Module 1 Flashcards
What is Article 1 - Responsibilities defined as?
In carrying out their responsibilities as professionals, members should exercise sensitive professional and Moral Judgements in all their activities.
What are the 6 articles of the Principles section of the AICPA Code of Professional Conduct?
1- Responsibilities 2-The Public Interest 3-Integrity 4-Objectivity and Independence 5-Due Care 6-Scope and Nature of Services
What is article 2 - The Public Interest.
Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism.
What is Article 3 - Integrity Defined as?
To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity
What is Article 4 - Objectivity and Independence?
A Member should maintain objectivity and be free of conflicts of interest in discharging professional responsiblities. A Member in public practice should be independent in fact an appearance when providing auditing and other attestation services.
Objectivity is a state of mind, it imposes obligation to be impartial, intellectually honest, and free of conflicts of interest.
What is article 5 - Due Care defined as?
A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.
Competence is derived from both education and experience
Each member is responsible for assessing his or her own competence and for evaluating whether education, experience and judgement are adequate for the responsibility taken.
What is article 6 - Scope and Nature of Services defined as?
A Member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.
Member should have in place adequate internal quality controls procedures
Determine whether scope and nature of other services provided to an audit client would create a conflict of interest in performance of audit
Assess whether activities are consistent with role as Professionals
The conceptual framework for AICPA Independence Standard describes a risk based approach to analyze independence. What else does it say?
A member is not independent if their is an unacceptable risk to the member’s independence. Risk is unacceptable if the relationship would compromise (or perceived as compromising by an informed 3rd Party) the members’ professinal judgement.
What is a self-review threat?
Reviewing evidence that results from the member’s own work (preparing source documentation for an audit client).
What is an Advocacy threat?
Actions promoting the client’s interests or positions ( Promoting a clients securities).
What is an Adverse interest threat?
Actions or interests between the member and the client that are in opposition (Litigation between the client and the member).
What is a Familiarity Threat?
Members having close or longstanding relationship with the client or knowing individuals or entities who performed nonattest services for the client. (eg a member of the attest engagement team whose spouse is in a key position at the client).
What is undue influence Threat?
Attempts by a client’s management (or others) to coerce the member or exercise excessive influence over the member (eg threat to replace the member over a disagreement regarding an accounting principle).
What is a financial self-interest threat?
Potential benefit to a member from a financial interest in, or some financial relationship an attest client. (having a direct financial interest in the client)
What is a management participation threat?
Assuming the role of management or performing management functions for the attest client (serving as an officer of the client)
When considering the threats to independence, the member should consider the ____________ that mitigate or eliminate threats to independence.
Safeguards
What are the 3 types of safeguards?
1- Safeguards created by the profession, legislation, or regulation
2- Safeguards implemented by the client
3- Safeguards implemented by the firm.
Rule 101 independence states that a member in public practice shall be independent in the performance of professional services as required by standards promulgated by designated bodies. Independence is impaired if?
During the period of the professional engagement a Covered Member:
1- Had or was committed to acquire any direct or material indirect financial interest in the client
2- Was a trustee of any trust or executor of any estate that held a direct or material indirect investment in the client
3-Had a joint closely held investment that was material to the covered member.
Independence would be considered to be impaired if (close relatives)
An individual participating on the attest engagement team has a close relative who had:
1-a Key position in the client, or
2- A financial interest in the client.
What is a covered member?
1- An individual on the attest engagement
2- an individual in a position to influence the attest engagement
3- A partner or manager who provides nonattest services to the attest client beginning once he or she provides 10 hours of nonattest services to the client
4- a partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement
5- The firm, including the firms’ employee benefit plan
6- an entity whose operating, financial or accounting policies can be controlled by any of the individuals or entities. (Consolidated entities
What is the period of the professional engagement?
The period of the professional engagement begins when a member either signs an initial engagement letter or other agreement to perform attest services or begins to perform an attest engagement for a client.
What is a Key Position?
1- Has primary responsibility for significant accounting functions that support material components of the financial statements
2- Has primary responsibility for preparation of the financials statements
3- Has the ability to exercise influence over the contents of the financial statements including when the individual is a member of the board of directors, CEO, CO COO, Council or CAO, Controller, Director of internal audit or equivalent position.
Interpretation 101-2 states that a firm’s independence is considered to be impaired if a partner or professional employee leaves the firm and is subsequently employed by or associated with a client in a key position unless ALL of the following conditions are met.
