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.
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