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Audit > Module B + C > Flashcards

Module B + C Flashcards

0
Q

Categorical imperative

A

Kant’s specification of an unconditional obligation to act as
One thinks others should act regardless of circumstances

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1
Q

Act-utilitariansm

A

Emphasis on an individual act as it is affected by specific
Circumstances of a situation

By focusing on individual acts, the long run effect of setting
Examples for other people appears to be ignored

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2
Q

Commission

A

Percentage fee charged for professional services

in connection With executing a transaction Or performing some
other business activity

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3
Q

Contingent fee 3

A

Type of compensation established for performance of any service
In an arrangement where no amount will be charged

Unless specific finding or result is attained/or fee depends on
The result

Ex. CPA’s can charge contingent fees for representing client in IRS
tax audit, or consulting service engagement

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4
Q

Fees are not contingent if they are…

A

Fixed by a court or public authority, in tax matters

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5
Q

Covered member (broad definition)

A

Individual who might be in position to compromise integrity of audit

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6
Q

Covered member (4 part definition AICPA Code of Professional Conduct), individual among others who is…

A

1 on audit engagement team
2 in position to influence audit engagement
3 partner or manager of nonaudit client service team
4 partner from local office

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7
Q

Generalization argument 3

A

Judicious combination of imperative and utilitarian principles

To act as one thinks others should act in similar circumstances

Ex. “What would happen if everyone acted in a certain way?” If the
Answer to the question is the consequences would be undesirable,
The conclusion is that way of acting is unethical and shouldn’t be
done

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8
Q

Independence

A

Mental attitude and appearance that auditor is not influenced
By others in judgements and decisions

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9
Q

Referral fee 3

A

1) Compensation CPA receives for recommending another CPA’s
Services and 2) that a CPA pays to obtain a client

May not be based on percentage of amount of any transaction

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10
Q

Rule-utilitarianism

A

Emphasis on centrality rules for ethical behavior while still
maintaining the criterion for greatest universal good

Decision makers must first determine the rules that will promote
The greatest general good for the largest number of people

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11
Q

Self-regulation

A

Quality control reviews and disciplinary actions conducted by fellow CPAs-professional peers

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12
Q

Virtue ethics, define, examples

A

Focus on the role of one’s character in decision making process

Ex. “What action will help me become my ideal self?”, “what action would I be proudest of?”

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13
Q

Ethics 3 elements

A

1 decision problems
2 moral principles
3 good or bad

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14
Q

Decision problems

A

Questions requiring reflective choice

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15
Q

Moral principles

A

Guides of right and wrong

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16
Q

Good or bad

A

Concerned with consequences

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17
Q

Ethical situation

A

Individual must make a choice, and right choice isn’t absolutely
Clear

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18
Q

Ethical problem situation

A

Choice of alternative actions affects well being of others

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19
Q

Ethical behavior 3 elements

That which…

A

1 produces the greatest good
2 conforms to moral rules and principles
3 demonstrates virtues you value most

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20
Q

Codes of professional ethics

A

Provide guidance in addressing situations that may not be

Specifically available in general ethics theories

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21
Q

Problem with using conscience as a guide?

A

It tells you about the wrong decision after you act

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22
Q

Imperative principle

A

Directs decision maker to act according to requirements of
Ethical rule

Does not involve considering consequence

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23
Q

Principle of utilitarianism

A

Emphasizes examining consequences of action rather than
following some rules

The criterion of producing greater good is made an explicit part
Of the decision process

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24
Q

The initial question in rule utilitarianism is not which action has the greatest utility but…

A

Which rule

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25
Q

Generalization argument may be considered a judicious combination of…

A

Imperative and utilitarian principles

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26
Q

Cargo rival imperative focuses on…

A

Rules

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27
Q

Consequentialism focuses on…

A

Outcomes

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28
Q

Virtue ethics focuses on…

A

Character

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29
Q

Source of Rules of Conduct: SEC

Who are they applicable to? 2

A

1 Persons who practice before the SEC as accountants

2 Auditors for SEC registered companies

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30
Q

Source of Rules of Conduct: PCAOB

Who are they applicable to?

A

Registered firms and individuals who perform audits of companies
Under the jurisdiction of the PCAOB

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31
Q

Source of Rules of Conduct: International Federation of Accountants (IFAC)

Who are they applicable to?

A

Public accounting firms and CPAs performing audits of multinational
Companies

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32
Q

Source of Rules of Conduct: American Institute of CPAs

Who are they applicable to?

A

AICPA members

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33
Q

Source of Rules of Conduct: Applicable state board of accountancy

Who are they applicable to?