1- Amounts due to the former partner for his previous interests in the firm are not material, and the amounts of payments are fixed
2- The former partner or professional employee is not in a position to influence the accounting firms operations or financial policies
3-The former partner or professional employee is not associated with the firm
4-others
Interpretation 101-4 states that a CPA who is a director of a nonprofit organization where board is large and representative of community leadership is not lacking independence if?
1- The Position is purely honorary
2- Position is identified as honorary on external materials
3- CPA participation restricted to use of name
4- CPA does not vote or participate in management affairs
Interpretation 101-3 states that when a CPA performs a nonattest services for an attest client it MAY OR MAY NOT impair independence. What are the reasons independence might be impaired
1- IF the SEC, GAO, or DOL state specifically that independence is impaired if
2- Should not assume management responsibilities for attest clients (independence is not impaired if they are discussing the clients policies and disclosures, they are evaluating the appropriateness of accounting methods, they are adjusting JE’s
3- When nonattest services are provided the client must assume all management responsibilities, oversee the services by designating a suitable person to oversee, establish and maintain internal control
4 Must establish in writing understanding with the client outlining the engagement objectives, services to be performed,Clients acceptance of its responsibilities, the CPA’s responsibilities.
5- The following activities always impair independence - Setting policies and strategic direction. Directing or accepting responsibilities for actions of clients employees, authorizing or executing transactions, having custody of assets.
Intrepretation 101-5 states that loans from financial institutions does not impair independence if they are Grandfathered in. It also discusses other permitted loans.
Grandfathered loans are permitted that were obtained?
1-Prior to January 1, 1992
2-From a financial institution for which independence was not required, and the financial institution subsequently becomes an attest client
3- Obtained from a financial institution for which independence was not required, and then the loan was sold to an attest client
4-Obtained by a CPA prior to becoming a member of CPA firm of which the financial institution is an attest client.
Other permitted loans are:
Automobile loans
Loans of surrender value under an insured policy
Loans fully collateralized by cash deposits
Aggregate outstanding balances from CC and overdraft accounts that are reduced to $10,000 on a current basis.
Interpretation 101-10 describes members’ duties for independence when auditing entities included in governmental financial statements:
1- Generally, auditor of a material fund type, fund account group, or component unit of entity that should be disclosed in notes of general-purpose financial statements, but is not auditing primary government, should be independent with respect to those financial statements and primary government
2- Also should be independent if, although funds and accounts a re separately immaterial, they are material in the aggregate
Independence 101-11 discusses independence requirements that apply to all attest engagements; exceptions in how they are applied for SSAE engagements.
1- Those requiring independence other than agreed-upon procedure engagements
- Covered members must be independent of responsible party - When someone other than a responsible party engages the CPA, covered members need not be independent of that individual or entity - nonattest services otherwise prohibited may be provided when such services do not relate to the specific subject matter of the SSAE engagement
Interpretation 101-22 states that independence is impaired if during professional engagement or while expressing an opinion, members firm had any material cooperative arrangements with client. Cooperative arrangements are?
1- Joint ventures to develop or market a product or service
2- Arrangements to provide services or products to a third party
3- Arrangements to combine services or products of the member’s firm with those of client to market them with references to both parties
4- arrangements under which member firm or client act as distributor of other’s products or services.
Joint participation with client is not a cooperative arrangement if ALL of the following 3 conditions are present
1- Participation of the firm an client are governed by a separate agreement
2- Neither firm nor client assumes any responsibility for the other
3- Neither party is an agent of the other
Rule 102 relating to integrity and objectivity states that in performance of any professional service a member shall:
a- maintain objectivity and integrity
b- avoid conflicts of interest
c- not knowingly misrepresent facts or subordinate judgement.
.
What is the PCAOB?
The Public Company Accounting Oversight Board
What does the PCAOB do for rules, interpretations and rulings relating to independence, integrity, and objectivity?
The adopted the AICPA rules in April 2003. Since then they have adopted several additional independence standards that apply to accounting firms registered with the PCAOB when they are auditing an issuer (public Company)
A registered public accounting firm must comply with all rules and standards of the PCAOB, and also those set forth in the rules and regulations of the SEC. what are the regulations?
1- A registered public accounting firm is not independent of its audit clients if the firm provides any service or product to the client for a contingent fee or a commission.
2-A registered public accounting firm is not independent of its audit client if the firm provides any nonaudit services to a audit client related to marketing, planning, or opinion in favor of a (1) a confidential transaction, or (2) an Aggressive tax position transaction.
