MCQ 2 Flashcards
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?
A.
A distinguishing mark of a profession is its acceptance of responsibility to the public.
B.
A requirement for a profession is to establish ethical standards that stress primary responsibility to clients and colleagues.
C.
Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character.
D.
Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.
Choice A (Correct) and Choice B (Incorrect): The CPA profession established ethical standards to emphasize the profession’s responsibility to the public, and not as one that sees its primary role merely in serving the interests of its own members and clients.
Choice C (Incorrect): While the standards undoubtedly enhance the reputation of the profession, the primary focus of the standards is on responsibilities and not image.
Choice D (Incorrect): The code of conduct is a voluntary code that provides guidance to members of the AICPA who have chosen to meet its standards, and is not primarily a tool for punishing unscrupulous behavior.
Each of the following broker-dealer relationships impairs auditor independence with respect to a broker-dealer issuer audit client, except
A.
The auditor has a brokerage account that holds both U.S. securities and assets other than cash or securities. (7%)
B.
The auditor has a brokerage account that holds U.S. securities in excess of Securities Investor Protection Corporation coverage limits. (7%)
C.
The auditor has a brokerage account that includes assets other than cash or securities. (14%)
D.
The auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation.
D
When CPAs are auditing issuers, they must comply with the independence requirements of the SEC. One set of requirements specifically involves audits of broker-dealer issuers with whom the CPA or the CPA’s firm holds a brokerage account. This arrangement can create a self-interest threat that impairs independence.
If the broker-dealer enters bankruptcy, the auditor’s investments may be lost. Therefore, the auditor has an interest in the continued financial stability of the broker-dealer. However, if the holdings in the brokerage account are covered by the Securities Investor Protection Corporation (SIPC) or a similar foreign program, the auditor is protected from losses that might result from the bankruptcy. This protection safeguards independence by eliminating the auditor’s interest in the client’s financial stability.
According to the standards of the profession, which of the following would be considered a part of a consulting service engagement?
I. Expressing a conclusion about the reliability of a client’s financial statements.
II. Reviewing and commenting on a client-prepared business plan.
A.
I only.
B.
II only.
C.
Both I and II.
D.
Neither I nor II
Choice B (Correct) and Choice A (Incorrect): Consulting services consist of consultations, advisory services, EDP system implementation services, transaction services, staff and other support services and product services. This might involve reviewing and commenting on a client-prepared business plan. Expressing a conclusion about the reliability of a client’s financial statements would be part of an audit or attestation engagement.
According to the AICPA Code of Professional Conduct, which of the following situations involving nondependent members of an auditor’s family is most likely to impair the auditor’s independence?
A.
A parent’s immaterial investment in a client. (3%)
B.
A first cousin’s loan from a client. (3%)
C.
A spouse’s employment with a client. (72%)
D.
A sibling’s loan to a director of a client.
C
Independence between CPA and client can be affected by relationships between the CPA’s family and the client. Whether independence is impaired depends on whether the family members are immediate family or close relatives, among other factors. Immediate family includes spouses and dependents (related or not). Close relatives include parents, siblings, and nondependent children.
Relationships between close relatives and clients impair independence only if the relative:
is in a key position with the client, or
has financial interests in the client that provide significant influence over the client or are material to the relative (Choice A).
In determining whether independence is impaired, relationships between immediate family and the client are treated as if they existed between CPA and client, with some exceptions. In this scenario, because the spouse is immediate family, not merely a close relative, it’s more likely that independence is impaired. Specifically, if the spouse’s employment with the client is in a financial reporting oversight role, independence is impaired.
(Choice B) Because the cousin is neither immediate family nor close relative, independence isn’t impaired by the loan.
(Choice D) Loaning money to a client’s director doesn’t create a financial interest in the client. Moreover, a sibling is a close relative, not immediate family, and there is no indication that the loan is material or provides significant influence. Therefore, it’s unlikely to impair independence.
