I. AICPA Code of Professional Conduct Flashcards
1
Q
When should a member choose MIPPS?
A
A member serving in multiple roles should choose the most restrictive applicable provisions and that will be the standards applying to MIPPs
2
Q
What is the best way for a CPA profession to promulgate ethical standards and to establish the means for ensuring their observance?
A
Ethical standards are not legally required, and so the goal in creating them lies in showing a willingness to go above and beyond minimum requirements. Observing ethical standards shows the public that CPAs are more concerned than are most professions with working in an ethical and trustworthy fashion.
3
Q
Principles of Professional Conduct
A
The code requires members to cooperate with each other to improve the art of accounting (and to maintain the public’s confidence in the profession, and to *carry out* the profession’s special responsibilities)
4
Q
The Code of Professional Conduct is divided into three main parts, depending on what roles members play. What are the three roles?
A
Members in public practice (MIPPs)
Members in business (MIB)
Other members (OM)
5
Q
Define “partner equivalent.”
A
A member who is not a partner but has either the authority to sign the firm’s name to an attest report or to bind the firm to conduct an attest engagement
6
Q
Objectivity is a state of mind that requires which three things?
A
Impartiality
Intellectual honesty
Freedom from conflicts of interest
Think: IIF
7
Q
What should an ethical accountant always ask him or herself?
A
“Am I doing what a person of integrity would do?”
8
Q
What are the six basic subjects of the Principles of Professional Conduct?
A
- Responsibilities
- Public interest
- Integrity
- Objectivity and independence
- Due care
- Scope and nature of services
Mnemonic: Respond to the Public w/ Integrity. An object is Independent must take Due care of the scope and nature of the service you provide.
9
Q
What three continuing responsibilities does the “responsibilities principle” place on members?
A
- To improve the art of accounting
- To maintain the public’s confidence
- To carry out the profession’s special responsibilities for self-governance
10
Q
How do you define an “acceptable level”?
A
A level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member’s compliance with the rules is not compromised (exposed to danger, reduce in quality)
11
Q
What are the three sources of safeguards for members in public practice?
A
-
Created by the profession, legislation, or regulation
- Ethics education and training,
- Professional standards and threats,
- External reviews of quality control,
- Legislation regulation,
- licensure requirement,
- Professional resources
-
Implemented by client
- Appropriate tone at the top,
- policies and procedure,
- ethics policies,
- knowledgeable and experienced managers,
- Policies to prevent the impairment of independence or objectivity
-
Implemented by the firm
- Strong leadership,
- Implement policies and procedures and monitor quality control,
- an effective disciplinary system
- Rotation of engagement team senior
- Policies precluding partners from being compensated for selling non-attest services to attest client.
12
Q
What are the three key terms in the conceptual framework?
A
- Threats
- Safeguards
- Acceptable level
TSA
13
Q
What are the three steps to applying the Conceptual Framework?
A
- Identify threats.
- Evaluate the significance of the threats.
- Identify and apply safeguards.
First Identify Threats, then evaluate the significance of the Threat and then Identify and apply safeguard.
14
Q
What are the seven categories of threats for members in public practice (MIPPs)?
A
- Adverse interest threats - Client Sues/Subrogee (insurance company) makes claims against the firm to recover payments made to the client
- Advocacy threats - member provide forensic accounting services to the client in lawsuit w/ third party
- Familiarity threats - Member’s spouse, siblings, or close friend is employed by the client
- Management Participation threats - member take the role of client mgmt (control of the mgmt of a company)
- Self-interest threats - the member has a financial interest that affects the professional service
- Self-review threats - Member does client bookkeeping, relies on the work product of own firm
- Undue influence threats - Client threats to fire firm/client major shareholder threats to withdraw or terminate professional services unless member reach desired conclusion
Adverse, Advocacy, Familarity (Family), Mgmt Partake, Self-Interest, Self-Review, Undue Influence (Affected/Overpowered)
15
Q
What types of financial interests impair independence?
A
- Direct and material
- Direct and immaterial
- Indirect and material
Only Indirect and Immaterial do not
16
Q
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?
A
5%
17
Q
Under what two conditions will a covered member not lose independence when she learns she has been named in a will to r_eceive securities of an attest client_ when her aunt dies at some unspecified time in the future?
A
- When she is not a team member
- When the number of securities is not material to her.
- So it would have to be immaterial to her, to be safe
18
Q
If a covered member learns that he has inherited the securities of an attest client, what should the member do?
A
Sell the securities as soon as practicable but DEFINITELY within 30 days
19
Q
What types of financial interest DO NOT impair independence?
A
Indirect and immaterial.
20
Q
Define “financial interest.”
