Chapter 19 Terms

Question 1

Ethics

Answer 1

A system or code of conduct based on moral duties and obligations that indicates how an individual should behave.

Question 2

kProfessionalism

Answer 2

The conduct, aims, or qualities that characterize or mark a profession or professional person.

Question 3

Why are rules of professionalism established?

Answer 3

1) Users of the professional services know what to expect when they purchase such services,
2) Members of the profession know what behavior is acceptable, and
3) The profession can monitor the actions of its members and apply discipline where appropriate.

Question 4

What are the three methods or theories of ethical behavior?

Answer 4

1) A utilitarian approach.
2) A rights-based approach.
3) A justice-based approach.

Question 5

Utilitarian Approach

Answer 5

An approach to ethics that focuses on the consequences of an action on all the individuals affected.

Question 6

What is one weakness of applying the utilitarian theory to ethical delimmas?

Answer 6

Measuring the potential costs and benefits of two or more courses of action is often difficult. Balancing the interests of all parties involved when those interests conflict with one another may also be difficult.

Question 7

Rights-Based Approach

Answer 7

An approach to ethics that emphasizes the need to respect the rights of each individual affected.

Question 8

What is a disadvantage of the rights-based approach?

Answer 8

It may be difficult or impossible to satisfy all rights of all affected parties, especially when those rights conflict.

Question 9

What is the “moral point of view”?

Answer 9

A concept stating that auditors must be willing to see issues through other’s eyes and put the interests of other stakeholders, such as investors and creditors, ahead of their own self-interests and the interests of the CPA firm.

Question 10

Justice-Based Approach

Answer 10

An approach to ethics concerned with individual freedom, equity, fairness, and impartiality.

Question 11

Why may the justice-approach be difficult to apply?

Answer 11

One or more individuals or groups may be affected when a better distribution of benefits is provided to others.

Question 12

What must a CPA follow when auditing a privately held company?

Answer 12

They must follow the auditing standards established by the ASB, as well as the standards of conduct established by the Code of Professional Conduct.

Question 13

What must a CPA follow when auditing a publicly held company?

Answer 13

They must follow the auditing standards of the PCAOB, the Code of Professional Conduct, and also the more stringent professional conduct requirements established by the SEC and PCAOB.

Question 14

Public Practice

Answer 14

Consists of the performance of professional services for a client by a member or member’s firm.

Question 15

Who does Part 1 of the Professional Code of Professional Conduct apply to and what does it require?

Answer 15

This part applies to CPAs in public practice; in other words, it applies to CPAs who provide assurance and conduct financial statement audits on which third-party stakeholders will rely. This includes auditors who serve private entity and public company clients and government auditors who issue audit and other assurance reports on government entities.
This part also requires CPAs to be independent of the entities on which they provide assurance.

Question 16

Who does Part 2 of the Professional Code of Professional Conduct apply to and what does it require?

Answer 16

This part applies to CPAs who are working in business but not as auditors that issue assurance reports on which the public will rely. This part of the Code does not require independence, but it does require integrity and objectivity on the part of CPAs working in any business capacity. For example, if a CPA works for a company as a controller or CFO, this part applies but Part 1 does not. If a CPA works both as an auditor and in another business capacity, both Part 1 and this part apply to her or his conduct.

Question 17

Who does Part 3 of the Professional Code of Professional Conduct apply to and what does it require?

Answer 17

This part of the Code applies to CPAs who are functioning neither as an auditor nor in business. Even in such cases the profession expects that CPAs will behave in certain ways; for example, that the CPA will not engage in any act that would be discreditable to the profession.

Question 18

What are the six fundamental ethical principles in the Preface to the Code?

Answer 18

1) Responsibilities
2) The Public Interest
3) Integrity
4) Objectivity and Independence
5) Due Care
6) Scope and Nature of Services

Question 19

Responsibilities

Answer 19

In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgements in all their activities.

Question 20

The Public Interest

Answer 20

Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism.

Question 21

Integrity

Answer 21

To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.

Question 22

Objectivity and Independence

Answer 22

A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.

Question 23

Due Care

Answer 23

A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.

Question 24

Scope and Nature of Services

Answer 24

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.

Question 25

Integrity and Objectivity Rule

Answer 25

In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgement to others.

Question 26

What are the seven threats to a CPA’s integrity?

Answer 26

1) Adverse interest threats
2) Self-Interest threats
3) Advocacy threats
4) Familiarity threats
5) Management participation threats
6) Self-review threats
7) Undue influence threats.

Question 27

Adverse Interest Threats

Answer 27

Where the CPA’s interest runs contrary to those of the client.

Question 28

Self-Interest Threats

Answer 28

Where a CPA may be forced to choose between actions that further her or his own interests and actions that serves the investing public’s interests.

Question 29

Advocacy Threats

Answer 29

Where a CPA might feel inclined to advocate for the client’s preferred outcomes.

Question 30

Familiarity Threats

Answer 30

Where a CPA might have such a close, long-standing relationship with a client that it becomes difficult to maintain objectivity.

Question 31

Management Participation Threats

Answer 31

Where a CPA who becomes involved in management decisions is unable to be completely objective.

Question 32

Self-Review Threats

Answer 32

Where a CPA is in a position that involves evaluating his or her own judgements.

