something are requiring the CPA to ______ a matter’s significance.

Answer 7

• Rules requiring a member to evaluate something are requiring the CPA to measure a matter’s significance.

Question 8

Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.

This topic also describes how certain terms are interpreted in a section related to drafting conventions.

• Rules requiring a member to determine something are requiring the CPA to ______ a conclusion related to a matter or make a decision in relation to it.

Answer 8

• Rules requiring a member to determine something are requiring the CPA to establish a conclusion related to a matter or make a decision in relation to it.

Question 9

Structure of the AICPA Code of Professional Conduct and its applicability to the services performed by a CPA.

This topic also describes how certain terms are interpreted in a section related to drafting conventions.

• Rules requiring a member to consider something are requiring the CPA to _____ about the matters being addressed.
• Rules requiring a member to evaluate something are requiring the CPA to ______ a matter’s significance.
• Rules requiring a member to determine something are requiring the CPA to ______ a conclusion related to a matter or make a decision in relation to it.

Answer 9

• Rules requiring a member to consider something are requiring the CPA to think about the matters being addressed.
• Rules requiring a member to evaluate something are requiring the CPA to measure a matter’s significance.
• Rules requiring a member to determine something are requiring the CPA to establish a conclusion related to a matter or make a decision in relation to it.

Question 10

• Rules requiring a member to consider something are requiring the CPA to _____ about the matters being addressed.

Answer 10

• Rules requiring a member to consider something are requiring the CPA to think about the matters being addressed.

Question 11

• Rules requiring a member to evaluate something are requiring the CPA to ______ a matter’s significance.

Answer 11

• Rules requiring a member to evaluate something are requiring the CPA to measure a matter’s significance.

Question 12

• Rules requiring a member to determine something are requiring the CPA to ______ a conclusion related to a matter or make a decision in relation to it.

Answer 12

• Rules requiring a member to determine something are requiring the CPA to establish a conclusion related to a matter or make a decision in relation to it.

Question 13

Principles embedded in the AICPA Code of Professional Conduct

In the preamble, it reminds CPAs of their _______ of self-discipline exceeding the simple compliance with applicable laws and regulations;

__________s to the public, to clients, and to colleagues;

and a commitment to act with ____ despite the possibility of personal sacrifice that may result.

Answer 13

Principles embedded in the AICPA Code of Professional Conduct

In the preamble, it reminds CPAs of their responsibility of self-discipline exceeding the simple compliance with applicable laws and regulations;

responsibilities to the public, to clients, and to colleagues;

and a commitment to act with honor despite the possibility of personal sacrifice that may result.

Question 14

Principles embedded in the AICPA Code of Professional Conduct:

   R 
   P
   I
   O
   D
   S

Answer 14

Principles embedded in the AICPA Code of Professional Conduct :

• Responsibilities
• Public Interest
• Integrity
• Objectivity and Independence
• Due Care
• Scope and Nature of Services

Question 15

____________s – Requires the application of sensitive professional and moral judgment at all times and cooperation with other members of the profession to improve the art of accounting, to maintain the public’s confidence in the profession, and to carry out the profession’s responsibility for self-governance.

Answer 15

Responsibilities

Requires the application of sensitive professional and moral judgment at all times and cooperation with other members of the profession to improve the art of accounting, to maintain the public’s confidence in the profession, and to carry out the profession’s responsibility for self-governance.

Question 16

_____ Interest

Requires a commitment to professionalism and acting in a manner that serves the _____ interest and honors the trust that the ____ has in the accounting profession.

The ____ interest is the collective well-being of the community of people and institutions that are served by the accounting profession, which requires the accountant to act with integrity when confronted by conflicts among various stakeholders and perform services applying integrity, objectivity, and due professional care.

Answer 16

Public Interest

Requires a commitment to professionalism and acting in a manner that serves the public interest and honors the trust that the public has in the accounting profession.

The public interest is the collective well-being of the community of people and institutions that are served by the accounting profession, which requires the accountant to act with integrity when confronted by conflicts among various stakeholders and perform services applying integrity, objectivity, and due professional care.

Question 17

_______

Requires that the highest level of ______ be applied through the CPA’s honesty and candor, within the constraints of client confidentiality, and an unwillingness to subordinate service or the public trust to personal gain or advantage.

Answer 17

Integrity

Requires that the highest level of integrity be applied through the CPA’s honesty and candor, within the constraints of client confidentiality, and an unwillingness to subordinate service or the public trust to personal gain or advantage.

Question 18

Objectivity and __________

Requires _________ , both in fact and in appearance, when performing auditing and other attestation services, for which standards require _________, and that the CPA remain free of conflicts of interest and exercise impartiality and intellectual honesty in the performance of all professional services.

Answer 18

Objectivity and Independence

Requires independence, both in fact and in appearance, when performing auditing and other attestation services, for which standards require independence, and that the CPA remain free of conflicts of interest and exercise impartiality and intellectual honesty in the performance of all professional services.

Question 19

________

Requires compliance with technical and ethical standards while continuing to endeavor to improve the CPA’s competence and quality of services, which is accomplished through a commitment to learning throughout the CPA’s professional life, and diligence in the provision of professional services enabling performance to the best of the CPA’s ability.

_________ also requires a CPA to remain competent and to understand the limitations to that competence, which may result in consultation or the referral of services, and to adequately plan and supervise all professional activities for which the CPA is responsible.

Answer 19

Due Care

Requires compliance with technical and ethical standards while continuing to endeavor to improve the CPA’s competence and quality of services, which is accomplished through a commitment to learning throughout the CPA’s professional life, and diligence in the provision of professional services enabling performance to the best of the CPA’s ability.