A
Ownership, or an obligation to obtain ownership:
in equity, debt, or derivatives issues by an entity
21
Q
You are a partner for a firm that does auditing work for a client, QRS Corporation, that in which your aunt Grace recently told you about a will she left for you that contained many shares of QRS stocks. What are you required to do to not lose independence?
A
- Dispose of the interest as soon as practicable (but not later than 30 days after having knowledge of the interest and gaining the right to dispose of it) and
- Not participate on the attest engagement team = not become a team member (after learning of the interest and before disposing of it)
22
Q
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?
A
More likely
Think: if the funds are not diversified then the funds would most likely hit one of the attest clients. So its best to diversified.
23
Q
A covered member who owns shares in a mutual fund has what kind of interest in the fund’s underlying securities?
A
Indirect
24
Q
A covered member who owns shares in a mutual fund has what kind of interest in the fund?
A
Direct
25
The Amalgamated Fund is a nondiversified mutual fund that owns shares in a few companies, including Beaufort Corporation. Tully is an auditor working for the Biggle Accounting Firm, and Tully is a “covered member” regarding Biggle's audit client Beaufort Corporation. Tully also is invested in the Amalgamated Fund. Assume that Amalgamated's total assets are $25,000,000, that Tully owns 2% of Amalgamated's outstanding shares, and that Amalgamated has 10% of its assets invested in Beaufort Corporation stock. What would be the value of **Tully's indirect interest _in Beaufort Corporatio_n** that would have to be **judged as material or immaterial** when compared to his total assets?
Correct! Amalgamated's total value is $25,000,000 and Tully owns 2% of that, or $500,000. Ten percent of Amalgamated's value is invested in Beaufort Corporation ($2.5 million), and so is 10% of Tully's $500,000, which would be $50,000.
26
Under what three circumstances could a "**covered member"** get into **_independence trouble_** when **_asked to be an 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.**
27
A **general partner's interest** in the **investments** *of* the **general partnership is** what?
**Direct**
28
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 are invested in.**
29
What are the conditions under which a covered member who as grantor sets up a trust **would have _direct interests_ in its underlying investments?**
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.**
30
What _two forms of management_ do **limited liability corporations** tend to have?
1. **Member management** - **like a general partnership** that members’ interests in _**both** the **firm** and its **underlying investments** are **direct**_.
2. **Agent management** - _members are more like limited partners_ and their **interests in the underlying investments are viewed as _indirect_** *_unless_* the members have the authority to control the limited liability company or to supervise or participate in its investments.
1. That would mean its direct
31
What is a **Blind Trust**?
**Investments ultimately will revert to the grantor** who typically ***_both_*** a **blind trust and its underlying investments** are ***considered to be direct financial interests of the grantor.***
32
What kind of **relationship/example** _create_ **indirect investments** rather than direct investments?
Member Polly's state sponsors **Section 529 prepaid tuition plans**. Polly owns an account in such a plan so that she will be able to send her daughter to college someday. This 529 plan owns shares in XYZ Co. Polly's interest in XYZ is indirect.
Remember that **Section 529 prepaid tuition** ONLY the **prepaid tuition plan**, **UNDERLYING INVESTMENTS** are considered to be **indirect**.
Educational Savings Plans - the Covered member are able to control what investment and such so it's considered DIRECT.
33
What situations would create an independence problem?
If the **co-trustee serves a trust** and its **_estate has more than 10% of its assets_**, there is an independence issue **even if the trustee has nothing to do with the investment**
34
What are the **three conditions** that **allow covered members** to **maintain** a **depository account at a bank that is an attest client?**
1. If an **uninsured account is** **material**, it is **_reduced to an immaterial amount within 30 days._**
2. Any insured amounts are not material to the cover member's worth. = **immaterial (**pretty much means the same thing as the first one**)**
3. The **balance** in the **depository account** is **fully insured**.
35
Pym is a covered member regarding audit client Twice Brewed Brokerage Firm (TBBF). What requirements are necessary for one to conclude that Pym's **having a brokerage account** at TBBF would **not impair his independence**?
TBBF's _**services are rendered under normal terms, procedures,** and_ ****_requirement_**s**, and Pym's **assets in the account** are **immaterial to his net worth.**
If **_both_** of these requirements are met, there is **no independence problem.**
**Covered members -** Any **person who is in a position to influence** an attest (Audit) engagement.
36
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** **the 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.**
37
From which entities should a **covered member generally not borrow, nor loan**?
1. An **attest client**,
2. **its officers** **and** **directors**, or
3. **any 10% shareholder**
38
What are some 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
39
Which kind of real estate lease is most likely to lead to an independence problem?
Capital leases
40
What are the two types of Business Relationships and how can they be safeguarded from impairing independence?
Cooperative Venture - A cooperative venture does not exist where all these safeguards are present:
* Participation of the firm and client is governed by separate agreements that do not create obligations between them.