A

Persons licensed by the state to practice accounting

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34
Q

The SEC has federal statutory authority to regulate the public accounting professions for what 2 purposes?

A

1 protecting reliability and integrity of financial statements of public
Companies

2 promoting investor confidence in financial statements and
Securities markets

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35
Q

Who what group does the SEC oversee?

A

PCAOB

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36
Q

what does the PCAOB set standards for and oversee for public accounting firms? 3

A

1 quality control
2 ethics

3 independence issues for accounting professionals who audit
Financial statements of public companies

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37
Q

For audits of multinational companies, auditors must follow guidelines of the…

A

International Federation of Accountants (IFAC)

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38
Q

Function of the Professional Ethics Executive Committee (PEEC) of the AICPA

A

Makes and enforces all rules of conduct for CPAs who are AICPA
members

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39
Q

2 sections of the AICPA Professional Code of Conduct

A

1 Principles of Professional Conduct

2 rules an applicability of principles

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40
Q

6 AICPA Principles of Professional Conduct

A 
1 responsibilities
2 the public interest
3 integrity
4 objectivity and independence
5 due care
6 scope and nature of services
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41
Q

Principles

A

Aspirational goals of behavior

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42
Q

Rules

A

Enforceable ethical regulations that CPAs must follow

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43
Q

Interpretations

A

Applications of rules to specific business situations

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44
Q

Independence in fact

A

Independence in state of mind of auditor

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45
Q

Independence in appearance

A

Financial statement users’ perceptions of auditors’ independence

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46
Q

2 major ways auditors preserve independence

A

1 avoid financial connections that makes their wealth depend on
The audit

2 avoid managerial connections were auditors make decisions
For management

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47
Q

Familiarity threat

A

CPAs have close/longstanding with client

Ex. Spouse is in a key client position or partner served prolonged
Tenure with client

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48
Q

Adverse interest threat

A

CPAs acting in opposition to clients

Ex. Litigation

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49
Q

Undue influence threat

A

Attempts to coerce and otherwise influence CPA member

Ex. Significant gifts, or threats to replace auditor over accounting principles disagreement

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50
Q

Self-review threat

A

CPAs reviewing their own work

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51
Q

Financial self-interest threat

A

CPAs having financial relationship with client

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52
Q

Management Participation threat

A

CPAs taking on role of client management/performing management
Functions

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53
Q

Advocacy threat

A

CPAs promoting client’s interests or position

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54
Q

If a CPA firm is in litigation with a client, what are they required to do?

A

Declare nonindependence and provide a disclaimer of opinion

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55
Q

Grandfathered loans (not subject to impairment of independence)

Loans obtained either…3

A

1 before independence rules changed

2 from financial institution before it became client for services
Requiring independence

Ex. Home mortgages, loans not material to CPA’s net worth

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56
Q

When can CPA’s serve on board of directors without impairing independence?

A

When they serve as honorary directors for nonprofits

The CPA can’t vote with the board on management functions

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57
Q

What 4 items must be disclosed in proxy statements that are deemed important to investors?

A

1 total audit fees
2 total fees for tax and advisory work
3 whether audit committee/board considered advisory work
Compatible with maintaining auditor’s independence
4 % of audit hours (if over 50% total) performed by temps rather
Than full time audit staff

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58
Q

SOX limitation on engagement partners on client?

Other partners associated with engagement?

A

5 years limit for engagement partners

7 year limit for other partners associated with the engagement

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59
Q

Client advocacy in support or advancement of client positions
Is acceptable only as long as…3

A

1 The member acts with integrity
2 maintains objectivity
3 does not subordinate judgement to others

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60
Q

What 3 rule making bodies has the AICPA Council designated to pronounce accounting principles under Rule 203?

A

1 FASB
2 GASB
3 Federal Accounting Standards Advisory Board (FASAB)

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61
Q

Confidential Client Information

A

A member in public practice shall not disclose confidential

Information without specific consent of the client

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62
Q

Privileged information

A

Information that can’t even be demanded by the court

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63
Q

State created accounting client privilege has…

A

Never been recognized in federal court

64
Q

Holders of privilege

A

Can be waived only by client, patient or penitent

65
Q

For all practical purposes, when is info not considered confidential?

A

If it’s disclosure is necessary to prevent financial statements
From being misleading

66
Q

5 situations where contingent fees aren’t allowed

A 
1 audit of financial statements
2 review of financial statements
3 compilation of financial statements
4 examine prospective financial info
5 everyday tax preparation
67
Q

Where does most commission activity for CPAs occur?

2) where is it prohibited?

