ACC 333 Final Exam [Questions from Discussion Boards]

Ryan and Darla are married. Darla is partner at Ernst and Notold, CPAs, where she serves as the lead engagement partner on the audit of Mortis Company. Darla does not own any stock in Mortis Company, but Ryan owns 1% of Mortis Company's preferred stock. Ryan's ownership of Mortis stock is not material to his net worth. a) Does Ernst and Notold, CPAs satisfy the independence standard to audit Mortis? b) Would your answer be the same if Ryan was Darla's brother instead of her husband? c) Would your answer be the same if Ryan was Darla's grown son who is married to a highly successful investment banker?

(a) Not independent, (b) Independent, (c) Independent. The Code of Conduct provides specific rules in determining when family members' interest should be treated as if they are an auditor's interests. In application this refers to classifying family members as either immediate family or close relatives. Immediate Family - A covered member's spouse, spousal equivalent, and dependents are referred to as immediate family. Stock belonging to immediate family is treated as being owned by the covered member (Klein, 2016, p. 203). Scenario (a) falls into this category since Ryan is Darla's spouse. Close Relatives - Parents, brothers, sisters, and self - supporting children are referred to as close relatives. Client stock held by close relatives is not attributed to a covered member if it is immaterial to the relatives' net worth or does not allow the relative to exert significate influence over the client's governance (Klein, 2016, p. 204). Scenario (b) and (c) fall into this category since Ryan is a brother or a "self-supporting child."

What is independence in fact? Could you own significant shares in a client and be independent in fact?

Independence in fact is defined by the book as "actual commitment to objectivity and professional skepticism." Owning significant shares in a client, in turn, means that you have significant influence over the client. While owning these stocks affects independence in appearance more, it would not be impossible to be independent in fact but very difficult to actually be and prove you are.

For which clients must a CPA be independent?

Independence is required for only those who perform attest services. CPAs in the private sector cannot e independent.

How can employees manipulate anti-retaliation rules?

COLLAPSE Some employees have been tempted to manipulate the protections offered by anti-retaliation rules to stall or avoid being fired from their company. This, however, has been prevented by the anti-retaliation rules stipulation of reasonable belief. In order to be protected by anti-retaliation rules, the employee must have and provide evidence to support a reasonable belief that the employer is engaged in misconduct. If there is no reasonable belief basis, the employee will not be protected.

Is independence required?: Issue an audit opinion concerning the financial statements of an employer-funded pension plan

Required

Under SOX, who has to certify financial information? What do they have to certify?

According to SOX, the CEO and CFO of a publicly-traded company must (under penalty of perjury) certify financial information. They must certify the following: - The company's quarterly and annual reports. - The company's internal controls are properly functioning. - They disclosed to the audit committee and auditor significant deficiencies and material weaknesses that could affect reporting. - Told the audit committee and auditor about any fraud. - Identified any necessary changes in internal controls.

The New York Stock Exchange requires all companies traded on it to utilize internal auditors. Commonly, companies do not directly hire their own internal auditors. Rather, internal auditors often are employed by an outside CPA firm, and client companies outsource their needs for internal auditors from these outside CPA firms. Why don't companies hire their own internal auditors? Although companies outsource their internal auditors from CPA firms, they never outsource them from their own external auditor. Why not?

1 There are a couple reasons why a company may not hire their own internal auditors. One reason is that internal auditors may find it difficult to remain objective -- especially when they are auditing their own co-workers. It is difficult to remain professionally skeptical while maintaining friendships within the workplace. In addition, there can be issues as to who the internal audit department reports to. If the management who hired them is the same management who the internal auditor is responsible to criticize, there is a risk that auditor independence will be impaired. Outsourcing internal auditors eliminates this concern as their job, and their social and financial interests are not tied to the same person whom they are auditing. 2. It would be completely unwise for a company to outsource their internal auditor from the same company where they outsource their external auditor, because an auditor can never audit their own work. For the same company to act as both the internal and the external auditor would be doing just that. The auditors would no longer be maintaining independence.

What are the steps of applying the conceptual framework on independence?

According to the AICPA, the steps of applying the conceptual framework of independence are as follows: 1. Identify the potential threats 2. Evaluate the significance of the threats identified 3. Identify safeguards against the threats identified 4. Evaluate whether or not these safeguards remove the threats or put the threats at an acceptable level

For what services does a CPA have to maintain objectivity and integrity?

According to the Code of Conduct's Integrity and Objectivity Rule, a CPA should maintain objectivity and integrity when performing all professional services. This includes work in public accounting, government, and industry.

What are advantages of setting up a trust?

Advantages of setting up a trust includes: Separate existence with its own set of account records and pays income taxes; to ensure wealth is managed and disbursed wisely after death; if irrevocable trust, grantor loses control of assets and they are not included in the grantor's estate; and, lastly, it protects assets from creditors and litigation claims.

When talking about Covered and Noncovered members who are members?

All members of the AICPA Code of Professional Conduct

What are a tax preparer's responsibilities for completing an engagement?

1) A tax preparers signature is required for the return to be considered complete 2) The taxpayer also needs to have all nonnumerical questions answered, aside from a few exceptions. 3) the tax preparer must return all client records to permit the client to fulfill its filing responsibilities. This must be done, even if there is unpaid fees to the tax preparer. The tax preparer could withhold the final product (tax return) until the fees are paid but the client information must be returned.

What are some examples of safeguards created by attest clients?

1) A tone created by top management that encourages honesty and emphasizes accurate reporting. 2) The hiring of qualified employees that can make decisions in regard to non-attest work that will be passed on to the auditor. 3) establishment of a governance structure that promotes forthright communications concerning financial reporting issues

Identify at least three suggested requirements of a code of conduct of a company?

1) Honesty 2) complying with laws and regulations 3) having full, fair and timely financial reporting

What are two examples of safeguards created by auditors?

1) The use of internal experts to help diffuse client pressures - This helps to prevent clients from pressuring auditors to "see it their way." 2) Policies that ensure a firm or a specific partner is not reliant on a single client - This helps to prevent preferential treatment and auditors turning a "blind eye" to issues found during an audit. 3) policies that identify financial interests or relationships that jeopardize independence 4) policies that segregate audit professionals from firm personnel who perform nonattest services 5) Rotation of personnel 6) audit firm quality control policies such as annually reevaluating clients for conflicts, reviews of auditors work.

What are two examples of safeguards created by regulatory and legislative bodies?

1) ongoing CPE 2) peer reviews of accountancy firms 3) passing the CPA exam 4) taking certain courses (including this one 5) disciplinary actions

A CPA firm requires recent college graduates joining its audit practice to sign an employment contract that specifically prohibits them from accepting "future employment at any time with any audit client for which they participated as a member of the audit engagement team." Assume that such an agreement is enforceable. 1) What are the pros and cons of such a contract term? 2) If an audit firm asked you to agree to such a contract term as a condition of employment, would you consider this provision to be reasonable? What factors might make you view it as unreasonable? 3) Would you expect a CPA firm to view favorably, or view unfavorably, audit staff members who quit to accept an in-house position employment with an audit client? 4) Would your answer to the above question depend on whether the employee quit two weeks before the client's audited statements had to be filed with the SEC?

1. A positive aspect of this contract term is that it reduces the risk of conflicts for the company. Specifically, it reduces the familiarity threat to objectivity and impairment of independence. It also reduces the risk of the former audit employee using their engagement knowledge to outwork the firm on future engagements. A negative aspect is that the employee may not be able to work for a client that they'd want to work for. It may also be more difficult for the client to find a new CFO, CEO, Controller, or Chief Accounting Officer. Many companies fill these positions through former auditors. You should not view this provision to be reasonable due to the fact that it doesn't allow the former employee to work in any position for the client company at any time. Since PCAOB allows exception to the rules, the company should allow less strict rules such as only prohibiting certain positions within the client's company and/or having a "cool-off" period. CPA firms may view favorably of an audit staff member who achieves a high ranking employment position for their clients. This situation is not uncommon for the industry, as it has happened for 1/3 of Fortune 1,000 company CFOs. However, it should be viewed unfavorably and questionable if an employee quits in the mist of an engagement.

"Auditors, like a good set of car tires, need to be rotated every so often." 1) Under what circumstances, if any, must a lead audit partner be rotated? 2) Under what circumstances, if any, must a concurring audit partner be rotated? 3) Under what circumstances, if any, must an entire audit firm be rotated? 4) Should audit firms be allowed to continue as a client's auditor forever, or should audit firms rotate? Identify the pros and the cons.

1. An audit partner should be rotated every 5 years. 2. Concurring audit partners should also be rotated every 5 years. 3. An entire audit firm does not need to be rotated. Congress passed a bill that prohibited the PCAOB from imposing audit rotation. 4. I do believe that audit firms should be allowed to continue as a client's auditor forever. I think this is a great way to gain a deeper understanding of the company as you continue to audit them over the years. The average auditor-client relationship is 28 years for 100 of the largest firms. There can be some cons to this though. The relationship developed could hinder the outcome of the audit.

"After a food inspector examines a restaurant's food safety practices, the food inspector gives the restaurant a letter grade that, by law in my state, must be posted in the front window of the restaurant. Auditors, though, do not have to post their PCAOB inspection reports on their websites. I suggest that the PCAOB should issue auditors ratings that they have to display on the home page of their websites. If restaurant food is deficient, I will never go back there again. But how am I, a simple investor, supposed to know if an auditor's work is deficient?" Should the PCAOB give auditors numerical scores or letter grades, so the investing public can better assess audit quality? How often are auditors inspected?

1. I feel that if the PCAOB were to issue ratings, it would cause auditors have a larger incentive to perform their jobs well. However, there probably aren't many auditors out there who are okay with giving an unqualified opinion on inaccurate financials in the first place, so I'm not sure how productive this system would truly be. Perhaps it would weed out a few bad auditors/firms, but overall investors are still having to trust that their work is good enough to rely on. 2. Firms that audit over 100 public companies can be inspected by the PCAOB annually. Everyone else that doesn't perform over 100 public company audits are eligible for inspection every three years.

Over time, your nonprofit organization, Kidz Against Cancer, has grown to generate over $3 million in annual contributions from donors. One of your donors is a very wealthy individual who has indicated that she is considered creating a trust fund in her grandchildren's name to help fund your organization. If she agrees to donate, the likely amount will exceed $50 million. All of your other donors typically contribute less than $100 to the cause. 1) Are there any aspects of the Sarbanes-Oxley Act that your organization is required to adopt? 2) Are they any other aspects of the Sarbanes-Oxley Act that you believe your organization should consider adopting?

1. Kidz Against Cancer must adopt the rules of the Sarbanes-Oxley Act for not-for-profit organizations. For example, the donor of the $50 million should not be allowed to become a member of the audit committee since her donation has exceeded the total amount of previous contributions. 2. Kidz Against Cancer should adopt the aspects of the Sarbanes-Oxley Act that pertain to whistleblowing, antiretaliation, and document retention.

Charitable organizations often find that potential donors are hesitant to contribute to charities that spend an excessively high percentage of their donations on fundraising costs rather than their core mission. Knowing this, a charity that is dedicated to helping wounded war veterans deliberately misclassified marketing expenses as War Veteran Service Expenditures. This resulted in a misclassification of expenditures, category by category, but it did not misstate total expenditures. 1) Did this charity violate SOX? 2) Did this charity commit any other violations?

1. The charity did violate SOX. SOX demands that expenses be properly allocated and not misappropriated, which this organization clearly didn't hold up to. Even though total expenditures are still the same, the organization is falsely informing investors of how they are allocating their funds. 2. This charity committed fraud, misappropriation of expenditures, and possible money laundering. With the plethora of misappropriation of expenditures present in this case, an auditor would be foolish to not further examine the basis behind the charity. The charity could be set up to launder money, misappropriating what the "investors" money is actually being used for. This could be a scheme for a group of investors to lower their taxable income, while simultaneously generating money from the bogus "charity".

What are the general legal standards of a fiduciary?

1. The responsibility to be loyal to the clients goals 2. Diligent in managing clients funds 3. Candid about their compensation 4. They have to be very straightforward about any conflicts or concerns

Why should a CPA be concerned when a high portion of their revenues is generated from an audit client?

A CPA should be concerned when a high portion of their revenues is generated from a single audit client because this could impact their independence with that client. This scenario would fall under the Under Influence Threat, where an accountant's independence is impaired when a client accounts for at least 15% of the accountant's revenue, because this could motivate them to please the client to prevent them from walking away. This also falls under the Self-Interest Threat, where excessive reliance on a particular client impairs the independence of the accountant.

What is a blind trust? Why might someone set up a blind trust?

A blind trust is a trust designed to keep its beneficiaries in the dark by preventing them from knowing the performance of its assets or earnings. In a typical the grantor appoints an independent trustee to oversee their investment portfolio but names themselves as the trust grantor and beneficiary. It is used by people in political roles to help shield themselves from critiques who may claim they favor certain corporations because they have no real knowledge about what the portfolio is invested in.

Who is considered a client for purposes of protecting interests?

A client is considered someone for which the accountant is providing a professional service. When it comes to corporate or government accounting, the employer is considered the client since they are the ones receiving your services. In the case of public accounting, the client can be anyone to whom you provide professional services to.

Is a conflict of interest a firm issue? Could it be a personal issue instead?

A conflict of interest is often more of a personal issue than it is a firm level issue. The reason why is because if one member does have a conflict of interest with a client, it does not mean that other firm members are precluded from serving that same client. Other firm members that do not have a conflict of interest with the client could perform the service instead, as long as they follow adequate safeguards. These safeguards will be needed to ensure subjectivity such as segregating information from flowing between the disqualified member and other firm members.

The lead attest partner, Lisha, on an audit engagement recently got married to Samid. After falling in love with Samid, Lisha discovered that her future father-in-law is the CFO of her largest attest client. What, if anything, should Lisha do to preserve her independence to remain this client's auditor?

A father-in-law is not considered to be an immediate family member or close relative. Accordingly, assuming that Lisha does not have an extremely close bond with her new father-in-law, Lisha does not have to take any actions because there is no familiarity threat to her independence.

What is a fiduciary? Give an example of circumstances in which an accountant is a fiduciary? Is an auditor a fiduciary? Explain your answer.

A fiduciary involves trust between a trustee and beneficiary. One example is an accountant overseeing a client's investments. Auditors cannot be given a fiduciary relationship with their clients due to their duties to the public. This is because auditors must remain independent and assume more responsibilities than solely the relationship with their client.

