Professional Responibilities & Ethics Flashcards
Which of the following best describes the effect of a contingent fee arrangement on the auditor’s independence?
Topic 1.500 of the AICPA Code of Ethics indicates that a CPA may NOT accept a contingent fee from a client for whom the CPA performs an AUDIT or REVIEW and may only perform a compilation if the LACK OF INDEPENDENCE is DISCLOSED.
The seven categories of threats to independence identified by the AICPA in its conceptual framework
The AICPA’s conceptual framework’s
seven potential threats to a CPA’s independence include:
1) ADVERSE INTEREST threat, (client and auditor litigation)
2) ADVOCACY threat, (promotes client’s interests)
3) FAMILIARITY threat, (close longstanding relationship)
4) MANAGEMENT PARTICIPATION threat, ( auditor takes on the role of management)
5) SELF-INTEREST threat,(opportunity to benefit from client relationship-financial interest in the client)
6) SELF-REVIEW threat, (reliability without testing or due diligence, auditor’s firm did bookkeeping for client)
7) UNDUE INFLUENCE threat. (excessive influence over auditor)
The standards a CPA should follow when recommending tax return positions and preparing tax returns?
A tax practitioner should ONLY support a tax position which he or she believes in good faith has at least a REASONABLE BASIS, generally understood as a 20% likelihood, of being SUSTAINED on its merits. While supporting a position with a realistic possibility (33% likelihood threshold) of success is preferable, the practitioner may still recommend or even prepare or sign a tax return which meets only the reasonable basis / 20% standard, provided adequate disclosure of the tax position is either provided in the tax return prepared or signed by the practitioner, or urged upon the client if the practitioner does not actually prepare or sign the tax return. In ALL CASES the practitioner should advise the client regarding potential penalties related to tax positions taken and the possibility of avoiding penalties through adequate disclosure.
Under the Statements on Standards for Consulting Services, what’s a CPA’s responsibility when undertaking a consulting services engagement?
One standard for consulting services requires communication to the client of any significant reservations about the potential benefits of the engagement. A consultant MAY also provide ATTEST services so long as the consultant meets the INDEPENDENCE and other standards of such engagements.
The Ultramares Decision,
Under Ultramares, only those with PRIVITY may hold the accountant liable and NEITHER foreseen nor FORESEEABLE third party beneficiaries may do so. A party that the auditor could have reasonably foreseen is considered foreseeable, not foreseen.
To whom may a CPA partnership provide its working papers without either the client’s consent or a lawful subpoena?
A CPA may provide working papers without the client’s consent ONLY when complying with a LAWFUL SUBPOENA OR when cooperating with a QUALITY CONTROL REVIEW of the CPA’s practice under AICPA, CPA society, or Board of Accountancy authorization. Not to either the IRS or the FASB without the client’s permission.
The AICPA Code of Professional Conduct, prohibited a CPA from performing what service for an audit client?
Provided the general requirements for performing non-attest services are met, which include management accepting responsibility for management responsibilities and overseeing the work of the accountant, making certain the accountant does not assume management responsibilities, and documenting an understanding with the client, the accountant may perform most bookkeeping services and many tax services for the client without impairing independence. When serving in a tax advocacy role, such as representing the client in tax court, independence would be impaired.
Which services may a CPA perform in carrying out a consulting service engagement for a client?
Among the many consulting services that may be performed by a CPA include review of a client’s business plan and assistance in obtaining financing for the client’s business.
When an auditor agrees to become an employee of an audit client?
When an audit client hires away a member of the audit engagement team, the next annual audit of that client performed by the audit firm must be separately reviewed by an audit firm professional un-involved in the audit. The audit team member must inform the audit firm of conversations with client about possible employment prior to leaving, and there is no requirement for full disclosure of all such correspondence.
According to professional standards, what will impair a CPA’s independence?
A CPA’s independence is impaired by ANY DIRECT and ANY MATERIAL INDIRECT FINANCIAL interest in an attest client. A close relative, such as a non-dependent stepchild, may have an immaterial direct financial interest in a CPA’s attest client but any material financial interest, whether direct or indirect, would impair independence. ‘Material’ in this context means that it is material to the close relative’s NET WORTH. Independence rules only apply to COVERED MEMEMBERS, which include those working in the SAME OFFICE as the CPA performing the audit and those who perform non-attest services for the client. A PARTNER working in a DIFFERENT OFFICE and not providing non-attest services for the attest client would NOT be a covered member. Independence would be impaired if audit fees are not paid within one year, but there is no 90 day requirement.
CPA’s independence- Personal Loan
Although a loan from a client generally impairs a CPA’s independence, including one that is fully secured, the CPA is ONLY required to be independent during the period COVERED by the financial statements being audited and the period during which the services requiring independence are performed.
Which reports may be issued only by an accountant who is independent of a client?
An engagement to report on an examination of a financial forecast is an ATTEST engagement that is also an ASSURANCE engagement, requiring the auditor to be independent. An auditor is not required to be independent to perform a NON-ATTEST engagement, such as a CONSULTING engagement. Although COMPILATIONS of either historical financial statements or financial projections are ATTEST engagements, they are NOT ASSURANCE engagements. An accountant is generally REQUIRED to be independent to perform an ATTEST engagement but there is an exception that allows an accountant to perform a compilation despite a lack of independence as long as the lack of independence is clearly indicated.
According to the AICPA Code of Professional Conduct, which of the following activities results in an act discreditable to the profession?
According to ET 1.400, acts discreditable to the profession include SOLICITING or DISCLOSING CPA exam QUESTIONS and ANSWERS. Failure to return a client’s records due to nonpayment of fees would be an act discreditable to the profession but refusing to make copies of the accountant’s workpapers is not.
A CPA’s independence in regards to attest clients is impaired if?
Social club membership does not impair independence. When an individual CPA holds a checking, savings, certificate of deposit, or money market account with a financial institution client, independence is impaired unless either the account is fully insured or the uninsured amount is not material to the CPA. Source documents, including client invoices, are designed to initiate action on behalf of either the client, a customer, or a supplier. As a result, preparing source documents involves accepting a management responsibility and impairs independence.
Who owns an accountant’s working papers?
The accountant owns the working papers that the accountant creates during an engagement; however, the accountant must maintain confidentiality of the working papers and their contents, only disclosing them in the absence of client permission in response to an IRS administrative SUBPOENA, a valid COURT SUBPOENA, a COURT ORDER (except in the few states with privilege statutes), or to comply with a PCAOB or PEER REVIEW QUALITY CONTROL PROGRAM.
