Professional Responsibilities

Question 1

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

Answer 1

Covers all professional engagements and is the minimum standard of conduct

Member should additionally follow specific standards for a specific engagement

Question 2

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

Answer 2

Integrity
Objectivity
No Conflicts of Interest
No known misrepresentations of facts
No outsourcing of judgment

Question 3

What are threats and safeguards to independence?

Answer 3

Safeguards > Threats - Independence

Threats > Safeguards - No Independence

Question 4

What are the threats to independence?

Answer 4

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

Question 5

What are the Safeguards to independence?

Answer 5

Offset the threats

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

Question 6

What are the characteristics of a Covered Member?

Answer 6

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)

Question 7

What are the requirements for a Covered Member?

Answer 7

No direct financial interest

No Material indirect financial interest

Firm 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.

Question 8

What happens when a Covered Member disagrees with a Supervisor?

Answer 8

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

Question 9

When is independence required?

Answer 9

Audit

Review

Attestation Engagement

Question 10

What are the requirements for Non-attest engagements?

Answer 10

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

Applicable engagements: Consulting- Compilation

Question 11

Which standards apply to consulting engagements?

Answer 11

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.

Question 12

List some common consulting engagements.

Answer 12

Advisory Services

Transaction Services

Management Consulting

Implementation Services

Question 13

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

Answer 13

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 not
required)- then Firm can get a commission on referring products/services- but they must disclose to the Client

Tax Preparation - Payment according to refund amount is disallowed

Question 14

When are contingent fees allowed?

Answer 14

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.

Question 15

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

Answer 15

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.

Question 16

What are the requirements for Personal Financial Planning Engagements?

Answer 16

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

Question 17

When is a GAAP departure appropriate?

Answer 17

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

Question 18

When may a covered member disclose confidential information?

Answer 18

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

Question 19

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

Answer 19

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!

Question 20

What are the rules with respect to CPA firm names?

Answer 20

CPA firm names must not be misleading.

If partner dies- remaining partner has two years to change name if partnership dissolved. 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)

All Partners/Shareholders must be members of the AICPA in order to hold themselves out as members of the AICPA. 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.

Question 21

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

Answer 21

It is an Act Discreditable.

Question 22

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

Answer 22

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

Question 23

What are the functions of the PCAOB?

Answer 23

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

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

Question 24

When is independence impaired under PCAOB standards?

Answer 24

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

Question 25

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

Answer 25

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

Firm must disclose any potential independence issues to Audit Committee

Question 26

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

Answer 26

GAO - Government Accountability Office

Question 27

What rules must auditors follow for governmental audits?

Answer 27

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

Question 28

GAAS Standards - General

Answer 28

TID - PIE - GCDO

Training - the auditor must have adequate technical training and proficiency to perform the audit.

Independence - the auditor must maintain independence in mental attitude in all matters relating to the audit.

Due care - the auditor must exercise due professional care in the performance of the audit and the preparation of the report.

Question 29

GAAS Standards - Field Work Standards

Answer 29

TID - PIE - GCDO

Planning and supervision - the auditor must adequately plan the work and must properly supervise any assistants.

Internal control - the auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the financial statements whether due to fraud or error, and to design the nature, timing, and extent of further audit procedures.

Evidence - the auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.

Question 30

GAAS - Reporting Standards

Answer 30

TID - PIE - GCDO

GAAP - The auditor must state in the auditor’s report whether the financial statements are presented in accordance with GAAP.

Consistency - the auditor must identify in the auditor’s report those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.

Disclosure - when the auditor determines that informative disclosures are not reasonably adequate, the auditor must so state in the auditor’s report.

Opinion - the auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report. When the auditor cannot express an overall opinion, the auditor should state the reasons therefore in the auditor’s report. In all cases where an auditor’s name is associated with financial statements, the auditor should clearly indicate the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking, in the auditor’s report.

Question 31

How do you know if a standard is an “unconditional requirement” or a “presumptively mandatory requirement”?

Answer 31

Unconditional means you must do it and is indicated by using the word “must”
Presumptively mandatory means you could depart from the requirement if you have a really good justification - indicated by the word “should”

Question 32

What are SAS?

Answer 32

Statements on Auditing Standards - make up authoritative GAAS

1. The auditor is expected to have sufficient knowledge of the SASs to identify those applicable to the audit.
2. The auditor should be prepared to justify any departures from the SASs.
3. Materiality and audit risk also underlie the application of the SASs, particularly those related to performing the audit (evidence gathering) and reporting.

Question 33

What are interpretive publications?

Answer 33

Consist of the appendices to the SASs, auditing interpretations of the SASs, auditing guidance included in AICPA Audit and Accounting Guides, and AICPA auditing Statements of Position

1. Interpretive publications are not considered to be auditing standards.
2. These are issued under the authority of the Auditing Standards Board after all ASB members have had an opportunity to comment on the interpretive publication.
3. Auditors should be aware of (and consider) interpretive publications applicable to their audits. When auditors do not apply such auditing guidance, they should be prepared to explain how they complied with the SAS provisions related to such interpretive publications.

Question 34

What are other auditing publications?

Answer 34

Non-authoritative - include articles in the Journal of Accountancy and the AICPA’s CPA Letter (and other professional publications), continuing professional education programs, textbooks, etc.

Question 35

Firms are required to have a quality control system for their accounting and auditing services. What are the six elements of quality control?

Answer 35

Leadership responsibilities for quality – internal culture, commitment to quality, “tone at the top”

Relevant ethical requirements – independence of personnel, written confirmation of compliance from all appropriate personnel at least annually

Acceptance and continuance of client-relationships and engagements – assess the risks associated with each engagement, only undertake engagements that can be completed with professional competence

Human resources – Policies and procedures should address important personnel issues (including initial hiring, assignments to engagements, professional development and continuing professional education, and promotion decisions).

Engagement performance – compliance with all applicable firm & professional standards/regulatory requirements, consult professional (or other) literature or HR for guidance

Monitoring – assessment of the design and operating effectiveness of the system of quality control