ACCT 406 Chapter 19 Quiz

9 Categories of Prohibited Non-Audit Services

1. Bookkeeping 2. Actuarial Services 3. Broker or Dealer 4. Financial Information Systems Design and Implementation 5. Internal Auditing Outsourcing Services 6. Legal Services 7. Appraisal or Valuation Services 8. Management Functions or Human Resources 9. Expert Services

Principle-Responsibilities

in carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities

Principle-Public Interest

members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism

Principle-Integrity

to maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity

Covered Members

1. An individual on the *attest engagement team* 2. An individual in a *position to influence* the attest engagement 3. A partner, partner equivalent or manager who provides *non-attest services* to the attest entity beginning once he or she provides *10 hours of non-attest services* 4. A partner or partner equivalent *in the office in which the lead attest engagement partner* or partner equivalent primarily practices in connection with the attest engagement 5. *The firm*, including the firm's employee benefits plan 6. An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described above or any two or much such individuals or entities if they act together *"Covered members" must be independent*

Prohibited Financial Relationships

-Direct: a financial interest that is owned directly by an individual or entity, or is under the control of an individual or entity -Material Indirect: results when a covered member has a financial interest in an entity that is associated with an attest entity, for an example an investment in a mutual fund that owns the entity's stock Exception: certain types of personal loans from financial institutions who are audited by a covered member

Principles of Professional Conduct

-Responsibilities -Public Interest -Integrity -Objectivity and Independence -Due Care -Scope and Nature of Services

CPA firms are required to implement policies and procedures to monitor the firms' practices and ensure that professional standards are being followed. -The AICPA -The PCAOB

-The AICPA administers a quality review system in order to enable firms to meet their state licensing, federal regulatory, and AICPA membership requirements and to serve firms that audit only privately held clients. -The PCAOB conducts regular inspections of public accounting firms that are required to register with the Board.

Effect of Actual or Threatened Litigation

-The commencement of litigation by management alleging deficiencies in audit work for the entity would be considered to impair independence. -An expressed intention by management to commence litigation against the CPA alleging deficiencies in audit work would also impair independence if the auditor concluded that it is probable that such a claim will be filed. -The commencement of litigation by the CPA against management alleging management fraud or deceit would be considered to impair independence.

Prohibited Business Relationships

-The independence of a CPA is impaired if the CPA performs a managerial or other significant role for a entity's organization *during the* time period covered by an attest engagement -Interpretations indicate that a firm's independence will be considered to be impaired with respect to an entity if a partner or professional employee leaves the firm and is subsequently employed by or associated with that entity in a key position unless a number of conditions are met.

SEC rules require:

1. Additional communication between auditors and their entities' audit committees 2. Public-company audit entities to reveal information regarding the fees (audit and otherwise) paid to their auditors

4 Basic Principles of Auditor Objectivity and Independence(SEC)

1. An auditor should not audit his or her own work. 2. An auditor should not function in the role of management. 3. An auditor should not serve in an advocacy role for the entity. 4. An auditor should not have a mutual or conflicting interest with an audit client

Elements of Quality Control: 1. Leadership: Tone at the Top 2. Relevant Ethical Requirements 3. Human Resources 4. Acceptance and Continuance of Entity Relations 5. Engagement Performance 6. Monitoring

1. Leadership: Tone at the Top: -Assign management responsibilities so that commercial considerations do not override the quality of the work performed -Provide sufficient and appropriate resources for the development, documentation, and support of the firm's quality control policies and procedures 2. Relevant Ethical Requirements: -Communicate the firm's independence requirements to its personnel and, when applicable, others subject to them -Require personnel to promptly notify the firm of circumstances and relationships that create a threat to independence so that appropriate action can be taken 3. Human Resources: -Ensure that the engagement partner has the appropriate competence, capabilities, and authority to perform his role -Establish policies and procedures to assign appropriate personnel with the necessary competence and capabilities to perform engagements in accordance with professional standards and applicable legal and regulatory requirements 4. Acceptance and Continuance of Entity Relations: -Require the firm to obtain such information as it considers necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement, and when considering acceptance of a new engagement with an existing client -Establish policies and procedures that provide for obtaining an understanding with the client regarding the nature, scope and limitations of the services to be performed 5. Engagement Performance: -Establish policies and procedures setting out the nature, timing and extent of an engagement quality control review. Such policies and procedures should require that the engagement quality control review be completed before the report is released -Establish policies and procedures for addressing and resolving differences of opinion within the engagement team; with those consulted; and when applicable, between the engagement partner and the engagement quality control reviewer 6. Monitoring: -Communicate to relevant engagement partners, and other appropriate personnel, deficiencies noted as a result of the monitoring process and recommendations for appropriate remedial action -Establish policies and procedures designed to provide reasonable assurance that complaints and allegations that the work performed by the firm fails to comply with professional standards and applicable legal and regulatory requirements and allegations of noncompliance with the firm's system of quality control are appropriately dealt with

