Chapter 18: Ethics and AICPA Code of Professional Conduct

Question 1

What is the result of a violation of Code of Professional Conduct?

Answer 1

revocation of CPA license

Question 2

What is Rule 101?

Answer 2

Independence

Question 3

What is independence required for?

Answer 3

attestation services

Question 4

What is independence impaired by?

Answer 4

1) Direct financial interest in client by covered member, 2) Material indirect financial interest in client by covered member, 3) Partner or Professional Employee had Management/Employee Relationship with client, 4) Partner or Professional Employee (r immediate family) owned >5% of client equity

Question 5

Who is considered a partner or professional employee?

Answer 5

1) All partners in the firm, 2) All professional employees of the firm (everyone except secretaries)

Question 6

Who is considered a covered member?

Answer 6

1) All persons on the attest engagement, 2) All partners in the same office as lead partner on attest engagement, 3) Any individual who can influence that attest engagement, 4) All partners/managers who provide >10 hours non-attest services to client

Question 7

Do immediate family members of covered members impair independence?

Answer 7

considered to be the same as covered member and can impair covered member’s independence if have financial interest in client or work for client

Question 8

What is the exception that allows an immediate family member to work for a client and have financial interest in the client?

Answer 8

1) Immediate family member can be employed by an audit client provided employment is not in audit sensitive area, 2) immediate family member can own financial interest in audit client if they are employee of client and own financial interest as result of participatin in employee retirement or savings plan of client

Question 9

When can close relatives of covered members present an independence problem?

Answer 9

1) Close relative has material financial interest in client, 2) Close relative employed in audit sensitive area

Question 10

What is considered a direct financial interest?

Answer 10

1) Investment in client, 2) Joint business venture with clients or officers/directors, 3) Unpaid fees for any service more than 1 year in arrears, 4) Actual or threatened litigation between CPA and client related to audit or management fraud, 5) Loans or credit arrangements between CPA and client

Question 11

What is considered a material indirect financial interest?

Answer 11

1) Material financial interest in client by nondependent close relative of covered member, 2) Covered member has direct financial interest in third party and third party has investor relationship with client, 3) CPA invests in non-client company and non-client company has investor/investee relationship with client

Question 12

When is a material financial interest in client by close relative a problem?

Answer 12

1) CPA aware of investment, 2) Investment is material to relative (>5% of net worth), 3) Investment enables close relative to exert significant influence over client

Question 13

When is independence impaired due to a management/employee relationship?

Answer 13

1) Was an employee of the client during the period covered by F/S being audited or during audit? 2) Acted as a member of management during the period covered by F/S being audited or during audit

Question 14

What is considered a management relationship?

Answer 14

1) Any service where CPA makes management decision, 2) Any service where CPA becomes integral part of IC system, 3) Consulting services disallowed by SEC

Question 15

What are exceptions to management/employee relationships?

Answer 15

1) Spouses/dependents/close relatives generally not problem unless related to covered member and work in audit sesitive area, 2) Does not apply to client employees who join CPA firm, 3) CPA firm employees who accept job with client usually not problem

Question 16

What does Rule 102 state?

Answer 16

CPA should maintain integrity and objectivity for any professional service

Question 17

What does Rule 201 state?

Answer 17

Comply with following GAAS standards: Professional competence, Due professional care, Planning and supervision, and sufficient relevant data

Question 18

What does Rule 202 state?

Answer 18

Comply with relevant professional standards covering work they are performing

Question 19

What does Rule 203 state?

Answer 19

Member should not claim that F/S are prepared in accordance with GAAP unless they are in compliance with GAAP

Question 20

What does Rule 301 state?

Answer 20

Member should not reveal confidential client information unless needed to comply with GAAS rules 202/203, needed to comply with court summons or subpeona, needed to facilitate an AICPA sanctioned peer review, and needed to defend oneself in an AICPA trial board

Question 21

What does Rule 302 state?

Answer 21

Permitted to perform services on contingent fee basis, except CPA may not perform tax or attestation services for contingent fee and CPA not permitted to perform any service for contingent fee for attestation client

Question 22

What does Rule 501 state?

Answer 22

Member shall not commit an act discreditable to profession

Question 23

What does Rule 502 state?

Answer 23

Member shall not seek to obtain clients by advertising or any other form of solicitation that is false

Question 24

What does Rule 503 state?

Answer 24

Permitted to receive commissions for recommending goods or services, except to clients, provided all parties in transaction know about commission arrangement

Question 25

What does Rule 505 state?

Answer 25

Member shall not practice public accounting under a firm name that is misleading, firm engaged in attestation services must also have more than 50% of the financial interest in firm owned by CPAs and all owners must be active members of the firm