Module 1: Professional Responsibilities - Key Terms

Question 1

What is a considered a ‘close relative?’

Answer 1

A parent, sibling, or nondependent child.

Question 2

What is a covered member?

Answer 2

1. an individual on the attest engagement team
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 ten hours of nonattest services to the client within any fiscal year and ending on the later of the date
   
   • firm signs the report on the financial statements for the fiscal year during which those services were provided
   • he or she no longer expects to provide ten or more hours of nonattest services to the attest client on a recurring basis
4. partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement
5. the firm, including the firm’s employee benefit plans
6. an entity whose operating, financial, or accounting policies can be controlled (as defined by GAAP for consolidation purposes) by any of the individuals or entities described above or by two or more such individuals or entities if they act together

Question 3

What is having a ‘direct financial interest?’

Answer 3

A personal investment under the direct control of the investor (eg. an investment in the stock of a company).

1. Owned directly by an ind. or entity, under control of the individual or entity, or beneficially owned through an investment vehicle
2. Under the control of an individual or entity
3. Beneficially owned through an investment vehicle, estate, trust or other intermediary when the beneficiary:
   
   • Controls the intermediary
   • Has the authority to supervise or participate in the intermediary’s investment decisions

Question 4

What is fraud?

Answer 4

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in financial statements that are subject of an audit.

For financial statement audits, fraud includes two types of intentional misstatements:

1. fraudulent financial reporting and misstatements
2. misappropriation of assets

Question 5

What is independence as defined by the Code of Professional Conduct?

Answer 5

1. Independence of mind - the state of mind that permits the performance of an attest service without be affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.
2. Independence in appearance - avoidance of circumstances that would cause a reasonable and informed third party, having knowledge of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of a firm or member of the attest engagement team had been compromised.

Question 6

What is considered ‘immediate family?’

Answer 6

A spouse, spousal equivalent, or dependent (related or non-related)

Question 7

What is an indirect financial interest (definition and example)?

Answer 7

An investment in which the specific investment decisions are not under the control of the investor.

Eg. an investment in a professionally managed mutual fund.

Question 8

Who is an individual in a position to influence the attest engagement (definition and example)?

Answer 8

An individual in a position to influence the attest engagement is who:

1. evaluates the performance or recommends the compensation of the attest engagement partner
2. Directly supervises or manages the attest engagement partner, including all successively senior levels above that individual through the firm’s chief executive
3. Consults with the attest engagement team regarding technical or industry-related issues specific to the attest engagement
4. Participates in or oversees, at all successively senior levels, quality control activities, including internal monitoring, with respect to the specific attest engagement.

Question 9

What is inspection and who is it conducted by?

Answer 9

Inspection is conducted by the PCAOB and is a process that leads to an assessment of the degree of compliance of each registered public accounting firm and associated persons of that firm with the Sarbanes-Oxley Act of 2002 and the board’s requirements in connection with its performance of audits, issuance of audit reports and related matters.

Question 10

What is the International Accounting Standards Board?

Answer 10

IASB. An independent, privately funded accounting standard-setter that is committed to developing a single set of high-quality, understandable, and enforceable global accounting standards.

Question 11

What is the International Auditing and Assurance Standards Board?

Answer 11

IAASB. A committe of the International Federation of Accountants, established to issue standards on auditing and reporting practices to improve the degree of uniformity of auditing practices and related services throughout the world.

Question 12

What is the International Federation of Accountants?

Answer 12

IFA. A worldwide organization of national accounting bodies established to help foster a coordinated worldwide accounting profession with harmonized standards.

Question 13

What are Interpretive publications?

Answer 13

Auditing interpretations of GAAS, exhibits to GAAs, auditing guidance included in AICPA Audit and Accounting Guides, and AICPA Auditing Statements of Position

Question 14

What is a Key Position?

Answer 14

1. Has primary responsibility for significant accounting functions that support material components of the financial statements.
2. Has primary responsibility for the preparation of the financial statements
3. Has the ability to exercise influence over the contents of the financial statements, including when the individual is a member of the BOD, CEO, president, CFO, COO, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position

Question 15

What is Peer review?

Answer 15

A study and appraisal by an independent evaluator of a CPA firm’s work.

Question 16

What is the period of the professional engagement?

Answer 16

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, whichever is earlier.

The period lasts for the entire duration of the professional relationship and ends with the formal or informal notification, either by the member or the client, of the termination of the professional relationship or by the issuance of a report, whichever is later. Accordingly, the period does not end with the issuance of a report and recommence with the beginning of the following year’s attest engagement.

Question 17

What is professional judgment?

Answer 17

The application of relevant training, knowledge, and experience, within the context provided by auditing, accounting, and ethical standards, in making informed decisions about the courses or action that appropriate in the circumstances of the audit engagement.

Question 18

What is professional skepticism?

Answer 18

An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.

Question 19

What are professional services?

Answer 19

All services performed by a member for a client, an employer, or on a volunteer basis, requiring accountancy or related skills.

Question 20

What is the Public Company Accounting Oversight Board? (PCAOB)

Answer 20

The five-member board established in 2002 to oversee the audit of public (issuer) companies that are subject to the securities laws. The board has authority to establish or adopt, or both, rules for auditing, quality control, ethics, independence, and other standards relating to the preparation of an audit report.

Question 21

What is public practice?

Answer 21

Performance of professional services for a client by a member or a member’s firm.

Question 22

What are quality control standards?

Answer 22

AICPA standards designed to provide reasonable assurance that all of a CPA firms’ engagements are conducted in accordance with applicable professional responsibilities.

Question 23

What is a reporting accountant?

Answer 23

An accountant, other than a continuing accountant, in public practice, who prepares a written report or provides oral advice on the application of the requirements of an applicable financil reporting framework to a specific transaction, or on the type of report that may be issued on a specific entity’s financial statements.

A reporting accountant who is also engagement to provide accounting and reporting advice to a specific entity on a recurring basis is commonly referred to as an advisory accountant.

Question 24

What is the risk of material misstatement?

Answer 24

The risk that the financial statements are materially misstated prior to the audit. This consists of two components, inherent risk and control risk.

Question 25

What is the Sarbanes-Oxley Act of 2002 (SOX)?

Answer 25

A set of reforms that strengthened penalties for corporate fraud, restricted the types of consulting CPAs can perform for audit clients, and created the Public Company Accounting Oversight Board to oversee CPAs and public accounting firms.

Question 26

What is a loan?

Answer 26

Financial transactions that generally provide for repayment terms and a rate of interest

Question 27

What is a financial institution and give an example.

Answer 27

Entity that makes loans to the general public as part of its normal business operations. Eg. banks, trust and insurance companies

Question 28

What is an attest engagement?

Answer 28

An attest engagement is an engagement that requires independence as defined in AICPA Professional Standards.

Question 29

What is a financial interest?

Answer 29

Ownership interest in an equity or a debt security issued by an entity, including derivatives directly related to the interest.

Question 30

What is a confidential transaction?

Answer 30

A tax transaction that is offered to a client under conditions of confidentiality and for which the client pays the public accounting firm a fee.

Question 31

What are attest services?

Answer 31

Practitioner expresses a conclusion about the reliability of a written assertion that is the responsibility of another party (the asserter)