* Neither assumes responsibilities for the other's activities or results.
* Neither has authority to act as the other's agent.
Joint Closely Held Investments -
Permissible:
* The firm and an attest client could both own the stock of a widely held public company, like Microsoft.
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.
41
Note that you as a CPA auditor purchased a small minority interest in XYZ, Co. which provide technical support and other non-audit services for businesses. You are engaged in an audit with the company that XYZ, Co. provide services for. Would that impair you from independence?
No, unless, you as a CPA has some sort of control over either of the companies to influence the interest. (direct interest)
42
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)
43
Under what conditions will a financial interest of a close relative of a team member impair independence?
If either the team member knows or has reason to know the financial interest is material to the close relative, or if the financial interest enables the close relative to exercise significant influence over the attest client.
44
May a close relative of another partner in the office hold a key position with an attest client?
No.
45
Which type of covered member has no restrictions on close relatives?
10-hour people
46
Immediate family members cumulatively may not own more than what percentage of an attest client?
5%
47
Which three safeguards need to be in place so that a partner or professional employee may serve as a director of a nonprofit?
1. The position is clearly honorary.
2. The position is represented as honorary.
3. The partner or professional employees may not vote or take a management role.
48
Under what conditions might a director leaving an attest client join a firm as an other partner in the office or a 10-hour person?
The director dissociates fully from the client.
49
If an officer of an attest client leaves the client and joins the firm, which position might the person occupy that would inevitably impair independence?
Team member or someone in a position to influence
50
What are the positions that partners or professional employees may not hold with an attest client?
Any of these positions: director, officer, employee, promoter, underwriter, voting trustee, trustee for any pension or profit-sharing trust of the client's, or any equivalent position
51
Partners and professional employees may serve as adjunct faculty members at a college that is an attest client so long as the following safeguards are all accurate regarding the faculty member. He or she:
1. Does not hold a key position with the client
2. Is not on the attest engagement team
3. Is not in a position to influence
4. Is on a part-time and non-tenure basis
5. Does not participate in any employee benefit plan sponsored by the school, unless participation is required
6. Does not assume any management responsibilities or set policies
52
Partners and professional employees may lend the prestige of their names to a not-for-profit that is an attest client so long as all of the following safeguards are in place:
1. The position is clearly honorary.
2. The partner or professional employee cannot vote and takes no management role in the organization.
3. All externally circulated materials identify the position as honorary.
53
What can and can't a Campaign Treasurer do?
POPE can't audit: the campaign and the governmental unit which the candidate will head if successful
POPE can audit" the political party of the candidate
54
What two things should a person in a position to influence do after receiving an offer of employment from an attest client?
1. Promptly report the offer to his or her firm.
2. Leave the engagement until a decision is made.
55
What type of job with an attest client creates an independence problem for a firm when taken by one of its partners or professional employees?
A "key position."
A key position is a position that may affect or any job that has influence over the financial statements.
56
An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions?
Staff Accountant
Another one that is okay is CMO (Chief Marketing Officer)
Note: The SOX provision addresses CEOs, controllers, CFOs, CAOs, or persons serving in equivalent positions.
57
Sarbanes-Oxley (SOX):
What type of rules does SOX impose?
What does SOX require of a covered member when it comes to Nonaudit services and tax services plus who are they to seek on the tax services and what must be met?
* imposes stricter rules where public companies are involved
* 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
* The positions that cannot be assumed within the one-year period include
* **(a)** chief executive officer, chief financial officer, controller, chief accountancy officer, or any equivalent officers;
* **(b)** any financial oversight role; and
* **(c)** any position preparing financial statements. If a former audit firm employee violates these rules, independence is impaired.
* The one-year cooling-off period is that **year preceding the beginning of the audit**, so the **cooling-off period actually can extend to nearly two years** **_if_** the **member has begun an audit cycle** **_before_** leaving the firm.
does not prohibit attest firms from providing tax services to their attest clients,
requires that rather than the audit client's management selecting the auditor, client audit committees should select, evaluate, and compensate the auditors.
* In addition, these audit committees, which are to be composed entirely of outside directors and therefore presumably independent of overt management influence, must pre-approve any permitted nonaudit services (such as tax services) purchased by a company from its auditor.
* when a firm seeks the permission of an audit client's audit committee to provide tax services, it must:
* (a) describe the proposed services in writing to the committee,
* (b) discuss with the committee the potential effects on independence, and
* (c) document that discussion.
58
When a covered member learns that a team member or a person in a position to influence is considering employment with a client and has not taken the steps listed above, that member should
alert the firm
59
What is the test to determine whether gifts impair independence?
Clearly insignificant (to the recipient)
If it is significant to the recipient then the gift may impair independence
60
Which types of covered members may receive gifts from an attest client without particular worry about independence?
