Module B Flashcards
Under the ethical standards of the profession, which of the following situations involving nondependent members of an auditor’s family is most likely to impair the independence of an individual participating in an audit engagement?
A. A parent’s immaterial investment in a client.
B. A first cousin’s loan from a client.
C. A spouse’s employment with a client.
D. A sibling’s loan to a director of a client.
C. A spouse’s employment with a client.
CPA Kara Rambo is the auditor of Ajax Corporation. Her audit independence will not be considered impaired if she:
A. Owns $1,000 worth of Ajax stock.
B. Has a husband who owns $1,000 worth of Ajax stock.
C. Has a sister who is the financial vice president of Ajax.
D. Owns $1,000 worth of the stock of Pericles Corporation, which is controlled by Ajax as a result of Ajax’s ownership of 40% of Pericles’ stock, and Pericles contributes 3% of its total assets and income in Ajax’s financial statements.
D. Owns $1,000 worth of the stock of Pericles Corporation, which is controlled by Ajax as a result of Ajax’s ownership of 40% of Pericles’ stock, and Pericles contributes 3% of its total assets and income in Ajax’s financial statements.
Which of the following acts is generally forbidden to CPAs in public practice?
A. Purchasing bookkeeping software from a high-tech development company and reselling it to tax clients.
B. Being the auditor of a “TaxAid” newsletter promoted and sold by a publishing company.
C. Having a commission arrangement with an accounting software developer to receive 4% of the price of programs recommended and sold to audit clients.
D. Engaging a marketing firm to obtain new financial planning clients for a fixed fee of $1,000 for each successful contact.
C. Having a commission arrangement with an accounting software developer to receive 4% of the price of programs recommended and sold to audit clients.
When a CPA knows that a tax client has skimmed cash receipts and not reported the income in the federal income tax return but signs the return as a CPA who prepared the return, the CPA has violated which of the following AICPA rules of conduct?
A. The Confidential Client Information Rule.
B. The Integrity and Objectivity Rule.
C. The Independence Rule.
D. The Accounting Principles Rule.
B. The Integrity and Objectivity Rule.
Most of the time, additional audit effort does not change anything.
But, …
it is your professional and ethical responsibility to audit diligently and completely, even if you blow your time budget
Human nature is to be friendly, flexible, and helpful. People liked to be liked.
However, …
effective auditing requires adhering to auditing standards, professional skepticism, and sometimes confrontation. This is not always fun.
A problem situation exists when…
an individual must make a choice among alternative actions and the right choice is unclear.
An ethical problem situation may be described as…
one in which the choice of alternative actions affects the well-being of other persons. There is a conflict between what we should do and what we want to do.
U.S. Securities and Exchange Commission (SEC)
Persons who practice before the SEC as accountants and auditors for SEC-registered companies
Public Company Oversight Accounting Board (PCAOB)
Registered firms and individuals who perform audtis of companies under the jurisdiction of the PCAOB
International Federation of Accountants (IFAC)
Public accounting firms and CPAs performing audits of multinational companiesA
American Institiue of CPAs (AICPA)
Members of AICPA
Applicable state society of CPAs
Members of a state society of CPAs
Applicable state board of accountancy
Persons licensed by the state to practice accounting
AICPA Code of Professional Conduct
Establishes guidance for acceptable behavior for auditors. Major portion deals with maintaining independence.
Who does the AICPA Code of Professional Conduct apply to?
Auditors of private AND public companies because SEC requires the signing auditor for a public company to be a CPA and courts have held CPAs to the standards of conduct established by the Code
The AICPA Code of Professional Conduct is composed of…
- Principles
- Rules of Conduct
- Interpretations
- Ethical Rulings
Principles
Ideal standards of ethical conduct
Rules of Conduct
Minimum standards of ethical conduct stated as specific rules
Interpretations
Interpretations of the rules by the AICPA division of professional ethics
Ethical Rulings
Published explanations and answers to questions about rules of Conduct
AICPA Code of Professional Conduct: Principles
Basic tenets of ethical conduct (aspirational goals)
1. Responsibilities
2. Public Interest
3. Integrity
4. Objectivity and Independence
5. Due care
6. Scope and nature of services
Responsibilities
Excercise sensitive professional and moral judgement
Public Interest
Honor the public trust
Integrity
Perform responsibilities with the highest sense of integrity
Objectivity and Independence
Impartial, unbiased, and independent
Due Care
Diligence, competence, thorough, prompt
Scope and nature of services
Observe the principles when considering the scope and nature of services provided
AICPA Code of Professional Conduct: Rules
Enforceable ethical regulations that CPAs must follow
AICPA Code of Professional Conduct: Interpretations
Applications of rules to specific business situations
An Emphasis on Independence
A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.
Threats to an Auditor’s Independence - Familiarity Threat
CPAs having a close or longstanding relationship with a client.
Threats to an Auditor’s Independence - Adverse Interest Threat
CPAs acting in opposition to clients (e.g., through litigation).
