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AUD > Professional Responsibilities > Flashcards

Professional Responsibilities Flashcards

1
Q

What engagements are covered by the AICPA Code of Professional Conduct?

A

Covers all professional engagements and is the minimum standard of conduct

Member should additionally follow specific standards for a specific engagement

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2
Q

What must an accountant have under the AICPA Code of Professional Conduct?

A 
Integrity
Objectivity
No Conflicts of Interest
No known misrepresentations of facts
No outsourcing of judgment
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3
Q

What are threats and safeguards to independence?

A

Safeguards > Threats - Independence

Threats > Safeguards - No Independence

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4
Q

What are the threats to independence?

A

Self-Review (Auditing own work)
Advocate of the Client
Adverse Interest (Lawsuit against Client)
Too familiar with Client - could impair the appearance of Independence to public
Undue influence on Client - On Board of Directors- exception being an Honorary board position

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5
Q

What are the Safeguards to independence?

A

Offset the threats

Safeguards are created by Legislation (SOX)- Client (Audit Committee)- Accounting Firm (Policies)

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6
Q

What are the characteristics of a Covered Member?

A

On the engagement team- have Significant influence on Audit- such as:

Reviewing Partner
Managing Partner in CPA Firm
Firm Personnel who does more than 10 hours of non-attest work (Income Taxes)
Partner sharing office with another Partner who oversees an engagement
Financial Interest in Client by Covered Member (Auditor on Engagement)

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7
Q

What are the requirements for financial interests of a Covered Member?

A

No direct financial interestNo Material indirect financial interestFirm personnel who are not Covered Members cannot own more than 5% of stock Covered Member’s immediate family cannot own more than 5% of stock or be employed in Key positions. If Covered member is aware of this- it will impair independence.Cannot make management decisions.All requirements apply during the period of the professional engagement- and as long as they are a client.

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8
Q

What happens when a Covered Member disagrees with a Supervisor?

A

If Supervisor’s position is still GAAP/GAAS- defer to Supervisor

If Supervisor’s position is not GAAP/GAAS- report to higher levels of management

If management ignores you- consider leaving the firm

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9
Q

When is independence required?

A

Audit

Review

Attestation Engagement

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10
Q

What are the requirements for Non-attest engagements?

A

Agreement must be in writing.
Independence not required - Must state if you are not independent

Applicable engagements: Consulting- Compilation

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11
Q

Which standards apply to consulting engagements?

A

Consulting engagements are covered by Statements on Standards for Consulting Services (SSCS)

Requirements: Competence- Due Care- Planning- Supervision- Obtain Sufficient Data- Must Serve Client Interest- Must have written or oral agreement- must communicate with client.

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12
Q

List some common consulting engagements.

A

Advisory Services

Transaction Services

Management Consulting

Implementation Services

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13
Q

What is the rule concerning contingent fees for a covered member?

A

Not allowed if Member also performs services where independence is required
Commissions or referral fees for Covered Members are not allowed; Example - Audit firm gets a commission for recommending to Client that they implement a new A/P System…NOT Allowed
If a firm performing non-attest work doesn’t also perform Covered Member services (aka - Independence notrequired)- then Firm can get a commission on referring products/services- but they must disclose to the ClientTax Preparation - Payment according to refund amount is disallowed

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14
Q

When are contingent fees allowed?

A

When fees are structured relative to judicial proceedings.

Example: IRS audit- or filing an amended tax return subject to tax case with a different taxpayer.

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15
Q

How should recommendations and suggestions by a covered member to a client be handled?

A

Client must carry them out - covered member cannot perform management functions.

Client must assign someone of competence to oversee the non-attest engagement and CPA must be satisfied that this has occurred.

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16
Q

What are the requirements for Personal Financial Planning Engagements?

A

Must have definite objectives

Must have specific procedures planned

Must have a basis for recommendations

Must have recommendations communicated

Must have action steps to implement

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17
Q

When is a GAAP departure appropriate?

A

Departure from GAAP is appropriate if GAAP would cause Financial Statements to be misleading- then it must be explained/disclosed.

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18
Q

When may a covered member disclose confidential information?

A

Member may disclose confidential info when client isn’t following GAAP

OR

If they receive a subpoena - CPAs are not Attorneys- so there is no CPA-Client privilege

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19
Q

What is the effect of not returning all client-provided documents upon request?