You recently introduced your wealthy client Grace to a broccoli importer named Gonzalo. You told your client that she would likely "get along well" with the broccoli importer because they both were entrepreneurial and they both were raised in Guatemala. You also told your client to strongly consider investing with the broccoli importer because he was a "stand-up guy." After several business discussions between Grace and Gonzalo, Grace invested $5 million in Gonzalo's business. Several months later, a fierce hurricane destroyed the broccoli importer's crop, causing the company to cease its operations. Grace now has sued you for breach of fiduciary duty. Are you liable?

A fiduciary relationship may have been created between Grace and you because she is my client. Telling her to invest in Gonzalo because he is a "stand-up guy" is not information that should be used to help a client make a decision about investing. Relevant facts like the location of the crop is in a region prone to hurricanes should have been discussed before the decision was made. In this situation you would be liable.

How do fiduciary responsibilities and potential liability legally different from not being considered a fiduciary?

A fiduciary responsibility means performing your duties with the highest degree of honesty and trustworthiness. Along with this major responsibility, comes the potential liability if you choose to breach this relationship. If fiduciary is breached, the client may recover damages or the fiduciary's ill gotten gains. When an individual is not a fiduciary, they, ethically, should still perform their duties honestly; however, they would not be subject to the potential liability as a fiduciary is.

Distinguish between general consent and specific consent indicating that client is okay with a conflict?

A general disclosure usually states "it is common for an accountant to serve numerous clients, including some who may be competitors, suppliers, or customers". This type of disclosure "is generic in nature and is made without reference to any anticipated or pending conflicts of interest" according to Klein. On the other hand, specific disclosure is "about a particular situation that already has arisen". This type "should be sufficiently detailed about relevant threats and safeguards to allow a client to make an informed decision about where to give its express consent".

What is a living trust? Why might someone set up a living trust?

A living trust is is when the grantor creates the trust for their own benefit because they remain in the same economic position before and after the trust's creation. Someone might set up a living trust because it avoids probate (court proceedings) at the grantor's death. Another benefit to setting up a trust is because the grantor is usually the initial trustee followed by a successor trustee if the grantor were to die or is incapacitated.

What are pretextual retaliations?

A pretextual retaliation is one of the types of illegal retaliation an employer may attempt to make against a whistleblower that is covered under the antiretaliation laws. When an employee is fired because of some made up rational that can be proven false or unjust, their termination would be classified as a pretextual retaliation.

What is a spendthrift trust? Why might someone set up a spendthrift trust?

A spendthrift trust prevents beneficiaries (such as minors) from accessing their trust prior to reaching adulthood. Someone sets up a spendthrift trust in order to prevent the transfer or sale of a trust interest by a minor beneficiary. They want to make sure that the trust is given to the minor when they can use it wisely.

What is a split-interest trust? Why might someone set up a split-interest trust?

A split-interest trust is a trust where grantors want to split trust benefits between two or more beneficiaries. A split-interest trust shares, or splits, the aggregate earnings and assets of a trust between multiple beneficiaries. Customarily, a split-interest trust designates that trust earnings belongs to one beneficiary, but trust net assets belongs to a different beneficiary. The first party is known as the income beneficiary, and the second is called the principal beneficiary or, alternatively, the remainderman. The text provides a nice illustration of why someone might set up a split-interest trust: a married man might create a trust that states, "Income to my wife for her life, with the principal going to our three children after her death." This type of trust allows the wife to maintain her current lifestyle out of trust earnings, but it also ensures that she will not deplete the children's intended inheritance, leaving them with nothing.

What are the duties of a tax planner (rather than a tax preparer)?

A tax planner gives clients advice for the upcoming tax season. Sometimes they are asked to give advice about an actual or contemplated transaction. When doing so, a tax planner follows five steps: understand the relevant background facts, evaluate whether assumptions underlying the transaction are reasonable, apply relevant sources of tax authority to the facts, consider whether a transaction complies only with the law and not with the spirit, and reach a well reasoned conclusion.

When can a tax preparer rely on estimates and when should the preparer require documentation?

A tax preparer can rely on estimates that are reasonable in order to fill in information gaps. There are three limitations: (1) estimates cannot be presented as an exact figure, (2) when estimates are pervasive, they should be disclosed, (3) estimates are prohibited for specified expense activities that are commonly used by taxpayers to exaggerate deduction claims. The preparer should require documentation for specified expense activities that are commonly used by taxpayers to exaggerate deduction claims as the IRS disallows deductions for the deduction of these expenses unless taxpayers satisfy their strict documentation requirement.

What are a tax preparer's responsibilities for correcting intentional misstatements?

A tax preparer's duties are more extensive with an intentional misstatement than with an unintentional error. Upon discovery, a tax preparer should inform the client of the penalties associated with filing a fraudulent tax return. That said, because tax fraud is a legal matter, only an attorney should provide legal advice. Confidentiality prevents a tax preparer from informing a taxing authority without client permission or a the law compelling disclosure.

What is a testamentary trust?

A testamentary trust is a trust that does not take place until the grantor is deceased. These are usually established by the will of the grantor.

What is the meaning of a threshold standard of "more likely than not" and when should it be applied?

A threshold standard of "more likely than not" means that a position taken by a tax preparer/tax client must have a higher than 50% chance of being sustained if it were to be challenged by tax authorities. Due to its stringent nature, this threshold is usually imposed only when evaluating potential abusive transactions that have historically been used to evade paying taxes, such as tax shelters. The "more likely than not" standard must be applied when the tax authority prescribes a standard that is higher than a more lenient standard mandated by the SSTS.

What is a trust? Why might someone set up a trust?

A trust is a fiduciary arrangement that allows a third party to hold assets on the behalf of a beneficiary. The primary reason that someone would set up a trust is to make sure that their wealth is managed and disbursed appropriately after they die. Another advantage of having a trust set up is that it can protect a person's assets from litigation claims.

How would an accountant avoid being a fiduciary? Why would an accountant want to avoid being a fiduciary?

According to the book, if an account wants to avoid being a fiduciary, they should avoid the following: 1) Ensure that clients have the ability to understand and evaluate the advice given to them 2) Ensure that clients understand that they have the ultimate responsibility for a decision 3) Keep clients fully informed about relevant facts, so they are able to make their own decisions 4) Encourage clients to consult with others, such as attorneys and insurance professionals, about the advice given to them 5) Expressly enter into agreements with clients that specify that a fiduciary relationship is not created An accountant might want to avoid being a fiduciary because of the major professional and legal duties associated with the job. In the event that they are taken to court, they have the duty to prove their actions were proper.

What are SOX requirements for auditor and audit firm rotation?

According to the text, SOX requires that the lead partner and the concurring partner must give up their roles every five years. It requires that after the top two partners on and audit engagement have served their client for five years, they must sit out any future engagements for that client for the next five years. Many believe that in order to maintain more independence, mandatory audit firm rotation should be implemented. In this instance the entire firm should be rotated rather than just the top partners of a firm, however, this policy was barred by the U.S. House of Representatives in 2013. In response, it has been suggested that firms should pay audit fees to a centralized pool and then that firm will be randomly assigned an auditor from a pool of qualified CPA firms. Another suggestion is to turn over the responsibility of ensuring accurate financial statements to the insurance industry.

Why would a pension fund manager be considered a fiduciary?

According to the text, a fiduciary would be considered a professional that is entrusted with other people's money or items of value and are expected to perform their responsibilities with the highest degree of honesty and trustworthiness. When it comes to a pension fund manager, they would be considered a fiduciary because they have great discretion in making decisions concerning other's financial well-being such as important investment decisions.

What are IRS guidelines to for conflicts of interest in tax practice?

According to the text, the IRS has established strict guidelines regarding conflicting interests that may arise when an accountant provides taxpayer representation services. According to these rules, if a clear accountant-client conflict, or a dual-client conflict arises, the preparer can continue if the following conditions are all met: The accountant believes they can be competent for all clients It is not against the law Every client is fully informed Client signs a waiver acknowledging their understanding of the conflict

What is the meaning of a threshold standard of "substantial authority" and when should it be applied?

According to the text, the meaning of a threshold standard of "substantial authority" is that a tax position has significant authoritative support. The presence of substantial authority is a qualitative and not a quantitative issue. A tax professional must examine various sources of tax guidance, including court decisions, the Internal Revenue Code, U.S. Treasury Regulations, and other pronouncements issued by taxing authorities. Careful professional judgment is required in making this determination because certain authoritative tax viewpoints must subjectively be weighted more heavily than others. Substantial authority should be applied to a tax position if it subjectively has a roughly 40% or greater chance of being sustained on its merits in a judicial or administrative hearing.

What is the familiarity threat to independence?

According to the text, under the Code of Conduct, the familiarity threat to independence generally arises when a covered member's close friends, family, or colleagues hold a key position with an audit client. A key position is a managerial role in which a person has a primary responsibility for accounting functions underlying financial statements, a primary responsibility for preparing financial statements, or a significant influence on the content of financial statements. Thus, in addition to key accounting personnel, company directors and high-ranking financial officers, including a company's CEO, CFO, Controller, and General Counsel, likewise hold key positions because they have the authority to influence financial statement content. The familiarity threat also may result when accountants have a long-standing professional relationship with client personnel.

What is the False Claims Act? How does it work?

According to the text, under the False Claims Act, whistleblowers are entitled to a percentage of the money recovered from wrongdoers who cheat the federal government. It works because of a feature called the qui tam provision. If federal authorities fail to pursue a claim, the informant may act under qui tam, which is an abridged Latin phrase that means "he who acts for the king also acts for himself." Under this provision, a private citizen can directly sue wrongdoers on behalf of the government without the government's involvement or approval. If successful, whistleblowers who instigate qui tam lawsuits typically retain between 15% and 30% of the government's total recovery, plus their attorney's fees. Over the years, whistleblowers have collected over $2 billion for themselves and shared far more with the federal government.

What is the undue influence threat to independence?

According to the text, undue influence is an intimidation threat where a client overreaches in its attempts to entice an auditor to subordinate its best judgment to conform to the client's wishes. When a client gains this much power over the auditor, it could influence the auditor's opinion, thus violating independence

You are the auditor for Q Company, and you also serve as the trustee of a trust that owns some shares of Q Company stock. According to trust documents, you are prohibited from making investment decisions for the trust. Furthermore, the trust owns a diversified portfolio of 100 stocks in large, publicly traded companies. No stock accounts for more than 2% of the trust's net worth. Does your position as trustee impair your independence to audit Q Company?

According to the three independent rules, this auditor's independence is not impaired. According to documents, the CPA is not authorized to make investment decisions for the trust, the trust is not a significant stockholder in the client company, and Q company's stock is not a significant asset of the trust (less than 10%). Because the auditor passes each of these three tests, the position as trustee does not impair independence to audit Q Company.

What is an Accountant-Client conflict?

Accountant-client conflict arise when you and your client have diverging goals

A CPA firm has numerous partners, all of whom work out of the firm's sole office in New York City. Jeannie is the lead attest partner on the audit of Bell Bank, a small financial institution located in midtown Manhattan. The audit team is comprised of five professional staff members and two administrative staff members. Tony is the managing partner of the firm, who also serves on the firm's Compensation Committee. Casey is the partner in charge of quality control monitoring for the firm, and Carina is the CPA firm's technical expert on derivatives valuation and auditing. Carina was consulted by the audit engagement team to help resolve a difference of opinion between the client and the firm on how a securitization transaction should be reported. Liam is a tax manager who spent four hours addressing a client matter with the state sales tax authorities. Which of these individuals is a covered member regarding the audit of Bell Bank?

All members within this scenario are covered except for Liam and the two administrative staff members. Liam is not covered because he only worked four hours addressing tax matters, when you need to provide a minimum of 10 hours. Jeannie is covered because she is the attest partner. Tony, Casey, and Carina are all covered because they are partners who work at the same office as the lead attest partner.

You serve two clients in the same business, one in Grand Rapids, and one in Kalamazoo. Both clients are expanding geographically, and will probably become direct competitors. What should you do?

Although it hasn't happened yet, the Code of Conduct states that this conflict presently exists (a dual-client conflict to be exact) since it is reasonably foreseeable that the clients will become competitors. In this case, I should give disclosures to both clients and continue serving both if each client gives consent with documentation. If one or both disagrees, I should terminate the relationship with one client and preserve the other.

In what situations are auditors permitted to inform the SEC about improprieties at an audit firm?

Auditors do gain the ability to inform the SEC of bad behavior participated by the firm if:1. Substantial injury may arise from and could cause harm to the firm itself or any investors involved 2. The entity will be planning on impeding any investigation (data dumping, deleting files).3. You have filed a complained more than four months ago and no action has happened since then.

What are the outside auditors' obligations to whistle blow?

American view: A general rule states that outside auditors may not directly inform the government or public about client misconduct. However, there are exceptions to this rule. Some of these exceptions are if a person believes a disclosure is needed to prevent "substantial injury" to financial interests of investors, a person believes an entity is about to impede an investigation such as by destroying documents, and lastly if a whistleblower submitted information internally to a company 120 days ago and the violations have not been corrected. International view: There is much debate whether an outside auditor should report illegal practices, with "some contend that promises of confidentiality are sacred, some believe that accountants should have the right to report suspected illegality but not the duty, and still others contend that reporting suspected illegal acts should be mandatory . . . In India for example, auditors recently became legally required to immediately inform the central government when they have 'reason to believe that an offense involving fraud is being or has been committed against the company by officers or employees of the company'

Distinguish between an actual conflict of interest and an apparent conflict of interest?

An actual conflict of interest occurs when an advisor must choose between acting with integrity or acting with their own self-interest. An apparent conflict of interest is where it is well believed that conflicts could occur in the future or that there is real conflict there now.

Under what circumstances, if any, should an accounting firm be allowed to concurrently prepare a corporation's tax return and perform its audit?

An auditor cannot provide advocacy in a tax hearing, representation in an IRS audit, or prepare taxes for client executives involved in financial reporting. An auditor can provide tax preparation and advisory services if the audit committee preapproves the service.

What tax services can an auditor provide under SOX?

An auditor may provide tax return preparation and advisory services to an audit client. The client's Audit Committee must approve the tax return and advisory services. Tax advisers should be careful when recommending certain types of tax transactions. Auditors can provide tax preparation services as long as the clients are not the CEO, CFO, or controller. They cannot provide these services to anyone involved with financial reporting.