Threats to an Auditor’s Independence - Undue Influence Threat
Attempts to coerce or otherwise influence the CPA member (e.g., significant gifts or threats to replace the auditor over an accounting principles disagreement)
Threats to an Auditor’s Independence - Self-Review Threat
CPAs reviewing thier own work
Threats to an Auditor’s Independence - Financial Self-Interest Threat
CPAs having a financial relationship with a client.
Threats to an Auditor’s Independence - Management Participation Threat
CPAs taking on the role of client management or otherwise performing management functions.
Threats to an Auditor’s Independence - Advocacy Threat
CPAs promoting a client’s interests or position.
Covered members include:
- All individuals participating in an engagement.
- An individual in a position to influence the engagement.
- A partner or manager who provides nonattest services to an attest client.
- A partner in the office where engagement partner practices.
- The firm’s benefit plan.
- An entity that can be controlled by any person considered a member.
A covered member cannot:
- Have a direct financial interest in a client
- Have a material indirect financial interest in a client
- Be a trustee or administrator of an estate that has a direct or material indirect financial interest in a client
- Have a joint investment with a client that is material to the covered member
- Have a loan to or from a client, any officer of the client, or any individual owning more than 10% of the client
- Participate on an attest engagement if she or he was fromally employed by the client in a position to influence the audit or acted as an officer, director, promoter, underwriter, or trustee of a pension or profit-sharing trust of the client
A covered member’s immediate family cannot:
- Have a direct financial interest in a client
- Have a material indirect financial interest in a client
- Have vested retirement benefits at a client
A covered member’s close relatives connot:
- Have a key management level position with a client
- Have a material financial interest in a client that is known to the covered member
- Have a financial interest in a client that allows the relative to have significant influence in a client
- Be in a position to influence the audit
A partner or a professional employee cannot:
- Be associated with a client as a director, officer, employee, promoter, underwriter, voting trustee, or trustee of a pension or profit-sharing trust of the client
How can CPAs invest in the stock market without impairing independence?
Diversified mutual funds
Immediate family
Spouse, spousal equivalent, dependents
Close relatives
Parents, brothers/siblings, nondependent children
Independence surrounding threatened litigation
Threatened litigation impairs independence if management and the auditors are suing each other.
But, Lawsuits from 3rd parties do not affect independence.
Auditors should be:
Independent in Fact and Independent in Appearance
Independent in Fact
A mental state of objectivity and lack of bias
Independent in Appearance
Depends on whether a reasonable investor, with knowledge of all relevant facts and circumstances, can conclude that the auditor is not capable of exercising objective and impartial judgment.
The SEC and PCAOB rules prohibit or place restrictions on the following types of nonaudit services provided to audit clients:
- Bookkeeping;
- Financial information systems design and implementation;
- Appraisal or valuation services;
- Actuarial services;
- Internal audit services;
- Management functions;
- Human resources;
- Broker-dealer services;
- Legal services;
- Expert services;
- Any service for an audit client for a contingent fee or commission;
- Tax services that are based on judicial proceedings or aggressive interpretations of tax law;
- Planning or opining on the tax consequence of a transaction;
- Tax services for key company executives.
How many consecutive years can partners be on an audit?
5
What is the “cooling off” period?
A one year “cooling off” period is required for employees in a “financial reporting oversight role” who previously worked with the CPA firm performing the audit.
A firm is not independent if an audit partner’s compensation is based on…
selling engagements to that client for services other than audit, review, and attest services.
Integrity and Objectivity
In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.
A member shall not commit an act discreditable to the profession. Examples include:
- Making false or misleading journal entries
- Failure to meet requirements of a Governmental body, commission, or regulatory body
- Failure to file personal income tax return
- Disclosure of CPA examination questions or answers
Contingent Fees: Those fees based on a particular finding or outcome
- Not permitted for attest clients
- Allowed for non-attest clients in some circumstances (tax, consulting, litigation support)
Commissions: percentage-based fee for recommending products / services of clients or third parties (e.g., non-CPAs)
- permitted for non-attest clients, if disclosed
- prohibited for attest clients
Referrals: receiving fees for recommending the services of CPAs
permitted for any engagement, if disclosed
Advertising cannot:
- Be “false, misleading, or deceptive.”
- Cannot create false or unjustified expectations of favorable results
- Cannot state ability to influence third parties
- Cannot underestimate fees
A CPA cannot disclose confidential information without client’s consent. Except if…
- Workpapers are subpoenaed by court
- As part of a PCAOB inspection, peer review, or quality review of practice
- As part of an ethics violation for a state board of accountancy investigation
Form of Organization and Name
- A firm can practice in any form permitted by law or regulation (e.g., LLP or LLC)
- Firm name should not be misleading.
- All partners must be CPAs or members of AICPA if included in firm name.
Self-Regulatory Discipline
AICPA
State Societies of CPAs
Public Regulation Discipline
State Boards of Accountancy
SEC
PCAOB
IRS