Things to remember:
In determining independence, relationships between immediate family (ie, spouses and dependents) and client are generally treated as if they existed between CPA and client.
When a former partner of a registered public accounting firm who left the firm two years ago accepts a financial reporting oversight role at an issuer audit client, the independence of the registered public accounting firm is considered impaired unless which of the following is true?
A.
The former partner discloses the relationship to the issuer audit client’s board of directors. (8%)
B.
The former partner was employed by the registered public accounting firm for a period of 2 years or less. (2%)
C.
The former partner has no remaining capital balance in the registered public accounting firm. (83%)
D.
The former partner exerts only limited influence over the registered public accounting firm’s operations and financial policies.
C
It is common for CPAs working in public accounting to subsequently go to work for a client. Because the client is an attest client, however, there is the risk that the CPA’s remaining ties to the firm may impair the firm’s independence, whether or not the client is an issuer.
If a CPA leaves an accounting firm but retains a capital balance (ie, equity) in the firm, the CPA could potentially exercise influence over the firm’s actions. Even if no such influence actually exists, the possibility could create a perceived conflict of interest. For this reason, when a CPA leaves an accounting firm to work in a financial reporting oversight role for an issuer audit client while retaining a capital balance in the firm, the firm’s independence is impaired.
(Choice A) Whether or not the relationship is disclosed, independence is impaired.
(Choice B) Regardless of how long the CPA worked for the accounting firm, maintaining a capital balance will impair independence from issuer audit clients.
(Choice D) If the CPA is in a position to influence the firm’s operations or financial policies, the firm’s independence is impaired, no matter how limited that influence.
Things to remember:
When a former employee (eg, partner or staff) of an accounting firm goes to work in a financial reporting oversight role for an issuer audit client of the firm while retaining a capital balance, the firm’s independence is impaired.
An auditor has performed bookkeeping and other nonattest services that are not prohibited by the independence rules of the AICPA Code of Professional Conduct. The auditor has established and documented an understanding with the potential audit client, and the client has agreed to assume all management responsibility. Which of the following is correct?
A.
The auditor may conduct the audit under GAAS without meeting any additional requirements. (21%)
B.
The auditor may conduct the audit under PCAOB standards but must disclose the performance of the services. (7%)
C.
The auditor may conduct the audit under GAAS but must disclose the performance of the services. (41%)
D.
The auditor may not perform the audit under GAAS.
A
Audits conducted under generally accepted auditing standards (GAAS) must follow the AICPA Code of Professional Conduct, which outlines the standards that must be met for an auditor to be independent of a current or potential audit client.
Independence may be impaired when an auditor assumes any management responsibility for nonattest services. Management should be solely responsible for judgments, assessments, and approvals that contribute to preparing financial statements. Auditors who assume these responsibilities and who also audit the entity’s financial statements are essentially auditing their own work, which makes the audit biased.
In contrast, certain routine functions are allowed under the Code of Professional Conduct. These functions do not require management assessment or judgment. To perform these services, the auditor should document management’s understanding of the scope of services and ensure that management, not the auditor, assumes all responsibility. Once this is completed, there are no additional requirements (Choice C). If independence is later impaired, it must be disclosed to the appropriate party, including any party who relies on the independence of the auditor.
(Choice B) In general, an auditor may not perform nonattest services for an audit client under PCAOB standards (for public entities). However, a limited number of nonattest services (eg, tax planning) may be performed if they are approved in advance by the client’s audit committee.
(Choice D) The auditor may perform the audit under GAAS (for private entities) because independence has not been impaired and documentation requirements have been met.
Things to remember:
GAAS requires that auditors follow the AICPA Code of Professional Conduct. The Code of Professional Conduct allows auditors to perform certain nonattest services for a potential client if independence is maintained. Auditors should establish and document an understanding with the client and must not assume any management responsibility. Disclosures are required when the auditor’s independence is impaired.
