ch 4 audit

What other restrictions and requirements apply to auditors when providing nonaudit services to public​ companies?

Auditors must be​ pre-approved by the​ company's audit committee before providing nonaudit services to public companies. These services must be disclosed in the public companies annual filings with the SEC with a breakout of audit and nonaudit fees paid to the audit firm.

Identify an activity that may not affect independence of mind but is likely to affect independence in appearance.

Dependence upon a client for a large percentage of audit fees.

Describe some of the reasons why there have been calls for mandatory rotation of audit firms.

Mandatory audit firm rotation will likely increase audit quality by increasing auditor independence and professional skepticism. Some clients have retained the same audit firm for​ decades, creating a question as to whether the audit firm is truly independent.

How could an investor of a public company determine how long an audit firm has served as that​ company's auditor?

PCAOB auditing standards require the audit firm of a public company to disclose in the auditor's report the year in which the auditor began serving consecutively as the company's auditor. The disclosure follows the auditor's signature in the auditor's report.

Identify the circumstances under which a CPA can disclose confidential information without client permission. ​

Participation in peer review, Obligations related to technical standards, Response to AICPA Ethics Division, Subpoena or summons or compliance with laws and regulations.

What is the purpose of the Principles of Professional​ Conduct?

The Principles of Professional Conduct describe characteristics required of a CPA. The principles indicate the​ profession's responsibilities to the​ public, clients, and professional colleagues. The principles are designed to guide members in the performance of their professional responsibilities and meet the basic requirements of ethical and professional conduct.

Identify the six principles of professional conduct

1) Responsbilities;​ 2) The Public​ Interest; 3)​ Integrity; 4) Objectivity and​ Independence; 5) Due​ Care; and​ 6) Scope and Nature of Services

Give an example of when stock ownership would be prohibited for each. Start first with a partner example and then continue with the professional staff example.

1. A partner in the San Francisco office owns one share of stock of a client whose audit is conducted by a different partner in the San Francisco office. 2. An audit manager owns stock in a client whose audit is performed by the office where the audit manager works. The manager is promoted to partner​ mid-year.

f. Seven small Austin, Texas, CPA firms have become involved in an information project by taking part in an interfirm working paper review program. Under the program, each firm designates two partners to review the audit files, including the tax returns and the financial statements, of another CPA firm taking part in the program. At the end of each review, the auditors who prepared the working papers and the reviewers have a conference to discuss the strengths and weaknesses of the audit. They do not obtain authorization from the audit client before the review takes place. Rule(s) of conduct? Violation?

1. confidential client information 2. yes

a. Stefan, CPA, provides tax services, management advisory services, and bookkeeping services and also conducts audits for the same nonpublic client. Because the firm is small, the same person often provides all the services. Rule(s) of conduct? Violation?

1. independence 2. no

b. Roberta Marteens is a CPA, but not a partner, with three years of professional experience with Johnson and Batchelor, CPAs. She owns 25 shares of stock in an audit client of the firm, but she does not take part in the audit of the client, and the amount of stock is not material in relation to her total wealth. Rule(s) of conduct? Violation?

1. independence 2. no

e. Silvia Panster, CPA, set up a casualty and fire insurance agency to complement her auditing and tax services. She does not use her own name on anything pertaining to the insurance agency and has a highly competent manager, Meg Emrich, who runs it. Panster often requests Emrich to review the adequacy of a client's insurance with management if it seems underinsured. She believes that she provides a valuable service to clients by informing them when they are underinsured. Rule(s) of conduct? Violation?

1. independence, integrity and objectivity 2. yes

c. A nonaudit client requests assistance of Taylor Bordeaux, CPA, in the installation of a local area network. Bordeaux has no experience in this type of work and no knowledge of the client's computer system, so she obtains assistance from a computer consultant. The consultant is not in the practice of public accounting, but Bordeaux is confident of her professional skills. Because of the highly technical nature of the work, Bordeaux is not able to review the consultant's work. Rule(s) of conduct? Violation?

1. General Standards 2. yes

d. In preparing the personal tax returns for a client, Sarah Milsaps, CPA, observed that the deductions for contributions and interest were unusually large. When she asked the client for backup information to support the deductions, she was told, "Ask me no questions, and I will tell you no lies." Milsaps completed the return on the basis of the information acquired from the client. Rule(s) of conduct? Violation?

1. Integrity and objectivity 2. yes

What consulting or nonaudit services are prohibited for auditors of public​ companies? ​

1. Management or human resource functions. 2. Financial information systems design and implementation. 3. Internal audit outsourcing. 4. Legal and expert services unrelated to the audit.

After accepting an​ engagement, a CPA discovers that the​ client's industry is more technical than she realized and that she is not competent in certain areas of the operation. What are the​ CPA's options? ​

1. Withdraw from the engagement. 2. Hire someone who has the expertise. 3. Work on a consulting basis with another CPA firm. 4. Obtain the expertise through continuing education and​ self-studies.

g. Francisco Hernandez, CPA, serves as controller of a U.S.-based company that has a significant portion of its operations in several South American countries. Certain government provisions in selected countries require the company to file financial statements based on international standards. Francisco oversees the issuance of the company's financial statements and asserts that the statements are based on international financial accounting standards; however, the standards he uses are not those issued by the International Accounting Standards Board. Rule(s) of conduct? Violation?

1. accounting principles 2. yes

Why is an​ auditor's independence so​ essential?

Independence in auditing means taking an unbiased viewpoint. Users of financial statements would be unlikely to rely on the statements if they believed auditors were biased in issuing audit opinions.

Distinguish between independence of mind and independence in appearance.

Independence of mind exists when the auditor is actually able to maintain an unbiased attitude throughout the​ audit, whereas independence in appearance is dependent on​ others' interpretation of this independence and hence their faith in the auditor.