A

occurs for personal financial planning services

2 prohibited for Attestation services

68
Q

The expulsion penalty, while servere, does not prevent…

A

A CPA from continuing to practice public accounting

69
Q

Which bodies conduct public disciplinary actions? 3

A

1 trial board of AICPA
2 SEC
3 PCAOB

70
Q

Penalties 5

Last Question for Module B

A 
1 monetary
2 litigation 
3 expulsion
4 penalize CPA's company
5 require additional education hours
71
Q

Breach of contract

A

Claim that accounting or auditing services weren’t performed in
The manner described in the contract

72
Q

Causation of defense

A

Argument available to auditors who can show that plaintiff’s
Economic loss

was caused by a factor other than the auditor’s failure to exercise
To exercise appropriate level of professional care/breach of contract

73
Q

Class action

A

Situation where group of plaintiffs comes together in legal action
Against another party

74
Q

Comfort letter

A

Letter issued by auditors to underwriters of securities that
Provides an opinion on fairness of issuers’ financial statements

Provides assurance to underwriters

75
Q

Common law 3

A

1 Liability for injuries that is based on reasons other than violation
Of a written law or statute
2 legal precedent used in assessing degree of responsibility or
Fault of parties
3 auditors have common law liability to clients and nonshareholder
Third parties

76
Q

Jurisdiction of common law actions

A

Typically a court in the state the alleged action occurred

77
Q

In Common law, when no legal precedent can be found the judge follows a sense of…

A

justice or morality, considering the prevailing customs

And moral standards

78
Q

Constructive fraud

A

Failure to provide any care in fulfilling a duty owed to another
Including a reckless disregard for truth

Similar to gross negligence

79
Q

Contributory negligence, is a Legal defense theory where…

A

plaintiff’s own failure to perform With appropriate level of
professional care bars recovery from Auditors

80
Q

“Deep pockets” theory

A

Concept that lawsuits may be brought against auditors not
Because they are necessarily at fault

But because they are the only party with resources against
Which recovery can be made

81
Q

Expectation gap

A

Difference between the actual work and assurance required by
GAAS and expectation of that work by the General public

82
Q

Financial Reporting Releases (FRRs)

A

Reports prepared by SEC staff that express new rules and

Policies about disclosure

83
Q

Foreseeable party

A

Individuals or organizations whose decisions normally rely on
Audited financial statements

and opinions on those financial statements

84
Q

Foreseen party

A 
Limited class of individuals or organizations that could be 
reasonably expected to rely on auditors' work
85
Q

Form 8-K

A

“Current events” report filed periodically at the occurrence of
Major events

86
Q

4 common major events that require an 8-K filing

A

1 earnings releases
2 major asset sales
3 acquisitions
4 auditor changes

87
Q

Form 10-K

A

Form to use for annual filing of financial statements

And related disclosures by public companies with the SEC

88
Q

Form 10-Q

A

Form to use for quarterly filing of financial statements

And related disclosures by public companies with the SEC

89
Q

Fraud

A

Misrepresentation of facts that the individual knows to be false

With the intention to deceive

90
Q

Gross negligence

A

Breach of duty owed to another party because of lack of
Minimal care

Similar to constructive fraud

91
Q

Initial public offering (IPO)

A

Initial issuance of securities by a registrant entity to the investing
Public

through a market that is subject to the provisions of the Securities
Act of 1933

92
Q

Joint and several liability, which is of deep concern to auditors, is a legal doctrine that…

A

When multiple defendants are named

The full amount of damage award may be collected from any of
The defendants named in lawsuit even though they may be
Partially at fault

93
Q

Limited liability partnership

A

Form of organization adopted by most large accounting firms

combines the advantages of traditional partnership with liability
Protection afforded to corporations

94
Q

Ordinary negligence

A

Unintentional breach of duty owed to another as a result of

Lack of reasonable care

95
Q

Plaintiff

A

Person or organization that initiates a lawsuit

Ex. Client or third party user of financial statements

96
Q

Primary beneficiary

A

Person known by name to auditor

For whose primary benefit the audit or accounting service is
Performed

97
Q

Privity of contract

A

Situation in which parties have contractual relationship

98
Q

Proportionate liability

A

Legal doctrine that payment of share of court’s damage award
Be based on extent

or proportion of fault exhibited by convicted Defendant

99
Q

Prospectus

A

Legal document offering securities for sale

Includes significant info about issuing entity, including historical
Financial statements and other necessary disclosures

100
Q

Registration statement

A

Set of documents, including prospectus

Company files with SEC prior to IPO

101
Q

Regulation S-K

A

SEC requirements relating to all business, analytical and
supplementary financial disclosures

