Ethics, Professional Responsibilites

Question 1

Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?

Answer 1

A distinguishing mark of a profession is its acceptance of responsibility to the public.

Observing ethical standards shows the public that CPAs are more concerned than are most professions with working in an ethical and trustworthy fashion.

Question 2

AICPA’s Code of Professional Conduct (3 parts)

Answer 2

Part 1 applies to members in public practice (MIPP)
Part 2 applies to members in busines (MIB)
Part 3 applies to other members (OM)

Members serving in multiple roles should choose the most restrictive applicable provisions.

Question 3

Principles of Professional Conduct (6) call for:

Answer 3

“an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage”

1. Responsibilities
2. Public Interest
3. Integrity
4. Objectivity and independence
5. Due care
6. Scope and Nature of services

Question 4

Principles of Professional Conduct (6):

Answer 4

1. “Responsibilities principle. In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.”
2. “Public Interest principle. 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.”
3. “Integrity principle. To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of what is right and just”
4. “Objectivity and Independence principle. 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.”
5. “Due care principle. 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”
6. “Scope and nature of services principle. 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 5

threats-and-safeguards Conceptual Framework

Answer 5

Where the code’s rules and interpretations do not provide a clear answer to a particular situation, members should always apply the threats-and-safeguards Conceptual Framework in order to determine whether threats to a member’s compliance with the rules (independence and otherwise) can be reduced to an acceptable level

Question 6

Three main steps to applying the Conceptual Framework:

Answer 6

Identify threats.

Evaluate the significance of the threats.

Identify and apply safeguards.

Question 7

Seven broad categories of threats:

Answer 7

1. Adverse interest threats-Client sues or threatens to sue firm.
   2/ Advocacy threats-Firm acts as investment advisor, underwriter, promoter, or registered agent for a client.
2. Familiarity threats-Member’s spouse, parent, sibling, or close friend is employed by the client.
3. Management participation threats-Member takes on role of client management.
4. Self-interest threats-Member has a financial interest in a client that may be affected by outcome of professional services the firm is providing.
5. Self-review threats-Member relies on work product of own firm.
6. Undue influence threats.

Question 8

Three kinds of safeguards exist:

Answer 8

1. Safeguards created by the profession, legislation, or regulation-Ethics education and training requirements, including continuing professional education (CPE)
2. Safeguards implemented by the client.- Knowledgeable and experienced managers, Appropriate tone at the top
3. Safeguards implemented by the firm.- strong leadership, policies and procedures

Question 9

The Patterson Accounting Firm (PAF) does not wish to have its integrity or objectivity compromised by the fact that its tax client, Borovia Corporation, is a constant giver of gifts and entertainment to its outside consulting, law, and accounting firms. Which of the following should PAF keep in mind?

Answer 9

If there is both a gift that violates the accounting firm’s or the client’s rules and the accountant knows or is reckless in not aware of the violation, a violation of the duties of objectivity and integrity is presumed.

Question 10

Selden has provided sage tax advice to QRS Co. for many years. QRS has invited Selden to join its board of directors. Which of the following is advice that Selden should heed?

Answer 10

If QRS wishes to tap Selden’s expertise, it would probably be preferable to have him serve as a consultant to the QRS board rather than to join the board as a member.

Question 11

In evaluating possible conflicts of interest, members should ask:

Answer 11

Would a reasonable and informed third party conclude that a conflict exists?

Question 12

Steps to prevent conflict of interest:

Answer 12

1. Identification—Before accepting an engagement, members should identify potential conflicts that threaten independence and objectivity, and should continue to monitor as engagement progresses.
2. Evaluation—When an actual conflict is identified by any member, the Conceptual Framework should be applied and engagements should be refused or terminated if risk of violation is unacceptably high.
3. Disclosure—Conflicts should be disclosed to clients and affected third parties, even if threats to compliance are at an acceptable level.

Question 13

Gifts and Entertainment and conflict of interest

Answer 13

Objectivity and integrity are threatened if the client (including its officers, directors, and 10% shareholders) give gifts or entertainment to the firm or its members (or vice versa).

Question 14

Members may properly advocate for:

1. Audit clients
2. Tax clients

Answer 14

2 ONLY

Members may advocate on behalf of tax and advisory service clients

Question 15

According to the profession’s ethical standards, which of the following events may justify a departure from a Statement of Financial Accounting Standards?