3- A registered public accounting firm is not independent of its audit client if the firm provides any tax services to a person in a financial reporting oversight role at the audit client, or an immediate family member.
4- A registered public accounting firm must et pre approval from the audit committee to perform for an audit client any permissible tax service
5- A registered public accounting firm must communicate with the audit committee all relationships between the firm and the audit client that may reasonably be thought to bear on independence
Rule 201 General Standards states that a Member shall comply with the following standards for all professional engagements that?
1- Only undertake professional services that can one can reasonably expect to complete with professional competence
2- Exercise due professional care
3- Adequate plan and supervise engagements
4- obtain sufficient relevant data to afford a reasonable basis for conclusions and recommendations
Rule 202 Compliance with Standards - A member who performs auditing, review, compilations, consulting services, tax or other services shall comply with standards promulgated by the bodies designated by the council
True
Rule 203 Accounting principles states that a member cannot provide positive or negative assurance that financials statements are in conformity with GAAP if statements contain departures from GAAP having a material effect on statements taken as a whole except when unusual circumstances would make financial statements following GAAP misleading
When unusual circumstances require a departure from GAAP, CPA must disclose in report the departure, its effects, and reasons why compliance would result in a misleading statement.
What is interpretation 203-1 referring to when it allows CPA’s to allow departures from GAAP (without giving qualified or averse opinion) What are examples of possible circumstances justifying departures?
New legislation, or a new form of business transaction.
Rule 301 Confidential Client Information states that members shall not disclose confidential client information without concept, except for:
1- Compliance with rule 202 or 203 obligations
2- Compliance with enforceable subpoena or summons
3- AICPA review of professional practice
4- Initiating complaint or responding inquiry made by a recognized investigative or disciplinary body
Interpretation 301-3 mentions that a member who is considering selling his/her practice, or merging with another CPA, may allow that CPA to review confidential client information without the specific concept of the client.
Rule 302 contingent fees states that a member in public practice shall not?
1- Perform for a contingent fee any professional services when the member or member’s firm also performs and of the following services for that client
Audits or review of financial statements
Compilations when the member is independent and expects that a third party may use the financial statements
Examinations of prospective financial statements.
Prepare an original or amended tax return or claims for a tax refund for a contingent fee for any client.
Rule 501 acts Discreditable states that a Member shall not commit an act discretable to the profession.
Intrepretation 501-1 states that a CPA’s response to a clients request for records depends upon the nature of the records and certain circumstances. What are they?
1- Records provided by the client - should be returned to the client at the client’s request
2- CPA prepared records that the CPA was not specifically engaged to prepare and are not on the clients books and records with the result that the clients financial information is incomplete should be provided except that they may be witheld if there are fees due the CPA for the specific work provided
3- CPA work products should be provided (Deliverables, audit reports, tax returns
4- CPA Work papers should not be returned
Rule 502 Advertising and Other Forms of Solicitation - In public practice, shall not seek to obtain clients by false, misleading, deceptive advertising or other forms of solicitiaon. Interpretation 502-2 states that Advertising that is false, misleading or deceptive is prohibited, including advertising that is:
- Creates false or unjustified expectations
- Implies ability to influence a court, tribunal, regulatory agency or similar body or official
- Contains unrealistic estimates of future fees
- Would lead a reasonable person to misunderstand or be deceived
Rule 503 Commissions and Referral Fees states that a member in public practice may not accept a commission for recommending a product or service to a client when the member or member’s firm also performs any of the following services for that client?
1- Audits or reviews of financial statements
2- Compilations when the member is independent and expects that a third party may use the financial statements
3- Examination of prospective financial information
Other rules:
A member who receives a commissions shall disclose that fact to the client
A member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity, or who pays a referral fee to obtain a client, shall disclose such acceptance or payment to the entity.
Rule 505 Form of practice or name states that a member may practice public accounting in form of proprietorship, partnership, professional corporation, etc and may not practice under a misleading name.
.
The Statements on Standards for Consulting Services (SSCS) became effective in January 1991, and apply to CPA’s who provide consulting services.
True
What are the differences between Attest and Consulting services as per SSCS 1?
Attest Services - Practitioner expresses a conclusion about the reliability of a written assertion that is the responsibility of another party
Consulting Services - Practitioner develops findings, conclusions, and recommendations presented, Generally only for the use and benefit of the client; the nature of the work is determined solely by agreement between the practitioner and the client.