Others partners in the office and 10-hour people.
Team members and those in the position to influence (PTI) must be concerned with impairing independence from gifts.
61
Litigation Between Client and Member—
If the client (or its management) sues the audit firm (or vice versa), the key question is whether the firm and client are in threatened or **actual positions of _material adverse interests_**_._ *(Like a lot of money is at stake, we got a probelm)* 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:
1. An attest client's current management sues or seriously threatens to sue firm alleging deficiencies in the audit work.
2. A covered member sues the client's current management alleging fraud or deceit.
If this is the case then you as a auditor should not be doing the next audit until the lawsuit is resolved
62
**Entertainment** may be accepted without impairing independence so long as it is reasonable in the circumstances. The circumstances to be considered include:
1. Nature of the gift or entertainment
2. Occasion giving rise to the gift or entertainment
3. Cost or value of the gift or entertainment
4. Nature, frequency, and value of other gifts and entertainment
5. Whether the entertainment was associated with the active conduct of business
6. Whether other attest clients also participated in the entertainment; and
7. Client and firm employees who participated in the entertainment
63
Litigation by Client Security Holders
Client shareholders filing a suit claiming securities fraud or some other wrong by both the client and the audit firm presumptively does not automatically impair independence.
But if there are **cross-claims between the client and its managers** on one hand and the attest firm of the other (or a serious risk of them), **independence is impaired** **if there is a significant risk** that a material settlement or judgment will result. ( in favor of the shareholder)
Note: Same rules also applies to non-shareholder (like lenders and such)
When problems (Litigation are solved) you can go back to being their auditor again)
64
What kind of threat to independence can be created by litigation filed by an attest client against its outside auditor?
Adverse interest threat
65
What are the different types of covered member associations and how do they all differ?
1. **Member of a Social Club** - If a covered member belongs to a social club, such as a country club, that is an attest client, there should be **no independence problem if the membership is primarily a social matter.**
2. **Member of a Trade Association -** If a partner or professional employee is employed by or associated with a trade association in an important role (director, trustee, etc.), independence is again impaired.
3. **Member of a Common Interest Realty Association (CIRA) -** If a covered member buys an interest in a condominium, cooperative, or other common interest realty association, his or her firm may nonetheless audit the common interest realty association, ONLY if all are met:
* common interest realty association performs functions similar to local governments, such as public safety, road maintenance, and utilities;
* CM annual assessment is not material to either the common interest realty association or the member;
* Liquidation of the common interest realty association or sale of common assets would not result in a distribution to the covered member
* common interest realty association's creditors would not be permitted to recover out of the member's assets if the common interest realty association became insolvent. (like bankrupt)
4. **Member of a Credit Union -** covered member is a member of a credit union and became eligible to join only because of the professional services (auditing) he or she provided to the credit union, independence is impaired. However it is not impair if its not in relation to the professional service.
66
Boady was an audit team member for her firm's audit of STR Corporation. Two weeks after her birthday, STR's CFO gave Boady a present, telling her it was a “late birthday present.” What question should Boady ask regarding whether this present creates an independence problem?
"Is it clearly insignificant to Boady (the recipient)?"
This is the test for gifts to the firm, team members, or PTIs (people in a “position to influence”).
67
What are the kinds of communications between auditors and their clients that would not be considered nonaudit services?
1. The client's selection and application of accounting standards or policies and financial statement disclosure requirements;
2. The appropriateness of the client's methods used in determining accounting and financial reporting;
3. Adjusting journal entries that the member has prepared or proposed for client management consideration; and
4. The form or content of the financial statement.
68
Fill in the blank: In performing nonaudit services, members must never assume attest clients' \_\_\_\_\_\_\_\_\_\_\_\_\_\_.
Management responsibilities
69
Briefly summarize the general requirements that must always be met before members may perform nonaudit services for attest clients.
1. The client must agree to assume all management and evaluative responsibilities.
2. The member must not do so.
3. The member and client must establish these agreements in writing.
70
Why should covered members monitor the total amount of their nonaudit services?
To ensure that it doesn't become so extensive that it constitutes performing a separate service, even though no specific boundaries in any area have been breached
71
What type of nonaudit services that a member may perform for an attest client if the general requirements are met?
1. provide advice, research materials, and recommendations to assist management in making decisions;
2. attend board meetings as a nonvoting advisor;
3. interpret financial statements, forecasts, and so on; or
4. provide management with advice regarding its potential plans, strategies, or relationships.
72
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?
I.This action would necessarily violate the Code.
II.This action would violate Sarbanes-Oxley rules, unless ABC's audit committee preapproved the hiring.
III.This action would violate Sarbanes-Oxley rules even if ABC's audit committee preapproved the hiring.
