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2017 Audit > MIPP - Financial Interests > Flashcards

MIPP - Financial Interests Flashcards

1
Q

is independence impaired if covered member has or is committed to acquire any direct, material or not, or any material indirect interest in an attest client

A

yes.

However, independence is not impaired if interests are both indirect and immaterial

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2
Q

define financial interest

A

includes ownership or an obligation to obtain ownership in equity, debt, or derivatives issued by an entity

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3
Q

define direct financial interest

A
  • interest owned directly (even if managed by others)
  • interest under one’s control (even if managed by others)
  • beneficially owned through an investment vehicle, estate, trust or other when the beneficiary either: control intermediary, or has authority to supervise or participate in investment decision
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4
Q

define indirect financial interest

A

an interest beneficially owned through investment vehicle, estate, trust or other intermediary when beneficiary neither:

  • controls the intermediary, nor
  • has the authority to supervise or participate in its investment decision
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5
Q

define beneficial ownership

A

occurs when an individual or entity is not the record owner but has a right to some or all of the underlying benefits of ownership, such as to:

  • direct the voting
  • dispose of the interest
  • receive its economic benefits
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6
Q

do rules about financial interests apply to covered members?

A

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 client’s ownership interests without impairing independence

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7
Q

is independence impaired, if covered members receive or learn they will receive an unsolicited financial interests in an attest client (perhaps through gift or inheritance) that is either a direct interest or a material indirect interest

A

independence will not be impaired if they 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

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8
Q

how is independence impaired with respect to mutual funds

A

Direct interest in MF = own shares

indirect interest in investments = <5% of diversified

Verify material indirect if:

  • > 5% diversified
  • owns diversified shares
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9
Q

unsolicited financial interests, if covered members receive or learn they will receive an unsolicited financial interest in an attest client (perhaps through gift of inheritance) that is either direct interest or a material indirect investment, will independence be impaired?

A

independence will not be impaired if they, dispose of interest as soon as practicable but not later than 30 days after having both knowledge of interest and gaining the right to dispose it, and do not participate on the attest engagement team after learning of the interest and before disposing of it.

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10
Q

general partnership - is general member’s investments in partnership or partnership’s investments direct or indirect?

A

a general partner has authority to influence investments, so a general partner’s financial interests in both the partnership itself and its underlying investments are direct

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11
Q

limited partnership - general partner’s authority
direct/indirect in
1. partnership
2. investment

A

general partner has authority to influence investments so a general partner’s financial interests in both the limited partnership itself and and its investments are direct

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12
Q 
limited partner's interest in the limited partnership and in its underlying investments is... 
direct/indirect in
1. partnership
2. investment
3. if agent managed
A

direct, but usually he will not have influence over its investments so this partner’s financial interest in its investments will be indirect
if limited liability company is agent managed, then member are more like limited partners and their interests in 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

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13
Q

prepaid tuition plans
direct/indirect interest in
1. plan
2. investments

A

owners of a 529 account used to prepay tuition have a direct interest in the plan but only an indirect interest in investments. owners of such plans essentially buying tuition credits. the state has an obligation to provide the education regardless of the investments performance

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14
Q

savings plans
direct/indirect interest in
1. plan
2. investments

A

owners of these accounts have a direct financial interest in both the plan and its investments because they may decide in which sponsors 529 savings plan to invest and can determine before investing which firms the plan will invest in

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15
Q

trusts and estates. the fact that a covered member is asked to serve as trustee of a trust or executor of an estate… independence issue?

A

does not create an independence problem it an attest client’s shares are covered by the trust or estate. however there is a problem if

  • covered member has ability to make investment decisions for trust or estate
  • trust or estate owns or is committed to acquiring more than 10% of attest client’s ownership interest, or
  • value of trust’s or estate’s ownership interest in the client exceeds 10% of its total assets
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16
Q

if a covered member acts as a grantor to set up a trust, it’s investments are direct financial interests if any of the following are true

A
  1. covered members has ability to amend or revoke trust
  2. covered member has authority to control the trust
  3. covered member has ability to supervise or participate in trust’s investment decisions
  4. underlying trust investments ultimately will revert to covered member as grantor
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17
Q

if a covered member is a beneficiary of trust, then covered member’s interest is direct/indirect in

  1. plan
  2. investments
A

direct and his/her interest in trust’s underlying investments is indirect, unless covered member controls trust or supervises or participates in its investment decisions, in which case interest becomes direct

