AUD 2.1 -- Code of Professional Conduct Flashcards
The Code of Professional Conduct contains Principles that guide all members of the AICPA. A commitment to act for the benefit of clients, creditors, investors, and others is most directly embodied in which Principle?
A. Due Care.
B. The public interest.
C. Integrity.
D. Objectivity and Independence.
Answer (B) is correct.
All members of the AICPA should act to benefit the public interest, honor the public trust, and demonstrate commitment to professionalism. The AICPA adopted ethical standards because a distinguishing mark of a profession is an acceptance of responsibility to the public. The public includes clients, credit grantors, investors, and others who rely on the integrity and objectivity of members to maintain the orderly functioning of commerce.
CPAs are required to complete engagements competently. Competence includes all of the following except:
A. The capacity to exercise judgment.
B. An unbiased mental attitude.
C. The technical qualifications of the CPA’s staff.
D. The ability to research subject matter and consult with others.
Answer (B) is correct.
The Code requires the CPA to maintain an unbiased mental attitude. A member in public practice must be independent in the performance of professional services as required by standards issued by bodies designated by Council.
The AICPA Code of Professional Conduct does not include enforceable Rules of Conduct on which of the following?
A. Professional competence and due professional care.
B. Independence and integrity and objectivity.
C. Responsibilities to colleagues.
D. Accounting principles.
Answer (C) is correct.
The Code previously included two rules regarding colleagues, but they were deleted after threats of antitrust actions against the profession by the Federal Trade Commission and the U.S. Justice Department. The principles express the profession’s recognition of its responsibilities to colleagues as well as to the public and clients, but adherence to them is not mandatory.
An accounting firm’s independence is most likely to be impaired when:
A. The firm has a material financial interest in a nonclient but does not know of the client’s material financial interest in the investee.
B. The firm and the client have a material cooperative arrangement.
C. An immediate family member is employed by the client in other than a key position.
D. In an agreed-upon procedures engagement, the firm is independent of the responsible party but not the party that engaged the firm.
Answer (B) is correct.
Independence is impaired if, during the engagement or at the time of expressing an opinion, a member’s firm had any material cooperative arrangement with the client. A cooperative arrangement involves joint participation in a business activity. However, joint participation in a business activity is not a cooperative arrangement when the participants (1) do not have a common understanding, arrangement, or agreement; (2) are not responsible for the other’s activities or results; and (3) are not agents for each other.
Fact Pattern: A CPA firm was purchased by a public company. The acquirer performs other professional services and has banking, insurance, and brokerage subsidiaries. The owners and employees became employees of a subsidiary. Also, the previous owners formed a new CPA firm that provides attest services. It leases employees, offices, and equipment from the parent, which also provides advertising, billing, and collection services.
In the alternative practice structure (APS) of which the new firm is a part, covered members are closely aligned with other persons and entities. Who is subject to the same independence rules as covered members?
A. The spouse of an indirect superior.
B. An indirect superior to whom a direct superior reports.
C. Any indirect superior.
D. An employee leased by the firm from the parent.
Answer (D) is correct.
The independence rules ordinarily apply in their entirety only to the persons and entities included in the definition of a covered member: (1) the traditional firm (the new firm), (2) its owners, (3) individuals employed or leased by the new firm, and (4) entities controlled by such persons. The independence rules also apply in their entirety to (1) direct superiors of a partner or manager who is a covered member and (2) entities within the APS subject to significant influence by a direct superior.
Answer (A) is incorrect.
Less restrictive independence rules apply to indirect superiors (and their spouses, spousal equivalents, and dependents).
Answer (B) is incorrect.
Less restrictive independence rules apply to indirect superiors (and their spouses, spousal equivalents, and dependents).
Answer (C) is incorrect.
Less restrictive independence rules apply to indirect superiors (and their spouses, spousal equivalents, and dependents).
An accountant has an immaterial direct financial interest in a nonpublic entity. The accountant is:
A. Not independent and may not perform a review.
B. Not independent and may not perform a compilation.
C. Not independent and may perform a review but not an audit.
D. Independent because the financial interest is immaterial.
Answer (A) is correct.
Independence is impaired if, during the period of the professional engagement, a covered member has any direct or any material indirect financial interest in the client. Materiality is therefore irrelevant when the interest is direct. Thus, the accountant is not independent, and a review or audit may not be performed.
A CPA in charge of the external audit of a nonissuer received an unexpected inheritance that includes 100 shares of the audit client’s common stock. Which of the following actions should the CPA take to avoid violating independence rules?