Answer is II.
This action would violate Sarbanes-Oxley rules, unless ABC's audit committee preapproved the hiring.
Sarbanes-Oxley requires audit committee preapproval.
73
What rules does SOX provide that an independent auditor cannot perform the following nonaudit services for a public company audit client?
1. Bookkeeping or other services related to the accounting records of financial statements
2. Financial information systems design and implementations
3. Appraisal or valuation services, fairness opinions, or contributions-in-kind reports
4. Actuarial services
5. Internal audit outsourcing services
6. Management functions or human resources
7. Broker or dealer, investment advisor, or investment banking services
8. Legal services and expert services unrelated to the audit
9. Any other service that the Public Company Accounting Oversight Board (PCAOB) determines is impermissible.
74
Non-auditing Services that Can & Can't be done:
**1. Appraisal, Valuation, or Actuarial -**
**2. Benefit Plan Administration**
**3. Bookkeeping, Payroll, and Other Disbursements**
**4. Business Risk Consulting**
**5. Corporate Finance Consulting**
**6. Executive or Employee Search**
**7. Forensic Accounting Services**
**8. Information Systems**
**9. Internal Audit**
**10. Investment - Advisory or Management**
**11. Tax Services**
**12. Hosting Services**
75
With actuarial or appraisal services what would impair independence and give an example of it?
Anything that is involving a high degree of subjectivity like:
Valuing an employee stock option plan
76
What is "conflict of interest" and what are the two types?
What are the two steps that will eliminate most conflicts of interest problems?
Conflict of Interest - pose a threat to objectivity and integrity
Two Types:
1. Client A versus Client B
* Providing tax services to both members of a couple embroiled in a divorce
2. Firm and Members versus Client
To reduce the threats to objectivity to an acceptable level:
* There is full disclosure to the client
* The client consents
77
Director Position
* Objectivity is threatened when a member serves as a client entity's director.
* It is preferable to serve as a mere consultant to a client's board.
* The Conceptual Framework should be applied to determine whether the threat to objectivity is unacceptably high.
78
Gifts and Entertainment Rules
it's violations
and what factors must determine the violation?
1. Objectivity and integrity are threatened if the client/MIPPs (**including its officers, directors, and 10% shareholders**) give gifts or entertainment to the firm or its members (or vice versa).
2. A violation is presumed if:
* The **member knows or is reckless in not knowing of the violation.**
* **Member receives gifts or entertainment** from a client that **violate the _member's or client's policies_** or **_applicable laws and regulation_**
3. If there is no violation then the gifts or entertainment are “reasonable in the circumstances.”
Factors to determine violation:
1. The nature of the gift or entertainment
2. The occasion giving rise to the gift
3. The cost or value of the gift or entertainment
4. The nature, frequency, and value of other gifts
5. Whether the entertainment was associated with active conduct of the business
79
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?
Remember that it is better to have someone you want on board of director as a consultant than to join the board as a member.
80
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?
and What happens if the misrepresentation of facts cannot be reduced to an acceptable level?
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.
Consider quitting the firm.
81
What is Subordination of Judgement?
If members have a disagreement with a superior over how to record potential earnings (or some other issue), they are no to simply accept the superior's judgment.
82
What are the rules of client advocacy?
* Members/MIPPs that are doing attest work may not advocate for their attest clients.
* Members providing nonattest services may advocate for their clients, but should be careful and conservative so as to preserve credibility and avoid the “zealous” advocacy that lawyers often provide.
83
Rules behind the "**Use of a 3rd party"**
* Outsourcing work to third-party service providers can threaten objectivity or integrity
* It's not a problem if the 3rd party provides only administrative support (e.g., record storage, software application software
* If substantive services are outsourced, clients should be notified in writing BEFORE any confidential info is provided to 3rd party ]
* **If Clients object**, members should:
* **Not outsource,** or
* **Decline the engagement**
84
What are the general standards that members must follow set by appropriate bodies?
1. Only take jobs that you can complete w/ **professional competence**
2. should always exercise **due professional care**
3. **adequately plan** and supervise professional services
4. Never jump into conclusion w/o **sufficient relevant data to support them.**
85
What does competence mean? and give some example of it.
Competence means that the member or his/or her staff has appropriate technical qualifications and the member can supervise and evaluate quality of work performed.
Ex:
* Engagement should be declined if you do not have the necessary knowledge or cant acquire it through research
* Even if you employ a specialist, you can't just walk away you have to make sure to define and evaluate the task
86
Under what two circumstances may an auditor depart from generally accepted accounting principles (GAAP)?
1. New legislation
2. New form of business transaction
87
What are two circumstances that do not justify departure from generally accepted accounting principles (GAAP)?
An unusual degree of materiality
Conflicting industry practice
88
What three things should a member describe when departing from generally accepted accounting principles (GAAP)?
