AUD - Ethics, Professional Responsibilities, and General Principles Flashcards
6 key principles of the Code of Professional Conduct
- Responsibilities principle
- Public Interest principle
- Integrity principle
- Objectivity and Independence principle
- Due care principle
- Scope and nature services principle
Responsibilities principle
AICPA members should exercise sensitive professional and moral judgment in all their activities
This principle imposes a continuing responsibility on members to cooperate w/each other to:
- improve the art of accounting
- Maintain the public’s confidence
- Carry out the profession’s special responsibilities for self-governance
Public Interest principle
Members should accept the obligation act in a way that will
- Serve public interest
- Honor the public trust
- Demonstrate a commitment to professionalism
Integrity principle
Perform all professional responsibilities w/the highest sense of integrity
Objectivity and Independence principle
Maintain objectivity and be free of conflicts of interest in discharging professional responsibilities
Due care principle
A member should
- Observe the profession’s technical and ethical standards
- Strive continually to improve competence (i.e. continued professional education)
- Perform professional obligations to the best of your ability
Scope and nature of services principle
A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided
At the minimum, members should:
- Practice in firms that have good internal quality control procedures
- Use their individual judgment to determine whether the scope and nature of services provided to an audit client would create a conflict of interest
- Individually assess whether a contemplated activity is consistent w/their role as professionals
3 main steps to applying the Conceptual Framework (MIPPs)
- Identify threats
- Evaluate the significance of the threats
- Identify and apply safeguards
Sometimes, the Code of Professional Conduct rules and interpretations don’t provide a clear answer to a particular situation -> in these instances, members should always apply the threats-and-safeguards Conceptual Framework
7 broad categories of threats
- Adverse interest threats
- Advocacy threats
- Familiarity threats
- Mgmt participation threats
- Self-interest threats
- Self-review threats
- Undue influence threats
Adverse interest threats
Examples:
- Client sues/threatens to sue the firm
Advocacy threats
Examples:
- Member provides forensic accounting services to client in lawsuit w/3rd party
- Firm acts as investment advisor, underwriter, promotor, or registered agent for a client
Familiarity threats
Examples:
- Member’s spouse or other relatives or close friend is employed by the client
- Former firm partner joins client in a key position
Management participation threats
Examples:
- Member takes on the role of client management
Self-interest threats
Examples:
- Member has a financial interest in a client that may be affected by outcome of professional services the firm is providing
- Firm relies excessively on revenue from single client
Self-review threats
Examples:
- Member relies on work product of own firm
- Member does client’s bookkeeping
- Partner in firm was an officer or director of client
Undue influence threats
Examples:
- Client threatens to fire firm or to w/hold future business unless firm accedes to client’s wishes
- Client’s major shareholders threatens to withdraw/terminate a professional service unless the member reaches desired conclusion
3 kinds of safeguards exist
- Safeguards created by profession, legislation, or regulation (e.g. professional standards and threat of disciple; license requirements; ethics education and training requirements)
- Safeguards implemented by the client (e.g knowledgeable/experienced managers, appropriate ethics policies or governance structures etc.)
- Safeguards implemented by the firm (e.g. strong leadership that emphasizes compliance, effective internal disciplinary system etc)
A covered member who owns less than 5% of a diversified mutual fund has an…
immaterial and indirect interest in the underlying securities and therefore independence is not impaired.
In evaluating possible conflicts of interest, members should ask:
Would a reasonable and informed third party conclude that a conflict exists?
2 main types of conflicts
- Between interests of 2 clients
- Between interests of client on one hand and firm and/or its members on the other
If an actual conflict is identified by any member…
engagements should be refused or terminated if risk violation is unacceptably high
Objectivity is threatened when a member serves as a
client entity’s director
At best, it is preferable to serve as a mere consultant to a client’s board
Objectivity and integrity are threatened if the client (including its officers, directors, and 10% shareholders)…
give gifts or entertainment to the firm or its members (or vice versa)
If members have a disagreement w/a superior over how to record potential earnings (or some other issue), the member is not…
supposed to simply do what the superior wants and subordinate their judgment
In an event of conflict, evaluate whether…
the threat is at an unacceptable level, which occurs if the position taken would result in a material misrepresentation or legal violation.
If the threat is not significant, then nothing further needs to be done
If, after discussion w/people up the chain, the member is still worried that the right thing isn’t going to be done, in no particular order, invoke the following safeguards:
- Determine whether the organization’s policies and procedures have any additional requirements for reporting differences of opinion
- Determine whether there is a duty to report to external authorities
- Consult legal counsel
- Fully document the situation
Members doing attest work may not
advocate for their attest clients
Outsourcing work to 3rd party service providers (TSPs) can
threaten objectivity or integrity
However, there is no problem if the TSPs provide only administrative support (i.e record storage, software application hosting etc.)
