INDEPENDENCE: Public Company Accounting Oversight Board (PCAOB) and Rule 201, 202, 203

Question 1

When did the PCAOB adopt the AICPA’s rules, interpretations, and rulings?

Answer 1

April 16, 2003

Question 2

Explain independence of a registered public accounting firm in regards to contingent fees and commissions.

Answer 2

Not independent of its audit client if the firm provides and service or product to the client for contingent fee or a commission, or receives from audit client a contingent fee or commission.

Question 3

Explain independence of a registered public accounting firm in regards to performing nonaudit service to client.

Answer 3

Not independence if related to marketing, planning, or opining in favor:

1. Confidential transaction: tax transaction that is offered to a client under conditions of confidentiality and for which the client pays the public accounting firm a fee
2. Aggressive tax position transaction: initially recommended by the public accounting firm

Question 4

Exceptions to independence being impaired if tax service is provided to a person in a financial reporting oversight role at the audit client, or an immediate family member of such person:

Answer 4

1. Person in a financial reporting oversight role only because he/she serves as a member of the board of directors or similar body
2. Person is in a financial reporting oversight role at audit client only because of relationship to an affiliate of the entity being audited and affiliates financial statements not material to consolidated financial statements or affiliate is audited by another public accounting firm
3. Person was not in a financial reporting oversight role at the audit client before a hiring or some other change in employment and the tax services were: Provided pursuant to an engagement in process prior to the change in employment and completed on or before 180 days after change in employement

Question 5

Who must the public accounting firm get pre-approval from to perform any permissible tax season?

Answer 5

The audit committee.

Question 6

What are the general standards of Rule 201?

Answer 6

1. Only undertake professional services that one can reasonable expect to complete with professional competence.
2. Exercise due professional care
3. Adequately plan and supervise engagements.
4. Obtain sufficient relevant data to afford a reasonable basis for conclusions and recommendations.

Question 7

Interpretation 201-1 - What does competence to complete an engagement mean?

Answer 7

1. Technical qualifications of CPA and staff
2. Financial Accounting Standards Advisory Board for accounting principles for federal governmental entities
3. Ability to supervise and evaluate work
4. Knowledge of technical subject matter
5. Capability to exercise judgment in its application
6. Ability to research subject matter and consult with others

Question 8

Who are the ‘designated bodies’ that a member must adhere to for its standards?

Answer 8

1. Financial Accounting Standards Board for accounting principles for businesses (FASB)
2. Financial Accounting Standards Advisory Board for accounting principles for federal governmental entities (FASAB)
3. Governmental Accounting Standards Board for accounting principles for state and local governmental entities (GASB)
4. Public Company Accounting Oversight Board for auditing, attestation, quality control, ethics, and independence standards for companies covered by Sarbanes-Oxley Act (PCAOB)
5. International Accounting Standards Board for international accounting standards (IASB)
6. AICPA designated bodies:
   - Accounting and Review Services Committee (ARSC)
   - Auditing Standards Board (ASB)
   - Management Consulting Services Executive Committee (MCSEC)
   - Tax Executive Committee (TEC)
   - Forensic and Valuation Executive Committee (FVEC)

Question 9

Rules 203 Accounting Principles - What are the sources of GAAP?

Answer 9

FASB, FASAB, GASB, IASB

Question 10

What must be disclosed if financial statements have a departure from GAAP?

Answer 10

CPA must disclose in report the departure, its effects, and reasons why compliance would result in a misleading statement

Question 11

Interpretation 201-3? What are some circumstances that might justify a departure from GAAP?

Answer 11

1. New legislation

2. New form of business transaction

Question 12

What happens if financial statements are on a member’s letterhead?

Answer 12

The member should disclose lack of independence.

Question 13

What is Rule 301 on Confidential Client Information and the exceptions?

Answer 13

Member in public practice shall not disclose confidential client information without client consent except:

1. Compliance with Rule 202 and 203
2. Compliance with enforceable subpoena or summons
3. AICPA review of professional practice
4. Initiating complaint or responding to inquiry made by a recognized investigative or disciplinary body

Question 14

Interpretation 301-3: Selling practice or merging with another CPA

Answer 14

May allow that CPA to review confidential client information without specific consent of the client.

EXCEPTION: only relates to a review in conjunction with a purchase or merger. Does not apply to review of working papers after a CPA has purchased another’s practice

Question 15

What is Rule 302 Contingent Fees?

Answer 15

1. Cannot perform for a contingent fee any professional service if provides the following:
   - Audits or reviews of financial statements
   - Compilations when member is independent and expects 3rd party to use financial statements
   - Examinations of prospective financial information
2. Fixed fees by courts or public authorities or in tax matters (fees determined based on results of judicial proceeding) are not regarded as contingent

Question 16

Interpretation 302-1: When would a contingent fee be permitted (in tax matters)?

Answer 16

Amounts due are not clear:

1. Representing a client in an examination by a revenue agent
2. Filing amended tax returns based on a tax issue that is the subject of a test case involving a different taxpayer or where the tax authority is developing a position
3. Representing a taxpayer in getting a private ruling

Question 17

When would a contingent fee not be permitted?

Answer 17

Preparing an amended tax return for a client claiming a refund that is clearly due to the client because of an inadvertent omission

Question 18

What is the policy for contingent fees and commissions in regards to a member’s spouse?

Answer 18

A member’s spouse may provide services to a member’s attest client for a contingent fee and may refer products or services for a commission.

Question 19

How is a contingent fee for a portfolio determined?

Answer 19

Fee is determined as a specified percentage of the portfolio. The dollar amount of the portfolio is determined at the beginning of each quarterly period (or longer) and adjusted only for additions or withdrawals by the client.