Ethics, Professional Responsibilites Flashcards

Question

Tammy is looking to increase the revenue stream for her accounting firm. She is thinking of using commissions and referral fees to do so. Which of the following is true regarding commissions and referral fees? I. Neither is permitted when the client is an attest client. II. Both are permitted when the client is not an attest client, if they are properly disclosed.

Answer 1

Representation of a nonattest client in an IRS examination.

Answer 2

a fee established for the performance of any service pursuant to an arrangement in which no fee will be charged unless a specified finding or result is attained, or in which the amount of the fee is otherwise dependent upon the finding or result of such service

Answer 3

Must be disclosed under an IRS administrative subpoena. There are only a few circumstances in which information may be disclosed without the consent of the client. These include when a valid court order demanding release of the information is issued, when a quality review board of a state's CPA society requests the information, when a client consents to disclosure, and whenever professional obligations otherwise require it.

Answer 4

1. Bind the third-party service provider contractually to maintain confidentiality and ensure that the third-party service provider has effective procedures in place. 2. Obtain specific consent from the client.

Answer 5

An accounting firm's name may not be misleading. An accounting firm's name may include the names of past owners. An accounting firm's name may (if not misleading) include a fictitious name.

Answer 6

1. Financial relationships—An attest partner should not own stock in an audit client 2. Employment relationships 3. Family relationships—An attest partner should not audit a client whose chief executive officer is the partner's spouse 4. Consulting relationships

Answer 7

1. The period covered by the financial statements | 2. The period of the professional engagement

Answer 8

1. An individual on the attest engagement team 2. An individual in a position to influence the attest engagement (PTI) 3. A partner, partner equivalent or manager who provides more than 10 hours of nonattest services to the attest client within any fiscal year (10-hour person) 4. Other partner in office 5. The firm 6. An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in items (1) through (5)

Answer 9

If Firm A and Firm B are in the same network, A must be independent of B's attest clients if use of the audit or review reports is unrestricted.

Answer 10

- An entity that a client can control - An entity in which a client has a direct and material financial interest - An entity that controls a client when the client is material to such entity - An entity with a direct and material financial interest in the client when that entity has significant influence over the client - A sister entity of a client if the client and sister entity are each material to the entity that controls both - A trustee that is deemed to control a trust financial statement attest client that is not an investment company - The sponsor of a single employer employee benefit plan financial statement attest client

Answer 11

Magnifica promises to reimburse MNO for any damages MNO must pay to investors caused by its nonnegligent failure to detect fraud by Magnifica's management. It is proper for an engagement letter to require an attest client to indemnify an audit firm for liability and costs resulting from knowing misrepresentations by the client's management.

Answer 12

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.

Answer 13

Because ABC has not paid Espinoza in more than a year, Espinoza's independence would be impaired if it signed this new report in 2020. A member in public practice may not sign a current-year audit report if it has unpaid fees from the client for services provided more than one year prior even if client issues a note receivable or the client has not been billed. This rule does NOT apply if client is in bankruptcy.

Answer 14

Yes, because the stock would be a direct financial interest and materiality is not a factor. This is a direct financial interest. Therefore, materiality is not a factor. A direct financial interest impairs independence even if it is immaterial.

Answer 15

Includes ownership (or an obligation to obtain ownership) in equity, debt, or derivatives issued by an entity. These rules about financial interests normally apply only to covered members; however, even if a partner or professional employee of a firm is not a covered member, that person (and his or her immediate family, or any group of such persons acting together) cannot own more than 5% of a client's ownership interests without impairing independence.

Answer 16

- Owned directly (even if managed by others) - Under one's control (even if managed by others) - Beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary either: Controls the intermediary, orHas the authority to supervise or participate in the intermediary's investment decisions. - Immateriality does NOT matter

Answer 17

-An interest beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary neither: Controls the intermediary, nor Has the authority to supervise or participate in its investment decisions. -Immateriality DOES matter

Answer 18

- Dispose of the interest as soon as practicable but not later than 30 days after having both knowledge of the interest and gaining the right to dispose of it; and - Do not participate on the attest engagement team after learning of the interest and before disposing of it.