Due care also requires a CPA to remain competent and to understand the limitations to that competence, which may result in consultation or the referral of services, and to adequately plan and supervise all professional activities for which the CPA is responsible.

Question 20

Scope and _____ of Services

Requires the CPA to evaluate whether or not services can be performed in a manner consistent with the principles of the Code by practicing in a firm with appropriate quality control policies and procedures commensurate with the services being performed; making certain that services performed for an audit client do not create a conflict of interest; and that activities in which the CPA participates are appropriate for members of the CPA profession.

Answer 20

Scope and Nature of Services

Requires the CPA to evaluate whether or not services can be performed in a manner consistent with the principles of the Code by practicing in a firm with appropriate quality control policies and procedures commensurate with the services being performed; making certain that services performed for an audit client do not create a conflict of interest; and that activities in which the CPA participates are appropriate for members of the CPA profession.

Question 21

Principles embedded in the AICPA Code of Professional Conduct :

Answer 21

Principles embedded in the AICPA Code of Professional Conduct :

• Responsibilities
• Public Interest
• Integrity
• Objectivity and Independence
• Due Care
• Scope and Nature of Services

Question 22

Only the AICPA Code of Professional Conduct is ___________ and that guidance provided by the staff of the Professional Ethics Division of the AICPA is nonauthoritative guidance.

Answer 22

Only the AICPA Code of Professional Conduct is authoritative and that guidance provided by the staff of the Professional Ethics Division of the AICPA is nonauthoritative guidance.

Question 23

AICPA Code of Professional Conduct

The conceptual framework approach involves a 3-step process:

1. Identify ________s
2. Evaluate the __________ of identified threats
3. Identify and apply ________s

Answer 23

AICPA Code of Professional Conduct

The conceptual framework approach involves a 3-step process:

1. Identify threats
2. Evaluate the significance of identified threats
3. Identify and apply safeguards

Question 24

_______ threats that may interfere with the CPA’s ability to remain in compliance with the Code.

The CPA may, for example, be considering entering into a relationship that is not prohibited but that raises the possibility of a conflict of interest.

The existence of one or more threats does not necessarily indicate that the CPA is in violation of the Code, but requires that the threat or threats be evaluated.

Answer 24

Identify threats that may interfere with the CPA’s ability to remain in compliance with the Code.

The CPA may, for example, be considering entering into a relationship that is not prohibited but that raises the possibility of a conflict of interest.

The existence of one or more threats does not necessarily indicate that the CPA is in violation of the Code, but requires that the threat or threats be evaluated.

Question 25

Evaluate the ________ of identified threats, both individually and in the aggregate, to determine if they are at an acceptable level.

A threat is considered to be at an acceptable level when a reasonable and informed third party would conclude that the Code was not violated.

Answer 25

Evaluate the significance of identified threats, both individually and in the aggregate, to determine if they are at an acceptable level.

A threat is considered to be at an acceptable level when a reasonable and informed third party would conclude that the Code was not violated.

The evaluation will consider qualitative and quantitative factors and should take into account existing safeguards that are in place and may reduce the threat to an acceptable level.

Question 26

Identify and apply ________s to those threats that are not at an acceptable level.

In some cases, a single ________ may eliminate more than one threat while, in others, it may require several __________s to reduce a single threat to an acceptable level.

In cases where _________s cannot be implemented to reduce the threat or threats to an acceptable level, providing those specific professional services would result in the member’s compliance with the Code being compromised, the member should determine if declining or discontinuing the service or resigning from the engagement would be appropriate.

Answer 26

Identify and apply safeguards to those threats that are not at an acceptable level.

In some cases, a single safeguard may eliminate more than one threat while, in others, it may require several safeguards to reduce a single threat to an acceptable level.

In cases where safeguards cannot be implemented to reduce the threat or threats to an acceptable level, providing those specific professional services would result in the member’s compliance with the Code being compromised, the member should determine if declining or discontinuing the service or resigning from the engagement would be appropriate.

Question 27

There are 7 categories of threats:

1. Self-R____
2. Adv_____
3. A____ Interest
4. Fam_____
5. U____ Influence
6. S___ - Interest
7. M________ Participation

Answer 27

There are 7 categories of threats:

1. Self-Review
2. Advocacy
3. Adverse Interest
4. Familiarity
5. Undue Influence
6. Self-Interest
7. Management Participation

They are not mutually exclusive in that a single threat may fall under more than one category. Threats are evaluated both individually and in the aggregate.

Question 28

There are 7 categories of threats:

1. S
2. A
3. A
4. F
5. U
6. S
7. M

Answer 28

There are 7 categories of threats:

1. Self-Review
2. Advocacy
3. Adverse Interest
4. Familiarity
5. Undue Influence
6. Self-Interest
7. Management Participation

They are not mutually exclusive in that a single threat may fall under more than one category. Threats are evaluated both individually and in the aggregate.

Question 29

The threat of _____-______ exists when the accountant performs some form of evaluation of matters that were previously influenced by the accountant’s judgment

The _____-______ threat is the threat that the accountant will assume a level of reliability without performing an appropriate level of testing or other due diligence.

Answer 29

There are 7 categories of threats:

1. Self-Review

The threat of self-review exists when the accountant performs some form of evaluation of matters that were previously influenced by the accountant’s judgment, such as when an accountant is performing an attest service in relation to a client’s financial statements when the accountant’s firm performed bookkeeping services for that client.

The self-review threat is the threat that the accountant will assume a level of reliability without performing an appropriate level of testing or other due diligence.

Question 30

An _______ threat exists when the accountant’s actions effectively promote a client’s interests or position.

Answer 30

There are 7 categories of threats:

2. Advocacy

An advocacy threat exists when the accountant’s actions effectively promote a client’s interests or position.

