Chapter 2 Flashcards
What are the four parts of the AICPA code?
- Preface
- Part 1 - For public practice members
- Part 2 - For industry members
- Part 3 - For all other members (retired, unemployed, etc)
If a CPA is works in both public and industry, which rules apply to them?
The highest and most restrictive level of rules apply to them
What does it mean when the code requires a member to “consider,” “evalulate,” or “determine?”
Consider - think about
Evaluate - measure significance
Determine - come to a conclusion
Is the code and guidance authoritative?
The Code is authoritative, but any guidance from the AICPA is nonauthoritative
What are the three steps of the conceptual framework approach?
- Identify threats
- Evaluate the significance of identified threats
- Identify and apply safeguards
What are the seven types of threats?
- Self-review: Evaluating work that you did yourself
- Advocacy - Promoting client interests or position
- Adverse interest - Interest of client in conflict with accountant
- Familiarity - Relationship too close to client
- Undue Influence - Mgmt trying to exercise excessive influence over accountant
- Self-interest - Opportunity to benefit from interest in client
- Management participation - Taking on the role of management or performing their functions
What are some safeguards an accountant can take against threats?
Professional safeguards - CPE credits, legislation, etc
Client characteristics - client personnel with appropriate knowledge, tone at the top Firm implemented - Ethical leadership, training and communcation of firm policies
What is the policy on gifts and entertainment from a client?
Gifts and entertainment can be accepted if reasonable in the circumstances
Which attest services must you maintain independence?
E xam
R eviews
A greed upon procedure engagements leaing to findings
S pecial reports
What are the two types of independence?
Independence of fact - state “of mind”
Independence of appearance - how it appears to the public
What is a direct and material indirect financial interest in a client?
Direct - have direct stake in client (ex: one share in cient)
Indirect - material holding in client in an indirect investment (5% or more of retirement fund is in client)
When can you not issue an audit report for a client when it concerns unpaid fees?
When the unpaid fees were for servies performed more than one year before the date of current year report
What should you do if you received a financial interest in a client as a gift to maintain independence?
- Dispose of the financial interest within 30 days
- Do not participate in the attest engagement during the period you can’t dispose of financial interest
What are some examples of direct interests in a client?
Investments in firm sponsored plan
Interests from share based compensation
Partnership interest (if general partner)
Ownership in an LLC Ownership of a 529 plan
When is a stake in a trust or estate a direct interest?
When the member has the authority to make investment decisions, can revoke, or control trust
When the trust owns >=10% of client’s oustanding securities
When client’s securities are >=10% of the trust’s total assets
When is indepedence not impaired in terms of a depository account from a client?
When the balance is fully insured OR
The aggregate of unisured amounts is NOT material to the individual OR
If uninsured amounts are material they are reduced to immaterial amount within 30 days
When are unsecured and secured loans not a threat to independence?
Loan was obtained under normal terms
Loan was obtained before becoming an attest client
Loan is current to the borrower at all times
Estimated collateral is at least equal to the outstanding balance of the loan or mortgage
What can an immediate family member do that would not impair a CPA’s independence?
Cam be employed by attest client in a NON-KEY position
Can be part of the employee benefit plan that is a client as long as they are not in a key position to make decisions and it is available to everyone
What makes up a CPA’s immediate family and close relatives?
Immediate family: Spouse and kids
Close relatives: parents, siblings, etc
What can a close relative do that WOULD impair a CPA’s independence?
Hold a key position in an attest client during the engagement
Have a material financial interest in client AND can exercise significant influence over the client
When can you be an adjunct faculty member for a client?
When is not a key position and/or does not have mgmt responsibility
When aren’t on the engagement team and have no influence over it
When it is a non-tenured or part-time position
When you are not a participant of the employee benefit plan
What must you do as a CPA is you are seeking or discussing potential employment with an attest client?
Must report circumstances to appropriate party at the firm
Must discontinue participation in engagement
When switch jobs from the engagement team to an attest client, how can you prevent your independence from being impaired?
Make sure amounts due from audit firm to member are not material
Make sure member cannot influence firm operations or financial position
Make sure member does not take part or appear to take part in audit firm activities once employed with the client
What must an employee do before leaving the audit firm to work for an audit client?
Inform audit firm of conversations with audit client about possible employment
Immediately be removed from the audit
Audit firm must review work performed from departed auditor
What must an audit firm do after a client hires a prior employee?
The firm must consider modifying the audit plan and assure if the audit team is objective
When is okay for a covered member to have a membership in a client?
Can have a direct financial interest if the membership is a social matter only
When can gifts or entertainment be accepted from a client?
Gifts can be accepted only if it is clearly insignificant
Gifts and entertainment can only be accepted if it is reasonable under the circumstances
When will litigation between a CPA and an attest client NOT impair independence?
Litigation will not affect independence if it is not related to the engagement and it is not material to either party
Any threats to independence are eliminated if the parties reach a final resolution.
What are the steps a CPA will take to ensure non-attest services performed for an attest client do not impair independence?
- Evaluate the cumulative effect of all non-attest services and determine if they are at an acceptable level
- Apply the three general requirements
- Client accepts responsibility
- Accountant has limited responsibility
- Need a written understanding (engagement letter)
- Evaluate specific services to make sure they are at an acceptable level
When can a CPA be an expert witness or fact witness for a client in court without impairing independence?
Can be an expert witness if the service is for a large group and the following conditions are met:
- Client makes up <20% of the group of members
- No client is the lead plaintiff or defendant
- No client has sole decision making on who is expert witness
Can be a fact witness without impair independence
When can you charge a contingent fee as a CPA?
- When you are representing a client in an examination of an income tax return
- Filing an amended income tax return claiming a refund based on a tax issue subject to a test case
When can a CPA accept commissions and referral fees?
Only if both a non-attest engagement client and payment is fully disclosed to the client
CANNOT accept a commission if the accountant is required to be independent.
What are the rules for naming a firm?
- The name should not be misleading
- Cannot designate itself as “members of the AICPA” unless all CPA owners are members of the AICPA
- An individual may practice in the name of a former partnership for up to two years (just need the same amount of partners)
- A firm name may include names of past partners
How many members are on the Board of the PCAOB?
Five full time members, 2 of which are CPAs. All appointed by the SEC.
How often do peer review inspections have to be conducted by the Board?
Every year for firms with more than 100 audits annually
Every 3 years if 100 or less audits annually
What are the monetary penalties for breaking Board rules?
100k for an individual and 2 mil for an entity (750k and 15 mil if it’s an intentional breach)
How often are an audit partner and partner responsible for review required to rotate off an audit?
Every 5 years
Who is required to certify each annual or quarterly report?
The CEO and CFO
What is the claw-back policy?
Policy to forfeit any bonus or incentive based on pay or profits from stock sales received in the 12 months after date of issuance of financial statements where earnings were restated?
What is the audit committee’s definition of a financial expert?
- Has an understanding of GAAP and F/S
- Experience of preparing or auditing F/S or comparable
- Experience with internal controls
- An understanding of the functions of the audit committee
How long are auditors required to maintain working papers?
For 7 years
What are the three things the Reform Act of 1995 required audit tests to detect?
R elated party transactions
I llegal acts (non-compliance with laws and regulations)
G oing concern doubts
What is a bias threat and a structural threat in terms of GAGAS?
Bias threat: When the auditor is not objective with regard to the client due to political, ideological, social or other beliefs
Structural threat: When the audit entity’s placement within the government entity impairs the auditor’s ability to remain objective