Answer 19

BOTH The ability of Sally and Joe to self-direct their investments makes their interests in ABC direct. Therefore, there is an independence problem even if the investments are immaterial.

Answer 20

Jo owns 3% of a diversified mutual fund and is on her firm's attest team for that fund. There would be an impairment here, for Jo owns a direct though immaterial interest in the audit client: the mutual fund.

Answer 21

- Pim has authority to make investment decisions for the estate. - The estate owns more than 10% of ABC stock. - More than 10% of the estate's assets are invested in ABC stock.

Answer 22

To be independent, Spencer must ensure both that TYD renders services to him on the same terms and conditions as to other customers and that any assets he has in the account that are subject to risk of loss are immaterial to his net worth.

Answer 23

-The balance in the depository account is fully insured, or -Any uninsured amounts were not material to the covered member's worth, or -If uninsured accounts are considered material, they are reduced to an immaterial amount within 30 days of becoming material.

Answer 24

ABC signs an operating lease with Bilton on terms and conditions that are comparable with other leases in the area, and Bilton is always on time with its payments. If an operating lease is on normal terms and all amounts are paid in accordance with the terms of the lease, there are no independence problems. Capital leases DO impair independence.

Answer 25

Both Brixton and ABC Co. own Microsoft stock. Because Microsoft is a public company, this situation creates no independence problem, although it might be considered a joint investment. Impermissible: - The firm and a client both own material stakes in a small company. - A covered member and an officer of an attest client jointly buy a sailboat.

Answer 26

Someone in Karen's shoes may never hold a material, indirect interest in a firm that her IFM is a covered member for. An IFM of a covered member is not completely barred from holding a material indirect interest in an audit client. However, three safeguards must be met: (1) the covered member (Wiley) may not be on the attest team or be in a position to influence the team; (2) the investment in BMC must be an unavoidable consequence of Karen's participation in her employer's plan; and (3) if Karen is given an opportunity to take another plan option and divest her interest in BMC, she must do so.

Answer 27

A covered member's nondependent child. Immediate family members include spouses, spousal equivalents, and dependents but not nondependent children.

Answer 28

Close relatives include parents, siblings, and nondependent children but not spousal equivalents, who are immediate family members.

Answer 29

Pai may serve as an honorary director of a small charitable organization that receives funding from a large foundation that Hamrick audits. Although Pai is a POPE, it is permissible for him to serve as a merely honorary director in this circumstance. He could not serve as a “real” director.

Answer 30

Chan could join PHAF as an OPIO who had nothing directly to do with Abex as a client, so long as he dissociates himself from the client prior to becoming an OPIO.

Answer 31

Advisor to a client's board of trustees. The role of advisor to a client's board is not forbidden by AICPA independence rules.

Answer 32

SOX imposes a one-year cooling-off period that requires the lead partner, the concurring partner, or any other member of the audit engagement team who provides more than 10 hours of audit, review, or attest services to observe a one-year cooling-off period before going to work for a client in a financial oversight position.

Answer 33

- Promptly reports such consideration or offer to an appropriate person in the firm, and - Removes him- or herself from the engagement until the offer is rejected or the position is no longer sought.

Answer 34

Sam's annual assessment must not be material to him or to the association. If the condominium association were liquidated, Sam would not receive a distribution. The condominium association's creditors would not be able to successfully sue Sam to recover his personal assets if the association became insolvent.

Answer 35

I ONLY Regarding independence, the firm, team members, and those in a position to influence may not accept gifts from attest clients unless the value of those gifts is clearly insignificant to the recipient. Other partners in the office and 10-hour people, are not covered by the rule.

Answer 36

A minor dispute or one not related to the engagement (such as a billing dispute) would not impair independence. However, the code gives these examples of impaired independence: - An attest client's current management sues or seriously threatens to sue firm alleging deficiencies in the audit work. - A covered member sues the client's current management alleging fraud or deceit.