AICPA Code of Professional Conduct: 3 parts

1. Principles of Professional Conduct (provide overall framework) •General, not enforceable, ideal attitudes and behaviors 2. Rules of Conduct (govern performance of professional services) •Specifically enforceable, minimally acceptable standards 3. Interpretations (provide guidelines as to the scope and application of rules) •Specific. Not specially enforceable, but departures must be justified. Detailed interpretations and answers to questions regarding rules of conduct

Partners are limited to _____ consecutive years

5 -A one year "cooling off" period is required for employees in a "financial reporting oversight role" who previously worked with the CPA firm performing the audit. -A firm is not independent if an audit partner's compensation is based on selling engagements to that client for services other than audit, review, and attest services.

A violation of the profession's ethical standards is least likely to occur when a CPA: A. Purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from entities over a three-year period. B. Receives a percentage of the amounts invested by the CPA's audit entities in a tax shelter with the entities' knowledge and approval. C. Has a public accounting practice and is president and sole stockholder of a corporation that engages in data processing services for the public. The CPA often refers his attest entities to the data processing company. D. Forms an association—not a legally binding partnership—with two other sole practitioners and calls the association Adams, Betts & Associates, CPAs.

A

According to the AICPA Code of Professional Conduct, which of the following activities results in an act discreditable to the profession? A. A CPA solicits recent Uniform CPA Examination questions without written authorization from the AICPA. B. A CPA signs a document containing immaterial false and misleading information, or permits or directs another CPA to do so. C. A CPA who is engaged to perform a government audit neglects to follow certain government auditing requirements and discloses in the audit report the fact that such requirements were not followed and the reasons for it. D. A CPA fails to give a client copies of the CPA's workpapersrelated to a completed and issued work product upon the client's request because the client has not paid fees payable to the CPA for the work product.

A

In connection with the element of engagement performance, a CPA firm's system of quality control should ordinarily include procedures covering all of the following except: A. Performance evaluation. B. Consistent, high-quality engagement performance. C. Supervision responsibilities. D. Review responsibilities.

A

One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through: A. A system of quality control. B. A system of peer review. C. Continuing professional education. D. Compliance with generally accepted reporting standards.

A

Rule-Independence

A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.

Rule-Contingent Fees

A member in public practice shall not (1) perform for a contingent fee any professional services for a client for whom the member or the members firm performs, an audit or review of a financial statement ...or" (2) prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client

Rule-Confidential Client Information

A member in public practice shall not disclose any confidential client information without the specific consent of the client ... Members shall not use to their own advantage or disclose any members confidential client information that comes to their attention

Rule-Commission & Referral Fees

A member in public practice shall not for a commission recommend or refer to a client any product or service, or for a commission recommend or refer any product or service to be supplied by a client, or receive a commission, when the member or the member's firm also performs for that client an audit or review of a financial statement

Rule-Form of Organization and Name

A member may practice public accounting only in a form of organization permitted by law or regulation whose characteristics conform to resolutions of Council. A member shall not practice public accounting under a firm name that is misleading. Names of one or more past owners may be included in the firm name of a successor organization. A firm may not designate itself as ""Members of the American Institute of Certified Public Accountants unless all of its CPA owners are members of the Institute

Rule-General Standards

A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council: Professional competence. Due professional care. Planning and supervision. Sufficient relevant data.

Rule-Accounting Principles

A member shall not (1) express an opinion ..• that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles or (2) state that he or she is not aware of any material modifications that should be made ... in order for them to be in conformity with generally accepted accounting principles, if such statements or data contain any departure from an accounting principle ...that has a material effect ..."

Rule-Acts discreditable

A member shall not commit an act discreditable to the profession.

Rule-Compliance with Standards

A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council.

A member shall not: Perform for a contingent fee any professional service for, or receive such a fee from, a client for whom the member or the member's firm performs: A) B) C) Or: Prepare an original or amended tax return or claim for a tax refund for a _________

A) an audit or review of a financial statement B) a compilation of a financial statement expected to be used by a third party if the compilation report does not disclose a lack of independence, C) an examination of prospective financial information Contingent fee for any client.

