CH 4b

Question 1

What is the code of professional conduct

Answer 1

1) Principles ( ideal standards of ethical conduct)
2) Rules of conduct ( Minimum standards of ethical conduct stated as specific rules)
3) Interpretations of the rules of conduct (Interpretations of the rules of conduct by the aicpa division of professional ethics)
4) Ethical rulings ( Published explanations and answers to questions about the rules of conduct submitted to the AICPA by practitioners and others interested in ethical requirements)

Question 2

What code of professional conduct is enforced?

Answer 2

Rules of conduct

Question 3

What code of professional conduct is not enforced?

Answer 3

Principles

Interpretations of the rules of conduct ( must justify departure)

Ethical rulings ( must justify departure)

Question 4

what are ethical principles?

Answer 4

1) responsibilities
2) The Public Interest
3) Integrity
4) Objectivity and independence
5) Due Care( Continually to improve competence including quality of services and discharge professional responsibility)
6) Scope and Nature of service ( public practice should observe the principles of code of professional conduct)

Question 5

How should CPA practitioners set their rules of conduct and principles?

Answer 5

1) rules of conduct ( set at minimum level)

2) principles ( set at high level)

Question 6

What is part A in IESBA code of ethics for professional conduct

Answer 6

1) establishes the five fundamental principles related to integrity, objectivity, professional competence and due care, confidentiality, and professional behavior
2) provides a conceptual framework that accountants apply to identify threats, compliance with the fundamental principles, evaluate the significance of identified threats, and apply safeguards.

Question 7

What is part B and C in IESBA code of ethics for professional conduct

Answer 7

B and C: conceptual framework applies in certain situations

B: Accountants in public practice

C: Accountants in business

Question 8

How does AICPA and IESBA both define independence?

Answer 8

1) Independence of mind ( unbiased attitude to audit)

2) Independence of appearance ( other’s interpretations of independence)

Question 9

What does SOX and SEC provisions generally address auditor’s independence

Answer 9

1) Both address and strengthen Auditor’s independence

Question 10

From SOX and revised SEC rules, what are auditors’ non-auditing restrictions?

Answer 10

Prohibited:

1) Bookkeeping and other acct services
2) Financial information systems design
3) Appraisal or valuation services
4) Actuarial Services
5) Internal audit outsourcing
6) Management or human resource
7) Broker or dealer or investment adviser or investment banker services
8) Legal and expert services unrelated to the audit
9) Any other service that the PCAOB determines by regulation is impermissible.

Question 11

If non audit clients ask for business services from CPA firm, is the CPA firm breaking rules?

Answer 11

1) no
2) As long as the clients aren’t audited by same company.
3) must have preapproval from SEC and PCAOB

Question 12

Is a CPA firm independent if selling services ( other than auditing) for compension?

Answer 12

1) no,

Question 13

PCAOB and SEC can allow CPA firms to do other service?

Answer 13

1) yes

2 company must have approval from audit committee

3) it must not be listed in prohibited ,non-auditing, services.

Question 14

Define audit committee

Answer 14

1) selected number of members whose responsible for helping auditors remain independent of management

Question 15

How many members are selected in auditing committee? What is required in audit committee?

Answer 15

1) selected by board of directors
2) from three to five independent directors
3) at least one financial expert

Question 16

What does “cooling off” mean?

Answer 16

1) A one year period must occur before a member of the audit engagement team can accept a key management position at a client.
2) CPA firm loses a client

Question 17

Partnership rotation?

Answer 17

1) every five years, auditor must change auditors

Question 18

What are SEC’s rules that prohibit ownership interests?

Answer 18

1) Members of the audit engagement team
2) Those in a position to influence the audit engagement in the firm chain of command
3) Partners and mangers who provide more than 10 hours of nonaudit services to the client
4) Partners in the office the partner primarily responsible for the audit engagement.

Question 19

What is shopping for account principles mean?

