Professionalism and Professional Responsibilities

Question 1

Do EC Professionals exist in public accounting firms? Explain.

Answer 1

Yes. Since the people who practice accounting rely on a profession’s responsibility and concern for the public interest, a hallmark of the accounting profession. The cornerstone of the public accounting profession is their recognition by the public interest in the work done by CPAs.

Question 2

Explain the concept of the CPI professional and how it applies to auditors.

Answer 2

Robert Mautz’s refers to a professional by its concern for the public interest (CPI professional). CPI professionals are commonly defined by the level of expertise they possess, or their high level of skill. Another way to define a professional relates to a profession’s responsibility and concern for the public interest. These individuals are often recognized by a specialize body of knowledge, a formal education process, standards governing admission to the profession, a code of ethics, recognized status indicated by a license, a public interest in the work that practitioners perform and by the recognition by practitioner of an obligation to society.

Question 3

Would you call a plumber an EC professional or a CPI professional? Explain.

Answer 3

One way that professionals are commonly defined is by the level of expertise and high level of skill they exhibit in their work. They are often referred to as “pros.” Robert Mautz refers to these people as an expert competitor (EC professional). This group is usually defined by their line or work or occupation and in this case by the expert work a plumber exhibits in their work.

Question 4

What is the AICPA Code of Professional Conduct?

Answer 4

It provides guidance to all members of the AICPA with respect to performance of their professional responsibilities. It consists of principles, rules, interpretations, and other guidance for AICPA members.

Question 5

Define “principles” of AICPA Code

Answer 5

They express the basis tenets of ethical conduct and provide the framework for the rules that govern the performance of a member’s professional responsibilities. The principles are not enforceable.

Question 6

Define “rules of conduct” of AICPA Code

Answer 6

They establish minimum standards of acceptable conduct in the performance of professional services. The AICPA bylaws require the members adhere to the rule of the code. The rules of conduct are enforceable and members must be prepared to justify departures from the rules of conduct.

Question 7

Define “interpretation” of AICPA Code

Answer 7

They provide additional guidance regarding the scope and applicability of the rules of conduct. A member who departs from the interpretations shall have the burden of justifying such departure in any disciplinary hearing.

Question 8

What are the four major sections of The Code?

Answer 8

1. A preface applicable to all AICPA member
2. Part 1: Ethical rules for members in public practice (CPAs)
3. Part 2: Ethical rules for members in business (CFO)
4. Part 3: Ethical rules for other members (non-CPA)

Question 9

Diagram of the conceptual framework of The Code

Answer 9

Question 10

What are the steps of the conceptual framework?

Answer 10

1. Identify threats
2. Evaluate the significance of threats
3. Identify and apply safeguards
4. Evaluate the effectiveness of safeguards
5. Document threats and safeguards applied

Question 11

What are the seven common threats to CPA’s compliance with ethical rules?

Answer 11

1. Adverse interest threat - A threat that the CPA will not act with objectivity because the CPA’s interests are opposed to the client’s interests.
2. Advocacy threat - a threat that a CPA will promote a client’s interest or position to the point that they objectivity or independence is compromised.
3. Familiarity threat - a threat that, due to a long or close relationship with a client, a CPA will become too sympathetic to the client’s interests or too accepting of the client’s work or product
4. Management participation threat - a threat that a CPA will take on the role of client management or otherwise assume management responsibilities.
5. Self-interest threat - a threat that a CPA could benefit, financially or otherwise, from an interest in a client.
6. Self-review threat - a threat that a CPA will not appropriately evaluate the results of a previous judgement made by, or service performed by, and individual in the CPA’s firm, and that the CPA will rely on that work in forming a judgment as part of an engagement.
7. Undue influence threat - a threat that a CPA will subordinate their judgement to an individual associated with a client, or any relevant third party due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the CPA.

Question 12

What are the three types of safeguards?

Answer 12

1. Safeguards created by profession, legislation, or regulation.
2. Safeguards implemented by a client.
3. An accounting firm can implement safeguards within the firm.

Question 13

What is the basis for determining that a threat is at an acceptable level after the application of safeguards?

Answer 13

If the CPA evaluates identified threats both individually and in aggregate, the CPA should determine if the threat is at an acceptable level for a reasonable and informed third party who is aware of the circumstances would conclude if a CPA is in compliance with the rules of the Code. (This is the third party rule.)

Question 14

Assume that you have been the tax manager on the tax engagement of XYZ Company. Your spouse has just been offered the job of CFO for XYZ. Is there a threat to ethical behavior? What would be an appropriate safeguard?

Answer 14

If your spouse accepts employment as a CFO, this situation presents a familiarity threat, possibly a self-interest threat, possibly a management participation threat and possibly an undue influence threat.
Your spouse may need to decline the offer from this or any client company as part of their management, or you may need to leave the CPA firm or the CPA firm will need to resign the client engagement to safeguard against this threat.