A. Petition the AICPA for an independence exception from unforeseen circumstances.
B. Resign from the audit firm.
C. Decline to accept the inheritance.
D. Sell or donate the stock within 30 days after receipt of ownership rights.
Answer (D) is correct.
A member in public practice must be independent when performing professional services as required by standards issued by bodies designated by the AICPA Council. Independence is impaired if a covered member has any direct financial interest in an attest client during the period of the engagement. An unsolicited financial interest in a client, such as through a gift or inheritance, does not impair independence if disposed of within 30 days.
In which of the following instances is the independence of the CPA most likely not considered to be impaired? The CPA has been retained as the auditor of a:
A. Company in which the CPA’s participant-directed retirement plan owns a 10% interest.
B. Credit union of which the CPA is a member.
C. Municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality.
D. Charitable organization in which the spouse of the CPA serves as treasurer.
Answer (B) is correct.
Membership in a credit union does not impair independence if (1) the member or his or her partners or employees individually qualify for the membership other than as a result of the services rendered; (2) the member has no significant influence over credit union policies; (3) any loans to the member meet the requirements of the relevant independence interpretation; and (4) any deposits are fully insured or, if uninsured, the amounts are not material.
On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA’s net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client’s financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client’s December 31, Year 2, financial statements?
A. No, because the CPA had a loan with the client during the period of a professional engagement.
B. Yes, because the CPA was not required to be independent at the time the loan was granted.
C. No, because the CPA had a loan with the client during the period covered by the financial statements.
D. Yes, because the loan was fully secured.
Answer (B) is correct.
An attest engagement requires independence as required by AICPA standards. Accountants who perform audits and reviews are required by AICPA standards to be independent. However, a compilation merely assists management in presenting information in the form of financial statements. It does not provide any assurance that no material modifications should be made for them to be in accordance with the applicable reporting framework. Although a compilation is not an assurance engagement, it is an attest engagement (AR-C 60). Furthermore, AICPA standards do not require an accountant to be independent to perform a compilation. But if (s)he is not independent, a final paragraph of the report should so state. Thus, the CPA was not required to be, and was not, independent during Year 1. Because the loan was paid in full during Year 1, the CPA is considered independent with respect to the audit of the client’s Year 2 financial statements. The CPA had no loan from the client during the engagement.
The spouse of a covered member of an accounting firm is in a permitted employment situation at an attest client and participates in the client’s employee stock ownership plan. According to the AICPA Code of Professional Conduct, which of the following actions is required of the spouse when beneficial financial interests are distributed?
A. The spouse must hold the shares for a minimum of 30 days after the right to dispose is obtained.
B. The spouse must serve as a trustee for the share-based compensation arrangement to receive put options as part of the compensation arrangement.
C. The spouse must not exercise any put option to require the employer to repurchase the beneficial financial interests until after 30 days from receipt.
D. The spouse must dispose of the shares as soon as practicable, but at most 30 days after the right to dispose is obtained.
Answer (D) is correct.
An immediate family member may be employed by the attest client in a nonkey position. As a result of such permitted employment, the immediate family member may participate in various employee benefit plans under limited circumstances. Distributions of client shares from the plan must be disposed of as soon as practicable, but at most 30 days after the right to dispose is obtained.
A registered public accounting firm is conducting an audit of an issuer and initiated its current-year audit on January 1, Year 3. Many of the firm’s former auditors are now employed by the client. Under which of the following circumstances may the firm perform the audit?
A. The client’s CEO was a manager on the audit until June 30, Year 2.
B. The client’s CFO was the lead partner on the audit until December 31, Year 1.
C. The client’s controller was a staff accountant on the audit for 2 weeks during Year 2.
D. The client’s chief accounting officer was the concurring partner on the audit until April 15, Year 2.
Answer (B) is correct.
Independence of the accounting firm is impaired if a former partner or professional employee of the firm is subsequently employed or associated with an attest client in a key position. However, independence is not impaired if the person is no longer associated or active with the CPA firm and any retirement compensation is fixed. A CPA firm is independent if the former lead partner did not participate in any capacity in the audit of the issuer during the year before the beginning of the audit.
Answer (A) is incorrect.
An accounting firm is not independent if a CEO for an issuer was employed by that accounting firm and participated in any capacity in the audit of that issuer during the year before the beginning of the audit.
Answer (C) is incorrect.
An accounting firm is not independent if a controller for an issuer was employed by that accounting firm and participated in any capacity in the audit of that issuer during the year before the beginning of the audit.
Answer (D) is incorrect.