1. The departure
2. Its approximate effects
3. The reasons why normal compliance would mislead
89
When is a departure from GAAP permitted?
is permitted when other accounting principles apply, such as:
1. Financial reporting frameworks generally accepted in foreign country
2. Frameworks prescribed by contract
3. Other special-purpose frameworks required by a law or by a domestic or foreign regulatory agency
90
When can a member advocate?
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.
91
Acts Discreditable—Members shall not commit discreditable acts, including:
1. Discrimination and harassment in employment
2. Solicitation or disclosure of CPA Exam questions and answers
3. Failure to file a tax return
4. Negligence in the preparation of financial statements or records
5. Material departure from the audit standards of government bodies, commissions, or other regulatory agencies
6. Failure to follow additional government standards over and above GAAS where applicable
7. Improper use of indemnification and limitation of liability provisions (in another video more details) - we want the accountant to be more liable
8. Confidential information obtained from employment or volunteer activities (more detail in the “Advertising and Confidentiality” lesson)
9. False, misleading, or deceptive acts in promoting or marketing professional services
10. Use of the CPA credential in violation of rules and regulations (need to follow all state and society rules) (ex: dont claim that you are a CPA unless you complete all requirement)
11. Records requests (more detail below)
12. Removing client files or proprietary information from a firm after termination
13. **Use of confidential information** obtained from a prospective client or nonclient **without consent = Disclosure w/o Consent**
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What are the four categories of records and provide a description of each category?
1. **Client-provided records** - records given by the client to the member.
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.
* ex: adjusting, closing, combining, or consolidating journal entries and supporting schedules and documents that the member proposed or prepared as part of an engagement.
3. **Member's work products** - are deliverables set forth in the engagement letter, such as a tax return.
4. **Working papers** - all other items prepared solely for purposes of the engagement, including items prepared by both the member
* Ex: audit programs, analytical review schedules, and statistical sampling and analysis) and the client (e.g., papers prepared at the member's request and reflecting testing or other work done by the member).
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What is the proper treatment on the requests from the client?
**Client-provided records** should be _delivered to the client at the client's request_, even if the client has not paid its bill to the member.
**Member-prepared records** related to a completed and issued work product should be delivered to the client at the client's request, **_except_** that they **may be withheld if fees are due for that specific work product.**
**Work products** should be delivered to the client at the client's request, **except** that they may be **withheld under four circumstances:**
* Fees are due for the specific work product.
* The work product is incomplete.
* To comply with professional standards (e.g., withholding an audit report because of unresolved audit issues).
* If threatened or outstanding litigation exists concerning the engagement or the member's work.
* **NOTE:** if the payment is made for the work done then the documents should be given to the client
**Working papers** are the member's property and n**eed not be provided to the client** (unless some regulation or contractual provision requires production).
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What are some other rules on Record Requests regarding State Laws?
* Sometimes state laws are more demanding of accountants, and those laws must be followed.
* Generally, client requests should be honored within 45 days.
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## Footnote
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?
Yes, Spinner will win because it is his audit documentation.
The CPA's audit documentation belongs to the CPA, so it is not improper to retain it.
however, if it is a client record then the record should be returned to the client even if the fees have not been paid for. Remember if they still do not end up paying you that is a breach of contract and you can sue them
IN OTHER WORDS:
Only audit documentation may be retained indefinitely by a CPA. Such documentation may be necessary for defending against a malpractice suit. Client records, however, must be returned to a client upon request.
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What are some for the rules on contigent fees basis?
What is a contingent fee?
What is some example where a contingent fee is permissible?
Members shall not receive contingent fees for any service performed for a client for whom he or she performs any of the following attest services:
1. A financial statement audit or review,
2. A financial statement compilation reasonably expected to be used by a third party that does not disclose a lack of independence, or
3. An examination of prospective financial information.
Nor are they able to claim contingent fees for amended tax returns/ original tax returns
**Contingent fee** is 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”] excludes fees “fixed by courts or other public authorities, or, in tax matters, if determined based on the results of judicial proceedings or the finding of government agencies
Examples of **some permitted contingent fees in the tax area include:**
1. Representing a client before a revenue agent examining the client's income tax return
2. Filing an amended federal or state income tax return claiming a refund based on a tax issue that is the subject of a test case involving a different taxpayer
3. Filing an amended federal or state income tax return (or refund claim) claiming a tax refund in an amount that will be examined by a tax authority, such as the Joint Committee on Taxation
4. Helping a client obtain a private letter ruling or influencing the drafting of a regulation or statute
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What are the rules behind a Commissions and Referral Fees?
1. Referral fees and commissions are **prohibited for _attest clients._**
* **_Ex: of attest work:_**
* Performing an audit/review of a financial statement.
