Rule 101 & 102 Independence and Objectivity & Independence

Question 1

How can independence be impaired by a covered member?

Answer 1

1. Had or was committed to acquire any direct or material indirect financial interest in client
2. Was a trustee of any trust or executor or admin of any estate if such trust/estate had or was committed to acquire any direct or material indirect financial interest in the client
3. Had a joint closely held investment that was material to the covered member
4. Had any loan to or from client, any officer or director of the client, or any ind. owning 10% or more of the client’s outstanding equity securities or other ownership interest

Question 2

How can independence be impaired by a partner/professional employee of the firm or immediate family?

Answer 2

1. Own more than 5% of a client’s outstanding equity securities or other ownership interests
2. (in regards to partner/professional employee) - is simultaneously associated with the client as a
   
   • director, officer, or employee, or in any capacity equivalent to that of a member of management
   • promoter, underwriter, or voting trustee
   • trustee for any pension or profit-sharing trust of the client

Question 3

How should materiality regarding financial interests be determined for immediate family?

Answer 3

Aggregately

Question 4

How could independence be impaired in regards to close relatives?

Answer 4

1. Individual participating on the attest engagement who has a close relative who had (1) a key position with the client (2) a financial interest in the client that another ind. has reason to believe was material to close relative or enabled close relative to exercise significant influence over client
2. Individual in a position to influence the attest engagement or any partner in office in which lead attest engagement partner primarily practices in connection with attest engagement has a close relative who had (1) a key position with the client or (2) a financial interest in the client

Question 5

What is Interpretation 101-2? (exception to Rule 101 - Independence)

Answer 5

Issue: partner or professional employee leaves the firm and is subsequently employed by or associated with a client in a key position, unless ALL conditions are met:

1. Amounts due to the former partner or prof. employee for his/her previous interest in the firm and unfunded benefits are not material to the firm and amounts of payments are fixed
2. former partner or prof. employee is not in a position to influence the accounting firm’s operations or financial policies
3. The former partner or prof. employee is not associated with the firm (eg. provides consulting services to the firm, ind. name is included in the firm directory)
4. Ongoing attest engagement team considers the risk of reduced audit effectiveness resulting from the fact that the partner or prof. employee has prior knowledge of the audit plan
5. Firm assess whether existing attest engagement team members have appropriate experience and stature to effectively deal with former partner or employee if significant interaction will occur
6. subsequent attest engagement is reviewed to determine whether the team members maintained the appropriate level of skepticism when evaluating the representations of the former partner or employee

Question 6

What is Interpretation 101-3?

Answer 6

Issue: CPA performs nonattest services for an attest client

1. Requires compliance with regulatory independence rules by regulators such as SEC, General Accounting Office (GAO) and the Department of Labor (DOL)
2. Not assume management responsibilities for attest clients
3. Not impaired if nonattest services provided prior to period of prof. audit engagement and relate to period before current audit
4. Not impaired if communication between CPA and management regarding: -client’s selection and app of accounting policies and discloses; appropriateness of client’s accounting methods; adjusting JE member prepares or proposes; form or contentof the financial statements

Question 7

Interpretation 101-3: What must the client do when a nonattest service is provided?

Answer 7

1. Assume all management responsibilities
2. Oversee the service by designating an individual (senior management)
3. Evaluate adequacy and skills
4. Accept responsibility for results
5. Establish and maintain internal controls

Question 8

Interpretation 101-3: What must the CPA establish in writing with the client when providing a nonattest service?

Answer 8

1. Engagement objectives
2. Services to be performed
3. Client’s acceptance of its responsibilities
4. CPA’s responsibilities
5. Any limitation of the engagement

Question 9

Interpretation 101-3: Name 5 activities that may impair independence when providing a nonattest service.

Answer 9

1. Having custody of assets
2. Setting policies or strategic direction for the client
3. Authorizing, executing, or consummating transactions
4. Preparing source documents
5. Accepting responsibility for preparing client financial statements

Question 10

What is Interpretation 101-4? (non-profit)

Answer 10

CPA who is director of of a nonprofit organization is not lacking independence IF:

1. Position is purely honorary
2. Position identified as honorary on external materials
3. CPA participation restricted to use of name
4. CPA does not vote or participate in management affairs

Question 11

What is Interpretation 101-5? (loans & independence) - in regards to grandfathered loans?

Answer 11

Grandfathered loans that are permitted (home mortgages, other secured loans, loans immaterial) that were obtained

1. Prior to January 1, 1992, under standards then in effect.
2. From financial institution, for which independence was not required and became an attest client
3. From financial institution, for which independence was not required and was sold to an attest client
4. Obtained by CPA prior to becoming CPA of which financial institution is an attest client

Question 12

Interpretation 101-5: What are other permitted loans from a financial institution attest client?

Answer 12

1. Auto loans and leases collateralized by auto
2. Loans of surrender value under an insurance policy
3. Borrowings fully collateralized by cash deposits at same financial inst (passbook loans)
4. Aggregate outstanding balances from credit card and overdraft accounts that are reduced to a $10,000 on a current basis

Question 13

What is Interpretation 101-6? (Who can threaten litigation?)

Answer 13

Note: Actual or threatened. Immaterial usually does not impair independence.

