SU 02: Professional Responsibilities Flashcards
Under AICPA code of professional conduct which of the following is required to be independent in appearance and in fact
A tax and management advisory services
B CPA in public practice providing audit and other attestation services
B, according to principles of conduct article 4 - objectivity and independence, a member is public practice should be independent in fact and in appearance when providing audit services.
The concept of materiality is least important to an auditor when considering
A adequacy of disclosure of a clients illegal act
B discovery of a weakness in a clients internal control
C effects of a direct financial interest in the client on the CPA independence
C, independence is impaired if a CPA has any direct financial interest in a client. Materiality is irrelevant. In a and b materiality is judged
Which acts are generally prohibited according to ethical standards
A purchasing product from third party and reselling it to client
B writing a financial management newsletter promoted and sold by publishing company
C accepting commissions for recommending product to an audit client
C, conduct rule 503 commissions and referral fees, prohibits members in public practice from recommending any product or service to a client when the firm performs 1 audit or review of f/s 2 a compilation of f/s that is reasonably expected to be used by a third party if report does not disclose the lack of independence 3 an examination of prospective f/s
According to PCAOB independence is least likely to be impaired if
A provides a service to the audit client on a contingent fees
B receives a commission from the audit client
C has an audit client that employs a former firm professional
C, the firm independence is impaired by the employment of a former firm professional that could adversely affect the audit unless safeguards are put in place.
A and B is incorrect because firm is not independent if firm or affiliate provide services based on contingent fee or receives a commission
SOX 2002, has strengthened auditor independence by requiring management of a public company
A include only independent persons on the board
B report disagreements with former auditors
C select auditors thru audit committee
C, the audit committee must hire and pay the external auditor. Such affliction inhibits management from changing auditors to gain acceptance of questionable accounting methods
1.) Self-interest
Ownership in client creates self interest
2.) Self-review
Audit of a client control system designed by the auditor. Auditors who evaluate their own designed system create threat of self-review
3.) Advocacy – Testifying for a client
Advocating on behalf of a client in litigation create threat of advocacy
4.) Familiarity – Spouse is on BOD of a client
Having a close relative on the BOD of a client create a threat of familiarity
5.) Intimidation
Client threatens to engage new auditor over a dispute. Being threatened by client creates threat of intimidation
1.) Ind. Or Not Ind. Leasing property to client under capital lease
a. Not Independent if – Leasing property to a client under a capital lease is deemed to be a loan to the client. Independence is impaired
2.) Ind or Not Ind – Sales position held by sister
a. Independent – Independence is impaired if an individual participating in the audit has a close relative who has a key position with the client. Sales positions held by John’s sister is not a key position. Thus, independence is not impaired
3.) Ind or Not Ind – Recommending qualified candidate based on client-approved criteria
a. Independent – Recommending qualified employment candidates to a client based on client-approved criteria is not an attest service and does not impair independence. However, making employment decisions does
4.) Ind or Not Ind – Providing tax services
a. Independent – Independence is not impaired if the firm provides tax services as long as the services are not prohibited nonaudit services and the provision of services has been approved by the audit committee. But preparing an tax return could impair independence, e.g. if the member had control of client funds or the return was not approved by a client-designated person
5.) Ind or Not Ind – Client management sues asserting deficient audit work
a. Independent – Inclusion of a clause in the engagement letter providing for indemnification of the firm by the client does not impair independence
6.) Ind or Not Ind – Indemnification Clause
a. Independent – Inclusion of a clause in the engagement letter providing for indemnification of the firm by the client does not impair independence
7.) Ind or Not Ind – Member’s indirect immaterial financial interest in client
a. Independent – Immaterial, indirect financial interest does not impair a member’s independence
8.) Ind or Not Ind – Joint venture in vacation home with principal shareholder
a. Not Independent – An auditor’s joint interest in a vacation home with a principal shareholder of a client is considered a jointly closely held investment that impair independence if it is material to the auditor
9.) Ind or Not Ind - Use of not independent other audit firms work
a. Not Independent – The use of work of another firm that is not independent impairs the firm’s independence
Covered Member
- ) Individual on engagement team that can influence engagement
- ) A partner or manager that provides nonattest services to client
- ) A partner in office where lead engagement partner practices in relation to the engagement
- ) Accounting Firm
Impairment for Covered Member Rule 101
A.) Direct Financial Interest
B.) Loans to or from client, officers, directors or 10% shareholders
C.) Material indirect financial interest
D.) Trustee or Executor of estate w/ direct interest in client
E.) Material Joint Investment with client
F.) If firm partner or professional employee own > 5% of client
G.) Is associated with client as officer, manager, employee or promoter
F.) Covered member was formerly employed or associated
I.) Covered member’s family are subject to Rule 101
J.) Close relative holds a key position of influence
K.) Former partner is employed or associated with client in key position
Rule 102 - Integrity and Objectivity
A member shall maintain objectivity and integrity
- ) Knowing Misrepresentation of Facts
- ) Conflicts of Interest
- ) Obligations to Employers External Accountant
- ) Subordination of Members Judegement
General Standards Rule 201
- ) Undertake services only with professional competence
- ) Exercise due professional care
- ) Adequate plan and supervise performance of services
- ) Obtain sufficient relevant data to provide a reasonable basis for conclusion
Compliance w Standards Rule 202
Members shall comply with standards issued by designated bodies
IFAC Fundamental Principles
- ) Integrity
- ) Objectivity
- ) Professional Competence and Due Care
- ) Confidentiality
- ) Professional Behavior
Code of Conduct Principles (6)
Framework for Rules
- ) Responsibilities
- ) Public Interest
- ) Integrity
- ) Objectivity and Independence
- ) Due Care
- ) Scope and nature of Services (public practice only)
Rules of Conduct
Integrity and Objectivity Independence (only public practice) General Standards Compliance with Standards Accounting Principles Acts Discreditable Contingent Fees Commissions and Referral Fees Advertising Confidential Client Information Form of Organization and Name]
Objectivity and Integrity
Be free of conflicts of interest
Not knowingly misrepresent facts
Not subordinate judgement
Professional Standards - General
Professional Competence
Due Professional care
Planning and Supervision
Sufficient Relevant Data
Confidential Client Information
Professional Obligations Comply w/ Subpoena Official Practice Review Participate in appropriate investigation No prohibition for review of practice for a purchase
Acts Discreditable
A member may not perform an act that would be discreditable to the profession.
The following are situations in which actual or threatened litigation impairs independence:
(1) litigation has begun alleging deficient audit work; (2) litigation has begun alleging fraud or deceit by current management; and (3) management has expressed an intention to commence litigation alleging deficient audit work, and the auditor concludes that it is probable that such a claim will be filed.
Knowing misrepresentations of facts include
1) knowingly making materially false and misleading entries in financial statements or records, (2) failing to make corrections in materially false or misleading statements or records when the member has such authority, or (3) signing a document with materially false and misleading information.