Answer 37

Setting policy or strategic direction for the attest client. Taking custody of client assets. Preparing source documents that evidence the occurrence of a transaction.

Answer 38

This action would violate Sarbanes-Oxley rules, unless ABC's audit committee preapproved the hiring

Answer 39

- The client's selection and application of accounting standards or policies and financial statement disclosure requirements; - The appropriateness of the client's methods used in determining accounting and financial reporting; - Adjusting journal entries that the member has prepared or proposed for client management consideration; and - The form or content of the financial statement. Covered members should monitor the total amount of their nonaudit services to ensure that their total involvement with the client does not become so extensive that it would constitute performing a separate service.

Answer 40

Members must not assume any management responsibilities of attest clients. “Management responsibilities involve leading and directing an entity, including making significant decisions regarding the acquisition, deployment, and control of human, financial, physical, and intangible resources.”

Answer 41

1. In order to ensure that the ultimate management of the attest client stays with the client's management, the members must determine that the client and its management agree to Assume all management responsibilities; oversee the service 2. Before performing nonaudit services, members must establish (and document in writing) their understanding with the attest client

Answer 42

(a) accounting firms should not audit their own work, (b) auditors should not advocate for their clients, and (c) accounting firms should not serve as their clients' managers. SOX does not prohibit attest firms from providing tax services to their attest clients

Answer 43

Because Harvey has been Hurricane's tax accountant for years and expects to be so into the future, it retains many of the original underlying financial, business, and legal documents on Hurricane's behalf. Harvey is hosting the attest client's records on its behalf, and this presents a management participation threat to independence. Harvey may hold the original records to help prepare the tax returns but should return them when the engagement is completed

Answer 44

An adverse interest threat arises when a member in business sues her employer. A familiarity threat arises when a member in business hires a relative to work for his employer. A self-review threat arises when a member in business reviews some internal audit work that she herself performed before she was promoted to her current position.

Answer 45

(a) adverse interest threats, (b) advocacy threats, (c) familiarity threats, (d) self-interest threats, (e) self-review threats, and (f) undue influence threats

Answer 46

- Discrimination and harassment in employment practices - Solicitation or disclosure of CPA Examination questions and answers - Failure to file a tax return or pay a tax liability - Improper disclosure of confidential information obtained from former employment or previous volunteer work - False, misleading, or deceptive acts in promoting or marketing services - Improper (misleading) use of the CPA credential

Answer 47

unemployed, retired, or otherwise not working in the profession, so most of the code that applies to members in public practice and members in business does not apply to them

Answer 48

Only direct and material indirect financial interests.

Answer 49

The member must determine that the client agrees to assume all management responsibilities in relation to the services to be performed. The member must satisfy itself that the audit client will make an informed judgment on the results of the member's nonaudit services. The member must establish and document in writing their understanding with the attest client the services to be performed by the member.

Answer 50

A role in which a person is in a position to or does exercise influence over the contents of the F/S or anyone who prepares them.

Answer 51

Includes the period covered by any F/S being audited or reviewed (the “audit period”) and the period of the engagement (the “professional engagement period”).

Answer 52

A person's spouse, spousal equivalent, parent, dependent, nondependent child, and sibling.

Answer 53

A person's spouse, spousal equivalent, and dependents.

Answer 54

The accounting firm, any of its covered persons or any or their immediate family members (IFMs) may not have direct investments in an audit client, such as owning stocks, bonds, notes, options, and so on.

Answer 55

Independence is impaired if any partner, principal, shareholder, or professional employee of the accounting firm (and any of their IFMs or CFMs) owns >5% or more of the client's stock.

Answer 56

As with the AICPA Code, accounting firms, covered persons, and their IFMs may not only not have direct financial interests in an audit client (whether material or immaterial), they may not have indirect interests that are material. It is permitted for these persons to own 5% or less of a diversified investment company, even if the company owns some shares of an audit client.