Other than financial statements themselves

102
Q

Regulation S-X

A

SEC accounting requirements for annual and interim financial
Statements

filed under both the Securities Act and the Securities Exchange
Act

103
Q

Scienter

A

Mental state embracing intent to deceive, manipulate or defraud
Prior to committing those actions

Ex. Auditors’ knowledge of misstatement in financial statements
And the intentional failure to disclose this misstatement in their
Report

104
Q

Staff Accounting Bulletins (SABs)

A

The unofficial but important interpretations of Regulation S-X
And Regulation S-K by SEC staff

105
Q

Statutory law

A

Legal rules affecting liability based on violations of written laws
Or statutes

Auditors have statutory liability to third party investors under the
Securities acts

106
Q

Tort

A

Civil complaint charging that the action of one person caused injury
(Personal or financial) to another

Action against auditors usually initiated by users of financial
statements

107
Q

SEC’s issuance of a Wells notice

A

Formal signal that civil charges may be forthcoming

108
Q

Auditors owe client’s a responsibility to conduct an audit in accordance with…

A

GAAS, consistent with the terms of the engagement letter

109
Q

Engagement letter

A

Serves as contract between client and auditor

110
Q

Loss suffered by client: breach of contract example

A

Losses from Delays in financing because auditors couldn’t meet
The engagement timeline

111
Q

2 reasons client’s may suffer loss because of auditors

A

1 breach of contract

2 lack of due professional care (ex. detecting employee fraud)

112
Q

Main defense for auditors

A

They followed GAAS to perform their audits

113
Q

The primary statutory laws relevant to the audit of financial statements are the laws governing…

A

The purchase and sale of securities

114
Q

Tort actions cover other…

A

Civil complaints

115
Q

Civil complaints

A

Fraud, deceit, injury arising from auditors failure to exercised
Due professional care

116
Q

When privity of contract exists what 4 things must plaintiff demonstrate?

A

1 suffered economic loss
2 breach of contract by auditors
3 auditors failed to exercise appropriate due care
4 breach of contract and lack of due care caused loss

117
Q

3 levels of substandard performance that may lead to tort liability

A

1 ordinary negligence

2 gross negligence

3 fraud

118
Q

If auditors exhibit ordinary negligence, clients will typically…

A

Prevail in their legal actions against auditors

119
Q

3 defenses by auditors to mitigate clients’ claims

A

1 auditors did exercise due care under contract

2 causation defense (economic loss caused by reason other than
Auditors)

3 contributory negligence

120
Q

It is well established that auditors are liable to all third parties for levels of performance representing…

A

Gross negligence and fraud

121
Q

Auditors extent of liability for ordinary negligence varies by…

A

Jurisdiction

122
Q

To bring a suit against auditors under common law, third parties must demonstrate all of these 4 things

A

1 suffered economic loss
2 auditors failed to exercise due care
3 financial statements contained material misstatement
4 loss was caused by reliance on materially misstated financials

123
Q

Ultramares precedent, expressed the view that if auditors’ failures to exercise the appropriate level of professional care were so great as to constitute gross negligence, grounds might exist that auditors engaged in…

A

Constructive fraud (reckless disregard for truth)

124
Q

2 possibilities for recognizing primary beneficiaries, that varies by jurisdiction

A

1 in some jurisdictions beneficiary must be named in contract

2 in others beneficiary need only be identified to auditors before
Engagement

125
Q

An accounting firm may be informed that the report is needed for a bank loan application with First National Bank. What is this an example of?

A

First National Bank is a primary beneficiary because it is known
By name to auditors

126
Q

Foreseen parties: if client informs auditors that it will be using audited financial statements to obtain financing and doesn’t identify any banks, under the doctrine of restatement of torts…

A

Any bank that uses audited financial statements in making Lending decisions may have legal standing to sue auditors for negligence

127
Q

When are auditors liable for ordinary negligence to foreseen parties in many jurisdictions?

A

In jurisdictions where restatement of torts doctrine specifies that
Auditors are liable if they are aware that auditors opinion

And financial statements are used by some third party

128
Q

Foreseeable parties, which 3 groups do they include?

A

Investors, creditors, potential investors

129
Q

If Grand Bank is relying on audited financial statements to decide whether to provide a loan to Prize Company, when would Gand bank be classified as a foreseen party

A

If Prize Company informed auditors that the audited financial
Statements would be used to obtain s loan

But not specify the name of a third party

130
Q

If Grand Bank is relying on audited financial statements to decide whether to provide a loan to Prize Company, when would Gand bank be classified as a foreseen party?

