MIPP - Independence Rules

Question 1

Conceptual framework

Answer 1

where the code’s rules and interpretations do not provide a clear answer to a particular situation, members should always apply the treats and safeguards conceptual framework in order to determine whether threats to a members compliance and the rules (independence) can be reduced to an acceptable level by application of safeguards

Question 2

what are the seven broad categories of threats

Answer 2

1. adverse interest threats
2. advocacy threats
3. familiarity threats
4. management participation threats
5. self interest threat
   6 self review threats
6. undue influence threats

Question 3

examples of adverse interest threats

Answer 3

client sues or threatens to sue form

subrogee makes claim against a firm to recover payments it made to client

Question 4

examples advocacy threats

Answer 4

firm acts as investment advisory underwriter promoter or registered agent for a client

Question 5

examples of familiarity threats

Answer 5

members spouse parent sibling or close friend is employed by client
former firm partner joins client in a key position

Question 6

example of management participation threats

Answer 6

member takes a role of client management

Question 7

examples self interest threats

Answer 7

member has a financial interest in a client that may be affected by outcome of professional services the firm is providing

firm relies excessively on revenue from a single client

Question 8

examples of self review threats

Answer 8

member relies on work product of own firm
member does clients bookkeeping
partner in firm was an officer or director of client

Question 9

examples of undue influence threats

Answer 9

client threatens to fire firm or to withhold future business unless firm accedes to clients wishes
clients major shareholder threatens to withdraw or terminate a professional service unless the member reaches desired conclusion

Question 10

what are the three kinds of safeguards

Answer 10

1. safeguards created by profession, legislation or regulation
2. safeguards implemented by the client
3. safeguards implemented by the firm

Question 11

examples of safeguards created by the profession, legislation or regulation

Answer 11

ethics education and training requirements/cpe
professional standards and threat of discipline
external reviews of a firm’s quality controls
legislation regulating firm’s professionals
licensure requirements
professional resources, such as ethics hotline

Question 12

safeguards implemented by the client, examples

Answer 12

knowledgeable and experienced managers
appropriate tone at top regarding ethics and compliance
appropriate policies and procedures for compliance and fair reporting
appropriate ethics policies and procedures
appropriate governance structure, including an active audit committee
policies to prevent client from hiring a firm to provide services that would impair independence or objectivity

Question 13

safeguards implemented by the firm, examples

Answer 13

strong leadership emphasizing compliance and acting in the public interest
policies and procedures to implement and monitor engagement quality control
designation of qualified senior manager to oversee firm’s quality control system
an effective internal disciplinary system
rotation of engagement team senior personnel
polices precluding partners from being compensated for selling non attest services to attest client

Question 14

when performing attest services, members in public practice should be/not be independent?

Answer 14

independent

Question 15

when code and its interpretations do not resolve independence issues, what standards should be applied?

Answer 15

conceptual framework

Question 16

threats to independence

Answer 16

detailed in code are very much the same as the threats to integrity and objectivity, 
adverse interest threats, 
advocacy threats, 
familiarity threats
management participation threats
self interest threats
self review threats
undue influence threats

Question 17

safeguards that may be applied to reduce the threats to independence come from the same three sources as those relevant to integrity and objectivity

Answer 17

-profession, legislation or regulation
attest client
the firm

Question 18

threats to independence are concentrated in four areas

Answer 18

1. financial relationships - attest partner should not own stock in audit client
2. employment relationships - attest partners should not be on audit client’s BOD
3. Family relationships - attest partner should not audit a client whose CEO is partner’s spouse
4. Consulting relationships - attest firm should not provide internal audit services to an attest client

Question 19

who is considered a covered member?

Answer 19

1. individual on the attest engagement team
2. individual in a position to influence attest engagement
3. partner, equivalent or manager who provides more than 10 hours of non-attest svc to attest client within a year
4. partner or equivalent in office in which the least attest engagement partner or equivalent practices in connection with attest engagement (other partner in office)
5. the firm, including the firm’s employee benefit plan
6. entity whose operating, financial or accounting policies can be controlled by any of the individuals or entities described in items 1-5, or two or more such individuals or entities if they act together.

Question 20

Network firms are

Answer 20

firms that cooperate to enhance their capabilities to provide professional services and share one or more of the following:

• common brand name
• common control
• profits or costs
• a common business strategy
• professional resources
• common quality control policies and procedures

Question 21

would independence be impaired if partners or professional employees of another, non independent firm participate on the attest engagement team?

Answer 21

yes.
such members of another firm may work in a manner similar to internal auditors, however without creating and independence problem so long as the firm complies with AU-C sections 610 (which sets out the rules for the proper relationship between internal and external auditors)

Question 22

if a member’s firm acquires, is acquired by or merges with another firm

Answer 22

independence issues can arise. AICPA has recently issued detailed rules to cover such situations, focusing on employment with an attest client and provisions of NAS

Question 23

what if abc firm audits lmn co and acquires def, which provides nternal audit services to lmn co?

Answer 23

in this case abc’s independence would be impaired unless:

1. def must terminate prohibited nas prior to closing of the acquisition
2. any individual who participated in the engagement to provide NAS must not be on the lmn attest team or be PTI
3. evaluation of the threats to independence must be conducted and it must be determined that application of safeguards they have been reduced to an acceptable level. evaluation must attribute the nas to abc in making the evaluation

Question 24

covered members or their firms that were independent when they first issued an audit report, may reissue

Answer 24

that report or consent to its incorporation by reference, even if they are no longer independent, slo long as they do not perform new procedures that would require updating the date (dual dating) of the original report

Question 25

when report is reissued, it is acceptable if necessary to assess the effect of recent facts on the original report to:

Answer 25

1. make inquiries of successor auditors
2. read subsequent financial statements
3. undertake similar procedures