This would be the case if the accountant is:

• Providing forensic accounting services to the client in a conflict with third parties.
• Providing investment advice for an officer, director, or shareholder holding 10% or more of the client’s shares.
• Promoting or underwriting the client’s securities, or acting as a registered agent for the client.
• Endorsing the products or services of a client.

It does not result from testifying as a fact witness or defending the results of a professional service performed for the client.

Question 31

The threat of an _______ ________ exists when the interests of the client are in conflict with the interests of the accountant, which may inhibit the accountant from applying objectivity.

Answer 31

There are 7 categories of threats:

3. Adverse Interest

The threat of an adverse interest exists when the interests of the client are in conflict with the interests of the accountant, which may inhibit the accountant from applying objectivity.

This would be the case, for example, if the client and the accountant were involved in, or anticipating, litigation against each other.

Question 32

The threat of _________ results from a close and longstanding relationship with a client, potentially causing the accountant to become too sympathetic to the client’s interests or too trusting of the client’s work or products.

Answer 32

There are 7 categories of threats:

4. Familiarity

The threat of familiarity results from a close and longstanding relationship with a client, potentially causing the accountant to become too sympathetic to the client’s interests or too trusting of the client’s work or products.

Examples of the types of relationships that create a familiarity threat include:

• The spouse, a family member, or a close friend of an engagement team member is employed by the client.
• The member has a close and significant business relationship with an officer, director, or significant shareholder of the client.
• Senior firm personnel have a long-standing relationship with the client.

Question 33

The threat of _____ _________ results from attempts by management or others to exercise an excessive amount of influence over the accountant.

Answer 33

There are 7 categories of threats:

5. Undue Influence

The threat of undue influence results from attempts by management or others to exercise an excessive amount of influence over the accountant.

This may involve:

• A client’s threat to replace the accountant as a result of a disagreement.
• A client exerting pressure to limit an engagement to reduce fees.

Question 34

The threat of ____ - ________ occurs when the accountant has the opportunity to obtain a potential benefit from an interest in, or another relationship with, a client.

Example:
• The accountant enters into an arrangement that involves a contingent fee rather than one that is predetermined.

Answer 34

There are 7 categories of threats:

6. Self-Interest

The threat of self-interest occurs when the accountant has the opportunity to obtain a potential benefit from an interest in, or another relationship with, a client.

This would be the case if:

• The accountant has a financial interest in the client, the value of which may be affected by the results of the service being performed.
• The accountant enters into an arrangement that involves a contingent fee rather than one that is predetermined.
• The accountant relies excessively on the fees earned from the client.

Question 35

The threat of __________ ___________ occurs when the accountant takes on the role of management for the client or performs management functions on behalf of the client.

Answer 35

There are 7 categories of threats:

7. Management Participation

The threat of management participation occurs when the accountant takes on the role of management for the client or performs management functions on behalf of the client.

Assuming management responsibilities will generally impair a member’s independence in relation to a client but will not necessarily, otherwise, indicate a violation of the Code.

A member may still perform professional services for such a client provided the services do not require the accountant to be independent.

The performance of management functions does not impair independence as long as the member is not assuming management responsibility.

The accountant may, for example, design a client’s system of internal control provided the client takes responsibility for all decisions involving the allocation or use of resources and the general requirements for the performance of nonattest services in section 1.295 of the Code, discussed later in this chapter, have been met. This includes designating someone from the client’s organization, preferably a member of senior management, who will take responsibility for the services performed by the CPA.

Question 36

S________ are controls that eliminate or reduce threats, ranging from prohibitions against circumstances that create threats to procedures that counteract the potential risk associated with a threat.

Answer 36

Safeguards are controls that eliminate or reduce threats, ranging from prohibitions against circumstances that create threats to procedures that counteract the potential risk associated with a threat.

Safeguards are considered effective if they eliminate a threat or reduce it to an acceptable level.

Question 37

Safeguards eliminate or reduce ______s.

Answer 37

Safeguards eliminate or reduce threats.

Question 38

Safeguards ________ or reduce threats.

Answer 38

Safeguards eliminate or reduce threats.

Question 39

There are a number of factors that determine if safeguards are likely to be effective.

Example:

Answer 39

There are a number of factors that determine if safeguards are likely to be effective.

• circumstances surrounding the situation,
• whether threats are identified properly,
• whether safeguards are designed appropriately,
• who applies the safeguards and who are subject to them, and
• how they are applied and the consistency with which they are applied.

Question 40

Certain safeguards are imposed on the accountant by requirements of the profession, or by legislation or regulation.

Examples:

Answer 40

Certain safeguards are imposed on the accountant by requirements of the profession, or by legislation or regulation.

Examples include:

• Education, training, and continuing professional education (CPE) requirements
• Professional standards, combined with monitoring and disciplinary processes and external reviews of the firm’s quality control
• Legislation
• Requirements related to competency and experience

Question 41

Other safeguards result from client characteristics or policies.

These, which act in combination with other safeguards, might include:

Answer 41

Safeguards result from client characteristics or policies might include:

• Client personnel with an appropriate combination of skill, knowledge, and experience to oversee professional services provided by the accountant
• A tone at the top that emphasizes a commitment to fair reporting, compliance with laws and regulations, and ethical conduct
• Client governance related to the accountant’s services that is structured and designed for appropriate decision making, oversight, and communication
• Policies limiting the client’s use of the accountant for services that impair independence, encourage noncompliance with ethical requirements, or would not serve the public interest

Question 42

Safeguards may be implemented by the firm.