Question 33

Undue Influence Threats

Answer 33

When a CPA’s integrity or objectivity is pressured due to another involved party’s aggressiveness or dominant personality.

Question 34

What are some safeguards to threats of a CPA’s integrity and objectivity?

Answer 34

These might include additional training, involvement of an otherwise uninvolved third party, and the availability of hotlines and direct consultation on ethical and other matters.

Question 35

Independence Rule

Answer 35

A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

Question 36

Attest services include:

Answer 36

• Financial statement audits.
• Financial statement reviews.
• Other attest services as defined in the Statements on Standards for Attestation Engagements (SSAEs).

Question 37

Covered Member

Answer 37

A member that is:
A) An individual on the attest engagement team.
B) An individual in a position to influence the attest engagement.
C) A partner or manager who provides nonattest services to the attest entity beginning once he or she provides 10 hours of nonattest services to the entity within any fiscal year and ending on the later of the date (i) the firm signs the report on the financial statements for the fiscal year during which those services were provided, or (ii) he or she no longer expects to provide 10 or more hours of nonattest services to the attest entity on a recurring basis.
D) A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement.
E) The firm, including the firm’s employee benefit plans.
F) An entity whose operating, financial, or accounting policies can be controlled (as defined by generally accepted accounting principles for consolidation purposes) by any of the individuals or entities described in parts (a) through (e), or by two or more such individuals or entities if they act together.

Question 38

Financial Interest

Answer 38

An ownership interest in an equity or a debt security issued by an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest.

Question 39

Direct Financial Interest

Answer 39

A direct financial interest is a financial interest that is owned directly by an individual or entity, or is under the control of an individual or entity.

Question 40

Indirect Financial Interest

Answer 40

An indirect financial interest is a financial interest that is beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary does not control the intermediary or have authority to supervise or participate in the intermediary’s investment decisions.

Question 41

What is a “Blind Trust?”

Answer 41

This is a trust in which the owner of the trust assets doe snot supervise or participate in the trust’s investment decisions during the term of the trust.

Question 42

These types of personal loans from an audited entity that operates as a financial institution are permitted:

Answer 42

1) Automobile loans and leases collateralized by the automobile.
2) Loans fully collateralized by the cash surrender value of an insurance policy.
3) Loans fully collateralized by cash deposits at the same lending institution.
4) Credit cards and cash advances where the aggregate outstanding balance is reduced to $10,000 or less by the payment due date.

Question 43

Normal lending procedures, terms, and requirements.

Answer 43

These are defined as lending procedures, terms, and requirements that are reasonably comparable to those relating to loans of a similar character given to other borrowers during the period in which the loan to the member is given.

Question 44

Key Position

Answer 44

A position in which an individual:
A) Has primary responsibility for significant accounting functions that support material components of the financial statements.
B) Has primary responsibility for the preparation of the financial statements.
C) Has the ability to exercise influence over the contents of the financial statements, including when the individual is a member of the board of directors or similar governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position.

Question 45

Immediate Family

Answer 45

A spouse, spousal equivalent, or dependent (whether or not related).

Question 46

Close Relatives

Answer 46

A parent, sibling, or nondependent child.

Question 47

What are the two major situations that can impair independence when it comes to family relationships?

Answer 47

1) A close relative has a financial interest in the entity that is material to the close relative, and the CPA participating in the engagement is aware of the interest.
2) An individual participating in the engagement has a closer relative who could exercise significant influence over the financial or accounting policies of the entity (i.e., a key position).

Question 48

What are the three categories of litigation?

Answer 48

1) Litigation between the entity and the CPA
2) Litigation by security holders
3) Other third-party litigation where the CPA’s independence may be impaired.

Question 49

What are some examples of management responsibilities that would be considered to impair a CPA’s independence?

Answer 49

1) Setting policy or strategic direction for the attest client.
2) Authorizing, executing, or consummating a transaction or otherwise exercising authority on behalf of an entity.
3) Preparing source documents, in electronic or other form, evidiencing the occurrence of a transaction.
4) Having custody of entity assets.
5) Supervising the entity’s employees in the performance of their normal recurring activities.
6) Determining which recommendations of the member should be implemented.
7) Establishing or maintaining internal controls, including preforming ongoing monitoring activities for an entity.
8) Reporting to those charged with governance on behalf of management.
9) Accepting responsibility for the preparation and fair presentation of the attest client’s financial statements.

Question 50

The SEC’s rules with respect to services provided by auditors are predicated on what four basic principles of auditor objectivity and independence?

Answer 50

1) An auditor should not audit his or her own work.
2) An auditor should not function in the role of management.
3) An auditor should not service in an advocacy role for the entity, and
4) An auditor should not have a mutual or conflicting interest with an audit client.

Question 51

System of Quality Management

Answer 51

A risk-based system that is designed, implemented, and operated in an interconnected and coordinated manner such that the firm proactively manages the quality of engagements that it performs.

Question 52

Attestation Engagement

Answer 52

An engagement that requires independence as set forth in the AICPA Statements on Auditing Standards (SASs), Statements on Standards for Accounting and Review Services (SSARSs), and Statements on Standards for Attestation Engagements (SSAEs). Attest engagements include financial statement audits, reviews, and examinations of prospective financial information.