If substantive services are outsourced, member should
notify clients, preferably in writing, before any confidential information is provided to TSPs
General Standards that apply to members
- Take on jobs only if you can reasonably expect to complete them w/professional competence
- You need not be perfect but should always exercise due professional care when providing professional services
- Always adequately plan and supervise your provision of professional services
- Never present conclusions/recommendations without sufficient relevant data to support them
Client-provided records should be…
delivered to the client at the client’s request, even if the client has not paid its bill to the member
Member-prepared records related to a completed and issued work product should be…
delivered to the client at the client’s request, except that they may be withheld if fees are due for that specific work product
Members shall not receive contingent fees for…
any service performed for a client for whom he/she performs any attest services (i.e. financial statement audit or review, financial statement compilation)
A member shall not prepare original/amended tax return for a contingent fee
In other words, primarily avoid contingent fees
Referral fees and commissions are…
prohibited for attest clients
for non-attest clients, they are permitted (but must be disclosed in writing)
Member cannot own
more than 5% of client’s ownership interests w/out impairing independence
If a member owns 5% or less of outstanding shares of a diversified mutual fund, the interest in the underlying investments of the fund are to be held…
immaterial and indirect financial interests -> they do not impair independence
Firms may maintain depository accounts at a bank that is an attest client if they conclude that.
the likelihood is remote that the bank will experience financial difficulties.
Immediate family members include
spouses, spousal equivalents, and dependents
close relatives include
parents, siblings, and nondependent children
Immediate family members cumulatively may not own
more than 5% of an attest client
A covered member’s immediate family member may work for an attest client, just not in a “key position” (any position related to exercising influence over financial statements)
The auditor obtains an understanding of internal control and the flow of documents related to the entity’s transactions primarily through:
- inquiry of appropriate personnel
- observation of client activities
- review of relevant documentation (client’s accounting manuals, prior-year’s audit documentations [working papers] etc.)
“other member” means
CPA who is retired or unemployed
3 different ways that an auditor might document the understanding of internal control
- Flow charts of transaction cycles
- Internal control questionnaires
- Narrative write-ups (written memos that describe the important control-related activities in the transaction cycles under consideration)
reliance
reliance means the same thing as to assess control risk at less than the max level for the purposes of accepting a somewhat higher level of detection risk
Members shall not receive contingent fees for any service performed for a client for whom he/she performs any of the following attest services
- Financial statement audit
- Financial statement review
- A financial statement compilation reasonably expected to be used by a 3rd party that doesn’t disclose a lack of independence, or
- An examination of prospective financial information
Immediate family members may work for audit clients, but they may not serve key positions (i.e. general counsel)
Which of the following is a “self review” threat to member independence?
A: An engagement team member prepares invoices for the attest client
The team member would be reviewing his or her own work, hence this is a “self review” threat.
Kate has a very unusual auditing situation. An unusual transaction has created a situation where following GAAP seems problematic. Kate needs advice. Which of the following is true as Kate considers how to handle the situation?
A: To depart from GAAP, Kate needs to demonstrate that following GAAP would mislead investors, and then describe the departure, its approximate effects, and the reason why compliance would mislead
Bill Fling, CPA, has posted the general ledger and has maintained the financial records of Wing Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries. Which of the following best summarizes the AICPA and SEC views as to the following question: Is audit independence impaired?
AICPA: No
SEC: Yes
A manager that provides 10 hours or more of nonattest services to the client is considered a covered member.
Neither SOX nor the PCAOB prohibit preparation of an audit client’s original return
CPAs need not be independent when providing tax and management advisory services
A member in public practice may not sign a current year audit report if it has unpaid fees from the client for services provided more than 1 year prior, but an exception arises when the client files for bankruptcy.
A CPA may not disclose information to the IRS without the client’s consent.
Referral fees and commissions are prohibited for attest clients
Operating leases, if proper conditions are met, do not impair independence.
Partners and professional employees, rather than “covered members” are the focus of the independence rules for employment relationships
Because Murple has both induced the TSP (3rd party service provider) to promise to keep the information confidential and assured himself that the TSP can do so, this disclosure is permitted.
An exception to the profession’s independence requirements exists for a cash balance in a brokerage account that is fully insured by an organization such as the Securities Investor Protection Corporation.
Keith worked directly under the CFO at Burnett Corporation. He has decided that he’d like to return to public accounting where he used to work, and he accepts an offer at the Beard CPA Firm. Beard audits Burnett. Which of the following is true?
Answer: Keith need not worry about independence issues as long as he joins Beard as another partner in office (OPIO) AND follows all 5 steps to complete dissociation from Burnett
Accounting and consulting services do not normally impair independence because the member’s role is advisory in nature.
All members must adhere to the Integrity and Objectivity Rule
Independence only applies to members in public service/practice (MIPP)
An accountant need not be independent to provide compilation services or prepare tax returns.
professional standards require payment prior to issuance of the subsequent year audit report.
Members in business
Members in business are 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..
Basically staff accountants, internal auditors, and other accountants not engaged in public practice
Thus, members in business don’t have to worry about independence rules