During what time period is independence required?

An auditor must maintain independence during the accounting periods covered by a client's financial statements and the duration of the professional engagement with the client.

Why is a conflict of interest likely to occur to an individual that is in a position to spend company money?

An employee who is in a position to spend company money is likely to have a conflict of interest simply due to the opportunities that arise with such a position. You have the opportunity to choose vendors that you know in your personal life, even if they aren't offering the best price or quality; you can accept kickbacks from vendors, or even submit overstated expense reports. The last two aren't just conflicts of interest but are also theft from the company.

What is external whistleblowing? What are the typical reasons for employees to become an external whistleblower?

An external whistleblower is an informant who reports misconduct to an outside, usually governmental or regulatory entity, such as the SEC. An informant would do this if dissatisfied by the internal control measures taken by a company, or the misconduct requires action from a law enforcement agency. However, an external whistleblower will have to prove that misconduct occurred, which usually requires a substantial amount of evidence. Some challenges that come up are: it is not clear who to talk to, and what would happen when you do; you need to have proof, and you need to protect yourself; and retaliation is likely.

What is an internal whistleblower? Typically, who in a company supervises the whistleblower system?

An internal whistleblower is someone who discovers in a workplace some sort of criminal wrongdoing and chooses to notify a supervisor of their discovery, or even a more formal action, such as filing a written report or calling a company hotline. Typically, the audit committee, a compliance officer, or an independent outsider usually are the ones who supervise the whistleblower system.

What is an intervivos trust?

An intervivos trust is a trust that takes effect while the grantor is still alive

Who determines independence requirements for auditors for public companies?

CPAs make the determination subject to guidance/requirements from the AICPA, state boards and legislature, and for public companies the SEC through the PCAOB. The SEC, AICPA, state boards of accountancy, and state legislatures are regulatory and legislative bodies that have determined independence requirements for auditors of public companies and have mandated safeguards for the auditors. Attest clients and CPA firms have also implemented safeguards in order to preserve independence.

If you have a client that is only a tax client, can you be an advocate or must you be independent?

As a tax preparer to a stand-alone tax client, you are allowed to act as an advocate.

What are auditor document retention requirements under SOX?

Auditor's are required to retain all audit working papers for five years. This mandate requires that auditors retain all business records, including any documents that may be inconsistent with the conclusions presented in audited financial statements.

You have prepared tax returns for Christine and Henry Chang for several years. This year, they emailed you, stating that they have finalized their divorce but they "remained friendly" and want you to prepare each of their individual tax returns. They did insist, however, that each's financial affairs be kept confidential from the other. When Christine brought in her tax records, she listed all three of her children as dependents and provided information which shows that they attended school in her neighborhood, which is about 40 miles from where Henry lives. Christine's oldest son John is 17 years old. Christine provided you with a photocopy of his driver's license which shows his address as being Christine's residence. Accordingly, you filed Christine's tax return, claiming all three children as her dependents. When Henry brought in his tax records, he also listed all three children as his dependents. He brought in a copy of their divorce decree. In a signed document incorporated into this decree, Christine expressly waived her right to claim their children as dependents on her tax return, in exchange for her receiving increased alimony. Based on your online research, the custodial parent who has physical custody of the children a majority of the time generally is entitled to claim children as dependents unless the right to this dependency exemption has been transferred in writing to the noncustodial parent. When you prepare Henry's tax return, may he claim the three children as dependents on his individual tax return? What, if anything, should you tell Christine? What, if anything, should you tell the IRS?

Because Christine's taxes were already filed, Henry can't claim his children. However, the accountant should probably talk to Christine about the issue. Due to the confidentiality rule, this situation is tricky. Informing Henry about this issue could break the confidentiality rule. You should probably advise Henry to seek advice regarding his tax return somewhere else. In this case the IRS may apply the tiebreaker rules.

Joyce spent the last three months working as part of an engagement team that was auditing Vintage by Jessica, a fast-growing, publicly traded, high-fashion cosmetics company headquartered in the heart of Manhattan and Austin. One day after the client's financial statements were issued, Alison, the partner in charge of the audit team contacted you to tell you that she will be accepting a position at this client as its new CFO. The partner also invited you to join "her new team" and relocate to this client's San Francisco office as a junior Financial Forecasting Associate for Asian Operations. You contacted the client to accept this offer on November 5 and plan to resign your current position on November 17. You also called your ace adviser Howard and attorney Lee for advice. How long do you and Alison have to wait before commencing work with this client?

Because of the one year waiting period or anyone who decided to switch from someone being involved in the client audit to someone becoming a CEO, CFO, or controller Alison would have to wait a year before switching. You however would not have this waiting period because this requirement does not apply to a junior level position.

What bodies provide regulatory oversight to public company auditors?

Before the Sarbanes Oxley Act Auditors regulated themselves through the AICPA and professional guidelines. SOX created the Public Company Accounting Oversight Board (PCAOB) controlled by the SEC to regulate the audit of public companies. All public audits must be done with CPA firms registered with PCAOB and must follow PCAOB's mandates. The AICPA still sets the rules for audits of private companies.

Bob is an accounting supervisor who works in Jimenco's tax department. Sharon is a partner at Delight, CPAs, and Delight, CPAs audits Jimenco. Recently, Bob asked Sharon if he could "make some extra cash" by preparing individual tax returns on weekends for Delight, CPA during tax busy season. Delight, CPA hired Bob to prepare tax returns on the condition that his employment will be temporary and he will not have any involvement in the preparation, presentation, or content of Jimenco's financial statements. Does Delight, CPAs satisfy the independence standard to audit Jimenco?

Bob can not be a professional employee working for the CPA firm and a managerial employee working at the audit client. It does not matter that he just works as a tax accountant rather than in the financial department it is that he is an employee for both. Bob would be providing professional services to the client as he is an employee there as well. It does not matter that he is not involved in the preparation of financial statements and that he is in tax.

What are the advantages of a setting up a whistleblower reporting system that allows individuals to report anonymously? Would a system in which people have to identify themselves be better in any respect?

By setting up an anonymous whistleblowing system, individuals are able to raise their concerns about things that could be happening that are unethical, without being afraid of the consequences that may come from it. Additionally, it will encourage more people to come forward, which will cause the misconduct in the office to decrease due to employees being afraid someone will notice and freely report it. The only way in which a system where people have to identify themselves would be better would be that the company would have access to all of the information in a clearer way. They could ask whoever reported it for more details, and potentially could have investigations done a lot faster.

When is independence lost for a a trustee for a trust that owns stock in an audit client?

COLLAPSE If a CPA is the trustee for a trust that owns stock in one of their audit clients, the CPA loses the independence to audit this client when the CPA is authorized to make investment decisions for the trust (such as which stocks to invest the trusts funds in), the trust is a significant stockholder in the client company (when the trust holds more than 10% of a company's outstanding shares), or when the company's stock is a significant asset of the trust (when the stock is more than 10% of a trust's investment portfolio).

What cautions should you take about the possibility of conflicts emerging at a later time in the relationship with a client?

Cautions you should take about the possibility of conflicts emerging at a later time in the relationship with a client are to be constantly evaluating your conflicts and relationships with clients and adjusting as necessary. You must always look ahead to contemplate the possibility of adversarial interests arising in the future. If a conflict of interest is later discovered, an accountant has a duty to eliminate the conflict of interest. Sometimes this may require the accountant to withdraw from a professional relationship.

When is client consent not permitted?

Client consent is not permitted in cases where there is an ethical dilemma or if there a situation that would call into question an accountant's independence.

During a period of cognitive overload, is it advisable, or not advisable, to make ethical decisions?

Cognitive overload arises when people have so much analytical information occupying their minds that they cannot use an analytical, calculating approach to decision making as they normally do. During this time, it is not advisable to make ethical decisions due to not being able to use System 2 thinking.

What are SOX requirements for company provided loans? What are arguments for and against this requirement?

Company-provided loans were disallowed by SOX. - Companies argue against the disallowance of company-provided loans because they are a big benefit to executives, and a method of control and retention for the company. -Companies that offered company provided loans saw them as beneficial since it would help with the retention of key personnel.

What message did the CPA profession get from the Consolidata Services Case?

Confidentially takes precedence over the duty to loyally protect other clients. In general it is expected that accountants must never share their clients personal / confidential information, with the exception of special circumstances. To ensure that accountants are aware of the expectation of this ethical behavior, the concept of confidentiality is incorporated within the AICPA's Code of Professional Conduct.

What is confirmation bias?

Confirmation bias is a cognitive bias that is present when people favor information that confirms the previously existing beliefs or bias that one holds and can cause one to one seek information that aligns with these existing beliefs. It causes one to hold false beliefs as any information that does not align with one's beliefs is disregarded. Confirmation bias affects all of us and is very powerful. Once we have a view on an issue (such as with a client) we tend to seek out information that supports our view and ignore information that is against our view.

Who are covered members who must be independent?

Covered members are accounting professionals who are subject to the full range of independence requirements. This group is divided into five groups of accountants: 1. Accounting professionals who serve on attest engagement teams - this includes all direct participants in an attest engagement including a partner who provides a concurring second opinion. 2. Accounting professionals who are in a position to influence an attest engagement - This could include senior firm members and their superiors who oversee quality control. 3. Partners and senior accounting staff members who provide at least 10 hours annually of non-attest services such as tax or consulting services to an attest client. 4. All partners who work in the same office as the lead attest engagement partner. 5. The firm itself.

What creditor interests impair independence?

Creditor interests that impair independence are borrowing money from a client or a client owes money to you. Borrowing money from a client does not always impair independence. The exception is secured loans at market terms. Likewise, normal accounts receivable and credit extensions for a normal commercial period do not impair independence. However, when a client owes fees for more than one year, independence is impaired.

What is discounting bias?

Discounting bias refers to the concept that people are more likely to choose a smaller, instant outcome rather than a larger, delayed outcome. Theoretically, this could translate to an audit engagement.

If client gives consent to a conflict orally, what should you do?

Even if the accountant receives consent to a conflict orally, it should still be written down. This is to ensure that it is documented somewhere and will give the accountant solid proof of the consent in case it is ever needed.

During the past two years, you audited the financial statements of many clients, including Zohank Company. After one of your individual clients had a stroke, she created a living trust and appointed you as the trustee. According to the trust documents, you may disburse "funds on behalf of the grantor to adequately satisfy her medical needs." You may not, however, alter the trust's investment portfolio. The trust's total investment portfolio is worth $1 million and is comprised of five different stocks, each of which represents 20% of the value of the trust's assets. Zohank Company common stock is one of the five stocks held in the trust's portfolio. Do you retain the independence to audit Zohank Company?

Even though you are not authorized to make any investment decisions, independence is lost in this case, and you will not be able to audit Zohank Company. The reason for this is because the company's stock is a significant asset of your client's trust (more than 10%), which is a situation which indicates a compromise of independence.

What should an auditor do when independence is impaired during an audit?

If independence is impaired during an audit, the auditor should be removed from the audit. Past work done by that auditor for that auditee should be reviewed by another auditor if material or if the reason for impairment goes back in time (just wasn't recognized).

In a trust, what is a trustee?

In a trust, the trustee is the person who oversees the management of the trust. They are typically appointed as the trustee by the grantor, and they are typically their lawyer, accountant, or close relative.

What is independence in appearance?

Independence in appearance is one of the two requirements to maintain independence auditors must be. Meaning in surrounding circumstances should not give an informed observer any reason to doubt a auditor's objectivity, integrity, and professional skepticism.

What are fiduciary duties?

they are duties to perform their responsibilities with the highest degree of honesty and trustworthiness commonly imposed by law when one person could exploit their special position of knowledge or influence to take advantage of a vulnerable second person

Which family members interests are considered direct extensions of your interests?

Family member interests that are considered to be direct extensions of your interests depending on your relation to them. If your immediate family members own stock, it is considered to be the same as if the stock was owned by you. If a close family member owns stock it is considered to be same as being owned by you if the amount is material to your relative's net worth or if it gives them significant influence of the client company. Other relatives interest may be direct extensions of your interests depending on the scenario

What should firms do to manage conflicts of interest?

Firms should establish databases of all clients (with information about each of their competitors, suppliers, and customers), create strict control over access to client files and create protocols on who should be allowed to access the information. They need to make sure that employees, clients, and competitors have no overlaps that may seem like a conflict of interest. They should also create information barriers, educate staff members on the necessity of avoiding conflict of interest, develop reward systems that provide incentives for staff members to report any potential conflicts of interest, and developing a review system to accepting new clients that will include evaluations of actual and potential conflicts of interest.

What is the management participation threat to independence?

IT is essentially where an auditor removes their independence by acting in a managerial role for an attest client and would have to evaluate and audit their own work. The auditor cannot make management decisions but can act as an adviser.

Why is independence so important for a CPA?

If a CPA is not independent there is a higher likelihood for bias in the audit whether intentional or not. Also, if a CPA appears not to be independent, the public will lose confidence in the CPA and the profession will be less able to add credibility to financial statements. in this case, the profession is less able to do their job.

Should coconspirators in any criminal matter be allowed to testify in court? If a whistleblower participated in perpetrating accounting fraud, should she be eligible to collect a whistleblower reward? What are your thoughts?

If a coconspirator participated in committing accounting fraud, they should not be allowed to testify in court or receive a whistleblower reward. Their testimony would not actually be reliable, especially if they have been caught and they're trying to get away with the crime. This person may be willing to throw everyone else under the bus to benefit themselves. This coconspirator committed the crime as the person held on trial and therefore, should also accept the consequences. * conflicting answers on DB

Describe the responsibilities of a tax payer versus a tax preparer for penalties and interest resulting from errors on a return?

If the error is on a past return for which the tax preparer did not prepare themself, they have an obligation to inform the taxpayer of the potential consequences and recommend action, but the taxpayer has the ultimate responsibility. The taxpayer always has final responsibility for accuracy of returns and correcting errors. Tax payers will often try and blame the preparer, but if they have adviser the taxpayer fully and honestly than the taxpayer will have to bear responsibility. Preparers are only responsible and liable for consequential damages stemming from misconduct, usually additional penalties and interest.

What are safeguards in the conceptual framework?