A

This is an act discreditable.

You MUST return all documents the client gives you even if they don’t pay their bill.

If you create a document- however- like a work paper- you are not required to give the client a copy of papers you created if they haven’t paid their bill

They are the firm’s work papers- but are still confidential!

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20
Q

What is the consequence of disclosing CPA exam material post-1996?

A

It is an Act Discreditable.

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21
Q

What are the consequences for a CPA who commits an Act Discreditable?

A

Licenses are granted at the State level
If State revokes certificate- AICPA Ban
Felony Conviction- AICPA Ban
Prepares Fraudulent Tax Return- AICPA Ban
Intentionally failing to file return- AICPA Ban
SEC can get involved with discipline

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22
Q

What are the functions of the PCAOB?

A

Monitors CPA Firms who audit SEC clients - All SEC Audit firms must register

Issues standards for firms to follow - usually stricter than AICPA standards

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23
Q

When is independence impaired under PCAOB standards?

A

If Client pays a contingent fee (i.e. based on outcome)

With Marketing or Planning engagements

Aggressive Tax Strategies

Firm does tax work for Client employee involved with audit oversight or their
family

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24
Q

Who must approve non-audit work performed by a firm for a client?

A

Client Audit Committee must approve non-audit work performed by Firm

Firm must disclose any potential independence issues to Audit Committee

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25
Q

Which organization is in charge of determining if federal funds are being misappropriated?

A

GAO - Government Accountability Office

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26
Q

What rules must auditors follow for governmental audits?

A

Auditors must follow both GAAS and GAS aka the Yellow Book materiality threshold is usually lower
More detail is required on working papers
More stringent CPE rules and requirements - 24 hours of continuing education must be related to governmental auditing every 2 years
Compliance with Regulations is a requirement of the Audit Report

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27
Q

What is governance?

A

Board of directors and audit committee. NOT MANAGEMENT.

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28
Q

What is the audit committee?

A

A committee of the board of directors (3-5 members) who are “outside directors.”

“Outside directors” are not employees, management, and do not have a direct financial interest in the company.

All SEC companies are required to have an audit committee.

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29
Q

What are the functions of the audit committee?

A
  • Select and appoint auditor and set the fee
  • Oversee auditor
  • Evaluate internal control of the company
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30
Q

How should an auditor communicate with the audit committee?

A
  • Have appropriate access to them
  • Meet with the audit committee (without management) at least once a year
  • Make sure if communication is sufficient
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31
Q

What happens when a management representation letter cannot be obtained?

A

Scope limitation - disclaimer of opinion or withdraw

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32
Q

What are the requirements regarding a management representation letter?

A

1) Final piece of evidential matter
2) It is MANDATORY
3) Dated same date as audit report (not required for ISA’s)
4) Signed be CEO AND CFO
5) Representations of management
6) Material items only
7) Doubts about reliability should be considered

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33
Q

What should management disclose to the auditor in the representation letter?

A
  • F/S information
  • Fraud
  • Noncompliance
  • Uncorrected misstatements
  • Litigation & Claims
  • Estimates are reasonable
  • Related party transactions - identify and accounted for
  • Subsequent events
  • Additional representations
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34
Q

What should an auditor communicate as significant audit findings?

A
  • Views on qualitative aspects
  • Significant difficulties encountered in audit
  • Disagreements with management
  • Uncorrected, nontrivial misstatements
  • Impair independence
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35
Q

What should an auditor communicate to governance if not all governance is involved with managing the entity?

A
  • Significant issues or findings discussed with management
  • Significant accounting policies/estimates assumed by management
  • Material, corrected misstatements brought to management’s attention
  • Management representations requested by auditor
  • Management’s consultations with other accountants
  • Level of responsibility assumed by auditor
  • Disagreements about the scope of the audit
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36
Q

What happens when there is no audit committee to report to?

A

Report to the entire board of directors

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37
Q

What are the ways communication can occur?

A

Generally - oral or writing

Significant audit findings should be communicated in writing and should have restricted use.

Oral communications should be documented

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38
Q

What should the timing of communication be?