1. Commenced or expressed intention by present management
2. By auditor
3. By client security holders or other 3rd parties (does not usually impair independence)

Question 14

Explain Interpretation 101-8. (relates to financial interests)

Answer 14

A CPA’s financial interests in a nonclient may impair independence in a client of that CPA when that nonclient has financial interests in that client.

Question 15

Explain Interpretation 101-10. (relates to entities in governmental financial statements)

Answer 15

1. Auditor of material fund type, fund account group, or component unit of entity that should be disclosed in notes of GENERAL PURPOSE financial statements (ind. respect to primary gov and financial statements)
2. Ind. in the aggregate if have funds and accounts

Question 16

Rule 101 applies to all attest engagements except in how they are applied in this type of engagement.

Answer 16

Statements on Standards for Attestation Engagements (SSAE)

Question 17

SSAE engagement requirements: Who requires independence other than agreed upon procedures?

Answer 17

1. Covered members must be independent of responsible party.
2. When someone other than a responsible party engages the CPA, covered members need not be independent of that individual or entity.
3. Nonattest services otherwise prohibited may be provided when such services do not relate to the specific subject matter of the SSAE engagement

Question 18

Whom are responsible for independence with respect to responsible party for Agreed-upon procedures (AUP)?

Answer 18

Covered members and their immediate families.

The responsible party:

1. Individuals on AUP team
2. Individuals who directly supervise or manage AUP engagement partner
3. Individuals who consult with attest team on matters specific to AUP engagement

Question 19

What is Interpretation 101-12? (joint business activity)

Answer 19

Independence is impaired if during professional engagement or while expressing opinion, member’s firm had any material cooperative arrangement with client.

Question 20

What are the exceptions to Interpretation 101-12? (joint business activity)

Answer 20

1. Participation of firm and client are governed by separate agreements
2. Neither firm nor client assumes any responsibility for the other
3. Neither party is an agent of the other

Question 21

Explain Interpretation 101-14. (leases staff for attest function)

Answer 21

The leased staff and management and every individual that is a direct supervisor of attest partners or managers must adhere to the Code of Professional Conduct.

Indirect superiors of attest partners and managers cannot have any relationships prohibited by Interpretation 101-1A.

Question 22

Explain Interpretation 101-17 - What are the characteristics of a network of firms?

Answer 22

Brand name, common control, profits/costs, common business strategy, significant professional resources, common quality controls.

Question 23

Explain Interpretation 101-17 - Network of firms in general

Answer 23

A firm member of a network of firms is required to be independent of financial statement audit and review clients of the other members of the network for such clients for which the use of an audit report is not restricted.

Question 24

Explain Interpretation 101-18 - Affiliates of an attest engagement

Answer 24

Financial interests in, or relationships, with affiliates of a financial statement attest client MAY impair ind with respect to client.

Question 25

Interpretation 101-18 - What are considered affiliates to an attest engagement client?

Answer 25

Entities (subsidiaries, partnerships) that attest client can control, material sister entities, entities with direct financial interest in attest client, an entity that controls the attest client, and sponsor of attest client’s single-employer employee benefit plan

Question 26

Explain Interpretation 101-19 - Educational Institutions

Answer 26

1. Not hold a key position
2. Not participate on attest engagement team
3. Not in position to influence
4. Employed part-time or non-tenure basis
5. Not participate in employee benefit plan
6. Not assume management responsibilities or set policies

Question 27

What is Rule 102 Integrity and Objectivity?

Answer 27

In performance of any professional service, a member shall (a) maintain objectivity and integrity, (b) avoid conflicts of interest and (c) not knowingly misrepresent facts or subordinate judgment.

Question 28

Explain Interpretation 102-2 (conflict of interest)

Answer 28

May occur is a member performing a professional service has a significant relationship with another person, entity, product, or service that could be VIEWED as impairing the member’s objectivity.

Question 29

Impair independence?

Designation as executor or trustree

Answer 29

No, unless actual services are performed.

Question 30

Impair independence?

Member’s ownership of an apartment in a co-op apartment building

Answer 30

Yes, it would impair independence.

Question 31

Impair independence?

Prior year fees for professional services remain unpaid.

Answer 31

Whether they are billed or unbilled, if they remain unpaid for more than 1 year from the date of report, it would impair independence.

Question 32

What is an example of a joint closely held investment?

Answer 32

A member with a a material limited partnership interest is not independent of other limited partnerships that have the same general partner.

Question 33

To issue an audit opinion or review report, the requirement is:

Answer 33

to be independent, unless it is a compilation report.

Question 34

Membership in credit union not impaired IF:

Answer 34

1. Member qualifies on grounds other than providing prof. services
2. No significant influence over credit union
3. Member’s loans are normal
4. Conditions of Ruling 70 have been met

Question 35

Is independence impaired in regards to an operating lease v. a capital lease?

Answer 35

Independence is not impaired when a member has an operating lease from a client made under normal terms.

Independence is impaired by a capital lease from a client unless the loan related to the lease is grandfathered.

Question 36

Effects of independence on a loan from a nonclient to it’s client parent.

Answer 36

Covered member’s loan from a nonclient subsidiary impairs independence with respect to the client parent.

A loan from a nonclient parent would not impair independence with respect to client subsidiary, as long as, the subsidiary is not material to its parent.