Independence is not required, but one must remain objective.
What is a SAS?
Standards on Auditing
What is SSAE?
Other Attest Servivces
What is SSARS?
Compilations and reviews.
What types of Consulting services are there as per SSCS?
Consultations - Provide counsel in short time frame, based mostly, if not entirely, on existing personal knowledge about the client
Advisory Services - Develop findings, conclusions and recommendations for client consideration and decision making
Implementation Services - Place an action plan into effect
Transaction services - Provide services related to a specific client transaction, generally with a third party.
Staff and other support services - Provide appropriate staff and possibly other support to perform tasks specified by client.
Product Services - Provide client with a product and associated support services.
What are some additional things to keep in mind when performing a SSCS Standard for Consulting Services?
1)Maintain professional competenece
2) Exercise Due professional Care
3) Obtain sufficient relevant data
4) Service client interest while maintaining integrity and objectivity
5) Have an Understanding with Client (Written or orally)
6) Communicate with the client of any conflicts of interest, significant reservations about engagement, significant engagement findings
USE PROFESSIONAL JUDGEMENT - Be as objective as possible
What is Personal Financial Planning?
Personal financial planning engagements are only those that involve developing strategies and making recommendations to assist a client in defining and achieving personal financial goals
What does a personal financial planning engagement include?
1- Defining engagement objectives
2- Planning specific procedures appropriate to engagement
3-Developing basis for recommendations
4-Communicating recommendations to client
5- Identifying tasks for taking action on planning decisions.
What are other engagements on personal financial planning?
1- Assisting client to take action on planning decisions
2- Monitoring client’s progress in achieving goals
3- Updating recommendations and helping client revise planning decisions
The Sarbanes-Oxley Act of 2002 establishes a Public Company Accounting Oversight Board (PCAOB) what are some of the functions of the board?
Consists of 5 members
2 must have been, or are CPA’s
3 cannot have been CPA’s
None receive pay or profits from CPA firms
Board regulates CPA Firms (registrants) that audit SEC Registrants (Issuers)
Main function is to register and conduct inspections of public accounting firms (replaces peer reviews). And to Set or adopt standards on auditing, quality control, independence, or preparation of audit reports
What are some other functions of the PCAOB? (Title 1)
1- Enforces compliance with professional standards, securities laws relating to accountants and audits
2- May regulate non-audit services CPA firms provide for clients
3- Performs investigations and disciplinary proceedings on registered public accounting firms
4- May perform any other duties needed to promote high professional standards and to improve auditing quality.
What are a few other items Title 1 of the Sarbanes-Oxley Act establishes?
1- Stipulates that accounting firms must have a 2nd partner review and approve each audit report
2- Accounting firms must report on an audit of internal control in addition to the audit of financial statements for issuers
3- Most CPA working papers must be saved for seven years
4- Material additional services of auditors must receive pre-approval by audit committee, and fees for those services must be disclosed to investors.
Title 2 of the Sarbanes Oxley Act stipulates about auditor independence. What are several categories that the issuer’s public accounting firm cannot legally perform?
1- Bookkeeping or other services relating to financial statements or accounting records
2- Financial information systems design and/or implementation
3- Appraisal services
4- Internal audit outsourcing services
5- Management functions
6- Actuarial services
7- investment or broker-dealer services
8- Certain tax services , such as tax planning for potentially abusive tax shelters.
Title 2 of the Sarbanes Oxley Act stipulates about auditor independence. What else does it state?
The Audit partner for the job and the audit partner who reviews the audit can only audit for 5 consecutive years.
If Public company has hired CEO, CFO, or CAO from audit firm, within previous year. The audit firm cannot audit
Title 3 of the Sarbanes Oxley Act states that?
It is unlawful for any officer or director to take any action to fraudulently influence, coerce, manipulate or mislead any public accountant engaged in the performance of the audit.
Title 4 of the Sarbanes Oxley acts discusses Internal Control. What are the highlights?
Led to CPA reporting on client internal control by establish adequate internal control
1- It is management’s responsibility to establish adequate internal control.
2- Management must assess its Internal Control
3- The CPA firm attests to management’s assessment of Internal Control
CFO’s and CEO’s of most large companies are not required to certify Financial statements filed with the SEC
The PCAOB is required to perform inspections of CPA firms that include at least the following 3 general components. What are they?
1-An inspection and review of selected audit and review engagements.