A

Issuers - communications are required to be made before the issuance of the auditor’s report

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39
Q

What is Article I of the AICPA Code of conduct?

A

Responsibilities

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40
Q

What is Article II of the AICPA Code of conduct?

A

Public Interest

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41
Q

What is Article III of the AICPA Code of conduct?

A

Integrity

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42
Q

What is Article IV of the AICPA Code of conduct?

A

Objectivity and Independence

Objective - applies to all services
Independence - applies to audits, special reports, and reviews

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43
Q

What is Article V of the AICPA Code of conduct?

A

Due Care (Critically review judgment)

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44
Q

What is Article VI of the AICPA Code of conduct?

A

Scope and Nature of the services

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45
Q

What does Rule 101 cover?

A

Independence

46
Q

What are some examples of a direct financial interest?

A
  • Stock ownership (including blind trusts)
  • Financial interest in a client through a partnership and the member is a general partner
  • Financial interest in a trust where the member is a trustee
  • Non-client investment club
  • Ownership of municipal utility bonds that are issued by a client
47
Q

What are some examples of a indirect financial interest?

A
  • Shares in a mutual fund that invests in the client
  • Member owns the direct financial interest in Company A and Company A has direct financial interest in the attestation client
48
Q

When is independence impaired by financial interests?

A

1) Direct financial interest/material indirect financial interest in client
2) Covered member/immediate family has a loan to/from client
3) Independence is impaired by acceptance of more than a token gift

49
Q

When is independence NOT impaired in a financial institution client?

A

1) Fully collateralized car loans with a financial institution client
2) Cash advance/credit card balances not exceeding $10,000
3) A bank account that is fully insured by the government (FDIC)
4) A passbook loan

50
Q

How is independence impaired by employment relationships?

A

1) Member was previously employed by client and is on engagement team
2) Immediate member employed by client in a key position
3) Member leaves accounting firm for a key position with the client (esp if within 1 year)
4) Seeking/discussing employment with client or offered employment by client

51
Q

When is independence impaired by business relationships?

A
  • If member makes management decisions for an attest client
  • Client is more than 1 year overdue in the payment of professional fees
  • Actual/threatened litigation
  • Activities such as bookkeeping, custody of assets, supervising client employees, financial information systems design & implementation, appraisal, valuation, or actuarial services, management of internal audit activities, litigation services, and expert witness services.
52
Q

What are some examples of business relationships with an attestation client?

A
  • Director, officer, employee or a key position
  • Promoter, underwriter, broker-dealer, voting trustee
  • Stock transfer or escrow agent
  • General counsel
  • Trustee for client’s pension or profit sharing trust
53
Q

When is independence NOT impaired by business relationships?

A

1) Providing non-attest services and not part of client management
2) Member of a honorary trust for a not for profit charity, civic, or religious group
3) Membership in the same trade association (ex: country club)

54
Q

What does Rule 102 cover?

A

Integrity & Objectivity

Conflict of interests may impair objectivity

55
Q

What does Rule 201 cover?

A

General standards

  • Professional competence (technical knowledge)
  • Due professional care (same skills in industry, critical review)
  • Planning & supervision
  • Sufficient relevant data (for reasonable basis)
56
Q

What does Rule 202 cover?

A

Compliance with Standards

1) ASB and PCAOB (F/S audits)
2) Management Consulting Services Executive Committee
3) Accounting and Review Services Committee
4) GASB
5) Tax Executive Committee

57
Q

What does Rule 203 cover?

A

Accounting Principles

GAAP should be followed and departures disclosed

58
Q

What does Rule 301 cover?

A

Confidential Client Information - cannot disclose client information without permission. Ex: when disclosure that may suggest client is experiencing financial difficulties

Exceptions:

1) Subpoena & summons
2) Quality “peer” review
3) Inquiry made by ethics division or the trial board of the AICPA
4) Your defense team (when client is suing you)

59
Q

What does Rule 302 cover?

A

Contingent Fees (not allowed)

60
Q

What does Rule 501 cover?

A

Discreditable Acts

61
Q

What is a contingent fee?

A

1) No fee is charged unless a specific finding or result is obtained
2) Fee amount is dependent on the finding or result obtained

62
Q

When are contingent fees permitted?