Question 15

What are the ethical rules for members in public practice?

Answer 15

1. Integrity and objectivity
2. independence
3. general standards
4. other rules for members in public practice

Question 16

Define integrity and objectivity

Answer 16

In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate their judgement to others.

Question 17

Define independence

Answer 17

A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

Question 18

What are the two types of independence?

Answer 18

1. Independence in fact
2. Independence in appearance

Question 19

Define independent in fact

Answer 19

As acting with integrity and objectivity. It is about being honest, unbiased, impartial, and not subordinating the public trust for personal gain. It is the cornerstone upon which attest services provide value.

Question 20

Define independence in appearance.

Answer 20

avoiding potential conflicts of interest that can be observed by others.

Question 21

Define covered member.

Answer 21

A person in a position to potentially influence attest decisions or the outcome of an attest engagement.

Question 22

Define key position

Answer 22

A position with an attest client where an individual can exercise influence over the financial statements.

Also, it can be someone who prepares or supervises other who prepare, financial statements, material accounting records or accounting decisions making.

Question 23

An audit manager in another office from the audit client that quality control responsibilities in the same region as the audit engagement. Is the audit manager a covered member? Explain.

Answer 23

Managers with consultation, oversight, or review responsibilities related to the engagement are covered members due to the fact that the audit manager has quality control responsibilities over the region of the audit client.

Question 24

An audit staff person has been with the firm for only 6 months. Her spouse works for an audit client in an accounting position that makes material accounting decisions in the corporate accounting office. Are there safeguards that can be implemented to preserve the audit firm’s independence? Explain.

Answer 24

Covered members must be aware of potential conflicts of interest that may be raised by the activities of immediate family members and close relatives. An immediate family member cannot work for an attest client in a key position, such as the spouse making material decisions.

Given the relationship of the staff person to someone in a key position with an audit client, either the CPA firm would need to resign the audit engagement or the individual would need to not be employed at the CPA firm.

Question 25

A partner works on the audit engagement of XYZ Company. After her husband died from a heart attack, she has had dinner a couple of times with a major shareholder in XYZ. The shareholder is not part of management. What are the implications if the personal relationship becomes serious between the partner and the shareholder?

Answer 25

A person who has more than a 5% direct investment in an audit client is considered a covered member, and therefore the major shareholder would need to sell enough shares so as to not be an owner of more than 5% of the audit client’s company. Or the CPA firm would need to resign the audit engagement of the client.

Question 26

Define audit committee

Answer 26

A committee of the board of directors responsible for oversight of internal controls, financial reporting and disclosure in the financial statements, regulatory compliance, and the company’s independent auditors.

Question 27

What are the general standards?

Answer 27

1. Professional competence
2. Due Professional Care
3. Planning and Supervision
4. Sufficient Relevant Data

Question 28

Identify two types of engagements that would be covered by the general standards in the AICPA Code.

Answer 28

1. Tax services
2. Consulting engagements

Question 29

When evaluating whether an engagement was completed with due professional care, how might a state board of accountancy judge the due care that was used in completing an engagement?

Answer 29

The due care standard expects CPAs to exercise the professional care that would be expected of other CPAs performing the same work. A State Board of Accountancy would refer to professional standards to judge and evaluate whether work was completed with due care.

Question 30

If a CPA does not have the professional competence to complete an investment advisory engagement, what steps should the firm take to ensure that the engagement is completed with professional competence?

Answer 30

While a CPA does not assume infallibility of knowledge or judgment, a normal part of providing professional services involves performing additional research or consulting with others to gain sufficient competence. If a CPA is unable to gain sufficient competence, a CPA should suggest, in fairness to the client and the public, the firm must find a competent person to review the needed professional service to ensure that the engagement is performed with professional competence.

Question 31

What are the bodies that are designated by the AICPA Council to promulgate accounting principles?

Answer 31

1. Financial Accounting Standards Board (FASB)
2. Federal Accounting Standards Advisory Board (FASAB)
3. Governmental Accounting Standards Board (GASB)
4. International Accounting Standards Board (IASB)

Question 32

Do the rules of conduct on accounting principles prevent a CPA from preparing financial statements for a client on a cash basis of accounting, which is not GAAP? Explain.

Answer 32

CPAs often prepare financial statements for small businesses on a cash basis of accounting or a federal income tax basis of accounting. In these situations, the client’s financial statements, and the CPA’s report should not purport that the financial statements are in accordance with GAAP, and should clarify the financial reporting framework used.

Question 33

Explain why accepting an engagement on a contingent fee arrangement impairs independence.

Answer 33

The rule on confidential client information allows a CPA to comply with a validly issued and enforceable subpoena or summons, or allows a CPA to comply with applicable laws and government regulations.

Question 34

After work, can a member of an audit team discuss confidential information about a client’s business with their spouse, who works for the client’s competitor?

Answer 34

A CPA cannot disclose confidential client information to someone outside of the accounting firm without the permission of the client.