Examples:

Answer 42

Safeguards may be implemented by the firm.
These may be many and varied, including:

• Leadership that stresses the importance of ethical behavior and acting in the interest of the public

• Policies and procedures designed to:
o Implement and monitor quality control
o Monitor compliance with firm policies
o Monitor the firm’s reliance on revenues from a single client

• Training and timely communication of firm policies and procedures
• Designating an appropriate individual from senior management to oversee the firm’s quality control
• Disciplinary policies designed to encourage compliance with policies and procedures, and to empower staff to communicate noncompliance
• Discussing independence and ethics with the client’s audit committee or the client’s governance, and establishing policies and procedures for independence-related communication
• Disclosing to the audit committee the nature of services being provided and their related fees
• Consulting with interested third parties
• Rotation of senior attest engagement personnel
• Use of another firm to re-perform and take responsibility for portions of engagements

Question 43

Safeguards eliminate or ______ threats.

Answer 43

Safeguards eliminate or reduce threats.

Question 44

Another safeguard that can be initiated by the firm would be to establish a _________ function.

It would be staffed with experts in accounting, auditing, independence, or other relevant issues.

They would assist the attest engagement team in assessing issues that are highly technical, require a great deal of judgment, or for which there is no guidance.

They would also assist the engagement team in resisting undue pressure from the client when there are disagreements regarding those matters.

Answer 44

Another safeguard that can be initiated by the firm would be to establish a consultation function.

It would be staffed with experts in accounting, auditing, independence, or other relevant issues.

They would assist the attest engagement team in assessing issues that are highly technical, require a great deal of judgment, or for which there is no guidance.

They would also assist the engagement team in resisting undue pressure from the client when there are disagreements regarding those matters.

Question 45

E____ conflicts may arise as a result of various circumstances, but most relate to a circumstance where internal or external pressures create obstacles that interfere with following an appropriate course of action; where conflicts arise in applying relevant professional and legal standards.

Answer 45

Ethical conflicts may arise as a result of various circumstances,
but most relate to a circumstance where internal or external pressures create obstacles that interfere with following an appropriate course of action;

where conflicts arise in applying relevant professional and legal standards,
such as when reporting suspected fraud may be a violation of client confidentiality rules; or some combination of these.

Question 46

Ethical Conflicts

A CPA should consider ________ with others within their employing firm or organization before taking a course of action.

When conflicts remain unresolved, it is likely that the CPA will be in violation of one or more rules and the CPA should consider whether it is appropriate to continue a relationship with the engagement team, assignment, client, firm, or employer.

Answer 46

Ethical Conflicts

A CPA should consider consulting with others within their employing firm or organization before taking a course of action.

If a course of action is not effective and an ethical conflict is not resolved, regardless of whether consultation occurred or not, the accountant should consider consulting with others or obtaining advice from a professional body or from legal counsel.

When conflicts remain unresolved, it is likely that the CPA will be in violation of one or more rules and the CPA should consider whether it is appropriate to continue a relationship with the engagement team, assignment, client, firm, or employer.

Question 47

In performance of any professional service, a member shall maintain objectivity and ______, avoid conflicts of interest, and not knowingly misrepresent facts or subordinate their judgment to others.

Answer 47

In performance of any professional service, a member shall maintain objectivity and integrity, avoid conflicts of interest, and not knowingly misrepresent facts or subordinate their judgment to others.

Question 48

_______ of interest arise when a CPA is performing professional services related to a matter for two or more clients with________ting interests or when the interests of the CPA or the CPA’s firm ______ with those of the client.

Answer 48

Conflicts of interest arise when a CPA is performing professional services related to a matter for two or more clients with conflicting interests or when the interests of the CPA or the CPA’s firm conflict with those of the client.

Question 49

Before accepting an engagement or a relationship, the CPA should evaluate a potential conflict of interest by identifying:

Answer 49

Before accepting an engagement or a relationship, the CPA should evaluate a potential conflict of interest by identifying:

• The relationships among parties involved and the natures of their relevant interests, which may change during the course of the engagement; and
• The nature and implications of the service being provided.

Question 50

Safeguards may reduce the threat of a conflict of interest to an _________ level.

Answer 50

Safeguards may reduce the threat of a conflict of interest to an acceptable level.

Maintaining separate engagement teams, for example, with clear policies and procedures for maintaining confidentiality may be an adequate safeguard to reduce the threat of a conflict of interest to a reasonable level when the conflict arises from performing services for two or more clients with conflicting interests related to the subject matter of the engagements.

Question 51

Serving as a director on the board of an entity may create a ______ of interest if the entity, such as a bank, enters into or considers transactions with the CPA’s clients.

Answer 51

Serving as a director on the board of an entity may create a conflict of interest if the entity, such as a bank, enters into or considers transactions with the CPA’s clients.

The member may consider limiting the relationship to a consulting arrangement, excluding transactions that may involve the CPA’s clients.

If, however, the CPA does serve as a director, threats and safeguards should be evaluated to make certain that threats are at an acceptable level.

Question 52

When a conflict of interest does exist, even when threats are reduced to an acceptable level, the accountant is required to _________ the nature of the conflict to clients and others affected by it and to obtain their consent for the performance of the professional services.

Answer 52

When a conflict of interest does exist, even when threats are reduced to an acceptable level, the accountant is required to disclose the nature of the conflict to clients and others affected by it and to obtain their consent for the performance of the professional services.

Question 53

Offering gifts or entertainment to a client or accepting gifts or entertainment from a client may create various ______s to the CPA’s compliance with the Code, including ______s associated with self-interest, familiarity, and undue influence.

Answer 53

Offering gifts or entertainment to a client or accepting gifts or entertainment from a client may create various threats to the CPA’s compliance with the Code, including threats associated with self-interest, familiarity, and undue influence.

Question 54

Threats cannot be reduced to an ________ level when the offer or acceptance of gifts is in violation of member or client policies or applicable laws, rules, or regulations if the member is aware of the violation or is unaware due to recklessness.