In a risk-based conceptual framework, there are safeguards implemented to help reduce threats to a level that is acceptable by the client and firm. These safeguard are meant to help mitigate and lower the risk of threats having large influence in an accounting process, and help create a more reliable and stable process. They can be new or existing, but as long as they are adequately applied, the threat level should remain okay.

In a trust, what is a grantor?

In a trust, a grantor is the one who puts the assets (like stock or real estate) into it. They are the ones who appoint a trustee to manage the trust. Likewise, the grantor selects the beneficiaries of the trust.

In addition to AICPA independence requirements, what are additional SOX independence requirements?

In addition to the AICPA independence requirements, SOX adds several provisions. First is the self-review and management participation threats. In addition, there is the provision of non-audit services, or "SOX thou shall not do's", which include: Bookkeeping, Financial information systems design and implementation, valuation and appraisal, actuarial, internal audit outsourcing, management decisions, legal, banking, expert witness, and some tax services. Another added provision says that partners cannot be compensated to sell non-audit services. Lastly, the audit committee must preapprove permitted non-audit services. Along with AICPA independence requirements, additional SOX independence requirements are self-review and management participation threats, and the Provision of Nonaudit Services. COLLAPSE The independence rules for auditing public companies incorporate the AICPA's principles and add tougher requirements concerning the use of concurring audit opinions, auditor rotation, CPA firm personnel transitioning to work for their clients, the performance of nonaudit services, and partner compensation relating to nonaudit services. Another requirement of independence is waiting a period before joining an audit client. The author of the text restated the SOX requirements, which states that anyone who, "participated in any capacity in the audit of a company is subject to one-year cooling off period before joining a publicly traded client as its CEO, CFO, Controller, of Chief Accounting Officer." This is make sure that the auditor remains his or hers objectivity and independence.

What is a whistleblower?

In general, a whistleblower is someone who "blows a whistle", or calls out an illegal or foul by disclosing organization misconduct to authorities. There are also specific types of whistleblowers such as internal and external whistleblowers. Whistleblowers can report misconduct for many different reasons. An internal whistleblower might act out of morals or duty to the public, and an external whistleblower might act for financial reasons.

When a publicly traded company acquired the operating assets of another company in a cash-for-assets deal, the overall purchase price had to be allocated among the assets. Due to time pressures, the company's CFO decided to retain the company's auditors to perform this asset allocation task. The company's auditors are highly reputable and have substantial experience valuing the kinds of assets that were involved in the acquisition. The auditors submit a written bid and they submitted the lowest fee of all bidders who participated. Do you applaud the CFO's efforts for getting all of this done on time and on budget?

In short no. Though it seems good that the CFO was able to find the lowest bid among those who are not just experienced but familiar with this company and this was done relatively quickly, it was not the job of the CFO to make this decision. In addition, this decision impairs the independence of the auditors. The audit committee of the company should have been the ones to make the decision as this is a service other than the annual audit.

In preparing an estate tax return, you listed the deceased's total assets at $2.7 million. This is the amount that the executor of the deceased's estate told you was proper. The executor is the deceased's nephew and, for tax purposes, he is considered to be your client. He also is a major beneficiary of the deceased's will. The IRS now has selected this estate tax return for examination. Further discussions with the executor reveal that $400,000 of assets were not reported. You have told the executor that you would like to inform the IRS about this omission and correct it. The executor has refused to let you allow you to do so. What should you do?

In this circumstance, the tax preparer must still maintain client confidentiality, and since the preparer does not have client consent to disclose the omission, it would be best for the preparer to end the professional relationship with the client.

After a fee dispute arose between a CPA firm and its client, the parties agreed to discuss their dispute confidentially with a retired federal judge in mediation. As of now, the parties have not managed to resolve their dispute. No lawsuits have been threatened or filed. Does the CPA firm still retain the independence to audit this client?

In this situation, the CPA does still retain independence with this client at the point in time. This is because the adverse interest threat to independence only applies when "A client's interests are opposite to the accountant's interests, such as when they threaten or are in, a lawsuit against each other." Because discussions between the CPA firm and the client have been peaceful with no lawsuits or threat of lawsuits this means that they are not affected by the adverse interest threat to independence. If the situation escalates to the threat of a lawsuit then we can assume that independence is broken.

A computer virus destroyed all of your client's files concerning depreciation expense and fixed assets. All other tax records for this manufacturing client remain intact. How should you report depreciation on this client's tax return?

In this specific scenario, because a virus destroyed all of the client's files concerning depreciation expense and fixed assets, an honest, estimated assumption can be used; however, a disclosure is required when estimations are used.

Distinguish when the rules of independence and objectivity apply versus when the rules of objectivity and integrity apply for a CPA?

Independence and Objectivity apply when accountants are doing work such as attestation. This is because independence is needed to ensure the accuracy and legitimacy of the financial statements and that there is no influence due to a lack of independence. On the other hand, Objectivity and Integrity rules apply to all professional accountants to ensure that accountants are free from conflicts of interest in their work. This improves the quality and accuracy of the work that accountants do.

You work for a metal fabrication company that has a trustworthy system for anonymously reporting accounting improprieties within the company. It has a clear policy that favors internal reporting. Should a whistleblower be allowed to bypass that system and go straight to law enforcement officials?

It depends on the severity of the violation. I would say that since the company has a trustworthy system in place that the violation should be discussed internally first before involving the proper authorities. However, if there is an issue of time or it is unlikely to be investigated and taken care of internally then the whistleblower should go outside the company

When are gifts or entertainment acceptable to give to or receive from a client?

It is generally at the discretion of the CPA. However gifts are very common in the business world between clients. Gifts are acceptable as long as they are of insignificant amount and do not impact any decisions after the gift is accepted. Entertainment and gifts should be given within reason or a special occasion. If gifts or entertainment violates either sides policies it would not be acceptable to give or receive.

Why should you look for potential future conflicts?

It is important for accountants to look for future conflicts of interest because accountant client relationships are always enduring and expanding. They can go places unexpected which could possibly cause the rise of conflicts of interest. Accountants must periodically review their relationships with clients in order to acknowledge any potential future conflicts.

How likely is it that employers will retaliate against a whistleblower? How can an employer retaliate?

It is usually not likely that an employer will retaliate against a whistleblower due to there being antiretaliation laws that protect the whistleblower from getting discharged, demoted, threatened, or harassed, as long as they have a sincere and reasonable belief that their concern is legitimate. However, if the employee unethically misuses the whistleblower rules and files a frivolous whistleblower claim, they are denied the protections granted to legitimate whistleblowers. If this were to occur, then the employer may be able to retaliate without being at risk of being held liable if the employee was denied of said protections. Nevertheless, both the employers and employees need to make sure to follow the proper rules involving retaliation so the employee can avoid being at risk of being terminated and the employer being at risk of being convicted.

Brett Terrible, your department supervisor, hates you for informing the federal government that he has been taking advantage of his position as the Controller at a publicly traded company to embezzle its funds. As part of his scheme, he sends international wire transfers to secret Swiss bank accounts. He then covers up this embezzlement by labeling the associated disbursements as Bank Fees Expense. Rather than lower your wages and financial benefits, he simply has given you unchallenging job assignments in the hope that you will quit out of boredom. He confided in an email to a friend that, by "thwarting you from proving financial harm, you won't be able to touch him." You have obtained a copy of this email, but you know realistically that hiring a lawyer to sue him would be prohibitively expensive. Is there a way for you to ensure that Brett will be punished? Would your answer be the same to the above question if your company was privately-owned by a single entrepreneur? Would your answer be the same to the above question if your company was a nonprofit foundation dedicated to the prevention of climate change?

It would be difficult in this situation to ensure that Brett is punished. The email could be used as evidence in court against Brett but no financial or physical retaliations have been made against the employee leaving little other evidence to back the case. If Brett has a supervisor or anyone above him, the employee might be able to take their concerns to that supervisor and the matter could be dealt with internally. Since there is no one above Brett there would be no great way to go about ensuring that he is punished. If the company was a nonprofit foundation and there was someone in a supervisor role above Brett I would still say to try and deal with the matter internally. * conflicting answers on DB

A large publicly traded company encourages its production-line employees to invest their tax-deferred retirement money in the company's own stock. The company believes that this creates an allegiance among company employees and gives them an incentive to diligently strive to improve the company's performance. The company recently hired you to advise employees in individual counseling sessions about how they should invest retirement funds in company deferred compensation plans and Individual Retirement Accounts. Do you need to make any disclosures to the employees? Is it wise for employees to invest retirement savings in their company's stock?

It would be important to disclose the fact that you are hired by the company to do this advising. This way the employees that you are giving advice to will know the relationship you have with the company who's stock they are potentially investing in. I also believe that it is reasonable for the employees to invest in their own company's stock. I wouldn't advise to invest an entire retirement portfolio in the company, but it would be good to have a small investment in order to promote hard work and longevity within the company.

How can non-disclosure agreements be used to retaliate against an employee?

Many companies have rules and agreements with there employees that prohibits confidential company information from being known. But there are whistleblowing protection rules which protect an employer from ," Taking any action to impede an individual from directly communicating with the [SEC] staff about a possible securities law violation, including enforcing or threatening to enforce a confidentially agreement." If an employer retaliates against an employee for reporting a securities law violation to the SEC, the employer can be held criminally liable.

What does the author describe as moral licensing?

Moral licensing is a psychological concept where someone who performs a good deed or who goes above and beyond at a task has earned the right to commit a "bad deed" such as taking a cheat day when you're on a diet or maybe someone who works at a restaurant turned in another employee who was stealing so they feel they've earned the right to "steal" some free food from where they work because they saved the company money overall.

Joe Bettalia, a general contractor, has struggled in recent years due to a downturn in the construction market in his region of the country. During the past two years, Joe has failed to file tax returns. He now has come to your office and asked you to file a tax return for the current year. You have agreed to do so. Joe also made an unusual request. He has asked you to deliberately overstate his income and tax liability on this year's return. When you expressed surprise at his request, he told you that "he feels guilty about not having filed with the government" in recent years. Also, he told you that his father never has "shown him much respect," so he wants to leave a tax return that shows high income around the house, where his father will see it. "That way, my Dad will think I'm a success and show me at least some of the respect that I'm owed." May you intentionally prepare a tax return for Joe that overstates his income and related tax liability?

No! An accountant should never purposely file a false tax return even if there is good reasoning to it.

Is an auditor allowed to own a direct interest in an audit client?

No, an auditor is not allowed to own a direct interest in an audit client.

Your client has given you a list stating that her charitable contributions were $20,000 last year. This amount would constitute nearly 10% of her take-home pay. It also is a larger percentage of income than you customarily see clients giving to charity. Do you have a duty to verify the accuracy of this charitable deduction?

No, as an accountant for my client, it would not be my duty to verify the accuracy of my client's charitable contributions. The IRS may choose to audit my client if this figure bothers them, but 10% of a yearly income should not raise any red flags. In addition, this donation could be in the form of non-cash donations such as physical items.

A CPA was elected to serve as his township's City Manager. The City Manager job is a paid, part-time position that requires 10 hours of work per month. The City Manager is not involved in the preparation or presentation of the city's financial statements. The CPA has been the township's auditor for the past decade. Does he continue to satisfy the independence standard to continue as the township's auditor?

No, the CPA does not continue to satisfy the independence standard as the township's auditor. According to the management participation threat, an auditor impairs their independence when they assume a client leadership role. An auditor cannot make important managerial decisions and then objectively review the consequences of his or her own actions. Although the CPA is not involved in the preparation or presentation of the city's financial statements, the city manager acts as an ultimate decision-maker and thus does not maintain the independence required to act as the township's auditor.

You plan to issue an audit report next month. Your client still owes you $20,000 for performing last year's audit, and you do not expect to collect all of these fees by the expected issuance date of the current-year audit. You have offered to lower your fee for last year's services by 25%. Also, you have offered to cancel the remaining unpaid fee and rebill it as part of the fee for performing this year's audit. If your client agrees to this compromise, do you retain the independence to issue the current-year audit report?

No, you are not independent. A CPA can always make a business decision to reduce or cancel an outstanding invoice. However, it is improper to reclassify past-due unpaid fees as if they were incurred this year. Reclassifying fees in that manner is a disreputable attempt to evade the independence rules.

For many years, you have audited the financial statements of Youster Company, an auto parts retail chain. Throughout the years, the founder of Youster Company, Yojan Youster, admired your advice and "good ol' business sense." When Yojan Youster recently died, you learned that his will designates you as the executor of his estate. You have agreed to serve as the executor. According to the will, you must continue to maintain his investment portfolio exactly as it existed at the time he died. His estate's investment portfolio, in part, consists of 70,000 of the 100,000 common shares outstanding in Youster Company. These shares accounted for 5% of Yujan's net worth as of the date of death. Do you retain the independence to audit Y Company?

No, you do not retain independence to audit Y Company. You have the ability to supervise or participate in investment decisions, so you have gained direct financial interest. Since you have gained direct financial interest, you have lost independence regardless of how immaterial it is.

A CPA became fascinated by the precious metals trading industry while auditing a client in that industry. A few years later, this CPA discontinued the practice of accounting and become an independent precious metals trader. Her former client was one of several major competitors in that industry. Did this CPA violate the Code of Conduct's rules against conflicts of interest?

No. A CPA must continue to owe a duty of loyalty to a client even when the client becomes a "former client". Nonetheless, the CPA does not seem to be utilizing any confidential information that she obtained from her former client or violating the trust in its former client. The CPA is just simply following her fascination and a new passion for a new industry that was sparked by the client. The CPA has every right to pursue whatever career they want.

The lead attest partner, Lisha, on an audit engagement recently got married to Samid. If Lisha's husband is a sales representative for one of Lisha's attest clients, is her independence impaired?

No. A client's employment of an auditor's immediate family member or close relative impairs a covered member's independence only if the employment is a key position. Employees hold a "key position" only if they have primary authority for processing or presenting financial data, or they hold a financial oversight role that gives them the authority to influence the content of a company's financial statements. Lisha's husband does not hold a key position.

Your CPA firm performs tax services for an audit client. The client has asked you to prepare and sign its tax return. Do you satisfy the independence standard to audit this client?

No. An auditor may not perform managerial functions for a client, and the act of signing a tax return is a managerial function.

The lead attest partner, Lisha, on an audit engagement recently got married to Samid. Lisha's husband plans to apply for a new job. Can Lisha's husband work as a data entry assistant in the Accounting and Finance Department at her attest client without impairing her independence?

No. He would have primary authority for processing data.

