Unit 3 - Professionalism and Professional Responsibilities

Question 1

When is audit independence NOT impaired?

Answer 1

Only if interests are both indirect and immaterial is independence not impaired.

Direct Material Interest = Impaired
Indirect Material Interest = Impaired
Direct Immaterial Interest = Impaired
Indirect Immaterial Interest = Not Impaired

Question 2

Define Financial Interest

Answer 2

Includes ownership (or an obligation to obtain ownership) in equity, debt, or derivatives issued by an entity.

Question 3

What is direct financial interest?

Answer 3

An interest owned directly (even if managed by others)

An interest under one’s control (even if managed by others)

An interest beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary either:
- controls the intermediary, or
-has the authority to supervise or participate in its investment decisions

Question 4

What is beneficial ownership?

Answer 4

Occurs when an individual or entity is not the record owner but has a right to some or all of the underlying benefits of ownership, such as to direct the voting or disposition of the interest or to receive its economic benefits.

Question 5

What is the rule regarding unsolicited financial interests? (Ex. Your rich aun writes a will saying when she dies, and you will receive her shares in an attest client)

Answer 5

If covered members receive or learn they will receive an unsolicited financial interest in an attest client (perhaps through gift or inheritance), independence will not be impaired if they dispose of the interest as son as practicable but within 30 days.

If CMs do not yet have the right to dispose of the interest (perhaps a relative who wrote a will is still alive), independence will not be impaired if the CM:
- disposes of the interest as soon as practicable, but no later than 30 days after having both knowledge of and the right to dispose of the interest AND
- does not participate on the attest engagement team after learning of the interest and before disposing of it

Question 6

The Code governs non-audit services (NAS) provision to non-public attest clients and to public non-attest clients.

What communications relate to the audit and are NOT non-audit services?

Answer 6

The client’s selection and application of accounting standards or policies and F/S disclosure requirements

The appropriateness of the client’s methods used in determining accounting and financial reporting

Adjusting journal entries that the member has prepared or proposed for client management consideration

The form or content of F/S

Question 7

What are the four subcategories of ethical rules for members in public practice?

Answer 7

Integrity and Objectivity

Independence

General Standards

Other Rules for Members in Public Practice

Question 8

Define how a conflict of interest occurs.

Answer 8

A conflict of interest occurs when a CPA or CPA firm provides a professional service related to a particular matter involving two or more clients whose interests, with respect to that matter, are in conflict.

Question 9

What three things undermine a CPA’s compliance with the integrity and objectivity rule?

Answer 9

Self-interest

Familiarity

Undue Influence

Question 10

What group licenses CPAs?

Answer 10

The state boards of accountancy

Question 11

What are the four major sections of the AICPA Code of Professional Conduct?

Answer 11

Preface

Rules for Members in Public Practice

Rules for Members in Business

Rules for Other Members

Question 12

Define a familiarity threat.

Answer 12

A Familiarity Threat is the 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.

Question 13

Define an adverse interest threat.

Answer 13

An Adverse Interest Threat is the threat that a CPA will not act objectively because the CPA’s interests are opposed to the client’s interests.

Question 14

Define an undue influence threat.

Answer 14

An Undue Influence Threat is the threat that a CPA will subordinate his or her influence to the client or someone associated with the client due to that individual’s reputation or attempts to coerce the CPA.

Question 15

Define a self-review threat.

Answer 15

A Self-Review Threat exists if a CPA performs bookkeeping services for a private company client and that work needs to be evaluated by the same firm in the course of an attest engagement.

Question 16

Interpretation 1.295 indicates that before performing nonattest services, the CPA should establish and document in writing an understanding with the client regarding _______.

Answer 16

the objectives of the engagemet

the services to be performed

any limitations of the engagement

Question 17

Define Due Professional Care

Answer 17

Due professional care refers to providing an appropriate level of diligence in undertaking professional services.

CPAs should exercise professional care expected of other CPAs.

Question 18

Define Professional Competence

Answer 18

Undertaking professional services that can be completed with the appropriate level of professional skill

Question 19

Define the Planning and Supervision general standards?

Answer 19

Planning and supervision refers to adequately preparing for and providing oversight for the performance of professional services.

Question 20

What should CPAs clarify while preparing financial statements for small businesses?

Answer 20

The financial reporting framework

Question 21

A staff auditor is having a difference of opinion with the auditing firm’s supervisor regarding the application of certain revenue recognition standards in the audit of a company. The matter is not resolved, and the staff auditor chooses to remain silent even though the problem may result in a material misstatement in the client’s financial statements.

