Ethics, Professional Responsibilities, and General Principles Flashcards
What should a member do if, after discussing a disagreement with superiors, she believes the matter is serious and is not going to be resolved as it should?
1.Determine whether the organization’s internal policies have any additional requirements for reporting differences of opinion. 2.Determine whether she is responsible for reporting to third parties. 3.Consult legal counsel. 4.Document the facts, principles, and conversations.
What are two circumstances that do not justify departure from generally accepted accounting principles (GAAP)?
1.An unusual degree of materiality 2.Conflicting industry practice
Under what two circumstances may an auditor depart from generally accepted accounting principles (GAAP)?
- New legislation 2. New form of business transaction
Name the four categories of records in the records request rules.
1.Client-provided records 2.Member-prepared records 3.Member’s work products 4.Working papers
How long do accountants have to produce records after a client has requested them?
45 days, absent unusual circumstances
Which type of records should be promptly delivered to the client even if the client has not paid its bill?
Client-provided records
Which type of record necessarily belongs to the member and almost always need not be produced upon request?
Working papers
List four circumstances when work products may be withheld from a requesting client.
1.Fees are due for the specific work product. 2.The work product is incomplete. 3.To comply with professional standards. 4.If threatened or outstanding litigation exists.
What two conditions must be present for a member’s spouse to be able to charge a commission or referral fee in connection with the member’s attest client?
- The spouse’s activities are separate from the member’s. 2. The member is not significantly involved in the spouse’s activities.
List at least two exceptions to the general rule that members may not disclose client confidences without specific consent of the client.
Any of these exceptions: 1.To comply with valid summons or subpoena 2.As part of AICPA or state review of a member’s practice 3.To initiate or respond to a complaint from AICPA or state board 4.To initiate, pursue, or defend a lawsuit
Besides their own, whose advertising might members be responsible for?
That of third parties for whose customers or clients the member renders services
When outsourcing work, what two things should a member do before disclosing confidential information to a third-party service provider?
1.Contractually bind the third-party service provider to maintain confidentiality and ensure that the third-party service provider has proper procedures in place. 2.Obtain specific consent from the client for the disclosure.
When is it not permissible to disclose the name of a member’s client?
When to do so would disclose confidential information
Name three characteristics that firms might share if they are in a network.
One or more of these: 1.Common control among the firms 2.Profits or costs 3.Common business strategy 4.Significant portions of professional resources 5.Common quality control policies and procedures
A firm may not designate itself as “Members of the AICPA” unless what condition applies?
All its CPA owners are members of the AICPA.
Who in a CPA firm may use the designation “partner”?
Only partners
When a member has invested in a separate business providing accounting services, what is the key determinant of whether the separate business’s owners and professional employees must all comply with the code?
Whether the member controls the separate business
If the code and its interpretations do not resolve an independence issue, what should a member do?
Apply the Conceptual Framework.
During which two time periods must a firm be independent of an attest client?
1.The period covered by the financial statement 2.The period of the professional engagement
In which four areas are threats to independence concentrated?
1.Financial interests 2.Family relationships 3.Employment relationships 4.Nonaudit services
An entity that can control a client and an entity that a client can control are examples of what?
Affiliates
Fill in the blank: Even if an auditor has appropriate relationships with an attest client, it may run into trouble if it has financial, consulting, employment, or family relationships with __________?
An affiliate of the client
What happens if an attest team receives significant help from employees of another, nonindependent firm?
Independence is impaired.
A member may not sign a current-year audit report if the client has not paid fees due for how long?
One year.
Fill in the blank: Engagement letters may allow the use of __________ to resolve disputes?
Alternative dispute resolution
What can covered members do regarding a reissue of an audit report for a client for whom they are no longer independent?
1.Make inquiries of successor auditors. 2.Read subsequent financial statements. 3.Undertake other procedures necessary to assess the effect of subsequently discovered facts on the original report.
Auditors may not hold a client harmless from what?
Liability arising from fraud by the client’s management
What exception applies when a member can sign a current-year audit report even though the client has not paid its bill for more than a year?
The client is in bankruptcy.
Define “financial interest.”
Ownership, or an obligation to obtain ownership, in equity, debt, or derivatives issues by an entity
What types of financial interest do not impair independence?
Indirect and immaterial.
When does beneficial ownership occur?
When an individual or entity is not the record (legal) owner but has a right to some or all of the benefits underlying ownership, as in the beneficiary of a trust or an estate
What types of financial interests impair independence?
-Direct and material -Direct and immaterial -Indirect and material
If a covered member learns that he has inherited the securities of an attest client, what should the member do?
Sell the securities as soon as practicable but definitely within 30 days
Under what two conditions will a covered member not lose independence when she learns she has been named in a will to receive securities of an attest client when her aunt dies at some unspecified time in the future?
1.When she is not a team member 2.When the amount of securities is not material to her.
What is the ownership cutoff that will disqualify a firm if its partners and professional employees who are not covered members own stock in an audit client?
5%
Is a covered member more or less likely to have an independence problem if he owns shares in an undiversified mutual fund rather than a diversified one?
More likely
Allocated shares held in an employee stock option plan are considered indirect interests of the covered members participating in the plan until what happens?
The members gain the right to dispose of the shares; then the shares become direct interests.
If covered members or their immediate family members participate in their retirement fund’s investment decisions, their interest in underlying securities is likely to be what?
Direct
A covered member who owns shares in a mutual fund has what kind of interest in the fund?
Direct
A covered member who owns shares in a mutual fund has what kind of interest in the fund’s underlying securities?
Indirect
Under what three circumstances could a covered member get into independence trouble when asked to be executor of an estate?
1.The covered member has authority to make investment decisions. 2.More than 10% of the estate’s assets are in the client’s stock. 3.The estate owns more than 10% of the client’s stock.
A general partner’s interest in the investments of the general partnership is what?
Direct
Why are the owners of 529 accounts used for savings deemed to have a direct financial interest in both the plans and their investments?
Because they can determine before investing which firms the plan has invested in
Name two conditions under which a covered member who as grantor sets up a trust would have direct interests in its underlying investments.
Any two of these conditions: If: 1.The covered member has the ability to amend or revoke the trust. 2.The covered member has the authority to control the trust. 3.The covered member has the ability to supervise or participate in the trust’s investment decisions. 4.The underlying trust investments ultimately will revert to the covered member as grantor.
What two forms of management do limited liability corporations tend to have?
Member management and agent management
Name the three safeguards necessary to ensure that joint participation with an attest client in a joint venture will not impair independence.
1.Separate agreements govern participation of the firm and the client. 2.Neither assumes responsibilities for the other’s activities or results. 3.Neither has the authority to act as the other’s agent or representative.
From which entities should a covered member generally not borrow?
An attest client, its officers and directors, or any 10% shareholder
Name two types of loans a covered member may have without impairing independence.
Any of these: -Auto loans collateralized by the vehicle -Loans fully collateralized by the cash surrender value of insurance policy -Passbook or similar collateralized loans -Credit card or overdraft amounts up to $10,000
Which kind of real estate lease is most likely to lead to an independence problem?
Capital leases
What is a “key position” that an immediate family member may not occupy with an attest client?
A position with: (1) primary responsibility for significant accounting functions that support the financial statement; (2) primary responsibility for preparing the financial statement; or (3) ability to exercise influence over contents of the financial statement (such as directors, C-level officers, director of internal audit, or similar positions)