A

1) Fixed by courts (tax/bankruptcy) or other public authorities
2) Permitted for compilations of F/S to be used by third parties

63
Q

What are some examples of discreditable acts?

A

1) Failure to return records to a client after the client makes demand (cannot hold documents hostage because the client did not pay you)
2) Discrimination or harassment in public practice
3) Failing to follow applicable standards or procedures in government audits
4) Negligence in preparing F/S or records
5) Failing to follow GAAS and other applicable standards
6) Solicitation or disclosure of CPA Exam questions/answers
7) Failure to timely file a personal or firm tax return or remit payroll/other taxes
8) Failure to follow regulatory requirements prohibiting the use of certain types of provisions

64
Q

What does Rule 502 cover?

A

Advertising or Other Forms of Solicitiation

Cannot be false, misleading, or deceptive:

1) Create false/unjustified expectations of favorable results
2) Imply the ability to influence a court, regulatory agent, or official
3) Intentionally underestimate fees
4) Mislead/deceive a reasonable person

65
Q

What does Rule 503 cover?

A

Commissions and Referral Fees

Cannot recommend or refer a service for a commission if a member performs an audit, review, compilation, or examination for a client

66
Q

When are commissions acceptable?

A

THEY MUST BE DISCLOSED!!!!!!!

1) If “other services” are performed (Ex: compilation, tax, advisory)
2) Referral fees received for recommending another CPA or referral fees paid to obtain a client

67
Q

What does Rule 505 cover?

A

Form of Organization & Name

68
Q

What are the rules with respect to CPA firm names?

A

CPA firm names must not be misleading.

1) All Partners/Shareholders must be members of the AICPA in order to hold themselves out as members of the AICPA.
2) Firm may not designate itself as “CPAs” unless all of its owners are CPAs.
3) Can use the names of one or more past owners
4) If partner dies- remaining partner has two years to change name if partnership dissolved.
5) If partner dies and more than one partner still remains (i.e. 1 dies and you still have 2 or more partners…you don’t need to change the name)

69
Q

What the rules with respect to ownership of CPA firms?

A

Non-CPAs can be owners- but 2/3 of Ownership must be CPAs.

Non-CPA owner must not be involved with the accounting- and is still bound by AICPA code of conduct- must maintain CPE requirements and have Bachelor’s degree.

Non-CPA owners cannot call themselves CPAs.

70
Q

What is the composition of the PCAOB

A

5 members of which 2 are CPAs and 3 cannot be CPAs.

71
Q

What duties does the PCAOB have?

A

Overseen by the SEC

1) Register public accounting firms
2) Establish rules regarding preparation of audit reports
3) Conduct inspections, investigations, and proceedings concerning registered public accounting firms

72
Q

How often does PCAOB conduct inspections

A

Annually for registered public accounting firms that regularly provide audit reports for more than 100 issuers.

For firms that provide audit reports for 100 or fewer issuers, inspections occur every 3 years.

73
Q

What rules should registered public accounting firms follow in accordance with PCAOB?

A

1) Audit documentation must be maintained for at least 7 years
2) Concurring or second partner review of each audit report
3) Describe scope of testing of the issuer’s internal control structure and procedures

74
Q

What is covered under SOX Title I?

A

PCAOB

75
Q

What is covered under SOX Title II?

A

Auditor Independence

76
Q

What services are prohibited when auditing an issuer?

A

1) Bookkeeping, custody of assets, supervising client employees,
2) Financial information systems design & implementation
3) Appraisal and valuation services
4) Actuarial services
5) Management or HR functions
6) Internal audit outsourcing services
7) Services as a broker, dealer, investment adviser, or investment banker
8) Legal services
9) Expert services unrelated to the audit

77
Q

What are some rules concerning audits of issuers?

A

1) Must have pre-approval from the audit committee
2) Audit partner rotation every 5 years (lead audit and reviewing partners)
3) Report to audit committee

78
Q

What are some rules concerning conflict of interest for audit firms?

A

Cannot have employed the issuer’s CEO, CFO, Controller, or Chief Accounting Officer, or any person serving in equivalent position for a 1 year period preceding the audit.

79
Q

What is covered under SOX Title III, Section 303?

A

It is unlawful for an officer or director of the issuer to mislead any independent CPA performing an audit.