* Performing an examination of a prospective financial statement.
2. For **nonattest** **clients, they are** **permitted**, but **_must be disclosed_**.
* Ex: Seeking a private letter ruling.
3. A _member's spouse_ **may receive a commission from the member's attest client**, so long as the spouse's activities are separate from the member's practice and **the member is not significantly involved in the spouse's activities.**
4. Members taking title to a product and assuming risks of ownership may resell the product to a client at a profit without disclosure.
* (Ex: If you notice a client needs a software, however, you have one in stock behind the shelf you are able to sell that to the client w/o needing to disclose since the client should know that you are going to profit from that)
5. Members may subcontract services to third parties and mark up the cost of the services to the client without this being considered a commission.
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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?
Ed sold Harriett an investment instrument, disclosing that he was earning a 5% commission on the transaction.
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## Footnote
Considering only the provisions of the AICPA Code of Professional Conduct, what service may a CPA perform for a commission or contingent fee?
Representation of a nonattest client in an IRS examination.
Because during an examination the IRS will almost certainly look at the merits of the tax return, there is no temptation to play the “audit lottery,” so contingent fees are allowed under the Code. = meaning someone is going to look at it and there no chance of hiding.
Remember: Neither the Code of Professional Conduct (the subject of this question) nor Sarbanes-Oxley allows performance on consulting services for audit clients on a contingent fee basis.
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Rules for Advertising
What Promotional efforts are a discreditable act if they are false, misleading, or deceptive?
For the most part, TELL THE TRUTH, no false/misleading
1. Create false or unjustified expectations of favorable results
2. Imply the ability to influence any court, tribunal, regulatory agency or similar body
3. Contain a representation that the member will perform services for stated fees when it is likely at the time that the fees will be substantially increased
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What is the general rule behind **confidential information?**
A member in public practice shall not disclose confidential client information (defined as “any proprietary information pertaining to the employer or any organization for whom the member may work in a volunteer capacity that is not known to be available to the public and is obtained as a result of such relationships”) without the specific consent of the client."
1. It is a discreditable act to inappropriately disclose confidential client information.
2. Members should take reasonable steps to ensure that staff members do not improperly disclose confidential information.
3. The confidentiality duty survives the employment relationship. (take it to the grave with you (ex: popeyes secret ingredient)
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What are some exceptions on the disclosure of confidential information?
What are some additional things to look out for when looking out for competitors?
Exceptions—Disclosures allowed where:
The client consents.
Disclosure is permitted by law and authorized by the employer.
1. Disclosure is required by law, for example, to:
2. Comply with a validly issued and enforceable subpoena or summons
3. Inform appropriate public authorities of violations of the law
4. Members may have responsibility or right to disclose the information, when not prohibited by law, to:
* Initiate an ethics complaint with the American Institute of Certified Public Accountants (AICPA), a state board of accountancy, and so on
* Comply with professional standards and other ethics requirements
* Report potential concerns regarding questionable accounting, auditing, or other matters to the employer's confidential complaint hotline or those charged with governance
1. Disclosure is permitted on behalf of the employer to:
* Obtain financing from lenders
* Communicate with vendors, clients, and customers
* Communicate with the external accountant, attorneys, regulators, and others
Additional Concepts:
1. Members should be sensitive to disclosing a client's confidential information when providing services to its competitors.
2. If taking on a new client would likely lead to disclosure of confidential information from an existing, identifiable client, the member should not take on new client without informed consent from the existing client.
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What should you do If a member prepares a tax return for a married couple and both are your clients?
so if during a divorce one spouse directs the member to withhold joint tax information from the other, the member may provide information to both spouses. When receiving conflicting directions from the spouses, the member should seek an attorney's advice.
This is acting in good faith, so speak with a lawyer and have him/her help you out.
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When outsourcing work to a third-party service provider (TSP), a member should do one of the what before disclosing confidential information:
What are the rules behind PEER REVIEW?
Is it okay for you to disclose clients names?
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.**
* Members involved in a **peer review** must keep information they receive confidential and not use it for their advantage.
* Disclosing clients’ names is permissible, unless to do so discloses confidential information.
Exception where is it not permissible:
* Where the member does primarily bankruptcy work and disclosing clients’ identities signals that clients are in financial difficulty.
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A CPA's audit documentation
Audit documentation may only be released to third parties in three situations:
1. The **client** may **consent** **to the release,**
2. a **court may order** the **release** **through** a **subpoena**,
3. or a **state CPA society's quality review board** may r**equest them**.
4. **inquiry** from the **professional ethics division** **of** the **AICPA**
* If a court orders the release, it must be done.
* Other side note:
* A CPA should refuse to produce confidential client records in response to a mere request from the IRS or SEC.