Answer 54

Threats cannot be reduced to an acceptable level when the offer or acceptance of gifts is in violation of member or client policies or applicable laws, rules, or regulations if the member is aware of the violation or is unaware due to recklessness.

Question 55

Threats may be reduced to an ________ level when gifts or entertainment are reasonable in the circumstances when considering such factors as the nature of the item, the occasion giving rise to it, the cost, and other facts and circumstances surrounding it.

Answer 55

Threats may be reduced to an acceptable level when gifts or entertainment are reasonable in the circumstances when considering such factors as the nature of the item, the occasion giving rise to it, the cost, and other facts and circumstances surrounding it.

Question 56

Preparing and Reporting Information

The information should not be presented in a manner intended to ______, nor should there be omissions that cause the information to be _____ing.

Answer 56

The information should not be presented in a manner intended to mislead, nor should there be omissions that cause the information to be misleading.

Question 57

A supervisor may take a position that the member believes is not in compliance with standards, represents a material misstatement of facts, or violates applicable laws or regulations.

In such cases, threats cannot be reduced to an acceptable level and the member should:

Answer 57

The member should:

• Discuss concerns with the supervisor.
• Discuss concerns with an appropriate higher level of management within the member’s organization when the difference of opinion cannot be resolved through discussion with the supervisor.

• If the member concludes that appropriate actions are not taken, the member should follow certain safeguards to reduce or eliminate the threats to an acceptable level:
o Consult with an appropriate professional organization or body.
o Determine if the member’s organization has internal policies and procedures for reporting differences of opinion.
o Determine whether the member is responsible for communicating with third parties, such as regulatory agencies, keeping confidentiality requirements in mind.
o Consult with legal counsel.
o Document an understanding of the facts, the matters involved, and the conversations held, identifying the parties with which they were held.

If threats can be reduced to an acceptable level, the member will discuss conclusions with the other party and take no further action.

Question 58

Upon a conclusion that no safeguards can eliminate the threats or reduce them to an acceptable level, the member should not be willing to continue to be associated with the information.

(meaning)

Answer 58

“Leave the firm”

Upon a conclusion that no safeguards can eliminate the threats or reduce them to an acceptable level, the member should not be willing to continue to be associated with the information,

consider whether it is appropriate to continue in a relationship with the organization and should take steps to eliminate exposure to having subordinated judgment.

Question 59

A member should neither yield to such pressure resulting in a breach to the Code nor exert pressure on others such that a breach may result.

Pressure may relate to any combination of:

Answer 59

A member should neither yield to such pressure resulting in a breach to the Code nor exert pressure on others such that a breach may result.

Pressure may relate to any combination of:
• Conflicts of interest;
• Presentation or suppression of information;
• Performing tasks without an appropriate level of competence or due care;
• Advancing the interests of those with financial interests; and
• Gifts and entertainment.

Question 60

If the member concludes that the pressure would result in a breach, there are a number of safeguards that may be considered.

The member might:

Answer 60

If the member concludes that the pressure would result in a breach, there are a number of safeguards that may be considered.

The member might:
• Try to resolve the matter by discussing it with the individual exerting the pressure.
• Discuss the matter with a supervisor or parties at a higher level, such as management, internal and independent auditors, or members of those charged with governance.
• Request a change in responsibilities, removing the member from the influence of the party exerting the pressure.
• Expose the matter using the mechanisms within the organization, such as whistleblower policies.
• Consult with legal counsel.

Question 61

If the member determines that the _______ to breach cannot be eliminated, the member should not undertake, or should cease undertaking, the activity that would result in the breach and consider whether to remain involved in a relationship with the organization.

Answer 61

If the member determines that the pressure to breach cannot be eliminated, the member should not undertake, or should cease undertaking, the activity that would result in the breach and consider whether to remain involved in a relationship with the organization.

The member should also document an understanding of the facts, the matters involved, the conversations held, identifying the parties with which they were held, and how the matters were addressed.

Question 62

When performing certain nonattest services for a client, such as tax or consulting services, the member may be in position to act as an _______ for the client in supporting the client’s position on accounting or financial reporting issues to other engagement team members or to standard setters or regulators.

These services may pose threats to the member’s ability to comply with the integrity and objectivity rules that should be evaluated.

Answer 62

Client Advocacy

When performing certain nonattest services for a client, such as tax or consulting services, the member may be in position to act as an advocate for the client in supporting the client’s position on accounting or financial reporting issues to other engagement team members or to standard setters or regulators.

These services may pose threats to the member’s ability to comply with the integrity and objectivity rules that should be evaluated.

Question 63

___________ is the ability to act with integrity and objectivity and applies to a covered member and to the member’s immediate family, including the member’s spouse or spousal equivalent, and all dependents, whether related or not.

Answer 63

Independence is the ability to act with integrity and objectivity and applies to a covered member and to the member’s immediate family, including the member’s spouse or spousal equivalent, and all dependents, whether related or not.

Question 64

A covered member would be:

Answer 64

A covered member would be any of the following:

• A member of an attest engagement team or an individual in a position to influence the attest engagement
• A partner, partner equivalent, or manager providing more than 10 hours of nonattest services to the attest client within a fiscal year
• A partner or partner equivalent in the same office in which the lead engagement partner for the attest engagement practices
• The firm and its employee benefit plan
• An entity under the control of any one of the other covered members described and two or more of those individuals or entities acting together
• With agreed-upon procedure engagements only, covered members may be limited to those participating in or directly supervising the engagement, and individuals consulting with the engagement team on technical or industry-related issues.