Answer 15

1. New legislation

2. Evolution in a form of business

Question 16

Use of a Third-Party Service Provider (TSP)

Answer 16

• There is no problem if the TSP provides only administrative support (e.g., record storage, software application hosting, authorized e-file transmittal services).
• If substantive services are outsourced, clients should be notified, preferably in writing, before any confidential information is provided to the third-party service provider.
• If the client objects, the member should:Not outsource, or Decline the engagement

Question 17

According to the profession’s ethical standards, which of the following events may NOT justify a departure from a Statement of Financial Accounting Standards?

Answer 17

• An unusual degree of materiality

- Conflicting industry practice

Question 18

According to the AICPA Code of Professional Conduct, which of the following records must a CPA return to the client when requested?

Answer 18

Client-provided records, even if fees are due to the CPA for the engagement and are unpaid

Question 19

Client Lewis has demanded return of work product produced by the Martin accounting firm. The Martin firm is resisting the demand. Which of the following is not a proper ground for Martin to deny return of the work product?

Answer 19

Lewis owes money to the Martin firm for work Martin did that is unrelated to these documents.

Question 20

Which of the following actions by a CPA most likely does not constitute an act discreditable to the profession?

Answer 20

Providing for a right of contribution from the client in an audit engagement letter (right of a person who has discharged a common liability or burden to recover of another, who is also liable)

While the SEC and most government agencies oppose full indemnification of wrongdoers, contribution is typically allowed and, therefore, would not violate the Code.

Question 21

Spinner, CPA, had audited Lasco Corp.’s financial statements for the past several years. Prior to the current year’s engagement, a disagreement arose that caused Lasco to change auditing firms. Lasco has demanded that Spinner provide Lasco with Spinner’s audit documentation so that Lasco may show them to prospective auditors to help them prepare their bids for Lasco’s audit engagement. Spinner refused and Lasco commenced litigation. Under the ethical standards of the profession, will Spinner be successful in refusing to turn over the documentation?

Answer 21

Yes, because Spinner is the owner of the audit documentation.

Spinner may, under proper circumstances, have to convey to Lasco (a) client-provided records, (b) client records prepared by Spinner, and (c) supporting records. However, it should not have to convey its audit documentation, which it owns.

Question 22

Four categories of records

Answer 22

1. Client-provided records are records given by the client to the member. Must be delivered at client’s request.
2. Member-prepared records are those the member was not specifically engaged to prepare and are not in the client’s books and records, rendering the client’s financial information incomplete. Example: adjusting, closing, combining, or consolidating journal entries and supporting schedules and documents that the member proposed or prepared as part of an engagement. CAN be withheld for nonpayment.
3. Member’s work products are deliverables set forth in the engagement letter, such as a tax return. CAN be withheld for nonpayment, litigation, if incomplete or for unresolved audit issues.
4. Working papers are all other items prepared solely for purposes of the engagement. Do NOT need to be provided to client.

Question 23

In which of the following scenarios has Ed, a CPA, not committed an ethical violation in relation to a tax client, Harriett, who asked Ed what she should do with a $12,000 tax refund she received from the IRS?

Answer 23

Ed sold Harriett an investment instrument, disclosing that he was earning a 5% commission on the transaction.

Assuming that Harriett is not also an audit client, then commissions and referral fees are permitted, if properly disclosed.

Question 24

Assuming appropriate disclosure is made, which of the following fee arrangements generally would be permitted under the ethical standards of the profession?

Answer 24

A fee paid to the client’s tax accountant for recommending a computer system to the client.

Tax accountants can accept referral fees and commissions. However, they should be disclosed to the client (and the question instructs us to assume appropriate disclosure).

Question 25

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 25

BOTH

Question 26

Considering only the provisions of the AICPA Code of Professional Conduct, which of the following services may a CPA perform for a commission or contingent fee?

Answer 26

Representation of a nonattest client in an IRS examination.

Question 27

The definition of a contingent fee

Answer 27

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

Question 28

A CPA’s audit documentation

Answer 28

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.

Question 29

When outsourcing work to a third-party service provider (TSP), a member should do one of the following before disclosing confidential information:

Answer 29

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.

Question 30

Which firms must have a majority of their financial interests owned by CPAs?

I. Attest firms.
II. Firms that identify themselves as “Members of the AICPA.”

Answer 30

I only

Question 31

Maisy wishes to start her own accounting firm and wonders what restrictions there are on names of such firms. Which of the following is accurate?

Answer 31

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.

Question 32

Members in public practice (MIPPs) shall be independent when performing attest services.

