chapter 2 professional resp & ethics

Question 1

AICPA - covered member

Answer 1

• member of attest team to someone who can govern engagement
• partner or equiv. who attest more than 10 hours of nonattest to client
• partner or partner eqiuv. in same office as lead partner of engagement

Question 2

AICPA- advocacy threat

Answer 2

• when promoting a clients position
• ex. serving as witness, representing client in tax court
  *

Question 3

AICPA - management participation threat

Answer 3

• officer or director of attest client
• resp for DIM of IC
• hires, supervises, or terminates employees
  *

Question 4

AICPA - self- interest threat

Answer 4

when member can benefit from client either financial or non financial.

Question 5

AICPA - independence - Loans and home mortgage

Answer 5

• not impair if below safeguards are put:
  
  • loan under normal terms, procedures, and requirements
  • obtained prior to institution becoming client, from a lender that was not an attest client but sold to client, prior to cpa becoming covered member
  • loan is current and no changes to terms of loan
  • estimated value of collateral at least equals the outstanding balance.

Question 6

AICPA - independence - Leases

Answer 6

• is ok if these are followed:
  
  • accounted for as operating lease under GAAP
  • terms and conditions are comparable to other similar leases
  • payments are made in accordance to terms

Question 7

AICPA - independence litigation with client

Answer 7

• litigation between cpa and client that will impair:
  
  • poor audit work done by auditor for client
  • allegations by cpa of fraud or deceit by management
• any threat of impairment is lost when an agreement is reached and litigation is over (according to cpa professional judgement).

Question 8

AICPA - independence - performance of non attest

Answer 8

• non attest items are ok if:
  
  • Should determine that the client has agreed to:
    
    • accept management responsibilities
    • designate a qualified individual to oversee the service
    • evaluate the adequacy of the results
    • accept responsibility for the results
  • should not assume management responsibilities and must be satisfied that the client will be able to meet the criteria it agrees to. will make an informed judgement in regards to the results of the service, and will accept responsibility for managements decisions.
  • have in writing with client the:
    
    • objectives of engagement
    • services to be performed
    • clients acceptance of responsibilities
    • cpas responsibilities
    • limitations of the engagement

Question 9

SOX - Title I PCAOB

Answer 9

• 101 - 5 full time members, 2 are CPA, appointed by SEC
• 102 - firms need to register with board to issue report
• 104 - provides for quality control peer review inspections by board:
• greater 100 reports = annually
• 100 or less = every 3 years
• 105 - monetary penalties:
• capped at 100K for individual and 2M for firm

Question 10

PCAOB - Title II - auditor independence

Answer 10

• prohibits firms to allows these non audit services:
  
  • bookkeeping, appraisal, internal audit outsourcing, management functions or human resources, legal services
• rotation of audit partner every 5 years

Question 11

PCAOB - Title III - corporate resp.

Answer 11

• Makes audit committee (which is independent)
• principal executive must certify in each annual report:
  
  • reviewed report
  • report doesn’t contain any untrue material facts or omission of material fact.
  • financial position and results of operations are fairly presented
  • IC:
  • responsible for establishing and maintaining effective controls
  • evaluated effectiveness within 90 days prior to report
  • presented conclusion about effectiveness of control
• signing officers must disclose to auditors and audit committee:
  
  • significant deficiencies of IC
  • any fraud material or not, that involves management or anyone in IC.
• must forfeit any bonus or incentive pay from sale of stock during the 12 month period after issuance (claw back policy)
• prohibits trading by officers and directors during blackout periods established between the end of quarter and the earnings report date.

Question 12

PCAOB - Title IV - Enhanced Financial disclosures

Answer 12

• all FS prepared to reflect all material adjustments identified by auditors
• no personal loans to directors and executives officers
• Management acknowledge its responsibility for establishing and maintaining adequate IC and that management assess effectiveness of IC as of the end of the period.

Question 13

Personal Financial Planning Services (PFP)

Answer 13

• Planning
• Obtaining and Analyzing Info
• Developing and communicating recommendations
• Implementation engagements
• Monitoring and updating engagements

Question 14

Consulting services

Answer 14

consists of advisory services, implementation services, product services or even providing technical assistance in implementing a new IT system.

Question 15

Department of Labor independence Requirements (DOL)

Answer 15

• Employee benefit plans must be audited in accordance to ERISA as enforced by DOL.
• DOL independence is a bit more restrictive than AICPA standards
• independence is impaired when:
  
  • having, or committed to any direct financial interest, or any material indirect interest in plan
  • acting as plans’s sponsors, promoter, underwriter, investment advisor, voting trustee, director, officer, or employee.
  • maintaining financial records for the plan.