2- An evaluation of the sufficiency of the quality control system of the CPA firm and the manner of documentation and communication of the system
3- Performance of such other testing of the audit, supervisory, and quality control procedures as are considered necessary.
The International Ethics Standards Board for accountants Code has three parts, What are they?
Part A - Framework
Integrity, Objectivity, Professional Competence and Due Care, Confidentiality, Professional Behavior
Part B - Accountants in Public Practice
Threats and Safeguards – Conflicts of Interest, Second Opinions, Fees and other types of remuneration, marketing, gifts, custody of client assets, Objectivity, Independence (not outright ban, must consider threats, and safeguards)
Part C - Professional Accountants in Business
Potential conflicts, preparation and reporting on information, acting with sufficient expertise, financial interests, inducements
What are the Intentional Standards - Ethical?
The International Ethics Standards Board for Accountants (IESBA) is a standard-setting body within the international federation of accountants (IFAC) that issues ethical standards for accountants throughout the world. This group has issued CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS
Part B indicates types of Safeguards and threats. What are some threats and safeguards?
Threats
Financial interests in the client
Having certain business relationships with the client
Serving as a director, officer, or employee of the client and
performing certain non assurance services to the client
Safeguards
1) Those created by the profession, legislation, regulation
2) Those implemented by the firm in the work environment
What are International Standards - Auditing/Assurance?
International auditing standards are developed by the INTERNATIONAL AUDITING AND ASSURANCE STANDARDS BOARD (IAASB) of the International Federation of Accountants (IFAC), a worldwide organization of approximately 160 national accounting bodies
The pronouncements do not override the auditing standards of its members. Rather they are meant to help develop consistent worldwide professional standards.
What are the main areas that IAASB differs from PCAOB standards?
1- International standards do not require an audit of internal control
2- Internal standards do not allow reference to another audit firm involved in a portion of the audit
3- International standards for documentation are less detailed than PCAOB standards, leaving more to professional judgement
4- International standards in the area of going concern include time horizon of at least, but not limited to, 12 months, while PCAOB standards limit the foreseeable future for going concern consideration of up to 12 months.
What is the SEC and what is pertinent to know?
The mission of the SEC is to protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation
The SEC has the authority to establish standards relating to financial accounting, auditing and CPA professional conduct when involved with public company financial statements
PCAOB pronouncements require SEC approval
What is the GAO? and what is pertinant?
The GAO’s mission is to support congress in meeting its constitutional responsibilities to help improvement the performance and ensure the accountability of the federal government (Audit arm of Congress)
Work Includes:
1- Auditing agency operations to determine if funds are being spent efficiently and effectively
2- Investigating allegations of illegal and improper activities
3- Reporting on how well government programs meet their objectives
4- Performing policy analyses and outlining various options for congress
5- Issuing legal decisions and Opinions
The GAO develops additional requirements for audits of organizations that receive federal financial assistance. (Yellow Book)
What are GAP Independence requirements?
1- In all matters relating to audit work the audit organization and the individual auditor must be free of personal, external and organizational impairments to independence, and must avoid the appearance of such impairments of independence
2-More Restrictive than AICPA, CPA firm cannot allow personnel to work on non-attest engagements and the Audit. It also places restrictions on the nature of nonattest services to be performed. (They must be deemed not significant or material)
What is the DOL, and what it pertinent?
The DOL’s mission involves fostering and promoting the welfare of job seekers. The DOL conducts financial and performance audits following Government Audit standards, including audits of Compliance, Economic and Efficiency of Operations, Effectiveness in achieving Goals
the DOL also audits employee benefit plans
What does the SEC issue?
Financial Reporting Releases
Under Which of the following circumstances may a CPA charge Fees that are contingent upon finding a specific issue?
If fixed by the courts, other public authorities, or in tax matters if based on the results of judicial proceedings.
The Sarbanes Oxley act prohibits a member of an audit engagement team from accepting employment as a chief executive of a client for how many audit periods?
1 Period
Independence requirement of the GAO lists 3 items that an individual auditor must be free of to ensure independence?
Personal,
External
Organizational
Bill Fling, CPA, has posted the general ledger and has maintained the financial records of Wing Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries. Which of the following best summarizes the AICPA and SEC views as to the following question: Is audit independence impaired?
AICPA? NO
SEC (PCAOB)? Yes
Going Concern assumptions for International Auditing Standards are 12 months or more from what date?
From the date o the audit report
Which of the following AICPA standards did the PCAOB not adopt as a part of its interim standards?
Accounting and Review Services Standards