The threats to independence (adverse interest, advocacy, etc.) are concentrated in four areas:

Answer 32

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

Question 33

Time Period—Independence rules must be followed when relationships exist during:

Answer 33

1. The period covered by the financial statements

2. The period of the professional engagement

Question 34

Covered members must comply with the independence rules for financial interests (and many others):

Answer 34

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)

Question 35

Which of the following is (are) true?

Answer 35

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.

Question 36

Affiliates

Answer 36

• 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

Question 37

Which of the following terms would be properly included in an engagement letter signed by audit firm MNO and its client, Magnifica Corporation?

Answer 37

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.

Question 38

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?

Answer 38

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.

Question 39

The Espinoza Accounting Firm is set to certify the financial statements of client ABC Co. on May 15, 2020. However, ABC did not pay Espinoza’s bill for doing the previous audit that was signed on May 15, 2019. Which of the following is true?

Answer 39

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.

Question 40

A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities are not material to the CPA’s wealth but are material to the child’s personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA’s independence with the client?

Answer 40

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.

Question 41

Financial interest

Answer 41

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.

Question 42

Direct financial interest

Answer 42

• 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

Question 43

Indirect financial interest

Answer 43

-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

Question 44

Unsolicited Financial Interests

Answer 44

• 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.

Question 45

Which of the following creates an independence problem?

I. Sally participates in her firm’s retirement plan, which allows her to select which companies’ stocks go into her portfolio. Sally selects a small amount of ABC Co. stock, even though she is on her firm’s audit team for ABC.
II. Although Sally has not selected ABC Co. stock for her retirement plan’s portfolio, her spouse, Joe, has done so.

Answer 45

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.

Question 46

Jo is a member in public practice who is very wealthy and has no individual investments that are material to her. Which of the following investments would impair Jo’s independence?

Answer 46

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.

Question 47

The Lox Accounting Firm audits ABC Co. Pim is a Lox tax partner in the office that runs the ABC audit. Pim has been asked to be a trustee of an estate that has ABC stock in its portfolio. In which of the following situations would there be an independence problem for Lox?

Answer 47

• 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.

Question 48

Member Spencer maintains a brokerage account at TYD Brokers. Spencer was just named to his firm’s audit team to the TYD account. Spencer is therefore deeply concerned about his independence. Which of the following is true?

Answer 48

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.

Question 49

Individual—Individual covered members may maintain depository accounts if any of three conditions is met:

Answer 49

-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.

Question 50

The Bilton Accounting Firm needs office space, and ABC Co. has office space to lease out. ABC is an attest client of Bilton. Which of the following would not create an independence problem?

Answer 50

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.

Question 51

Which of the following situations does not create an independence problem for the Brixton Accounting Firm relative to its attest client ABC Co.

Answer 51

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.

Question 52

Wiley works for the Imlauf Accounting Firm. He is a tax partner in the Peoria office. The Bradley Manufacturing Co. (BMC) is an audit client of the Peoria office of Imlauf. Wiley provides more than 10 hours of tax advisory services to BMC each year. Wiley’s spouse, Karen, works for Spiggot Corporation and participates in its employee benefit plan which holds a lot of BMC shares. Regarding Wiley’s independence and the BMC audit, which of the following is not true?

Answer 52

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.

Question 53

Which of the following is not an immediate family member?

Answer 53

A covered member’s nondependent child.

Immediate family members include spouses, spousal equivalents, and dependents but not nondependent children.

Question 54

Which of the following is a close relative?

Answer 54

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

Question 55

Pai is an audit partner at the Hamrick Accounting Firm. Which of the following is true?

Answer 55

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.

Question 56

Chan was a talented accountant who worked as Chief Accounting Officer at Abex Corporation, which was audited by the Pleasant Hill Accounting Firm (PHAF). PHAF offered Chan a position as an auditor. Which of the following is true if Chan is to join PHAF without impairing the accounting firm’s independence relative to Abex?

Answer 56

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.

Question 57

Under the ethical standards of the profession, which of the following business relationships would generally not impair an auditor’s independence?

Answer 57

Advisor to a client’s board of trustees.

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

Question 58

Sarbanes-Oxley (SOX) imposes stricter rules where public companies are involved.

Answer 58

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.

Question 59

When an attest team member or person in a position to influence is considering employment with the attest client, independence is impaired unless the team member:

Answer 59

• 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.

Question 60

Which of the following safeguards must be met for Sam, who is a member of his condominium association, to be able to serve as a covered member of his firm, which audits the condominium association, without impairing independence?

Answer 60

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.