Is independence required?: Render tax advice to a nonaudit client

Not Required

Is independence required?: Determine proper account classifications prior to recording journal entries that will appear on your employer's books and affect the content of its year-end audited financial statements

Not Required

Is independence required?: Make recommendations as an internal auditor to your employer Determine proper account classifications prior to recording journal entries that will appear on your employer's books and affect the content of its year-end audited financial statements Issue an audit opinion concerning the financial statements of an employer-funded pension plan Provide litigation-related advice to a nonaudit client

Not Required

Is independence required?: Provide litigation-related advice to a nonaudit client

Not required

A client has asked you to cosign disbursement checks of over $500 when the CFO of the company is traveling abroad. The company's Assistant Controller is the other designated co-signer. You want to help out your client, but you are concerned that this might impair your independence. May you do so?

Our cooperation preference leads us to want to reduce conflict with the client and do what they ask of us, however an auditors duty is to maintain professional skepticism and look at guidance by the SEC and AICPA before making a decision such as cosigning client checks when it is not our role. When the issue is looked into further, you would see that independence would be impaired by signing the client's disbursement checks.

Is an auditors ownership of an indirect interest permitted?

Ownership of indirect interest is allowed as it is not direct ownership of the company but rather indirect. This could be mutual funds or retirement plans that hold client stock in their portfolio. This is permitted as long as it is not a material interest which is determined in relation to the CPA's (in this case) net worth.

From a behavioral point of view, pleasing clients has immediate psychic rewards. What should you do to mitigate this encouragement?

People prefer immediate gratification, that is why many will choose to please the client now even if it means making a misstatement that will cause problems down the road. In order to mitigate this subconscious reaction, accountants must shift their decision making process from system 1 intuitive decision making to a system 2 formal analysis so that the material misstatements hold more wight in the accountant's mind than the gratification they would receive from pleasing the client.

Kupan, a famous forensic pathologist, failed to report income from the sale of his mansion on his tax return. His gain on sale exceeded $1.7 million. He also sold stock at a $400,000 gain and did not report that gain either. In a criminal prosecution against Kupan for tax fraud, Kupan blamed his accountant Rachel for the omission, claiming that Rachel knew that the pathologist was a "poor record-keeper." Kupan admitted that he read the tax return prepared by Rachel and signed it. Will Kupan's defense of shifting responsibility to Rachel in this criminal prosecution be successful?

Probably not. Kupan as a taxpayer has the ultimate responsibility to make sure the return is accurate. If the accountant knew about the sale of the mansion and stock and purposely left them off then she could be held liable but the tax payer would still be in trouble since it his return.

What are the core duties of an accountant fiduciary?

Professional accountants in public practice are entrusted with client funds to have five core duties: 1) The first is they must not commingle client assets with their own assets. 2) The second duty is they must use assets only for their intended purpose. 3) The next duty they must maintain an up to date accounting for these assets and the related income generated. 4) The fourth duty is they must comply with all relevant laws and regulations. 5) The final duty is if client funds appear to have been derived from illegal activities, they must follow all applicable laws and avoid associating with others who might discredit them or the accounting profession.

What provisions if any of SOX apply to nonprofit organizations and to private companies?

SOX adopted rules to apply to non-profit and private companies. The document retention rule and the whistleblower anti-retaliation rules apply to non-profit and private companies with SOX adaptation. Additionally, nonprofit organizations have voluntarily adopted other provisions from SOX if they so desired. Along with that, states can adopt their own rules to add to SOX.

Identify at least three responsibilities of audit committees under SOX?

SOX established many different responsibilities for audit committees. One of them is that the audit committee has to select and supervise a company's independent auditor. Another one responsibility is that the committee must review all SEC filings such as financial statements, published earnings forecasts, and reports on internal controls. Another responsibility of the audit committee is that they must periodically meet with internal and external auditors to make sure that the reliability and content meet all the necessary standards and regulations as well as are truthful and reliable. A final example is that the committee must monitor internal controls for financial reporting risks and whistleblower complaints.

What are SOX requirements with regard to retaliation against whistleblowers?

SOX protects whistle blowers in two ways. One way is if an executive of a publicly traded company retaliates against a worker, the worker can hold the executive and the company liable for monetary damages. Another way is SOX makes it a crime for anyone to deliberately retaliate against a whistle blower who truthfully informs the correct personnel about the commission of a federal offense. As a result, the government may prosecute a company executives who retaliate against a whistle blower up to 10 years in jail.

What are SOX requirements for whistleblowing? Who must follow these requirements?

SOX requires all publicly traded companies to maintain a whistleblower hotline, overseen by their Audit Committee, to receive complaints from outsiders and employees concerning accounting, internal control, and auditing practices. Employee identity must remain anonymous, and companies may face sever penalties if whistleblower system is not maintained or complies.

What are requirements as far as waiting period before an auditor can join and work for an audit client?

SOX requires anyone who participated in any capacity in the audit of a company is subject to a 1-year cooling-off period before joining a publicly-traded client as its CEO, CFO, Controller, or Chief Accounting Officer. Furthermore, this rule does not apply to privately held companies, so an immediate transition to working as a client CFO for a private company is permissible.

Is independence required?: Issue a review opinion concerning quarterly reports of a privately held company

Required

Is independence required?: Issue an audit opinion concerning a government-run airport

Required

As the accountant in charge of Current Asset reporting for a publicly traded company, you recorded inventories at historical cost in a draft version of the company's quarterly balance sheet. Just before sending this version to the company's CFO, you realized that inventory had to be recorded at lower of cost or market. As a result, you updated your calculations and submitted a corrected version that reported a loss write-down in inventory value from cost to market. To eliminate possible confusion, you put the heading FINAL in bold letters on the submitted version and deleted the obsolete version from the company's server. You did perform a backup of the final version on the company's server, with a clearly worded description to facilitate later retrieval. Did your actions comply with SOX?

SOX rules state that a company must keep all versions of a spreadsheet, including earlier versions even if they were revised. Although the earlier version does not influence the final conclusions of the financial statements, it must still be archived. Because the accountant deleted the obsolete version from the server, they did not comply with SOX.

Who decides the effectiveness of safeguards?

Safeguards are implemented to counteract the impact of threats, these safeguards may be created by an external regulatory or legislative body, the client, or the auditor itself. Even the AICPA, State boards of accountancy, the SEC, and State legislatures have mandated safeguards for auditors. CPA firms and auditors are the ones that decided the effectiveness of the safeguards.

A CPA just left her position as an audit manager at a prominent regional CPA firm to start her own accounting practice. She is interested in marketing herself to serve on companies' Audit Committees. However, she has no interest in serving as a company director because members of Boards of Directors require strategic and marketing skills that she lacks. Are her marketing efforts to get appointed to serve on a company's Audit Committee likely to be successful?

Since Audit Committees are subcommittees of a company's Board of Directors, she would still be considered a member of the board. Her marketing efforts to serve on an Audit Committee is unlikely to be successful since she lacks the strategic and marketing skills required of a member.

"Snakeman" Jackson, as his friends call him, is an aging blues guitarist and songwriter. He frequently tours throughout Europe and South America. He requires tour promoters to pay him half of his fee upfront. He then collects the other half of his fee in cash from the performance venue immediately following the performance. He told you that he collects in cash because "once you're gone, they forget you." "Snakeman" is a great guitarist, but not a great accountant. He maintains meticulous records of his gigs, including bank deposits, receipts, and copies of his contracts. He pays his backup musicians and roadies in cash, but always gets signed receipts from them. However, he pays for his hotels in cash, and usually checks out quickly without saving his receipts. He explained to you that he does this because, once he has collected in cash for a performance, he wants to minimize the amount of cash he physically carries with him to the next location. It is clear to you from your client's website that he did in fact perform last year at over 80 venues throughout the world. How should you report the hotel expenses on Snakeman's tax return?

Since the client keeps meticulous records of his gigs it is clear he performed in 80 cities. With him paying in cash at the hotels he stays at to minimize money he carries there will be little to none of a paper trail from his stay there. We can report the hotel expenses as long as we have a reasonable estimate to be based off of. If we are able to get the rates in the cities he stayed in or common cost at the hotel we could then have a reasonable estimate. By giving an estimate on the amount of money spent in hotel expenses there will have to be a reasoning disclosed as to how the estimate for expenses was conducted.

A CPA recently purchased several bonds issued by its audit client. Does this CPA satisfy the independence standard to continue auditing this client?

The CPA does not satisfy the independence standard to continue auditing this client because of the financial relationship established between them and the client. The bond is in effect a loan to the bank. This would be a violation of independence

Describe the Dodd-Frank Whistleblower Incentives and Protections.

Some the incentives laid out in the Securities Whistleblower Incentives and Protections section of the Dodd-Frank Act include: informants may be awarded between 10% and 30% of any amounts recovered over one million and they may receive a bonus if they can prove that they informed the proper individuals internally first before informing the SEC. The Dodd-Frank Act also provides some protections for informants in order to protect them from forms of retaliation from their employers. According to this law, companies may not fire anyone engaged in protected whistleblower activities, demote them to a lesser paying job in a less favorable location, suspend them, threaten them with retaliation, harass them, or discriminate against them in any direct or indirect manner.

What are our normal biological influences towards whistleblowing?

Studies completed on vervet monkeys, Brazilian ants, and 18-month-old toddlers suggest that humans have an innate tendency to help others. Using brain imaging equipment, further studies indicate that our brains pleasure sectors become activated when we sacrifice our self-interest for the benefit of strangers. Although the aforementioned research shows we have a natural tendency and experience some joy in helping strangers, other research on fairness suggests that we are likely to be disgusted when others profit unfairly.

What is the responsibility of a tax preparer of informing the IRS of client tax improprieties?

Tax preparers must be careful about their duties of confidentiality. They must never disclose expenditures even if they are illegal. The tax preparer may only express their disapproval if they end their professional relationship with the client.

What are your duties as a tax payer's advocate? Contrast the responsibilities to the relationship of an auditor and client.

Tax professionals have both the right and responsibility to advocate for their clients as long as recommended tax positions comply with established reporting standards. However, a tax advisor must not advise their client to take an unsupported position because the probability of audit is low or in order to negotiate towards a supported position. Unlike auditors, tax advisors are not expected to approach uncertain tax questions with the same lack of bias that applies in expressing an opinion on the fairness of the presentation of financial statements. To satisfy independence requirements, an auditor cannot serve as a client's advocate; representing a client may lead others to reasonably doubt their ability to remain an arbiter of facts. Tax practitioners are not independent, and thus they may argue on their clients' behalf.

Generally, what standards and laws determine fiduciary responsibilities?

The AICPA's Statement on Standards in Personal Financial Planning Services and the Code of Conduct determine fiduciary responsibilities. Most notably, CPAs must especially abide by the Code's provisions relating to conflicts of interest, commissions, and referral fees. CPAs or other financial professionals who have managerial discretion over client funds are additionally subject to general legal standards. Additional professional and legal duties arise when an accountant takes custody of assets.

In response to a new banking regulation, the consulting department of your CPA firm has been retained to determine the amounts that a bank client overcharged customers on their credit cards. A customer is entitled to either accept a refund equal to the amount calculated by the CPA firm or submit its disputed claim to arbitration against the bank. As a new partner at this CPA firm, you have been put in charge of dealing with all such claims, which encompasses over 40,000 bank customers. In reviewing this list of claimants, you noticed that one of the bank's customers is your former college roommate. You still socialize with this former roommate frequently. Does your CPA firm have a conflict of interest in determining the refund amount owed to your former roommate?

The CPA firm does not have a conflict of interest in determining the refund amount owed to the former roommate. That said, the accountant does have a conflict of interest and should inform another partner to review/process my roommates claim.

What nonattest services can be provided to an audit client?

The Code of Conduct has resolved that generally, CPA firms may provide nonattest services to audit clients as long as four elements are present: 1. The CPA firm does not make client management decisions. 2. The Client has the skill to supervise and evaluate the provided nonattest services. 3. The client accepts full responsibility for all services rendered. 4. Both parties documented in writing the nature and scope of the nonattest services to be provided.

What is the Dual-Client conflict?

The Dual-Client conflict is what happens when an accountant has two clients that have opposing interests. The accountant cannot protect the interests of both clients at the same time.

What are international requirements for auditor rotation?

The European Parliament began limiting auditor-client relationships to a maximum of 10 years. Unlike the partner rotation (5 years with a client and 5 years off) seen in the United States, international standards require audit firms to rotate every 10 years. There is a possibility for twenty years for member states if a public audit tender is held after the first ten years.

Describe the IRS Whistleblower program.

The IRS Whistleblower program pays individuals for solid evidence on large recoveries, and the information provided does not have to be original or private information. The program protects the identities of those who come forward with information, but that is not to say that the individuals are cleared of any legal trouble because of their whistleblowing.

What is the PCAOB? What are SOX registration requirements of audit firms with the PCAOB?

The PCAOB was created in SOX to set public-company governing rules that were set by the AICPA prior to SOX. The creation of the PCAOB made more strict rules for independence, and documentation rules. In order to register with the PCAOB companies must: 1) Disclose in initial registration: fee structures, QC policies, and Audit clients 2) Provide a routine annual report specifying nature and amount of fee income 3) Provide a special report within 30 days of a reportable event 4) Auditors must be approved by the PCAOB before becoming an external auditor of a public company 5) Must undergo periodic QC inspections,

What is the SOX prohibition on coercion?

The SOX prohibition on coercion is simply the prevention of management, directors, the board , etc. from influencing their auditors. Any act of coercion, manipulation, or fraud to the auditor is strictly prohibited.

What are the SOX rules for independence and expertise for members of the audit committee?

The SOX rule for independence applies to the audit committee members who were selected from the company's Board of Directors. They must, however, be independent of the of the corporation they serve. Company officers, paid outside lawyers and consultants, and shareholders who own more than 10% stock cannot serve in the audit committee. The SOX rule for expertise states that at least one member of the audit committee should have proven expertise in accounting or financial management.

What are the governing sources of guidance for the conduct of a CPA tax preparer?

The U.S. Treasury Circular 230, state and local laws and AICPA's Tax Executive Committee - Statements on Standards for Tax Services (SSTS) are all governing sources for a CPA tax preparer. The primary source of guidance for federal income taxes comes from the U.S. Treasury Circular. However, CPA tax preparers must also follow the guidance from state and local tax laws and AICPA's standards for tax services at the same time.