An accounting firm is not independent if a chief accounting officer for an issuer was the concurring partner on the audit during the year before the beginning of the audit.
In which of the following circumstances would a covered member’s independence be impaired with respect to a nonissuer client?
A. The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.
B. The member is designated to serve as guardian of a friend’s children if the need arises, and the friend’s estate, which would be held in trust for the children, holds significant stock ownership in a client entity.
C. The member belongs to a client golf club that requires members to acquire a share of the club’s debt securities.
D. The member’s spouse qualifies because of geographical residence to belong to a client’s credit union, and all transactions with the credit union are conducted under normal operating practices.
Answer (A) is correct.
Independence is impaired if a covered member has a direct financial interest in a client, e.g., ownership of equity, debt securities (such as bonds issued by an attest client), or other investments in a client. A direct financial interest impairs independence even if it is not material to the member’s wealth.
Answer (B) is incorrect.
Serving as the trustee for the estate, not as guardian of the children, impairs independence. Furthermore, the mere designation to serve as a trustee does not impair independence.
Answer (C) is incorrect.
If membership in a club is essentially a social matter, a member’s independence is not impaired if the club requires members to acquire a share of debt or equity securities. Such ownership is not considered a direct financial interest.
Answer (D) is incorrect.
The qualification because of geographical residence of a member (or his or her immediate family) to join a client’s credit union is not an association that impairs independence. For example, even membership in a credit union does not impair independence if (1) it is for reasons other than services provided to the client and (2) transactions are conducted under normal operating practices.
A firm performed an attest engagement to apply agreed-upon procedures to help KIG Co. determine whether it should acquire FTBL Co. FTBL is responsible for the information to which procedures were applied. Who most likely is not required to be independent of the responsible party?
A. The supervisor of an engagement partner.
B. Anyone on the engagement team.
C. The firm, if it designed the responsible party’s information system.
D. Anyone who consulted with the engagement team about technical matters specific to the engagement.
Answer (C) is correct.
The following covered members and their immediate families must be independent in relation to the responsible party: (1) an individual on the attest engagement team; (2) an individual who directly supervises or manages the attest engagement partner; and (3) individuals who consult with the attest engagement team about technical or industry-related matters specific to the engagement. Independence also is impaired if the firm had a material relationship with the responsible party prohibited under the Independence Rule. Moreover, a firm may provide nonattest services to the responsible party that normally are prohibited, e.g., designing the financial information system. However, if the nonattest services do not relate directly to the subject matter of the attest engagement, independence is not impaired.
Fact Pattern: A CPA firm was purchased by a public company. The acquirer performs other professional services and has banking, insurance, and brokerage subsidiaries. The owners and employees became employees of a subsidiary. Also, the previous owners formed a new CPA firm that provides attest services. It leases employees, offices, and equipment from the parent, which also provides advertising, billing, and collection services.
Independence is not impaired when:
A. A bank subsidiary in the consolidated group provides asset custody services in the ordinary course of business to an attest client of the new CPA firm.
B. An indirect superior has a material investment in an attest client of the new CPA firm.
C. An indirect superior is a promoter of an attest client of the new CPA firm.
D. The new CPA firm audits another subsidiary in the consolidated group.
Answer (A) is correct.
Other entities in the consolidated group and their employees may not be (1) promoters, (2) underwriters, (3) directors, (4) officers, or (5) voting trustees of an attest client. However, with these exceptions, indirect superiors and other consolidated entities may provide services to an attest client that a member could not without impairing independence. For example, a bank’s provision of trustee and asset custody services in the ordinary course of business does not impair independence if the bank is not subject to the independence rules in their entirety (e.g., because it is not significantly influenced by a direct superior).
A member of the AICPA has been requested to serve as a client advocate on accounting matters in a hearing before a regulatory body. The member should consider whether it is appropriate to accept the engagement if
I. The service stretches the bounds of performance standards.
II. The service compromises credibility.
III. The service exceeds sound and reasonable professional practice.
A. I and III only.
B. II only.
C. II and III only.
D. I, II, and III.
Answer (D) is correct.
Professional services involving client advocacy are governed by the Code (General Standards Rule, Compliance with Standards Rule, Accounting Principles Rule, and Integrity and Objectivity Rule). If independence is required for a service, the Independence Rule also applies. If the service (1) stretches the bounds of performance standards, (2) exceeds sound and reasonable professional practice, or (3) compromises credibility, it poses an unacceptable risk of injury to the member’s or the firm’s reputation. In these circumstances, the propriety of accepting the engagement should be considered.
