Professional Responsibilities Flashcards
What are broad categories of safeguards that mitigate or eliminate threats to independence?
- Safeguards created by the profession, legislation, or regulation
- Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements
- Safeguards implemented by the attest client
Sarbanes Oxley Act
- Strengthen penalties for corporate fraud
- CPA consulting activities are restricted by Sox
- Sox created the PCAOB
- Sox eliminates a significant portion of the accounting profession’s self regulation, largely through responsibilities assigned to the PCAOB
Who is considered a covered member?
-Individuals on the audit team, all partners in the practice office in which the audit is performed, overall partner in charge of firm are covered members
Note partners in another office who do not work on the audit are not considered covered members.
-no partner in the office may have a direct financial interest in the client
- a covered member’s spouse may be employed by an attest client provided he/she is not employed in a key position
- partner in charge of the audit practice could influence the engagement and is a covered member
- a manager that provides ten hours or more of nonattest services to the client is considered a covered member (ex: tax services)
When can a CPA disclose confidential client info without consent?
- a review of the CPA’s professional practice by a state CPA society
- an inquiry from the professional ethics division of the AICPA
- a court ordered subpoena or summons
Note that a CPA cannot disclose info the IRS without client’s consent.
When can a commission be received?
A commission/contingent fee may be received providing it is not from a client for which the CPA provides any of the following services 1) audit or review of FS, 2) compilation of FS expected to be relied upon by a third party, 3) examination of prospective financial info. Also, a contingent fee cannot be accepted for preparing an initial or amended tax return.
What roles for the auditor are not allowed by the AICPA Code?
Cannot serve as promoter of a client’s securities, board member, or general counsel.
The auditor CAN serve as an advisor to client’s board of trustees and not be in violation.
What advertising is allowed and not allowed under rule 502?
Allows - advertising of services offered and fees, experience, and % of staff with CPA certificates
Not allowed - advertising including an indication that the firm has a close relationship with several tax court judges
What auditing standards does the Department of Labor follow?
DOL conducts most of its financial and performance audits following Government Auditing standards, including audits of compliance with laws, evaluation of economy and efficiency of operations, and evaluation of effectiveness in achieving program results.
DOL administers the audit requirements of ERISA (Employee Retirement Security Act of 1974) with respect to employee benefit plans.
DOL does not tie to Sox or GAAS
DOL rules apply to independence from the plan and the plan sponsor.
Who owns the CPAs working papers?
The working papers are the sole property of the CPA and can be made available to third parties under certain cases (eg litigation)
What is the CPA allowed to retain until paid?
If fees for the engagement are unpaid, the CPA can retain supporting records which he prepared but cannot keep client prepared records (eg the GL).
For the PCAOB and SEC, what if the auditor prepares the FS AND audits them for a client?
Auditor is not independent.
What services can and cant be provided for a nonissuer attest client?
CAN be done and still maintain independence - perform data processing, record transactions approved by mgmt, prepare FS
CANNOT be done - mgmt functions such as signing payroll checks - impairs independence
INTL: When are contingent fees acceptable?
Only if appropriate safeguards are established to prevent impairment of independence
INTL+AICPA: Disclaimer of opinion allowed if multiple properly disclosed uncertainties in the FS?
Both allow disclaimer of opinion in those cases
What are types of threats to independence?
- Self review, familiarity (close relationship with client), undue influence, financial self-interest (financial interest in client)
Note that public interest threat is not a threat.
How can an auditor exercise due professional care?
The principle of due care requires the member to observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge responsibility to the best of the member’s ability. Ex: critically review the judgment exercised by those assisting in the audit.
Note that an auditor is not required to examine all corroborating evidence supporting mgmt’s assertions, but to examine evidence on a scope basis based on consideration of materiality and level of risk assessed.
When is an auditor’s independence impaired?
Interpretation 101-5 prohibits joint closely held investments that are material to the auditor.
Immaterial indirect financial interests are allowed
Auto loans collateralized by auto are allowed
Mortgage loans that existed at Jan 1, 1992 were grandfathered and are not considered an impairment of the auditor’s independence.
What actions by a CPA are discreditable to the profession?
Not allowed - discriminatory employment practices, commiting felony, fraud - knowingly signing a false tax return
CPA is allowed for valid business reasons to refuse a request by another CPA to allow review of working papers.
INTL: When must a letter of audit inquiry be sent to the client’s lawyer?
Under intl audit standards, a lawyer’s letter is only required when the auditor assesses a related risk of material misstatement.
Disclosure of info
CPA is prohibited from disclosing confidential info learned in the course of an engagement. Cannot tell another client about that client - eg if going concern issues.
When providing what services does a CPA have to be independent in fact and appearance?
An accountant need be independent only when providing attestation services. An accountant need not be independent to provide compilations (eg forecast) or prepare tax returns.
When can a CPA firm disclose the names of its clients without the client’s permission
A CPA may disclose client names unless disclosure releases confidential info, such as info that would suggest that the client may be experiencing financial difficulties.
Who issues International Standards on Auditing
They are issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants.
Which standards require the confirmation of AR
PCAOB and ASB standards require confirmation, IAS does not. IAS leaves it to auditor’s judgment as to whether it is performed.
What are the General Accountability Office (GAO) audits?
GAO’s mission is in support of Congress of USA. GAO conducts operational audits and reports results to congress.
They often include standards beyond those of GAAS.
GAO standards do not allow personnel working on nonattest engagements to also work on the audit.
Based on the Yellow book
What family relationships can impair CPA’s independence?
Ex: if father is in key position
It is ok if cousin has immaterial investment or close relative has material but CPA is not aware.
PCAOB board
Board consists of 5 members. SEC oversees the PCAOB.
The board has the responsibility to discipline CPA firms that audit public companies and the responsibility to develop independence standards for CPA firms that audit public companies.
Compared to the AICPA code of professional conduct, the rules of the International Code of Ethics for Professional Acountants..
Has fewer definitive prohibitions, international standards are less restrictive.
Sox prohibits the performance of which services for audit clients by auditors of public companies?
Prohibits bookkeeping, appraisal services, and mgmt functions.
However, tax prep services are not prohibited.
PCAOB inspections
High risk areas are emphasized.
Inspections may include consideration of such aspects of practice mgmt.