A parent company owns 83% of a subsidiary. When the parent corporation recently bought valuable patents from this subsidiary, the minority shareholders in the subsidiary allege, the parent company paid a below-market price. The three largest minority shareholders of the subsidiary claim that the subsidiary sustained damages by virtue of the parent company underpaying for these patents. These shareholders want to hire you to determine the amount of damages that they suffered. You do not have any interest in the parent company. Do you have a conflict of interest in representing these three minority shareholders?

The accountant, in the situation presented above, does not have a conflicting interest; however if the accountant also represented the parent company, this would create a dual-client conflict. The accountant should refrain from representing either side in this situation.

What is the adverse interest threat to independence?

The adverse interest threat to independence is when the interests of the CPA are in conflict with the interests of thier client

What is the advocacy threat to independence?

The advocacy threat to independence happens when an accountant's services as a client's representative makes them either unable to remain impartial as an arbitrator of facts or makes other third parties view them as being unable to be impartial.

Should the amount of the reward given to a whistleblower depend upon whether the whistleblower acted out of the purest of motives, rather than greed or a desire to impose revenge on his employer or a coworker? Explain your answer.

The amount of the reward should be the same regardless of whether or not the whistleblower acted out of the purest of motive or greed. Basing the reward on different things will only cause people to lie and could potentially cause fewer people to be whistleblowers. If the reward were higher if someone acted out of the purest of motives when compared to greed or desire for revenge, fewer people would report illegal acts. It would also be difficult to determine whether or not someone was trying to get revenge on another coworker or employee.

Can an auditor satisfy the Independence Rule by having a tough and objective attitude, or does an auditor's appearance also matter?

The appearance of independence for an auditor is also needed to satisfy the Independence rule. This means that there should be no circumstance when an informed observer should doubt an auditors integrity. To achieve independence, an auditor must satisfy the two pronged test of state of mind and appearance. To emphasize it is important that the public perceive the auditor as independent to add credibility to financial statements. Also, even if the auditor believes himself to be independent if he has a relationship with the client he may subconsciously have bias that influences the audit.

What is the self-review threat to independence?

The book gives the definition of self-review threat as " An accountant cannot objectively evaluate or audit services, such as accounts receivable or payroll source document preparation, that he or she previously performed in a role essentially equivalent to being a client employee"

What is likely to be a buyer's reaction when he is specifically told about a conflict of interest?

The buyer is interested in ensuring they get the most beneficial price available to them in a financial transaction. Often when a conflict of interest arises a buyer is being disadvantaged by the seller, so they would lose faith in the arrangement or potentially money depending on when the conflict of interest was discovered. It is in the buyer's best interest to deal with sellers who do not have any conflicts of interest that might prevent the buyer from getting the best deal possible, so the buyer may pull out of deals involving conflicts of interest.

What are the challenges of external whistleblowing?

The challenges of external whistleblowing stem from the fact that it more of a bureaucratic process than internal whistleblowing. The whistleblower is responsible for identifying the appropriate enforcement agency and the person who is in charge of pursuing whistleblowing claims. The whistleblower must also collect substantial evidence to prove wrongdoing, which can be an uphill battle. Some challenges that come up are: it is not clear who to talk to, and what would happen when you do; you need to have proof, and you need to protect yourself; and retaliation is likely.

What are SOX requirements for claw backs of compensation? What is a claw back?

The claw-back provision is the requirement where a company's CEO and CFO have to forfeit personal income earned within the 12-month period following the issuance of erroneous financial statements if the error found was caused by employee misconduct. According to Klein, it includes "all forms of income that are tied to reported company results, such as bonuses, sales incentive payments, the receipt of stock option, and capital gains earned by the officers". The "claw" part is like a metaphor because the company angrily, like a tiger, takes back any undeserved executive profits.

Your audit client was thrilled with your audit team's efficiency and slightly wacky sense of humor. On the day that the client's audited statements were issued, the client's Controller invited all of you to "share some beer, catch some dinner, and watch a basketball game at a sport bar." The Controller insisted on "picking up the tab" on the company credit card. What, if anything, should you do?

The client does not appear to be trying to influence the audit so it would be acceptable from the AICPA Code point of view. But, if the audit firm has a policy of not accepting any gifts from the client it should be turned down. As indicated , it is also a good idea to let your superiors know so there is no misunderstanding.

Your client is a well-known fashion designer who has created three successful Internet brands. Each online brand sells a different genre of clothing, and each is profitable. This past year, your client boasted that she "got great pleasure" out of creating a fourth, innovative retail clothing brand. This brand was professionally managed and well-capitalized, but it unfortunately generated a large loss due to a lack of customers. Your client wants to deduct all of the expenses incurred by this brand on her tax return, but she has heard that personal expenses may not be claimed and she admits that she got great personal joy out of starting this business. May your client claim all of these expenses?

The client will most likely be able to claim the expenses because she has established that these clothing brands generate a profit and seem to take up a lot of her time, so she can make money and profit to support her livelihood. Just because she got personal joy from it, does not mean it can not be considered as a business. Other factors that may be considered are if she plans to rethink her fourth clothing line to generate a profit in future years, or if she wants to keep it going as it is just for the pleasure of doing it.

A company's Audit Committee recently held a three-hour meeting with its internal auditors, its CFO, its Controller, and its external auditors. The meeting was held to investigate reports filed by two internal auditors about deficiencies in the company's internal controls and accounting department personnel policies. Both internal auditors were introduced to the meeting participants and were asked to participate in Question and Answer sessions about their concerns. Did the company do anything wrong?

The company did anything wrong. Because they allowed a collaborative discussion between the internal and external auditors with the direction and input of management, they were able to have a comprehensive analysis of deficiencies within the company's internal controls and accounting department personnel policies. SOX established there had to be occasional meeting between internal/external auditors to discuss the company but does not state they can't also have a meeting with management involved as well.

What are the requirements for document retention for public companies under SOX?

The document retention policies put in place by SOX was to deter companies from intentionally (or unintentionally) destroying incriminating documents. The type of documents that are expected to be retained include all electronic and paper documents that relate to an organization's plans, policies, and/or performance. A company must also keep all previous versions of spreadsheets and reports. How long these documents are to be retained varies depending on the type of documentation. Stock ownership records, bank statements, training manuals, and contracts are to be kept forever. Other documents (such as payables invoices or cash receipts) should be kept for a minimum of seven years.

What are the duties of a trustee?

The duties of a trustee consist of the duty of loyalty, care, and impartiality. 1) Duty of Loyalty: To whom is the duty owed? 2) Duty of Care: Adhere to grantor's wishes 3) Duty of Impartiality: Select investments that objectively and impartially further the interest of all trust beneficiaries

Why is their elevated concern with related party transactions?

The elevated concern with related-party transactions is due to the higher possibility of a conflict of interest situation. Since conflicts of interests arise whenever a professional acts out of self-interest, transactions between related parties could be an issue if they receive favorable treatment. Related-party transactions could be sales, lease agreements, or loan agreements between business affiliates, shareholder groups, or subsidiaries. Related-party transactions are not illegal, but could lead to illegal situations.

In what situations are auditors permitted to inform the SEC about illegal conduct of clients?

The following events may allow auditors and others to inform the SEC of illegal activity when a person believes: - A disclosure is needed in order to prevent "substantial injury" to the financial interest of an entity or investors. - The entity is about to impede an investigation, such as by destroying documents - A whistleblower submitted information internally to a company at least 120 days ago, and no correction has been made to the securities violation.

Identify at least three non-audit services that SOX forbids an auditor from doing?

The following services cannot be performed for audit clients are listed below, 1. Bookkeeping services 2. Certain tax services 3. Hiring, leasing, or other managerial decisions

What are the challenges in identifying retaliations in mixed-cause situations?

The main challenge in identifying retaliations in mixed cause situations is being able to tell if the employer took an action against the employee because of a legit reason such as having a mediocre or poor work record, or if the action was taken as retaliation for whistle blowing activities. Typically the scales of justice are tipped in the favor of whistle blowers, because they only have to prove that whistleblowing was one of the reasons they were fired/demoted, not the only reason.

Two employees at a large nonprofit organization recurrently have observed the Chief Recruiter for their company extend job offers to prospective employees who are members of the Chief Recruiter's ethnic group. Other, more deserving applicants routinely are rejected. The two observers both are contemplating becoming internal whistleblowers. One is a union employee who has been with the organization for 17 years and regularly receives raises in accordance his union contract. The other is a non-union employee who recently joined the organization. Which of these employees is most likely to inform the company's Ethics and Compliance Officer?

The new hire nonunion employee is more likely to be a whistleblower. Since they have been recently hired, they likely do not feel the same sense of obligation to the company that the employee who has been there for 17 years does. They also are likely only receiving the company's entry level wage and are aware they could find another company to work for and receive the same or similar wage if they lose their employment at the company as a result of their whistleblowing and so they are less afraid of retaliation.

Compare U.S. requirements for whistleblowing with international requirements?

The requirements from the United States when it comes to whistleblowing is optional for most employees within a company, but can be required if you work in a financial department. Internationally on the other hand it varies depending on the country and mostly the organization.

What is the role of an accountant in estate practice?

The role of an accountant in estate practice also includes keeping track of the estate income tax return on income from date of death until distribution of assets, the accountant prepares a final balance sheet after somebody dies. They ensure that all of the deceased's assets are in order and debts are paid. They also file an estate tax return if the deceased's net worth exceeds a certain amount.

What is the role of the audit committee for non-audit services?

The role of the audit committee for nonaudit services includes selecting and supervising a company's independent auditor and preapproving all services provided by the selected auditor, including nonaudit services such as tax planning. These steps act as a safeguard to the company.

Which non-covered members of a firm must be independent?

There are two circumstances in which non-covered members must be independent. If they own over 5% of an audit client's stock, either individually or combined with immediate family members, they must remain independent. Additionally, they must be independent if they are simultaneously also employed by an audit client in a position that involves or may influence the financial reporting process. The reason behind why these non-covered members must be independent is due to conflicting interest "If accounting professionals were predisposed to evade independence requirements, they might contemplate transferring formal ownership of client stock into relatives' names."

What is the self-interest threat to independence?

The self-interest threat to independence is defined by the book as "financial stakes that make others question auditors' impartiality."

What are a tax preparer's responsibilities on completing a tax return?

The tax preparer's responsibilities on completing a tax return include the following: 1) Obtaining Client Information 2) Filling in Information Gaps 3) Formulating Tax Return Positions 4) Evaluating Uncertain Tax Positions 5) Understanding the Threshold Standards 6) Applying the Threshold Standards 7) Claiming Positions That Are Inconsistent with Prior-Year Returns 8) Completing a Tax Return 9) Correcting Past Tax Returns 10) Correcting Unintentional Errors 11) Correcting Intentional Misstatements 12) Completing the Client Engagement

What are a tax preparer's responsibilities for correcting unintentional errors?

The tax preparer's responsibility is to disclose the error to the client. Client's are ultimately responsible for their taxes. But if an error is caused by the carelessness of the accountant and causes incremental harm beyond the principal amount of tax owed, then the accountant is responsible for the consequential damages. If the said client refuses to refile their return the accountant should consider dropping them as a client.

To whom is the duty of loyalty and care owed by a trustee?

The trustee owes a duty of loyalty, and duty of care to the grantors and their wishes.

What are the two principal duties of an accountant in trust practice?

The two principle duties of an accountant in trust practice is to manage the assets of a trust based on the Grantor's intent and to prepare or have prepared, the trust's financial statements and tax return. For each of these duties, the accountant is entitled to a fair compensation for the provided services.

Identify typical reasons why people whistle blow?

The typical reasons informants to whistle blow include motivations such as revenge, to save their own reputation, financial reward, the IRS whistle blower program, and the Dodd-Frank Whistle blower Program.

What ownership interests impair independence?

There are two types of ownership interests that impair independence, being direct interest and indirect interest. Direct interest occurs when a covered member owns shares of stock in a client, even if it is only one share. Indirect interest occurs when, according to the text, "when a covered member owns a stake in another entity but does not control or influence the entity's investment decisions". Indirect interests impair independence only if a covered member owns a material indirect interest.

"Sleazy" Slenoso, is a convicted ex-governor who has been indicted by a federal grand jury for running a Ponzi scheme that cost investors millions of dollars. As part of the government's allegations, Sleazy is accused of murdering angry investors. As a result, if Sleazy loses, a judge might impose the death penalty on him. Sleazy is a notorious character because he has a large tattoo of a pink flower on his forehead, and he is the son of a well-known supermodel and famous boxer. Sleazy wants to hire you to prove that he properly accounted for investment funds and show that no one lost "even one dime." He cannot afford to hire you, though, so he has offered to give you the exclusive rights to any movie or book written about him in return for your services. Do you have a conflict of interest in representing him in criminal trial?

There is a conflict of interest in this situation because Sleazy is offering a reward in return for accounting services. If they represent this client then the accountant will be biased and will give him a better result.

The Code of Conduct in use at a well-known national tax preparation firm says that, if you are contacted by law enforcement, a governmental agency such as the IRS, SEC, or FBI; or the media about "actual or suspected improper or illegal activity of any kind by you or anyone connected with the Company, you must immediately report the contact to your manager (unless that would be inappropriate under the circumstances) and the Legal Department..." Is this Code of Conduct provision ethical?

This Code of Conduct provision is unethical. Even before the SEC implemented Item 406 which requires companies to disclose their adoption of a code of ethics, plenty of companies have had codes that direct employees to report to their manager or the legal department simply in order to receive council and advice from more knowledgeable sources. Additionally, the wording from the provision in this example even gives the exception "unless that would be inappropriate under the circumstances" so this it is not unethical, especially because it includes an exception which could cover a broad variety of situations. * conflicting answers on DB

How has regulation of auditors changed from before and after SOX?

With the passing of SOX, new regulations arose for auditors regarding their regulatory oversight. SOX created the PCAOB which toughened independence rules and document retention rules. Documents would have to be kept for prolonged periods of time, and auditors could not be company officers or shareholders who owned more than 10% of outstanding shares.

If you have a client that is both a tax and audit client are you an advocate or must you be independent? Explain.