Threats to Compliance: Self-Interest

Accountant could benefit, financially or otherwise, from an interest in, or relationship with a client -Examples: 1. Accountant has a financial interest in a client, and the outcome of an engagement may affect the value of the interest 2. Accountant's spouse enters into employee negotiations with a client 3. Accountant excessively relies on revenue from a single client

Threats to Compliance: Familiarity

Accountant will become too sympathetic to the client's interests or too accepting of client's work or product due to a long or close relationship -Examples: 1. Accountant's immediate family, close relative, or friend is employed by a client 2. A former partner or professional employee joins the client in a key position and has knowledge of CPA firm's policies and practices

Threats to Compliance: Adverse Interest

Accountant will not act with objectivity because of interests opposed to the clients interests. -Example: threatened or actual litigation between accountant and a client

Threats to Compliance: Self-Review

Accountant will not appropriately evaluate results of a previous judgment made or service performed or supervised by the accountant or the accountant's firm -Examples: 1. Accountant performs bookkeeping services for a client 2. A partner in the members office was associated with the client as an employee, officer, director, or a contractor

Threats to Compliance: Advocacy

Accountant will promote a client's interests or position and compromise objectivity or independence -Examples: 1. Promoting a client's securities 2. Endorsing a client's services or products

Threats to Compliance: Undue Influence

Accountant will subordinate judgment to that of an individual's associated with a client due to a client's reputation, expertise, dominant personality or attempts to coerce or excessively influence the accountant -Examples: 1. CPA firm is threatened with dismissal 2. An individual associated with a client threatens to withdraw or terminate a professional service unless the accountant reaches certain judgments or conclusions

Threats to Compliance: Management Participation

Accountant will take on the role of client management or otherwise assume management responsibilities -Example: accountant assumes a client's role while performing non-audit services

An independent auditor must have which of the following? A. A pre-existing and well-informed point of view with respect to the audit. B. Technical training that is adequate to meet the requirements of a professional. C. A background in many different disciplines. D. Experience in taxation that is sufficient to comply with generally accepted auditing standards.

B

Rule-Advertising & Solicitation

Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client. A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive Solicitation by the use of coercion, overreaching, or harassing conduct is prohibited.

During the audit of Moon Co., the auditor disagrees with management's estimation of collectible accounts receivable. The possible misstatement amount is material. Which of the statements below should weigh most heavily for the auditor in this instance? A. Moon management has the right to make company estimates. B. Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information. C. There is a small but reasonable chance that accounts receivable as stated by Moon Co. might turn out to be fully collectible. D. The interests of Moon Co., the auditor, and the public should be weighed equally in the decision.

B

In which of the following situations would a CPA's independence be considered impaired according to the Code of Professional Conduct? 1. The CPA has a car loan from a bank that is an audit entity. The loan was made under the same terms available to all customers. 2. The CPA has a direct financial interest in an audit entity, but the investment is maintained in a blind trust. 3. The CPA owns a commercial building and leases it to an audit entity. The rental income is material to the CPA. A. 1 and 2. B. 2 and 3. C. 1 and 3. D. 1, 2, and 3.

B

The AICPA Code of Professional Conduct contains both general ethical principles that are aspirational in character and a: A. List of violations that would cause the automatic suspension of a CPA's license. B. Set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain. C. Description of a CPA's procedures for responding to an inquiry from a trial board. D. Complete list of all the different kinds of crimes that would be considered as acts discreditable to the profession.

B

Which of the following rules of the AICPA Code of Professional Conduct must be observed even by a member who is not in public practice? A. Independence Rule. B. Integrity and Objectivity. C. Contingent Fees Rule. D. Form of Organization and Name Rule.

B

Without the consent of the entity, a CPA should not disclose confidential entity information contained in working papers to a(n): A. Authorized quality control review board. B. Successor CPA firm that has been engaged to audit the former audit entity. C. Federal court that has issued a valid subpoena. D. Disciplinary body created under state statute.

B

According to the AICPA Code of Professional Conduct, which of the following actions will impair independence? A. Preparing client financial statements based on information in a trial balance. B. Processing payroll for a client's signature based on client record keeping. C. Participating in the hiring or termination of a client's employees. D. Assisting a client in drafting a stock-offering document or memorandum.

C

According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA's independence? A. All direct and indirect financial interests. B. Only direct financial interests. C. Only direct and material indirect financial interests. D. Only material financial interests.