Question 61

Which categories of covered members must be concerned with independence problems that might arise from gifts they receive from attest clients?

I. Team members.
II. Other partners in the office

Answer 61

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.

Question 62

Litigation Between Client and Member

Answer 62

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.

Question 63

Which of the following would be deemed by the code “management responsibilities” that would likely impair independence if a covered member performed them for an attest client?

Answer 63

Setting policy or strategic direction for the attest client.

Taking custody of client assets.

Preparing source documents that evidence the occurrence of a transaction.

Question 64

The Flakel Accounting Firm audits ABC Co., a public company. ABC would like to fire its current tax consultant and replace it with Flakel. Which of the following is true?

Answer 64

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

Question 65

The code governs provision of nonaudit services to private company audit clients and indicates that communications about the following matters that would not normally be considered nonaudit services:

Answer 65

• 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.

Question 66

Management responsibilities

Answer 66

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.”

Question 67

General Requirements for Performing Nonaudit Services

Answer 67

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

Question 68

SOX limitations on nonaudit services are based on three fundamental notions:

Answer 68

(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

Question 69

The Harvey CPA Firm prepared all tax returns for its attest client, Hurricane Corporation. Which of the following activities by Harvey would impair independence?

Answer 69

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

Question 70

Which of the following is true regarding application of the Conceptual Framework for members in business?

Answer 70

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.

Question 71

Six of the seven threats identified for members in public practice also apply to members in business:

Answer 71

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

Question 72

Which of the following are discreditable acts that should not be performed by other members?

Answer 72

• 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

Question 73

Other members

Answer 73

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

Question 74

According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA’s independence?

Answer 74

Only direct and material indirect financial interests.

Question 75

Which of the following are among the general requirements that the code provides always must be met in order to perform nonattest services for a nonpublic attest client?

Answer 75

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.

Question 76

Financial Reporting Oversight Role (FROR)

Answer 76

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.

Question 77

Audit and Professional Engagement Period

Answer 77

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”).

Question 78

Close Family Member (CFM)

Answer 78

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

Question 79

Immediate Family Member (IFM)

Answer 79

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

Question 80

Direct Investments for SOX

Answer 80

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.

Question 81

Five Percent Investments for SOX

Answer 81

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.

Question 82

Material Indirect Interests for SOX

Answer 82

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.

Question 83

Loans/Debtor Creditor Relationships for SOX

Answer 83

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.

Question 84

Credit Cards for SOX

Answer 84

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

Question 85

Contingent Fees for SOX

Answer 85

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

Question 86

Partner Rotation for SOX

Answer 86

• 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).

Question 87

The PCAOB (created by SOX), among other things:

Answer 87

• 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

Question 88

The GAO’s independence rules for auditing apply when Sam audits which of the following:

Answer 88

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.

Question 89

Under GAGAS, auditors should never audit their own work

Answer 89

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

Question 90

A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization:

Answer 90

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

Question 91

The GAO’s guidelines apply to those who conduct audits of:

Answer 91

• Government entities (e.g., federal, state and local)

- Entities that receive government awards (e.g., colleges, trade schools, charities, local governments)

Question 92

Threats of GAO (Gov Accountability Office)

Answer 92

• 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

Question 93

Structural threats may be mitigated if the head of an AO meets any of the following criteria in accordance with constitutional or statutory requirements:

Answer 93

• 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

Question 94

Internal auditors working under the direction of the audited entity’s management are considered independent for purposes of reporting internally if the head of the audit organization meets all of the following:

Answer 94

• 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.

Question 95

Continuing Professional Education (CPE) for GAO

Answer 95

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.

Question 96

Audit firms performing GAGAS audits must:

Answer 96

• 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

Question 97

The ABC Accounting firm is auditing an employee benefit plan. Which of the following parties cannot have any direct or material indirect financial interest in the plan to prevent an independence violation?

Answer 97

• 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.

Question 98

Wang is an auditor helping to audit an employee benefit plan. Which of the following services would create independence problems for Wang if performed by members of his office for the plan?

Answer 98

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.

Question 99

According to the U.S. Department of Labor, an auditor of an employee benefit plan would be considered independent if

Answer 99

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.

Question 100

Which of the following is true regarding the independence of audit firms and their public company audit clients?

Answer 100

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.”

Question 101

Which of the following is not a primary responsibility of an auditor:

Answer 101

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.

Question 102

According to GAAS, which of the following terms identifies a requirement for audit evidence?

Answer 102

GAAS requires the auditor to obtain “sufficient appropriate audit evidence…”