Question 65

A covered member:

• Must maintain independence for certain engagements (ERAS)

Answer 65

A covered member:

• Must maintain independence for certain engagements (ERAS)
o Examinations − Audits
o Reviews - Conclusions
o Agreed-upon procedure engagements leading to findings
o Special reports

• Need not be independent for:
       o Taxes
       o Consultations
       o Preparation engagements
       o Compilations (when a lack of independence is indicated)

• Independence should be maintained in both:
o Fact – State “of mind”
o Appearance – How it appears to the public

Question 66

Independent

Attest Function = ?

Independence required for:
• Audit – ?
• Review – ?
      o Taxes – ?
      o Compilation – ?
      o Preparation eng’s − ?
      o Consultation – ?

Answer 66

Attest Function = Must be Independent

Independence required for:
• Audit – Yes
• Review – Yes
      o Taxes – No
      o Compilation – No
      o Preparation eng’s − No
      o Consultation – No

Question 67

When events, circumstances, or conditions that might impair independence are not addressed directly in the Code, the member is required to apply the conceptual ________ approach, applied in the same manner as the conceptual __________ approach related to the Code itself.

Answer 67

When events, circumstances, or conditions that might impair independence are not addressed directly in the Code, the member is required to apply the conceptual framework approach, applied in the same manner as the conceptual framework approach related to the Code itself.

Question 68

Threats to ____________ are considered to be at an acceptable level when a reasonable and informed third party, aware of the relevant information, would conclude that the member’s independence is not impaired.

Answer 68

Conceptual Framework Approach

Threats to independence are considered to be at an acceptable level when a reasonable and informed third party, aware of the relevant information, would conclude that the member’s independence is not impaired.

As a result, the member will focus on the appearance of independence when applying the conceptual framework.

Question 69

Threats to independence include:

• A______ Interest
• A_______
• F_____ty
• M_________ Participation
• S___ - Interest
• S___ - Review
• U____ Influence

Answer 69

Threats to independence include:

• Adverse Interest
• Advocacy
• Familiarity
• Management Participation
• Self-Interest
• Self-Review
• Undue Influence

Question 70

Threats to independence include:

• A______
• A_______
• F______
• M_________
• S___ - _____
• S___ - _____
• U____ ______

Answer 70

Threats to independence include:

• Adverse Interest
• Advocacy
• Familiarity
• Management Participation
• Self-Interest
• Self-Review
• Undue Influence

Question 71

Threats to independence

What is adverse interest threat?

Answer 71

• Adverse interest threat

When a member’s interests are in opposition to the clients, such as when they are involved in, or anticipating, litigation, the member may not act objectively.

Question 72

Threats to independence

What is advocacy threat?

Answer 72

• Advocacy threat

A member may compromise independence when promoting a client’s position, depending on the degree to which the member promotes it.

This may be the case when the member is promoting the client’s securities in an initial public offering, serving as an expert witness on behalf of the client, or representing the client in tax court or elsewhere.

Question 73

Threats to independence

What is familiarity threat?

Answer 73

• Familiarity threat

A long relationship with a client may make a member sympathetic to a client’s interests or accepting of the client’s work or product, such as when there has been a history of work that has been essentially error-free in the past.

The degree to which this occurs may cause a threat to the member’s independence, particularly when an immediate family member or close relative holds a key position with the attest client; a partner of the firm, or the equivalent, has been on the engagement team for the attest engagement for an extended period of time; or a member of the engagement team’s firm has recently been a director or officer of the attest client or has a close friend in a key position.

Question 74

Threats to independence

What is management participation threat?

Answer 74

• Management participation threat

A member who serves as an officer or director of an attest client; accepts responsibility for the design, implementation, or maintenance of internal control for an attest client; or hires, supervises, or terminates employees of the attest client, creates a management participation threat to independence.

An auditor, for example, may decide to ignore a significant deficiency in internal control when the auditor’s firm has accepted responsibility for their design and implementation of internal control.

When this is the case, of course, the accountant would not be independent since accepting responsibility for the design and implementation of internal control involves assuming a management responsibility.

Doing so raises the management participation threat to an unacceptable level in relation to independence. In such a case, no safeguards would be able to reduce the threat to an acceptable level.

Question 75

Threats to independence

What is self-interest threat?

Answer 75

• Self-interest threat

When a member may benefit from an interest in, or relationship with, an attest client, a self-interest threat to independence is created.

The benefit may be financial or nonfinancial, including a direct financial interest or material indirect financial interest in an attest client;

a loan from the client, an officer or director, or a significant shareholder of the attest client;

an excessive reliance on fees from a single attest client;

or a material joint venture or business arrangement with an attest client.

Question 76

Threats to independence

What is self-review threat?

Answer 76

• Self-review threat

When a member or the member’s firm performs nonattest services for an attest client, there is the possibility that either the member will not test the information with an appropriate level of due diligence, or may overlook an error or other discrepancy to preserve the reputation of the firm and the relationship with the client, creating a self-review threat to the member’s independence.

Question 77

Threats to independence

What is undue influence threat?

Answer 77

• Undue influence threat

is the threat that the member will subordinate judgment to a third party as a result of a third party’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence;

or to someone associated with the attest client due, perhaps, to a threat to replace the member or the member’s firm over a disagreement, pressure to reduce procedures as a means of reducing fees, or receiving gifts from the attest client or related parties.

Question 78

• A_____ ______ threat

When a member’s interests are in opposition to the clients, such as when they are involved in, or anticipating, litigation, the member may not act objectively.

Answer 78

Threats to independence:

• Adverse interest threat – When a member’s interests are in opposition to the clients, such as when they are involved in, or anticipating, litigation, the member may not act objectively.

Question 79

• A_______ threat

A member may compromise independence when promoting a client’s position, depending on the degree to which the member promotes it.