C

An audited company has not paid its 2018 audit fees. According to the AICPA Code of Professional Conduct, for the auditor to be considered independent with respect to the 2019 audit, the 2018 audit fees must be paid before the: A. 2018 report is issued. B. 2019 fieldwork is started. C. 2019 report is issued. D. 2020 fieldwork is started.

C

Rick, an independent CPA, must make an ethical judgment related to the audit of an entity. If he primarily focuses on whether his decision might yield unfair advantages for some at the expense of others, he is using: A. A utilitarian perspective. B. A rights-based approach. C. A justice-based perspective. D. Rule-based AICPA guidelines.

C

Under the SEC's rules regarding independence, which of the following must an entity disclose? A. Only fees for the external audit. B. Only fees for internal and external audit services provided by the audit firm. C. Fees for the external audit, audit-related fees, tax fees, and fees for other non-audit services performed by the audit firm. D. Only fees for systems implementation and design and nonaudit services performed by the audit firm.

C

Which of the following legal situations would be considered to impair the auditor's independence? A. An expressed intention by the present management to commence litigation against the auditor, alleging deficiencies in audit work for the entity, although the auditor considers that there is only a remote possibility that such a claim will be filed. B. Actual litigation by the auditor against the entity for an amount not material to the auditor or to the financial statements of the entity arising out of disputes as to billings for management advisory services. C. Actual litigation by the auditor against the present management, alleging management fraud or deceit. D. Actual litigation by the entity against the auditor for an amount not material to the auditor or to the financial statements of the entity arising out of a dispute as to billings for tax services.

C

Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance? A. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. B. Ethical standards that emphasize excellence in performance over material rewards establish individual reputations for competence and character. C. Ethical standards are established so that users of accounting services know what to expect and accounting professionals know what behaviors are acceptable, and so that discipline can be applied when necessary. D. A requirement for a profession is to establish ethical standards that primarily stress responsibility to entities and colleagues.

C

Safeguards

Controls that mitigate or eliminate threats to independence 3 Broad Categories: 1. Created by profession, legislation, or regulation (ex. education requirements, and competency requirements for professional licensure) 2. Implemented by the attest client (management with suitable skills) 3. Put in place by CPA firm - including policies and procedures for implementing professional and regulatory requirements (ex. polices/procedures designed to monitor compliance with firm policies/procedures) Examples of safeguards might include additional training, involvement of an otherwise uninvolved third party, and the availability of hotlines and direct consultation on ethical and other matters.

All of the following nonaudit services are identified by the SEC as generally impairing an auditor's independence with respect to an audited entity except: A. Information systems design and implementation. B. Human resource services. C. Management functions. D. Some specific tax services. E.All of the above are seen by the SEC as impairing independence.

D

Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result? A. For an examination of prospective financial statements. B. For an audit or a review if agreed upon by both the CPA and the client. C. For a compilation if a third party will use the financial statement and disclosure is not made in the report. D. If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings.

D

Which is the following policy/procedure? •A requirement of GAAS, or •An element of Quality Control Plan work and supervise assistants

GAAS - Performance Principle

Which is the following policy/procedure? •A requirement of GAAS, or •An element of Quality Control Conducting the audit with professional skepticism

GAAS - responsibilities

Rule-Integrity & Objectivity

In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.

Which is the following policy/procedure? •A requirement of GAAS, or •An element of Quality Control Answering an independence questionnaire

Quality Control - making sure they are following rules

Effect of Family Relationships

Two major situations with close relatives that can impair independence: 1. A *close relative* has a *financial interest* in the entity that is *material to the close relative* and the CPA participating in the engagement is *aware* of the interest 2. An individual participating in the engagement has a *close relative* who *could exercise significant influence* over the *financial or accounting policies* of the entity Close relatives: nondependent children, brothers, sisters, parents, grandparents, parents-in-law, and their respective spouses

Principle-Scope & Nature of Services

a member in public practice should observe the principles of the AICPA Code in determining the scope and nature of services to be provided

Principle-Objectivity & Independence

a member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services

Principle-Due care

a member should observe the profession's technical and ethical standards, strive to continually improve competence and the quality of services, and discharge responsibility to the best of the member's ability

"Management Responsibilities"

•Authorizing transactions •Preparing source documents •Custody of assets •Supervision of employees •Decision making/implementing recommendations •Establishing or maintaining internal controls.

Standards for Auditor Professionalism: AICPA Code of Professional Conduct

•Maps out primary areas in which ethical conduct is expected of CPAs •AICPA = private, nongovernmental agency; can only require members to follow code •However, rules apply to all CPAs: -Federal/State court rulings, State Boards -Private or Public practice