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18
Q

blind trust - because investments ultimately will revert to grantor who typically retains right to amend or revoke, both blind trust and its underlying investments are considered to be…

A

direct financial interests of the grantor

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19
Q

is covered member’s independence impaired if he participates in employee benefit plans sponsored by attest client

A

independence is imapired if a covered member participates in EBP that is an attest client or sponsored by one

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20
Q

what are two independence exceptions for covered members with respect to EBP

A
  1. when covered member is employee of a gov org that sponsors ebp and covered member is required by law to audit the plan, then it is acceptable to do so if all apply:
    - covered member is required to participate in plan as condition of employment
    - plan is offered to all employees in comparable positions
    - covered member is not director, officer, employee, promoter
    - covered member has not influence or control over investment strategy, benefits or other mgt activities
  2. when covered member formerly was associated with attest client but is no longer, then independence is not impaired
21
Q

firms may maintain depository accounts at a bank that is attest client if they

A

conclude the likelihood is remote that the bank will experience financial difficulties

22
Q

individual covered members may maintain depository accounts in attest client if any of three conditions are met

A
  1. balance in depository account is fully insured
  2. any uninsured amounts were not material to covered member’s worth
  3. if uninsured accounts are considered material, they are reduced to an immaterial amount within 30 days of becoming material
23
Q

brokerage accounts - covered member’s brokerage account at an attest client broker dealer would - impair independence?

A

would not impair independence only if both apply:

  1. attest client’s services were rendered under attest client’s normal terms, procedures, and requirements
  2. any covered member’s assets subject to to risk of loss are immaterial to covered member’s net work
    - in determining risk of loss, the questions is not whether the assets’ market value might decline but whether the client might become insolvent or commit fraud. protection by regulators and insurance are relevant factors in determining risk of loss
24
Q

is an insurance policy a financial interest?

A

insurance policy is not a financial interest unless it offers an investment option

  • if there is an investment option, there would still not be an independence problem if covered member bout policy under normal terms and conditions, unless
  • covered member had the ability to select policy’s underlying investments
  • covered member had the authority to supervise or participate in investment decision and covered member invested in attest client
25
Q

loans - if covered member borrows from (or loans to) an attest client or any of its officers, directors or 10% owners, is independence impaired?

A

independence is impaired, especially if client is not a lending institution

26
Q

if attest client is a lending institution making a loan to covered members or their immediate family members,,, is independence impaired?

A

independence would not be impaired if it is

  • an immaterial unsecured loan,
  • home mortgage
  • secured loan, so long all safeguards are met
    1. normal lending procedures, terms and requirements were applied
    2. loan occurred before lending institution become an attest client, or came from a lending institution for which independence was not required and later sold to an attest client
    3. loans are kept current, and terms are not altered by extending maturity date, lowering interest rate
    4. estimated fair value of collateral equals or exceeds the outstanding balance, any deficit is not material to covered member’s net worth
27
Q

if covered member keeps payments current and otherwise complies with loan or lease terms, these also do not impair independence:

A
  1. auto loans and leases collateralized by car
  2. loans fully collateralized by cash surrender value of insurance polity
  3. loans fully collateralized by cash deposits at the same lending institutions (passbook loans)
  4. aggregate outstanding balances from credit card ad overdraft reserve accounts of $10,000 or less
28
Q

capital lease - impair independence?

A

leases to own - impair independence

29
Q

operating lease - impair independence?

A

do not impair independence if all safeguards are met

  1. lease meets gaap criteria for operating lease
  2. terms and conditions are comparable with similar lease
  3. amounts are paid in accordance with terms of the lease
30
Q

cooperative ventures

A

cooperating with attest client to provide services to a third party or to develop a product is problematic. a cooperative venture does not exist where all these safeguards are present

  1. participation of firm and client is governed by separate agreements that do not create obligations between them
  2. neither assumes responsibilities for other’s activities or results
  3. neither has authority to act as other’s agent
31
Q

joint closely held investments

A

joint financial investments may create an independence problem

  • permissible: the firm and attest client could both own stock of a widely held public company like Microsoft
  • impermissible
  • firm and client both own material stakes in small company
  • covered member and officer of attest client jointly buy a sailboat
32
Q

two categories of family relationships that create independence

A
  1. immediate family members: spouses, spousal equivalent, and dependents
  2. close relatives, parents, siblings and nondependent children
33
Q

immediate family members

A

with substantial exceptions, immediate family members of covered members must comply with the same independence rules as covered members themselves. they may not work for attest clients and own financial interests in them unless interests are both indirect and immaterial. irrespective of exceptions, immediate family members cumulatively may not own more than 5% of an attest client