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Forms of Organization basic Rules:
1. Members in public practice may practice only in a form of organization **permitted by law.**
2. Members in public practice **may not practice under misleading firm name.**
3. Names of **past owners** may be **included in the name of a successor firm**.
4. A **firm may not designate itself as** “**Members of the AICPA**” **_unless_** **all** its CPA owners are members of the AICPA.
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Ownership of a Separate Business
What is the rule behind Designation Partners?
1. A member may own an interest in a separate business that performs accounting, tax, or consulting services
* BUT: if s/he control the seperate business they must comply with the code for issues such as commissions and referral fees. And regarding an attest client, independence rules would have to be complied with as well.
* BUT: if the member's interest is not a controlling one, then the code's provisions apply to him but not to the separate firm or its employees.
**Only members of a firm who are legally partners** should use the designation “partner.” (Its as simple as that)
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What are some Responsibility for Nonmember Practitioners?
If a member becomes an employee of a firm made up of one or more nonmembers, he or she still must comply with the code.
And if the member is a partner in the firm, he or she is responsible for the firm's professional employees.
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Attest Engagement Performed with a Former Partner
before you may have a partner, but to make it clear that no partnership exist anymore you should: **present their report on plain paper (with no letterhead)**.
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What is the rule behind Firm Names?
* If two firms merge, they may use in the newly formed firm's name the name of retired or other partners in either or both of the former firms. (ex: past = Ernest & Ernest, and present = Ernest & Young)
* A CPA member who is in partnership with non-CPAs may sign reports in the firm's name and also affix the designation “CPA” to his or her own signature if it is clear that the firm is not holding itself out as entirely comprised of CPAs.
* Accounting firms have substantial leeway in choosing names, so long as they do not mislead.
* Ex:
* 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.
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To be part of a network, the firms should share what common things with other network firms?
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
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Which firms must have a majority of their financial interests owned by CPAs?
Attest firms must be majority owned by CPAs.
Note: Firms that identify themselves as "Members of the AICPA." must ALL be CPAs
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Who are Members in Business (MIBs) and what are the rules?
MIBs are “employed or engaged on a contractual or volunteer basis in an executive, staff, governance, advisory, or administrative capacity in such areas as industry, the public sector, education, the not-for-profit sector and regulatory or professional bodies.”
do not have to worry about independence rules. They have other responsibilities that generally mirror those of members in public practice, so it should not take long to master their part of the Code of Professional Conduct.
Remember the 6 Threats? It applies to MIPPs and **also MIBs** (AAFSSU)
114
Where do the Conceptual Framework's safeguards come from regarding members in business?
1. The profession, legislation, or regulation
2. Their employer
115
Which area of professional responsibility worries members in public practice but not members in business?
Independence
116
Who are Members in Business?
1. Staff Accoutant
2. Internal Auditor (not Outside Auditor)
3. Assistant Controller
117
Candy an internal auditor (MiBs) that wishes not to violate the standards for objectivity and integrity should not do what?
1. She should accept no gifts that violate the law.
2. She should accept no gifts that violate company policy.
3. She should accept no gifts that are not reasonable in the circumstances.
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What are "Other Members" (OMs)?
What are some things that OM should not do?
are, by definition, **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**).
They **should not:**
* Discriminate and harass in employment
* Soliciting CPA Exam Q&As
* Failing to file tax return or pay a tax liability
* Improperly disclosing confidential info
* Falsely Advertise
* Improperly using CPA credential
119
Name some close relatives.
Parents, siblings, and nondependent child.
120
What are some immediate family members?
Spouses, spouse equivalent, and dependent child..
NO nondependent child.
121
What are some of the conditions that must be met to ensure that independence is not impaired?
* If the person does not appear to participate in ABC's business
* If they retain no influence over ABC operations or financial policies
* If as a PUBLIC company (not private), wait for one entire audit cycle before going to work
* The company that the person leaves plans on modifying the audit procedures to adjust for the risk that the possibility that the person would tell the other company how to evade the current audit procedures.
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What type of actuarial or appraisal services would impair independence?
Valuing employee stock option plan.
123
Audit documentation may only be released to third parties in three situations, what are those three situations?
* The client may consent to the release,
* a court may order the release through a subpoena,
* or a state CPA society's quality review board may request them.
* If a court orders the release, it must be done.
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What are signs that firms are part of a network?
They share common control, common business strategy. and are located in the same office building, and share profits.
125
What are the rules behind a firms name?
Accounting firms have substantial leeway in choosing names, so long as they do not mislead. they may include names of past owners, and again if not misleading have a fictitious name.
126
What are the difference between an attest firm and a firm that identify themselves as " Members of the AICPA"?
An attest firms must be majority owned by CPAs and firms that identify themselves as "member of the AICPA" are ALL CPAs.
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