Which rule of the AICPA Code of Professional Conduct is this staff auditor violating?

a) General Standards

b) Acts Discreditable

c) Integrity and Objectivity

d) Compliance with Standards

Answer 21

c) Integrity and Objectivity

The matter listed falls under the subordination of judgement issue of the Integrity and Objectivity Rule of the AICPA Code of Professional Conduct.

The staff auditor should report the concern to the next level of management.

Question 22

An auditor issues an unmodified (clean) audit opinion regarding a client’s financial statements even though the balance sheet does not reflect an allowance for uncollectible accounts receivable, which is material to the balance sheet.

According to the rules of conduct for AICPA members, when would this scenario be justified?

Answer 22

This violates the Accounting Principles Rule UNLESS compliance would be misleading due to unusual circumstances.

The rule suggests that there might be unusual, limited instances in which a departure from accounting principles is justified.

Question 23

A CPA firm audits its client’s financial statements and prepares the client’s corporate income tax returns. The CPA firm received a referral bonus for referring the client to a professional firm that specializes in the maximization of research and development tax credits.

Is the CPA firm allowed to receive a referral bonus? How does this affect independence?

Answer 23

The CPA is not permitted to receive a referral bonus when the CPA firm provides assurance services for the associated client.

Because a referral fee will impair independence and independence is required for assurance services, the CPA may not receive this referral bonus when engaged to issue an audit opinion regarding the client’s financial statements.

Question 24

Define advocacy threat.

Answer 24

An advocacy threat occurs when a CPA promotes a client’s welfare or situation to where their impartiality is compromised.

ex. CPA agrees to testify as an expert witness in a court case in which a customer is suing the client over the quality of their products.

Question 25

Define self-interest threat.

Answer 25

A self-interest threat can occur when a firm has excessive reliance on the revenues from a single client.

Question 26

The AICPA Code of Professional Conduct (the Code) consists of three different components. What are those components?

Answer 26

Principles

Rules of Conduct

Interpretations

Question 27

The AICPA Code of Professional Conduct (the Code) consists of three different components.

What does the Principles component entail?

Answer 27

Principles express the basic 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 28

The AICPA Code of Professional Conduct (the Code) consists of three different components.

What does the Rules of Conduct component entail?

Answer 28

Rules of conduct establish minimum standards of acceptable conduct in the performance of professional services.

The AICPA bylaws require that members adhere to the rules of the code.

The rules of conduct are enforceable and members must be prepared to justify departures from the rules of conduct.

Question 29

The AICPA Code of Professional Conduct (the Code) consists of three different components.

What does the Interpretations component entail?

Answer 29

Interpretations 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 30

According to the AICPA Code, when do CPAs not need to be independent of their client?

Answer 30

CPAs performing tax services or consulting services do not need to be independent of their client.

Also, CPAs who compile financial statements for a client with no assurance provided do not need to be independent. However, they need to disclose that they are not independent in the compilation report.

Question 31

Define integrity and objectivity as stated in the Code.

Answer 31

Integrity and objectivity means a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgement to others.

Question 32

What is every external auditor’s report entitled?

Answer 32

Independent Auditor’s Report

Question 33

What does it mean to be Independent in Fact?

Answer 33

Being honest

Not subordinating the public trust to personal gain and advantages

Unbiased and impartial when performing attest services

Question 34

What does it mean to be Independent in Appearance?

Answer 34

Avoid threats to independence and apparent conflict of interest

Observable and subject to enforcement under the rules of conduct.

Question 35

What are the four General Standards included in the Code

Answer 35

Professional Compentence

Due Professional Care

Planning and Supervision

Sufficient Relevant Data

Question 36

According to the code, all members must comply with the four General Standards.

Define Professional Competence.

Answer 36

Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence.

Question 37

According to the code, all members must comply with the four General Standards.

Define Due Professional Care

Answer 37

Exercise due professional care in the performance of professional services.

Question 38

According to the code, all members must comply with the four General Standards.

Define Planning and Supervision

Answer 38

Adequately plan and supervise the performance of professional services.

Question 39

According to the code, all members must comply with the four General Standards.

Define Sufficient Relevant Data

Answer 39

Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

Question 40

A new CPA is aware of how accounting affects stakeholders.

Which characteristic of professionalism is motivating this awareness?

Answer 40

Concern for the public interest