This is a somewhat conflicted position. It is allowed but some think auditors should not also be tax preparers and advisers. A CPA firm that provides both tax and audit services to a client must remain independent; independence is required whenever a CPA expresses an auditing or other attest opinion. Any firm that provides audit services for a client cannot be an advocate. Advocating for an audit client compromises the CPA firm's independence. If a firm were to advocate for an audit client, third parties may reasonably doubt an auditor's ability to remain impartial arbiter of facts.

You have prepared the tax return for a married couple for many years. This couple is now divorced. They have approached you to prepare individual tax returns for each of them. What should you do?

This situation is known as a dual-client conflict. You should continue working with both clients if representation is not prohibited by law, each client is informed about the nature of the conflict, and each promptly waives the conflict in writing on being informed. Because you have prepared tax returns for the couple for many years, there is reasonable belief that you'd be able to provide competent and diligent representation on their behalf.

If someone reveals their conflicts of interest, will they feel more or less inhibited to exaggerate their claims?

Those who engage in full disclosure are more likely to exaggerate their claims due to moral licensing. By disclosing their conflict of interest, they feel entitled to engage in a bad deed to balance out the good of disclosure. Once someone discloses a conflict of interest, they may feel that they can tout their interest freely and to the fullest extent

What is the meaning of a threshold standard of "reasonable basis" and when should it be applied?

Threshold standards are used to measure the likelihood of an uncertain tax return position being upheld; there are five categories of threshold standards. A threshold standard of reasonable basis means that the uncertain tax position has been viewed favorably by at least one authoritative source, and is an asserted position. It should be applied when there is at least a 20% likelihood (specifically 20% - 33.3%) that the position would be sustained in a judicial or administrative hearing, and all relevant facts are disclosed in the tax filing.

Are there any SOX restrictions on compensating partners for selling nonaudit services?

To eliminate auditors incentives to cross-sell other accounting services, audit partners cannot be based on the amount of non audit income that a partner procured. In other words, audit partners cannot be compensated based on non audit services.

You are a CPA who was appointed to serve as the trustee of a trust that owns stock issued by a publicly traded company. This company is one of your major audit clients. The trust owns $4 million of stock in your audit client, the trust's net worth is $50 million, and the total market value of the client company is over $1 billion. You have numerous duties as trustee, but the trust agreement clearly prohibits you from making investment decisions. Do you retain the independence to serve as the company's auditor?

Tristin Tenlen RE: 34. Is trustee independent? COLLAPSE Yes, I would retain the independence to still serve as the company's auditor. A CPA loses independence to audit a client in three sitations: 1 - The CPA is authorized to make investment decisions for the trust; 2- The trust is a significant stockholder in the client company; or 3- The company's stock is a significant asset of the trust (for a stock ownership to be considered significant, it is more than 10% of a company's outstanding shares or a trust's investment portfolio) For this situation, the company owns less than 10% of the stock, so the auditor would still obtain the independence to audit this client.

Who decides if you are independent of a client?

Ultimately, the accountant decides if they are independent of their client. Third parties can have an opinion of your independence in appearance, which is how a reasonable person would judge your independence. However, the accountant's independence in fact is only known by themselves, because only they know if they have unwavering integrity, objectivity, and professional skepticism towards the client.

What tax services can an auditor not provide under SOX?

Under SOX, auditors: 1) cannot advocate for the taxpayer in a judicial or administrative hearing 2) cannot represent the taxpayer in an IRS audit 3) cannot prepare a tax return for executives involved in a client's financial reporting oversight process.

When a member of your review client's accounting staff quit abruptly, you agreed to "help out" by preparing customer invoices and verifying shipping documents and warehouse receipts. Was your kindness a mistake?

Under the AICPA Cofe of Professional Conduct An accountant loses his independence to conduct an attest engagement, such as an audit or a review, if he prepares underlying source documents for a client. This creates a self-review threat. However, under the IFAC Code this arrangement might be permitted because it allows an auditor to assist his client without impairing independence in "emergency situations."

Under what circumstances should you claim a position inconsistent with a prior year return?

Under usual circumstances, a taxpayer should treat income and expenses consistently from year to year. However according to the text, if circumstances have changed since an earlier period, a taxpayer may assert a previously denied tax position in a later year. Changed circumstances arise when: 1) There is better documentation 2) Taxpayer's position was approved of in a new court case or IRS pronouncement 3) The taxpayer compromised last year but did not agree with tax authority's reasoning

What is an estate?

When a person dies, all of their property that they owned is transferred to an estate. Thus, an estate is everything comprising the net worth of an individual, including all land and real estate possessions, financial securities, cash, and other assets that the individual owns/owned or has/had a controlling interest in.

What is a relevant interest in a client that should be considered for conflicts of interest?

When deciding if there is a conflict of interest the interest may be personal and not necessarily a financial nature. The interest could be related to family and friends, a promotion, helping a charity, or several other non-financial stakes.

What is the meaning of a "threshold standard"?

When evaluating a client's uncertain tax position, the SSTS requires the accountant to make a prediction about the likelihood of the position ultimately being sustained by a court or administrative body. The likelihood is classified into 5 categories, which are known as the threshold standards (from least likelihood of success if challenged, to highest likelihood of success if challenged): frivolous, reasonable basis, realistic possibility of success, substantial authority, and more likely than not.

What elements of an organizations culture would encourage an ethical culture?

While every element of an organizations culture can encourage an ethical culture, there are some that have a greater impact than others. The tone at the top is perhaps the most important element because the rest of the company will mirror what their bosses do so if they see ethical behavior from the top then they will mirror that behavior in their own work. Another important element is transparency, if you make information readily available to employees they feel more trusted and they can see that they are being fairly treated therefore, they are more likely to exhibit ethical behavior.

How likely is whistleblowing in the U.S. compared to other countries? Why?

Whistleblowing in the United States is more likely than it is in other countries. The United States is known for their individualism and therefore has a low tolerance for cheating. In an instance with low tolerance for cheating whistleblowing is more likely to take place. Although there are other countries whose values might align with the United States, whistleblowing is closely tied to the culture of the country and therefore it is the individualism in the US that causes whistleblowing to be much more likely than in other countries.

Should whistleblower laws be transformed into mandatory rules that impose punishment on any person who has knowledge of a major financial reporting violation but knowingly fails to act? What problems could this cause?

Whistleblowing should be mandatory. It is not right to allow financial violations to continue. However, it may cause various forms of retaliation. This may cause the employee a lack of a promotion, to get fired, or even destruction of property. Therefore, we can see why individuals may not want to report; because of the effects that take place later. However, there should be mandatory rules on this, and proper protections against those who whistleblowers.

The lead attest partner, Lisha, on an audit engagement recently got married to Samid. Lisha's new husband owns a few shares of stock issued and outstanding in Lisha's attest client. Lisha did not learn of his stock ownership until after they got married. Is Lisha's independence impaired? Do you have any recommendations that might preserve Lisha's independence?

Yes, Lisa's independence is impaired. An auditor may not have any direct interests in its audit client and, for this purpose, shares held by immediate family members, such as her new husband, are considered to be her own property. Lisa should be able to restore her independence by having her husband sell his shares as soon as possible.

A CPA audits a well-known New York bank and also uses a credit card issued by that bank. The CPA makes purchases using the credit card near the start of a month, but always pays her outstanding balance on time by the end of the month. Does she satisfy the independence standard to audit this bank?

Yes, the CPA does satisfy the independence standard to audit the bank. Independence is not impaired if a client extends the use of a credit card on customary terms and conditions.

A CPA serves as the trustee of a trust that owns many different stocks, including stock in a client company that the CPA audits. The client company sold a complex set of products and services for one combined price. The client would like to record the entire price as revenue of the current year, in the hope that this large revenue boost will increase its stock price. The GAAP rules that govern how revenue should be allocated among the various products and services sold are not clear-cut. Does the auditor have a conflict of interest?

Yes, the auditor would have a conflict of interest in this situation. The auditors principle duty is to serve the best interests of the public, however, since he has a financial interest in the company he wants their stock price to be as high as possible. In this scenario, if he allows the revenue to be reported in a misconstruing nature to boost the stock prices benefiting him, then he is failing his duty to investors.

Are there antiretaliation laws in the U.S.? What are they? How effective are they?

Yes, there are anti-retaliation laws in The United States. Title VII, The Fair Labor Standards Act, Dodd Frank Act, OSHA, The Family and Medical Leave Act, and The National Labor Relations Act are all organizations designed to protect employees rights. They are extremely effective in the sense that when an employee complains to an outside agency or court about a violation of workplace rights, chances are very good that the employee is protected from retaliation through a combination of these acts. An example is an employee who reports fraud against federal agencies or contracts are protected from retaliation by the False Claims Act.

Your client has given you a list stating that her charitable contributions were $90,000 last year. This amount is more than her take-home pay last year. Do you have a duty to verify the accuracy of this charitable deduction?

Yes, there is a duty to verify the accuracy of this charitable deduction. When returns are filed, one must be able to be sure of all sources of funds and expenses, which allows one to explain them in the future. At this time it seems unusual that charitable contributions are larger than take home pay, and should verify the charitable contribution. There is a duty to investigate further when client-provided information is questionable on its face such as the amount is so large in comparison to her take-home pay.

The Audit Committee of a publicly traded is comprised of three members. One of the members is a retired Chief Financial Officer of a global bank headquartered in New York. She has extensive experience in managerial finance. However, she is not a CPA and never has worked in accounting or auditing. The other two members of the Audit Committee inherited shares of stock in the corporation from their parents and have no experience in corporate management or accounting. These two members each own 7% of the corporation's stock. Does this corporation's Audit Committee comply with SOX?

Yes, this corporation's audit committee does comply with SOX. The two members each only own 7% of the corporation's stock. The requirement states that shareholders must own less than 10% of the company's stock to be eligible. Another requirement is that at least one member needs to ensure financial proficiency by their expertise within accounting and financial management. The first member meets this criteria with her extensive managerial finance background. There is no specific criteria requiring a member to obtain a CPA license. Therefore, this corporation's audit committee meets all of the necessary requirements.

As a junior staff accountant for a publicly-traded corporation, you were shocked when your department head told you to book January sales shipments as if they had occurred in December so the company could "make it rain" in the earlier year. You later learned that "rain" was a company code word for how executives were "showered" with cash bonuses for achieving targeted earnings milestones. You made an audio recording of this conversation and sent it to the company's Audit Committee. You did not include a written explanation, and you did not provide identifying information that would enable the Audit Committee to further investigate your claim. Also, you ignored company procedures which state that you must first attempt to resolve issues of this type with "supervisory personnel in your department." If the company discovers your identity and retaliates against you, are you entitled to protection as a whistleblower?

Yes, you are protected as a whistleblower. Even though you many not have followed company procedures, you may have felt that this was the best course of action. The head of your department was the one who asked you to engage in fraudulent behavior, leading you to believe that the supervisor in my department may not be the best person to resolve issues with. You may have deemed the only appropriate course of action was to report the matter to the audit committee. *conflicting answers on DB

A CPA firm maintains its savings and checking accounts at Columbus Bank. The CPA firm also is negotiating to become this bank's auditor. Does the CPA firm meet the independence requirements to audit this bank?

Yes. As a depositor at a bank, the CPA firm technically is owed money by the bank and perhaps earns interest. Arguably, this is a "loan." However, due to a specific ruling this banking arrangement does not impair independence as long as the accounts are insured by governmental agencies, there are no excess uninsured amounts, and the likelihood of the bank defaulting is remote.

The lead attest partner, Lisha, on an audit engagement recently got married to Samid. If Lisha's husband is promoted to become the client company's Chief Executive Officer, will Lisha's independence become impaired?

Yes. He would hold a key position.

When can you rely on tax client provided information and when must you verify?

You can rely on information provided by your tax client, unless you have a suspicion that the information is incomplete or inaccurate. In that instance, you would have a duty to verify the information as the tax return preparer.

When does a conflict of interest exist?

a conflict of interest exists when a person is tempted to neglect or subordinate duties owed to others for personal gain. This can be a clash of a person's official, professional, or ethical duties with a pursuit of self-interest.

What is self-serving bias?

a self-serving bias is often an unconscious bias to do something that is in our self-interest and rationalize why it is the right thing to do.

Assume that the tax law does not prescribe a reporting standard for a particular tax position. What threshold standard should a tax return preparer apply to avoid penalties? What is the lowest threshold standard for asserting a tax position if the taxpayer is willing to disclose his use of such a standard?

a) A tax prepare should try and may asset the reasonable basis standard if the position has a 20% chance of being upheld but should try and an aim for the substantial authority standard with a 40% chance of being upheld b) The lowest a tax return prepare should go it the reasonable basis standard

A company pays bonuses to its production employees based on them achieving favorable standard cost variances. a) Does company management have a conflict of interest in setting these standard costs? b) Do the workers have a conflict of interest in setting these standard costs? c) How should standard costs be set?

a) Yes, company management may have a conflict of interest in setting standard costs. It is advantageous for company management to not pay their production employees a bonus; bonuses increase compensation expenses and subsequently reduce net income. Therefore, company managers may be more likely to create unrealistic standard costs in order to reduce the expense of granting bonuses. Additionally, as Maddy pointed out, company management also has the interest of shareholders to keep in mind. Using standard cost variances as a measure to grant bonuses may result in poorer quality products if production employees produce poorer quality products in order to cut costs. b) Yes, the production workers have a conflict of interest in setting these standard costs. Production workers may appeal to company management to create lower standard costs, so the workers are more likely to receive their bonuses. Production workers have a conflicting interest in pleasing their employer through the production of adequate-quality goods. c) Company management should consider the company's past history of utilization, industry norms, and economic conditions to set standard costs. Standard costs are reasonable, expected costs. The company management should not consider production employees' bonuses when setting standard costs.