This may be the case when the member is promoting the client’s securities in an initial public offering, serving as an expert witness on behalf of the client, or representing the client in tax court or elsewhere.

Answer 79

Threats to independence:

• Advocacy threat – A member may compromise independence when promoting a client’s position, depending on the degree to which the member promotes it.

This may be the case when the member is promoting the client’s securities in an initial public offering, serving as an expert witness on behalf of the client, or representing the client in tax court or elsewhere.

Question 80

• F________ threat

A long relationship with a client may make a member sympathetic to a client’s interests or accepting of the client’s work or product, such as when there has been a history of work that has been essentially error-free in the past.

Answer 80

Threats to independence:

• Familiarity threat – A long relationship with a client may make a member sympathetic to a client’s interests or accepting of the client’s work or product, such as when there has been a history of work that has been essentially error-free in the past.

The degree to which this occurs may cause a threat to the member’s independence, particularly when an immediate family member or close relative holds a key position with the attest client; a partner of the firm, or the equivalent, has been on the engagement team for the attest engagement for an extended period of time; or a member of the engagement team’s firm has recently been a director or officer of the attest client or has a close friend in a key position.

Question 81

• M_______ ___________ threat

A member who serves as an officer or director of an attest client; accepts responsibility for the design, implementation, or maintenance of internal control for an attest client; or hires, supervises, or terminates employees of the attest client, creates a management participation threat to independence.

Answer 81

Threats to independence:

• Management participation threat – A member who serves as an officer or director of an attest client; accepts responsibility for the design, implementation, or maintenance of internal control for an attest client; or hires, supervises, or terminates employees of the attest client, creates a management participation threat to independence.

An auditor, for example, may decide to ignore a significant deficiency in internal control when the auditor’s firm has accepted responsibility for their design and implementation of internal control.

When this is the case, of course, the accountant would not be independent since accepting responsibility for the design and implementation of internal control involves assuming a management responsibility.

Doing so raises the management participation threat to an unacceptable level in relation to independence. In such a case, no safeguards would be able to reduce the threat to an acceptable level.

Question 82

• S___ - ______ threat

When a member may benefit from an interest in, or relationship with, an attest client, a ____ - _____ threat to independence is created. The benefit may be financial or nonfinancial.

Answer 82

Threats to independence:

• Self-interest threat – When a member may benefit from an interest in, or relationship with, an attest client, a self-interest threat to independence is created.

The benefit may be financial or nonfinancial, including a direct financial interest or material indirect financial interest in an attest client; a loan from the client, an officer or director, or a significant shareholder of the attest client; an excessive reliance on fees from a single attest client; or a material joint venture or business arrangement with an attest client.

Question 83

• S___ - ______ threat

When a member or the member’s firm performs nonattest services for an attest client, there is the possibility that either the member will not test the information with an appropriate level of due diligence, or may overlook an error or other discrepancy to preserve the reputation of the firm and the relationship with the client, creating a ____ - _____ threat to the member’s independence.

Answer 83

Threats to independence:

• Self-review threat – When a member or the member’s firm performs nonattest services for an attest client, there is the possibility that either the member will not test the information with an appropriate level of due diligence, or may overlook an error or other discrepancy to preserve the reputation of the firm and the relationship with the client, creating a self-review threat to the member’s independence.

Question 84

• ____ _________ threat

It is the threat that the member will subordinate judgment to a third party as a result of a third party’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence;

or to someone associated with the attest client due, perhaps, to a threat to replace the member or the member’s firm over a disagreement, pressure to reduce procedures as a means of reducing fees, or receiving gifts from the attest client or related parties.

Answer 84

Threats to independence:

• An undue influence threat is the threat that the member will subordinate judgment to a third party as a result of a third party’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence;

or to someone associated with the attest client due, perhaps, to a threat to replace the member or the member’s firm over a disagreement, pressure to reduce procedures as a means of reducing fees, or receiving gifts from the attest client or related parties.

Question 85

The covered member should consider any _____s to independence that the covered member knows of or has reason to believe may be created by the interests or relationships of other firms within the network.

Answer 85

The covered member should consider any threats to independence that the covered member knows of or has reason to believe may be created by the interests or relationships of other firms within the network.

Question 86

A firm is considered to be part of a n_____ of firms if the firms cooperate to enhance their ability to provide professional services through cross referrals and other means and has one or more of the following additional characteristics:

Answer 86

A firm is considered to be part of a network of firms if the firms cooperate to enhance their ability to provide professional services through cross referrals and other means and has one or more of the following additional characteristics:

• A common brand name or initials that are part of the firm name
• Common control through ownership or management
• Sharing of profit and costs
• Collaboration to create a common business strategy that member firms are held accountable for implementing
• Sharing of significant professional resources, such as systems and staff
• Uniform quality control policies monitored and enforced by the association

Question 87

A c_____ member may also be part of an alternative practice structure (APS), which is required to comply with independence rules;

is required to be organized in a form allowed by applicable laws, rules, and regulations; and

is required to comply with the rules in the Code related to the form of an organization and its name.

Answer 87

A covered member may also be part of an alternative practice structure (APS), which is required to comply with independence rules;

is required to be organized in a form allowed by applicable laws, rules, and regulations; and

is required to comply with the rules in the Code related to the form of an organization and its name.

Question 88

An alternative practice structure (APS) is an organization in which a firm provides a____ services while other professional services are performed by another public or private organization that is closely aligned, such as a CPA firm with a closely aligned consulting entity.

Answer 88

An alternative practice structure (APS) is an organization in which a firm provides attest services while other professional services are performed by another public or private organization that is closely aligned, such as a CPA firm with a closely aligned consulting entity.

Independence rules apply to both covered members and direct superiors in an APS.