A

In almost any situation because audited financial statements

Are commonly used to obtain financing

131
Q

3 defenses available to auditors against 3rd party plaintiffs

A

1 3rd party doesn’t have appropriate standing to sue
2 3rd party’s loss was caused by events other than financial
Statements and auditors exam
3 auditors performed in accordance with GAAS

132
Q

Causation defense, define and example

A

3rd party’s loss was caused by events other than financial
Statements and auditors exam

Ex. Failure of entity may result from poor business practices and
Decisions

133
Q

Liability under statutory law

A

Auditors can be liable to individuals when they violate a specific
Law or statute when performing professional services

134
Q

6 federal statutes that pose potential liability to auditors

A 
1 Federal False Statements Statute
2 Federal Mail Fraud Statute
3 Federal Conspiracy Statute
4 Securities Act of 1933
5 Securities Act of 1934
6 SOX
135
Q

What does the Securities Act of 1933 regulate

A

The initial issuance of securities by registrants to public

Requires company register with the SEC and provide prospectus

136
Q

Burden of proof for plaintiff investors against auditors according to section 11 of the Securities Act of 1933. 2

A

1 they suffered economic loss

2 financial statements contained material misstatement

137
Q

According to section 11, auditors have the…

A

Burden of proof (assumes auditors are guilty until proven innocent)

138
Q

2 defenses auditors have under section 11

A

1 due diligence defense

2 causation defense

139
Q

Criminal liability

A

Monetary fines and prison terms

Results from willfully causing materially misstated statements

140
Q

The Securities Exchange Act of 1934

A

Regulates daily trading of securities

requires most entities whose securities are traded in interstate
Commerce to register and file pertinent info with the SEC

141
Q

Under the securities exchange act of 1934, entities having total
assets of over $10 million and over 500 shareholders…

A

Are required to register under the Securities Exchange Act

142
Q

What 3 forms that are significant for auditors are required for filing under the Securities Exchange Act of 1934?

A

1 Form 10-K
2 Form 10-Q
3 Form 8-K

143
Q

The form and content of 10-K and 10-Q filings are governed by
The SEC through…

A

Regulation S-X (annual and quarterly financial st.)

and Regulation S-K (supplementary disclosure)

144
Q

What reports express new rules and policies about disclosure for public ally traded companies?

A

Financial Reporting Releases (FRRs)

145
Q

What provides unofficial but important interpretations of Regulations S-X and S-K?

A

Staff Accounting Bulletins (SABs)

146
Q

4 documents that provide authoritative literature on financial reporting of public ally traded companies that must be filed with the SEC?

A

1 Regulation S-X
2 Regulation S-K
3 Financial Reporting Releases (FRRs)
4 Staff Accounting Bulletins (SABs)

147
Q

Section 10 of Securities and Exchange Act: antifraud

A

Makes it unlawful for persons to use manipulative or deceptive
Devices in connection with sale or purchase of securities

148
Q

Section 17 antifraud (of securities act 1933)

A

Makes it unlawful to use mail or instruments of transportation
In interstate commerce to defraud others

149
Q

Statute of limitations

A

Gives time frame that auditors can be held liable for violating
A statute

150
Q

Auditors defenses for Securities Exchange Act

A

Auditors acted in good faith and had no knowledge of material
Misstatements

151
Q

Criminal liability depends on the auditors…

A

Willfully and knowingly committing the act

152
Q

Foreign Corrupt Practices Act (1977) (FCPA) 2 things

A

1 bribery with foreign officials illegal

2 required entities to develop effective internal controls

153
Q

The doctrine of joint and several liability, may expose auditors to…

A

Extensive/unreasonable losses when they are only partially at
Fault

154
Q

SOX has extended what against auditors?

A

Time frame for filing a lawsuit from 2 years (before SOX) to

5 years after incident occurred

155
Q

Auditors are not subject to RICO complaints, unless they…

A

Actively participate in management or operation of corrupt

business

156
Q

Proportionate liability (from the Private Securities Litigation Reform Act of 1995) 3 terms

A

1 total responsibility for loss is divided between all parties
Responsible for loss

2 if other defendants are insolvent, solvent defendant’s liability
Is extended to 50% more than proportion found at trial

3 only defendants who knowingly committed violation of securities
Law are held jointly and severally liable

157
Q

If plaintiffs have a net worth of less than $200,000 and lost
10% or more of their net worth, auditors remain…

A

Jointly and severally liable

158
Q

Federal courts are preferable venues for defendants in…

A

Class action lawsuits

Audit (36 decks)

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