Answer 19

1) Having a particular CPAs that adhere to client’s demand for console.

Question 20

What is “engagement and payment of audit fees by management” mean?

Answer 20

1) this demonstrates on assurance of defining independence of auditors.

Question 21

What are the rules of conduct for independence

Answer 21

1) A member in public practice shall be independent in the performance of professional services required by bodies of standards that is designated by council.

Question 22

What does rule 101 apply? not?

Answer 22

when it applies

1) audits
2) attestations services

when it does not

1) tax returns
2) management services

Question 23

When interpretations of rule 101 cover stockholders, how is that applied in audits?

Answer 23

1) Direct investments are prohibited. Stockholders could damage both independence of mind and appearance.
2) Indirect investment are also prohibited UNLESS if amount is material to the auditor.

Ownership of stock is more complex than it appears at first glance.

Question 24

What are the three important distinctions in the rules?

Answer 24

1) Covered members
2) Direct versus indirect financial interest
3) Material or immaterial

Question 25

Who is covered by rule 101?

Answer 25

1) attest engagement team
2) Individual who influences attest engagement
3) A partner or manager who provide nonattest services
4) partner in office who works with attest engagement
5) Firm and employee benefit plans
6) An entity ( more than one) that can be controlled by other covered members ( two or more)

Question 26

What is Direct versus Indirect financial interest?

Answer 26

1) Direct financial interest ( family who owns stock)

2) Indirect Financial interest( close but not direct ownership between auditor and the client)

Question 27

What is meaning of Material or Immaterial ?

Answer 27

1) Materiality is relation from a member’s wealth and income.

Question 28

What are five financial interests( relationships) issues? What relationships or actions are prohibited

Answer 28

1) Former Practitioners ( influence auditors/ clients)

2 )Normal Lending Procedures

3) Financial Interest and Employment of Immediate and Close Family members ( spouse owns stocks and auditor is responsible of audit that involves spouse’s stocks. it is a direct violation of rule 101 [ unless stocks have materiality}).
4) Joint Closely Held Investments with a Client. ( holding non-auditing client’s stock, auditing client owns or relates to non-auditing client)
5) Director, officer , management , or employee of a company. ( if management is able to affect engagement team, it is a violation of rule 101).

Question 29

How is litigation between CPA firm and client a violation of rule 101?

Answer 29

When there is a lawsuit or intent to start a lawsuit between a CPA firm and its client, the interpretations regard such litigation as a violation of rule 101 for the current audit.

Question 30

When is litigation not a violation of rule 101?

Answer 30

1) when litigation ( by the client or vice versa) is tax or other non audit services

Question 31

What are three important requirements that the auditor must satisfy before it is acceptable to do bookkeeping and auditing?

Answer 31

1) Client must be full responsibility for the financial statements.
2) CPA must not assume the role of employee or of management when conducting the operations of an enterprise.
3) The CPA must conform to auditing standards

Question 32

Can a CPA firm do both bookkeeping and auditing for a private company?

Answer 32

1) yes
2) AICPA and CPA permits this.
3) must fulfil three requirements

Question 33

Can CPA firm do both bookkeeping and auditing for a public company?

Answer 33

1) no

2) SEC and AICPA don’t allow this.
i) smaller companies have little knowledge of acct or processing transactions

Question 34

What are two services that are prohibited by SEC and AICPA that are restricted in public companies?

Answer 34

1) consulting and other non auditing services ( services that interfere with independence is a violation)
2) Unpaid fees ( if fees are left unpaid for a year, this is considered violation of rule 101.

Question 35

When result of expulsion from AICPA, how is it enforced?

Answer 35

1) AICPA professional ethics division ( investigated violations of the code and deciding disciplinary action)
(Two actions: corrective action or remedial or authority to suspend or expel members)

2) State Board of Accountancy ( loss of CPA license to practice)
3) PCAOB enforcement actions ( investigate and discipline CPA firms for non compliance of SOX)