Code of Professional Conduct Flashcards
Members may properly:
I. Advocate on behalf of audit clients.
II. Advocate on behalf of tax clients.
Members may advocate on behalf of tax and advisory service clients, although they should never stretch the bounds of performance standards, go beyond sound and reasonable professional practice, or compromise their credibility.
Which of the following statements is correct with respect to ownership, possession, or access to a CPA firm’s audit documentation?
Audit documentation is not transferable to a purchaser of a CPA practice unless the client consents.
A third party buyer may get access to the audit documentation, but only if the client consents. The client controls a CPA’s ability to release the documentation, unless their release is ordered by a court or CPA society’s quality review board.
CPA is permitted to disclose confidential client information without the consent of the client to
I. Another CPA firm if the information concerns suspected tax return irregularities.
II. A state CPA society voluntary quality control review board.
A CPA may generally disclose confidential information without a client’s consent if it is necessary to avoid violating GAAP, if in response to an ethics inquiry by a quality review board, or pursuant to a court order.
Tondry is a CPA working for a Big Four firm as an auditor. Tondry has invested in a local firm, XYZ, that provides technical computer support and other nonaudit services for businesses. At least one of the businesses that receives technical support from XYZ (and purchases software on XYZ’s recommendation for which XYZ received a commission), is an audit client for which Tondry is on the audit engagement team. Given these facts, which of the following is true?
I. There is clearly an independence problem here.
II. There is an independence problem here only if Tondry (or Tondry with his firm or other firm members) controls XYZ.
While Tondry must, of course, abide by all professional rules, the firm in which he has invested (XYZ) and its employees must do so only if controlled by Tondry.
Art is on his firm’s audit team for client ABC Co. Which of the following is an indirect financial interest?
Art is a member in an agent-managed limited liability corporation that owns stock in ABC.
Unless Art participates in the investment decisions of his limited liability corporation, which is not indicated in the facts, his interests in its underlying investments are indirect if the LLC is agent managed.
RJ is a partner at PricewaterhouseCoopers’ New York office. His engagement team is currently auditing PwC’s largest client, IBM. Which of the following conditions would not violate AICPA independence guidelines?
RJ owns 100 shares of AIM Energy A, a mutual fund trading on the Nasdaq. This mutual fund is comprised of several stocks, including IBM.
RJ’s ownership of AIM Energy A is both immaterial and indirect, which is permitted by the AICPA.
Which of the following is not an immediate family member?
A covered member’s nondependent child.
Immediate family members include spouses, spousal equivalents, and dependents but not nondependent children.
Manny is a well-respected CPA in his hometown of Cut & Shoot, TX, which has a population of slightly over 5,000. Manny currently audits a nonprofit organization and has recently been approached by this organization to join its board. The board is currently made up of many influential figures in the community and they would like to add Manny’s name to that list for increased recognition. Manny would love to help out the community but is afraid that this might affect his independence. Which of the following situations would cause Manny’s involvement with the board to result in a lack of independence?
Manny is only required to vote in critical management affairs, which do not arise frequently.
A CPA serving on a charitable board can never vote or participate in management affairs and, therefore, this choice would impair independence.
Rachel is on her firm’s attest team for client ABC Co. Which standards apply to gifts and entertainment?
If Rachel receives a gift from ABC, the key question is whether or not it was “clearly insignificant” to Rachel.
The code applies the “clearly insignificant” standard to gifts and the “reasonable in the circumstances” standard to entertainment.
Which of the following actions by a CPA most likely does not constitute an act discreditable to the profession?
Providing for a right of contribution from the client in an audit engagement letter.
While the SEC and most government agencies oppose full indemnification of wrongdoers, contribution is typically allowed and, therefore, would not violate Rule 501.
The Melancon accounting firm audits XYZ Co. out of its Boston office. Who, among the following Melancon employees, is a “covered member” regarding XYZ?
Bit, the new college accounting graduate, who was added to the XYZ audit team on his first day at Melancon.
As a staff member who works on the engagement, Bit is a “covered member.”
ABC is an accounting firm with offices all over the U.S. Its Seattle office audits Macrohard Co. Who, among of the following, is a “covered member” regarding the Macrohard audit?
Tap, a tax partner in ABC’s Seattle office, who has never in his career done any work for Macrohard.
Because he is an “other partner in the office” (OPIO) in which the lead attest engagement partner primarily practices, Tap is a “covered person.”
The Cheng Accounting Firm is concerned with litigation costs, so it is inserting provisions in all its engagement letters that require arbitration rather than litigation of disputes between Cheng and its attest clients. Which of the following is true?
I. Such a provision is simply not allowed by the code.
II. Such a provision is allowed, but if it is invoked, Cheng should apply the Conceptual Framework to determine whether independence is impaired by the fact that it and its client have potentially been placed in positions of material adverse interests.
II only.
The code does note that entering into binding arbitration potentially creates independence problems by placing the firm and the client in positions of material adverse interests, creating a self-interest threat.
The Fritz Accounting Firm finished an audit of ABC Co. nine months ago and then fired ABC as a client. Fritz was independent of ABC when it signed off on the audit. It is not independent of ABC now, but ABC is attempting to borrow a large sum of money and ABC would like to show the audited financial statements to the borrower with Fritz’s permission. Fritz generally wishes to accommodate ABC but would not like to allow this to be done if Fritz’s financial situation has dramatically worsened in the last nine months. Which of the following is not true?
This is fine so long as Fritz substantially reperforms the audit to ensure that the numbers are still valid today.
Because Fritz is no longer independent, it should not be performing an essentially new audit.
The Smathers Accounting Firm is worried about liability and has hired a new law firm to rewrite its attest engagement letters to provide maximum legal protection. Which of the following might create an independence problem?
I. A provision that holds Smathers harmless from liability and costs it sustains when litigation results from the client’s management’s knowing misrepresentations to Smathers.
II. A provision that requires Smathers to indemnify its clients for losses resulting from the acts of the client’s managers.
II only.
This is improper because the code generally calls for parties to be responsible for their own wrongdoing, and such a provision would not give clients sufficient incentive to act properly.