Answer 57

Any loan to or from an audit client, its officers or directors, or its 10% owners, except for the following loans obtained from a financial institution under its normal lending procedures, terms, and requirements: - Automobile loans and leases collateralized by the automobile; - Loans fully collateralized by the cash surrender value of an insurance policy; - Loans fully collateralized by cash deposits at the same financial institution; and - A mortgage loan collateralized by the borrower's primary residence provided the loan was not obtained while the covered person was a covered person.

Answer 58

Any aggregate outstanding credit card balance > $10,000 owed to a lender that is an audit client.

Answer 59

An accountant is not independent if it provides any service or product to a public company audit client for a contingent fee or commission.

Answer 60

- There are no requirements that public companies rotate audit firms. - Lead and concurring audit partners must be rotated every five years (five on, five off). - Other partners providing more than 10 hours of attest services must be rotated every seven years (seven on, two off).

Answer 61

- Registers accounting firms that audit public companies - Establishes auditing, quality control, ethics, independence, and other standards - Inspects firms - Annual inspections are conducted for firms doing more than 100 audits per year. - Inspections occur once every three years for firms auditing fewer companies. - Investigates and punishes wrongdoing

Answer 62

Maricopa County, Arizona. This is a government entity, and no doubt an entity that receives federal funds, so in addition to the AICPA's Code of Professional Conduct, GAGAS and attendant independence rules will apply.

Answer 63

This creates an independence problem so severe that it cannot be remedied by application of supplemental safeguards.

Answer 64

Is removed from political pressures to conduct audits objectively, without fear of political reprisal.

Answer 65

- Government entities (e.g., federal, state and local) | - Entities that receive government awards (e.g., colleges, trade schools, charities, local governments)

Answer 66

- Self-interest threat—The threat that a financial or other interest will inappropriately influence - Self-review threat—The threat that an AO will evaluate its own NAS - Bias threat—The threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective - Familiarity threat - Undue influence threat—The threat that external influences or pressures will impact an auditor's independence and objectivity - Management participation threat—The threat to objectivity resulting from an auditor's performing management functions of the audited entity - Structural threat—The threat that an AO's placement within a government entity

Answer 67

- Directly elected by voters of the jurisdiction being audited; - Elected or appointed by a legislative body, subject to removal by a legislative body, and reports the results of audits to and is accountable to a legislative body; - Appointed by someone other than a legislative body, so long as the appointment is confirmed by a legislative body - Appointed by, accountable to, reports to, and can only be removed by a statutorily created governing body

Answer 68

- Accountable to head of the government entity or to those charged with governance; - Reports audit results both to the head of the government entity and to those charged with governance; - Located organizationally outside the staff or line management function of the areas being audited; - Has access to those charged with governance; and - Is sufficiently removed from political pressure to conduct audits and report findings objectively without fear of political reprisal.

Answer 69

Auditors performing GAGAS audits should undertake at least 24 hours of government auditing CPE every two years. Auditors performing more senior auditor responsibilities or more than 20% of their time charged to GAGAS audits must also have 56 hours of CPE every two years.

Answer 70

- Establish and maintain a system of quality control designed to provide the organization with reasonable assurances that both the organization and its staff comply with professional standards and applicable legal and regulatory requirements. - Undergo an independent peer review at least every three years. - Adopt policies and procedures

Answer 71

- A member of the engagement team. - A partner in an office in another city. - ABC itself. Choices A and C would both be correct under the current AICPA Code of Professional Conduct as well, although B would not. But B is correct under DOL standards.

Answer 72

Maintaining financial records. Under DOL guidelines, many consulting services are permitted, but one cannot maintain independence while auditing records that one maintained in the first place.

Answer 73

An actuary associated with the auditor's firm renders services to the plan. Department of Labor rules allow audit firms to provide actuarial services to a plan without impairing independence.

Answer 74

The Mable Accounting Firm may provide tax advice to a public company audit client without impairing independence so long as they do not advise or help the client enter into “confidential transactions” or “aggressive tax position transactions.”

Answer 75

Provide management with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. Management prepares the financial statements and represents that they are in fact fairly presented while the auditor is auditing such representations.

Answer 76

GAAS requires the auditor to obtain "sufficient appropriate audit evidence..."