80
Q

What is covered under SOX Title IV?

A

Enhanced Financial Disclosures:

  • Disclosures (material adjustments) reported in periodic reports
  • Off balance sheet transactions
  • Disclosure of Transactions - officers, directors, or 10% + shareholders must disclose number of shares owned within 10 days and file a report within 2 days
  • Management assessment of internal controls. Forms 10-K and 10-Q must state management’s responsibility and the auditors are required to attest to management’s assertion of internal control.
  • Code of Ethics for Senior Financial Officers (state reason if don’t have one; Form 8-K reports changes)
  • Disclosure of Audit Committee Financial Expert (at least 1 member required)
  • Real Time Issuer Disclosures
81
Q

What are rules concerning tax services of issuers under PCAOB?

A
  • Cannot provide tax services for certain confidential or aggressive tax transactions.
  • Cannot provide tax services to corporate officers of audit clients, or to immediate family members of corporate officers.
82
Q

What did the Department of Labor establish rules for?

A

Audits of employee benefit plans under ERISA

Independence required.

Independence NOT impaired when:

1) Former officer or employee of the plan or plan sponsor is employed by the firm and that person has disassociated completely and is not going to participate in the audit.
2) Accountant/firm engaged by plan sponsor during the period of the professional engagement with plan
3) An actuary associated with the accountant/firm rendered services

83
Q

What are the principles of professional ethics under IFAC?

A

1) Integrity
2) Objectivity
3) Professional Competence & Due Care
4) Confidentiality
5) Professional Behavior

84
Q

What are some threats to compliance with IFAC principles?

A

1) Self-interest threat (financial interest will influence accountant)
2) Self-review threat (previous judgments not appropriately evaluated)
3) Advocacy threat (advocate client/employer position to the point where objectivity is compromised)
4) Familiarity threat (too familiar/sympathetic to client)
5) Intimidation threat (outside pressures)

85
Q

What are the partner rotation rules under IFAC?

A

Rotated every 7 years with a time out period of 2 years.

86
Q

What kind of power do state boards of accountancy hold?

A

Sole power to license, and suspend/revoke license.

87
Q

What are the three types of misconduct for CPAs?

A

1) Misconduct while performing accounting services
2) Misconduct outside the scope of accounting services
3) Criminal conviction

88
Q

What are the consequences of professional misconduct?

A

1) Reasonable doubt is required for formal hearing
2) Accountant entitled to due process of law
3) Adverse state board decisions subject to judicial review

89
Q

What are the five penalties that a state board may impose for professional misconduct?

A

1) Suspension of revocation of license
2) Monetary fine
3) Reprimand/censure
4) Probation
5) Requirement for CPE courses

90
Q

What are some civil penalties that can be imposed by the SEC?

A

Listed in SOX, Title I

1) Censure, suspend, or revoke an accountant’s right to practice before the SEC, including right to sign documents.
2) SEC can issue cease and desist orders

91
Q

What are the reasons civil penalties may apply to a CPA under SEC?

A

1) Accountant lacks qualifications
2) Accountant lacks character/integrity
3) Accountant acted unethically/unprofessionally
4) Accountant willfully violated federal security laws or regulations
5) Accountant was convicted of a felony or convicted of a misdemeanor
6) Accountant’s license was suspended/revoked

92
Q

What are the exceptions to impairment of independence for owning financial interests under the SEC?

A

Financial interest is disposed of in 30 days if received as a gift; disposed before signing engagement letter and commencement of job; family members dispose within 30 days

93
Q

What are the partner rotation rules under the SEC?

A

Audit partners rotated every 5 years with a 5 year timeout period

Other partners rotated every 7 years with a 2 year timeout period

Small firms with fewer than 5 issuer clients and 10 partners may be exempted

94
Q

What are rules regarding audit committee administration of the audit engagement?

A

Independence is impaired if the audit committee fails to pre-approve

Pre-approval not required for non-audit services that do not exceed 5% of total revenues from the audit client

Audit required to report to audit committee

95
Q

What are the rules regarding audit documentation?

A

They are the evidence for the basis of the auditor’s opinion and proof that audit was conducted under GAAS

Workpapers belong to the auditor

Workpapers cannot be disclosed without client permission and court order

Indicate that accounting records = F/S

Be prepared in enough detail that an experienced auditor can understand

Sign offs and dates required

96
Q

What are audit documentation retention rules?