Dalbeck, a CPA, serves on the Alumni Admissions Committee of his alma mater. As part of his duties, he interviews and evaluates applicants for this prestigious college and ranks them on a scale of 1 to 10. If he gives an applicant a high ranking, the Alumni Admissions Committee reviews the applicant's credentials and makes the final recommendation concerning admission. If he gives an applicant a low ranking, their admission is automatically denied. In accepting this volunteer position, Dalbeck agreed to be impartial. a) Allison, the high school valedictorian in Dalbeck's community, now is applying for admission to this college. Allison is a close friend of Dalbeck's daughter Emily. Does Dalbeck have a conflict of interest? b) Does Dalbeck have a conflict of interest if valedictorian Allison attends the same church that Dalbeck attends? c) Does Dalbeck have a conflict of interest if Allison is a member of an underrepresented ethnic group and Dalbeck feels strongly that the college needs to admit more members of this ethnic group? d) In which of these cases, if any, does Dalbeck, have a duty under the Code of Conduct to make appropriate disclosures to the university? e) Assume instead that Dalbeck was providing bookkeeping services to the Alumni Organization on a pro bono basis. Would the scope of Dalbeck's disclosure duties be affected by the fact that he is donating his services as an unpaid volunteer?

a) and b) In both a and b, Dalbeck may have a conflict of interest. Even if there is not an actual conflict of interest, there is an apparent conflict of interest. Dalbeck could have a personal interest in whether or not his daughter's friend a member of his church (more so in situation a) is accepted into the university. Some could perceive Dalbeck's objectivity impaired throughout Allison's interview and the review of her application. c) It is difficult to determine if Dalbeck has a conflict of interest in c because one could argue that admitting more underrepresented students adheres to the principal of integrity (especially if the group has faced discrimination in the past). However, doing so would impair his objectivity because he is giving preferential treatment to one student over others. It could also be argued that these are his personal interests and may not align with the interests of the college. d) Under the Code of Conduct, Dalbeck should disclose to the university the apparent conflicts of interest (so in all cases) so that the university can either waive its consent or Dalbeck can withdraw from reviewing Allison's application. e) If Dalbeck was providing bookkeeping services to the Alumni Organization on a pro bono basis the scope of his disclosure would be affected because he is acting an accountant. * conflicting answers on DB

Your employer, Megan Manufacturing, has asked you to negotiate the sale of certain tangible fixed assets to a German company. When you were discussing this sale, Kyle, the German company's representative, mentioned that he was a huge fan of a German national soccer team. You also are a loyal fan of this same team because its star player is from your home country of Jordan. As a result, you attended this team's soccer game together. a) Do you now have a conflict of interest in negotiating this sale? b) Would you have a conflict of interest if Kyle paid $300 to buy your ticket to the game? c) Would you have a conflict of interest if Kyle bought you a beer at the game, but you each bought your own tickets?

a. I believe there is a growing conflict of interest if I am continuing to negotiate for the German Company since there is a on-going developing relationship that could potentially impact deals. b. There would be a conflict of interest if Kyle paid for my ticket because there is than an incentive and favor perceived to be owed by a client. c. I do not think a purchase of a beer would be a conflict of interest, since it is most likely a lower cost amount than the tickets would be. * Conflicting answers in DB were present

A married couple came to your office to ask you help them structure their estate plan. When the wife stepped out of your office to visit the restroom, the husband told you that he "hates with a passion his wife's son from a previous marriage" wants you to "find a way to give him less than zero in the will!" a) Do you owe a duty of confidentiality to the husband, or may you share his comments with his wife? b) Do you have a conflict of interest in representing both spouses? c) Is it possible for these spouses to consent to your conflict of interest?

a. I do not owe confidentiality to the husband, as I was asked to represent both spouses and I may share his comments with his wife. b. Yes, there is a conflict of interest, as both spouses might not agree. c. If all remains the same, it is not possible for them to consent my conflict of interest and I am unable to act on it either.

When your clients need tax-sheltered life insurance coverage, you always recommend a particular insurance agent. This agent appreciates your referrals and frequently refers clients who need accounting services to you. You, in fact, have a formal referral agreement that compels you and this insurance agent to refer client leads to one another. You sincerely believe that this insurance agent is highly competent and offers the same wide range of policies and premiums that other agents offer. Do you have a duty of disclosure prior to recommending this insurance agent to your clients? Assume instead that you do not have a formal referral agreement with this insurance agent, but you respect his professional skill and he respects yours.

a. No, I do not believe that there is a duty of disclosure prior to recommendation. The two parties are compelled to refer to each other, but there is no kickback or additional interest that could be conflicted. It is a situation that could cause pause for clients but this sort of disclosure could cause the client to discount the recommendation, despite the fact that the insurance agent is highly competent. b. I stand by what I said above and that there is still no duty of disclosure

Graywall, CPA, serves as a trustee of the CureCancerNow Foundation, a charitable foundation that is dedicated to cancer research activities. For years, he has been the loyal friend and advisor to Adolpho Rabin. In fact, Adolpho made a fortune as the founder of an apparel manufacturing corporation. After his mother died of cancer, Adolpho Rabin asked Graywall for advice about how he could meaningfully preserve the memory of his mother. Shortly after attending the funeral for Adolpho's mother, Graywall persuaded Adolpho to designate the CureCancerNow Foundation as one of several beneficiaries of his will, along with Adolpho's grown children and two grandchildren. Adolpho's will also provides that the executor may redirect more money to Adolpho's "offspring and their offspring if needed to facilitate their medical care, education, or critical life needs." Adolpho also designated Graywall to be the executor of his estate. Does Graywall satisfy the Independence Rule to audit the charitable foundation? Did Graywall have a conflict of interest when he advised Adolpho to designate the CureCancerNow Foundation as one of his estate beneficiaries? Does Graywall have a conflict of interest in serving as the executor of Adolpho's estate?

a. No, I don't think Graywall satisfies the Independence Rule because he would be auditing a client over which he is authorized to make significant investment decisions. b. Yes I think Graywall had a conflict of interest in advising his friend to make the foundation a beneficiary--even if his intentions were pure, that is still a conflict of interest. c. Yes Graywall definitely has a conflict of interest in serving as the executor of Adolpho's estate because he has a direct incentive to give more money to the charitable foundation instead of to Adolpho's wishes, which are to prioritize his children and grandchildren.

A corporate client incurred substantial penalties for understating its tax liability. As a result, it has accused its tax return preparer in a lawsuit of acting "below the standard of care" and "recklessly" for failing to apply the substantial authority standard in preparing this client's tax return. In support of its claims, the client's attorney has pointed out to the jury that AICPA Standards generally require that a tax position meet the substantial authority standard. The client is suing to recover the penalties imposed by the taxing authority as damages. The tax law did not establish any particular standard of reporting regarding this taxpayer's tax positions. a) Can the tax return preparer successfully defend this lawsuit by pointing out that she is not a CPA? b) If this tax return prepare was a CPA, could she successfully defend this lawsuit by pointing out that she is not a member of the AICPA? c) Does a tax position always have to meet, at minimum, the substantial authority standard?

a. No, this argument would not work because as a tax preparer she is obligated to meet the standards of care for reaching a return position that is honest and accurate. b. No, this argument also not work because she is still required to meet the standards of care and has a duty to uphold the values established in the Code of Conduct. c. No, a tax position can meet at a minimum the Not Frivolous standard to be upheld in court. Below substantial authority, a tax position can also meet the realistic possibility of success or reasonable basis standards.

Eldridge Elderly retired from the active practice of public accounting last year. As part of his retirement, he received a buyout package from his former CPA firm that pays him $300,000 per year for 10 years. The payout is not contingent on firm profits and is guaranteed by a well-established insurer. After retiring, Eldridge used some of his retirement money to buy stock in Wojo Warehouse Stores, a wholesaler that had been a firm client when he was active. Wojo has remained a firm audit client since Eldridge's departure. Eldridge never was a covered member with respect to Wojo, and he has severed all operational ties to his former CPA firm. His photo and biography, however, remain proudly displayed on his former firm's website. a) Does Eldridge's ownership of Wojo stock affect his former firm's independence to audit Wojo? b) In retirement, Eldridge was getting bored, so he has agreed with Wojo to provide quality control and oversight over Wojo's financial reporting staff as a paid consultant. His title is Chief Internal Control Officer. He only works one half-day per week. Could Eldridge's retirement activity affect his former firm's independence to audit Wojo? c) What should Eldridge's CPA firm do to ensure that it retains its independence to continue as Wojo's auditor?

a. Once Eldridge retires from his CPA firm, he can invest in anything he wants. b. Eldridge's contribution to Wojo as a CICO is a key position because his decisions impact financial reporting. Because his image is still all over his previous firm, he appears to still have strong affiliations or even appears to still work there affecting his independence. c. Eldridge's CPA firm should cut their ties with him in terms of his image being all over the firm and quit making it appear as if he still works there. The buyout package does not affect his independence.

You are the accountant for a very successful import brokerage business. Customer goodwill is its largest asset. The three co-owners wish to enter into a buy-sell agreement that will require the surviving co-owners to purchase a departed partner's ownership interest upon the departed partner's withdrawal due to retirement, death, or permanent disability. One of the co-owners is 60 years-old and the other two co-owners are about 40 years-old. All three co-owners have retained you to develop a buyout formula that will result in the withdrawing partner receiving a fair price from the surviving co-owners. The formula will apply equally to all owners, and no partner has any current plans to withdraw from the partnership. Do you have a conflict of interest? Is there a remedy for this conflict of interest? Are you obligated to make disclosures to these partners in order to continue to perform this engagement?

a. Yes I believe there is a dual client conflict of interest. Because of the age gap between the 40 year old clients and the 60 year old client, it is likely that the oldest client will want to retire first and thus will want a higher selling price to benefit them, while the younger two would want a low buying price. This creates a conflict of interest. b. I would say that after disclosing the conflict to both parties, there should be a safeguard where each party makes their own decisions independently from the CPA so that the CPA can't influence anyone. This would be a good time for the veil of ignorance to come into play, where each co-owner would not know their own death or retirement time so they would all desire a fair buying/selling price. c. AICPA Code would indicate that yes there is an obligation to make disclosures to the three partners about the conflict of interest, because it shouldn't be assumed that it is obvious. However IFAC might imply there is implied consent here by all three co-owners entering into the agreement together.

An accountant audits Quickiron, LLC. This accountant also serves as a trustee of a trust that has an ownership interest in Quickiron, LLC. As the trustee, she is expressly empowered to make all investments for the trust. Ownership interests in Quickiron, LLC, are traded infrequently and are illiquid. a) Should this accountant be concerned about violating the Independence Rule? b) If the accountant-trustee sells the Quicksilver, LLC ownership interests on behalf of the trust, will that fix the accountant's independence problem? c) If the accountant-trustee sells the Quicksilver, LLC ownership interests, could this constitute a breach of fiduciary duty?

a. Yes, she should be concerned about violating the Independence rule. Since she is authorized to make investment decisions for the trust, audits the company, and the trust hold an ownership interest in the respective company, it is clear that independence is violated. b. This will not resolve the independence issue. In order to solve the issue, she should be removed from working with the client. c. Yes, this could breach her fiduciary duty. As a fiduciary, she must act for the interests of the client, and make the best possible decisions on their behalf. If her independence is compromised, this could lead to even more issues for the client.

A trustee of a split-interest trust has to allocate income to the income beneficiary and principal to the remaindermen. The trustee recently used $20 million of the trust's assets to purchase a zero-coupon bond in a very safe company. The effective annual yield on this bond is 8%. Zero-coupon bonds are purchased at a deep discount and provide the full face value to an investor in cash on the maturity date of the bond. a) As the accountant for this split-interest trust, would it be important for you to read the trust document? Why? b) Do you have to do any research to perform your task properly? c) How should the annual appreciation in the maturity value of this bond be accounted for? d) How much cash income will this bond generate for the income beneficiary in the first year of ownership? Has the trustee breached a fiduciary duty

a.) Yes, as the accountant you will need to determine who is the income beneficiary and who is the remainderman. This will establish responsibilities. b.) If by research you mean reviewing the trust, looking up relevant tax laws, understanding risks to zero-coupon bonds, and how to record zero-coupon bonds then yes the accountant should conduct the necessary research. c.) The annual appreciation will be reported as interest revenue even though no interest has been paid. Such revenue will be taxed as interest. d.) The answer is zero. Zero-coupon bonds (also called Pure Discount Bonds) do not pay out periodic interest. Instead, the total return will be realized when the bond is matured. In a zero-coupon bond, the difference between the purchase price of the bond and the par value of $1,000 includes the compound interest to be earned over the life of the bond. In this scenario, the trustee has breached the fiduciary duty of impartiality. Because this is a zero-coupon bond there will be no income distribution for the income beneficiary. This means that not all parties are being treated fairly.

What is the difference between direct and indirect interests?

direct interest implies ownership where you ca influence the company such as through voting shares. Indirect implies that you cannot influence any decisions related to your client company.

What message did the CPA profession get from the Fund of Funds Case?

he message that the CPA profession got from the Fund of Funds Case was that the CPA firms should not have kept quiet and to better keep track of its conflicts of interest. A court determined that an accountant's duty to inform one client that it had been defrauded superseded its duty of confidentiality to another client. Additionally, the firm should have either withdrawn from the second audit when it realized the conflict of interest. Or at the very least, the auditor should have implemented safeguards by assigning different personnel to work on each engagement and prohibited them from sharing this information.

What is implied consent?

implied consent is when an obvious issue arises yet both parties still have an engagement

What is moral seduction?

moral seduction is the gradual process by which people unconsciously adopt the perspectives of others with whom they regular interact. Moral seduction arises when, "an accountant initially indulges a client's minor ethical infractions and then, over time, fails to contest escalating client improprieties

Who decides whether a conflict exists?

the accountant should be the one to decide if a conflict of interest exists. They are expected to use their own professional judgment when making this determination. The decision cannot be made by an outside review board or third party.

Your client is disabled and unable to work. However, the state tax form he is about to file asks for a taxpayer's Trade or Business. How should you answer that question?

the client should either write in "Disabled" or leave the field blank. If they choose to leave the field blank, they should provide a note explaining why the field is blank and the rationale behind the disability.

During the course of reviewing a client's tax returns for earlier years, you noticed that his reported interest income dropped off substantially this year from prior years. You also did not notice any sales of bonds reported by your client this year. Interest rates have been steady over the past few years. Your client did not ask you to review his prior tax returns. Do you have a duty to ask your client to explain why his interest income changed so much?

the tax preparer in this situation has a duty to inquire about the unexplained change from prior tax periods.

While acting as a fiduciary, you recommended that your client buy a particular brand of refueling station to charge her new, electricity-powered car. You told your client that she would be able to save 70% of the purchase price of the home refueling station through a combination of tax credits and utility rebates. You were correct, and the client achieved these savings. However, you did not tell the client that you were receiving a $200 commission from the manufacturer of that particular refueling station brand. Your client now is furious that you received this commission and never told her about it. Do you owe your client $200?

yes, since you are in a fiduciary role and earned income without disclosing your conflict of interest at the grantors expense they are entitled to profit disgorgement