• Covered members include employed and leased individuals otherwise having the characteristics of a covered member.
• Direct superiors are covered members who can directly control the activities of an engagement partner or manager.

Question 89

Indirect superiors, those one or more levels above direct superiors, can impair ____________ by

• having a material relationship with an attest client that is prohibited as a financial interest;
• acts as a trustee or executor;
• has a prohibited loan;

Answer 89

Indirect superiors, those one or more levels above direct superiors, can impair independence by

• having a material relationship with an attest client that is prohibited as a financial interest;
• acts as a trustee or executor;
• has a prohibited loan;
• maintains joint closely held investments with the attest client; or
• is involved in any of a variety of specific relationships.

An indirect superior may, however, perform nonattest services that would be prohibited to the firm performing attest services without impairing independence.

Question 90

When an attest firm allows members of another firm which is not independent of an attest client to participate in an attest engagement, threats to independence cannot be reduced to an __________ level and the attest firm’s independence will be impaired.

Answer 90

When an attest firm allows members of another firm which is not independent of an attest client to participate in an attest engagement, threats to independence cannot be reduced to an acceptable level and the attest firm’s independence will be impaired.

Members of the non-independent firm, however, may serve in a capacity similar to that of an internal auditor as long as the firm complies with auditing standards.

Question 91

A member whose __________ becomes impaired after the issuance of a report may reissue the report provided the member or the member’s firm does not perform procedures associated with updating or dual dating the report.

Answer 91

A member whose independence becomes impaired after the issuance of a report may reissue the report provided the member or the member’s firm does not perform procedures associated with updating or dual dating the report.

Question 92

An indemnification clause in an engagement letter, in which an attest client holds the member harmless from liability resulting from knowing misrepresentations by management does not impair __________.

Answer 92

An indemnification clause in an engagement letter, in which an attest client holds the member harmless from liability resulting from knowing misrepresentations by management does not impair independence.

Independence would be impaired, however, if an attest firm indemnifies an attest client from liability arising directly or indirectly from the acts of the attest client.

An alternative dispute resolution clause in an engagement letter would not impair independence.

Question 93

________ would be impaired if an attest firm indemnifies an attest client from liability arising directly or indirectly from the acts of the attest client.

Answer 93

Independence would be impaired if an attest firm indemnifies an attest client from liability arising directly or indirectly from the acts of the attest client.

Question 94

When fees for services that were performed more than one year before the date of the current-year report remain unpaid, this creates a threat to __________ that cannot be reduced to an acceptable level.

Answer 94

Unpaid Fees

When fees for services that were performed more than one year before the date of the current-year report remain unpaid, this creates a threat to independence that cannot be reduced to an acceptable level.

This is true even if the fees have not been billed to the client and if the client has signed a note for the amount owed. This does not apply, however, to unpaid fees due from a client in bankruptcy.

Question 95

When fees for services that were performed more than one year before the date of the current-year report remain unpaid, this creates a threat to independence that cannot be reduced to an __________ level.

Answer 95

When fees for services that were performed more than one year before the date of the current-year report remain unpaid, this creates a threat to independence that cannot be reduced to an acceptable level.

Question 96

A member who possesses or has a commitment to acquire a direct or material indirect financial interest in an attest client creates a ____ - ______ threat that cannot be reduced to an acceptable level and the member’s independence would be impaired.

Answer 96

Financial Interests

A member who possesses or has a commitment to acquire a direct or material indirect financial interest in an attest client creates a self-interest threat that cannot be reduced to an acceptable level and the member’s independence would be impaired.

Question 97

_________ would be impaired, if a partner or professional employee of the firm, including the partner’s immediate family or any group of those individuals acting together, owned more than 5% of an attest client during the period of the attest engagement.

Answer 97

Financial Interests

Independence would be impaired, if a partner or professional employee of the firm, including the partner’s immediate family or any group of those individuals acting together, owned more than 5% of an attest client during the period of the attest engagement.

Question 98

• Threats to independence may be reduced to an acceptable level when a member receives an unsolicited direct or indirect financial interest in an attest client, such as through a gift that is not material to the member, if the member applies two ________s:

   1. The financial interest is disposed of within 30 days of learning of the interest, or sooner if practicable; and
   2. The member does not participate on the attest engagement team during the period in which the covered member does not have the right to dispose of the financial interest.

Answer 98

Financial Interests

• Threats to independence may be reduced to an acceptable level when a member receives an unsolicited direct or indirect financial interest in an attest client, such as through a gift that is not material to the member, if the member applies two safeguards:

   1. The financial interest is disposed of within 30 days of learning of the interest, or sooner if practicable; and
   2. The member does not participate on the attest engagement team during the period in which the covered member does not have the right to dispose of the financial interest.

Question 99

• Ownership of shares of a mutual fund constitutes a direct financial interest in the mutual fund.

Ownership of the underlying investments of the mutual fund may be direct or indirect, depending on the proportion of the mutual fund owned by the member and the diversity of the mutual fund’s holdings.

      o Ownership of \_\_\_% or less of a diversified mutual fund results in an immaterial indirect financial interest in its investments.

      o Ownership of more than \_\_\_\_% of a diversified fund, or an ownership interest in an undiversified fund, should be evaluated to determine if the member holds a material indirect interest.

Answer 99

Financial Interests

• Ownership of shares of a mutual fund constitutes a direct financial interest in the mutual fund. Ownership of the underlying investments of the mutual fund may be direct or indirect, depending on the proportion of the mutual fund owned by the member and the diversity of the mutual fund’s holdings.

      o Ownership of 5% or less of a diversified mutual fund results in an immaterial indirect financial interest in its investments.

      o Ownership of more than 5% of a diversified fund, or an ownership interest in an undiversified fund, should be evaluated to determine if the member holds a material indirect interest.