A 
SAS rules (nonissuers): 5 years
PCOAB rules (issuers): 7 years
97
Q

What are audit documentation completion dates?

A

After document completion, it cannot be deleted or modified

Final documentation must be assembled in:
SAS rules (nonissuers): 60 days
PCOAB rules (issuers): 45 days
98
Q

What is the report release date?

A

Date on which the auditor grants the client permission to use the report

99
Q

What is the permanent (continuous) file contain?

A
  • Contracts
  • Pension plans
  • Leases
  • Stock Options
  • Bylaws
  • Articles of Incorporation
  • Minutes of Meetings
  • Bond Indentures
  • Internal Information
100
Q

What is the current file contain?

A
  • Audit plan (audit program)
  • Financial statements and auditor’s report
  • Working TB, AJE’s, RJE’s
  • Letters of confirmation and representation
  • Analyses, worksheets, issues memos, schedules
  • Abstracts or copies of entity documents
  • Summaries of significant audit findings or issues
  • Records of test of controls and substantive tests
101
Q

When is independence impaired under IFAC?

A

1) Financial interests
2) Loans & guarantees
3) Close business relationships
4) Family & personal relationships
5) Employment with assurance clients
6) Recent service with assurance clients
7) Serving as an officer or director on the board of an assurance client
8) Partner rotation
9) Provision of non-assurance services to assurance clients
10) Fees & pricing (too low, too high, contingent)
11) Gifts & Hospitality
12) Actual or threatened litigation

102
Q

What are the 6 elements of quality control?

A 
"HELP ME"
Human Resources
Engagement/client acceptance and continuance
Leadership responsibilities
Performance of the engagement
Monitoring
Ethical Requirements
103
Q

What is included in the human resources element of quality control?

A
  • Recruitment and hiring
  • Determining capabilities & competencies
  • Assigning personnel to engagements
  • Professional development
  • Performance evaluation, compensation, and advancement
104
Q

What is included in the engagement/client acceptance and continuance element of quality control?

A

Deciding whether to accept or continue a client relationship and whether to perform a specific engagement

  • Minimizes association with a client whose management lacks integrity
  • Undertake engagements that can be performed with professional competence
  • Comply with legal & ethical requirements

Document issues & resolvement
-Obtain understanding of client
Policies & procedures for withdrawal

105
Q

What is included in the leadership element of quality control?

A

Tone at the top

Responsible for quality control

106
Q

What is included in the performance element of quality control?

A

Policies & procedures established for:

  • High level of performance
  • Engagement supervised & work reviewed
  • Maintain confidentiality, safe custody, integrity, accessibility, retrievability, and retention of documentation
  • Allow consultation with experts
  • Provide means to resolve differences in opinion
  • Engagement quality control review
107
Q

What is included in the monitoring element of quality control?

A
  • Monitoring involves an ongoing consideration & evaluation of the design and effectiveness of the quality control system
  • Performed by qualified people (ex: partner)
  • Performance of quality control reviews; inspections
  • Peer review
  • Wrap up or second partner pre-issuance review
108
Q

What is a peer review?

A
  • One CPA firm reviews another CPA firm’s compliance with it’s quality control system. A CPA firm that is a member of the AICPA must have a peer review every 3 years.
  • Purpose to determine if adequate policies & procedures have been established
  • Report issued with conclusions & recommendations
109
Q

What is included in the ethical requirements element of quality control?

A
  • Maintain public confidence in the profession
  • Independence, objectivity, integrity
  • Independence requirements communicated
  • Employees confirm independence
110
Q

What is the difference between GAAS and quality control?

A

GAAS = conduct of each individual audit engagement

Quality Control = conduct of all professional activities of the firm’s practice as a whole. Relate to both performance of each audit and the performance of the audit practice.

Failed quality control does not equal failed GAAS

111
Q

How is independence affected if a CPA provides bookkeeping services to a client?

A

Independence NOT impaired if:

  • post JE’s
  • prepare F/S from a TB
  • record transactions determined by management

Independence IS IMPAIRED if:
-Authorize client transactions and report to management

AUD (9 decks)

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