34
Q

immediate family members employed by attest client

A

covered member’s immediate family members may work for attest client, just not in a key position such as one in which employee has

  1. primary responsibility for signifiant accounting functions that support material components of FS
  2. primary responsibility for preparation of FS
  3. ability to exercise influence over contents of FS, including when individual is member of bod or similar gov body, ceo, president, cfo, coo, general counsel, cao, controller, director of internal audit, director of fin reporting, treasurer, etc.
35
Q

immediate family members participation in EBP

A

immediate family members may not only owrk for attest client in a non-key position, they may also participate in ebp that is attest client or is sponsored by attest client, as long as safeguards are followed

  1. plan is offered to all employees in comparable employment positions
  2. immediate family member does not service in position of gov for plan
  3. immediate family member does not have ability to supervise or participate in plan’s investment decisions or in selection of investment options made available to plan participants
36
Q

immediate family member participation if EBP with financial interest in attest client

A

immediate family member might work for company that is not an attest client but participate in its EBP and learn that plan holds stock of attest client. general rule is that in this setting an immediate family member may hold a direct financial interest or material indirect financial interest in attest client if all safeguards are met

  1. covered member is neither on attest team nor in a position to influence
  2. such investment is an unavoidable consequence of such participation, no other options available
  3. plan creates an option that would allow the immediate family member to invest in a non-attest client, the immediate family members should select that option and dispose of attest client shares as soon as practicable but within 30 days
37
Q

close relative

A

close relatives of covered members must follow the same independence rules as covered members themselves, but restrictions are looser than for immediate family members and they are looser for close relatives of covered members who are on on the engagement team

38
Q

when is independence impaired for close relative if the close relative of an audit engagement team member has either of the following

A
  1. a key position with the attest client
  2. financial interest in attest client that
    - the team member knows or has reason to know was material to close relative
    - enabled close relative to exercise significant influence over attest client
39
Q

independence is impaired if close relative of a person in a position to influence or tother partner in office has either of the following

A
  1. key position with an attest client
  2. financial interest that
    -person in a position to influence or other partner in office has reason to believe was material to close relative
    -enabled close relative to exercise significant influence over attest client
    There are no specific restrictions on close relatives of 10 hour people - though the conceptual framework should always be kept in mind
40
Q

cpa purchased stock in client corporation and placed it in a trust as an educational fund for cpa’s minor child. trust securities are not material to cpa’s wealth but are material to child’s personal net worth. according to aicpa code of professional conduct, would this action impair cpa’s independence with client

A

yes, because the stock would be a direct financial interest and materiality is not a factor

41
Q

does the following create independence problem?
sam is on the attest team for client abc. while he does not currently own any abc stock, he has signed a commitment to purchase a small amount but not until a month after the audit report will issue

A

yes

42
Q

does the following create independence problem?
sam is on the attest team for client abc company. while he does not currently own any bc stock in his own name,. hi is beneficiary of a trust that holds a significant amount of abc stock. sam does not control trusts investments

A

yes

43
Q

does the following create independence problem?
sam is not a covered member. for purposes of his firm’s audit of abc co, but he is a partner in a different office and does own 7% of abc shares

A

yes

44
Q

jo is member in public practice who is very wealthy and has no individual investments that are material to her. does this situation impair independence. jo owns 3% of diversified mutual fund and is on her firm’s attest team for that fund

A

yes. there would be an impairment

jo owns a direct though immaterial interest in the audit client: the mutual fund

45
Q

jo is member in public practice who is very wealthy and has no individual investments that are material to her. does this situation impair independence. jo owns 4% of diversified mutual fund and is on her firm’s attest team for abc whose shares are in the mutual fund’s portfolio of stocks

A

no impairment

46
Q

jo is member in public practice who is very wealthy and has no individual investments that are material to her. does this situation impair independence. jo owns 2% of un-diversified mutual fund that has abc co stock in its portfolio and jo is on her firm’s attest team for abc

A

no impairment

47
Q

does this situation create an independence problem?

brixton cpa and client abc own microsoft stock

A

no. independence problem, because microsoft is a public company

48
Q

does this situation create an independence problem? one of brixton’s cpa covered members is friends with abc’c ceo and they pursue their passion for skiing by jointly purchasing a ski chalet in vail

A

yes

2017 Audit (10 decks)

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