Chapter 4
identify and explain factors that should keep the quality of audits high even though advertising and competitive bidding are allowed
Audits should be maintained at a high level of quality even if solicitation, advertising, and competitive bidding are allowed for several reasons: 1. Professionals do high quality work because it is a characteristic of being a professional. 2. A reputation of doing high quality work usually pays off in more clients and a more profitable practice. 3. Potential legal liability is also a deterrent to substandard work. 4. The Code of Professional Conduct requires a high quality of performance.
identify some of the most important ways that the profession and society encourage CPAs to conduct themselves at a high level
CPA exam, auditing standards and interpretations, continuing education requirements, legal liability, AICPA practice and quality centers, Code of professional conduct, PCAOB and SEC, peer review, quality control
what organization is responsible for developing ethics standards at the international level? what are the fundamental principles of the international ethics standards
International ethics standards board for accountants
what is the purpose of the AICPA code of professional conduct restriction on commissions
Prohibiting paying commissions to obtain clients who receive attestation services is intended to discourage overly aggressive obtaining of clients by giving "finders' fees" to banks and others in a position to give business rather than on the basis of competitive and other qualifications. Prohibiting receiving commissions for referrals to other CPAs or other providers of services where attestation services are provided is intended to discourage referrals to others on the basis of a "sales commission" rather than the competition of those offering services. Commissions when attestation services are not provided are permitted to encourage competition for these types of services.
indirect financial interest
a close, but not direct, ownership relationship between the auditor and the client; an example is the ownership of stock by a member's grandparent
ethics
a set of moral principles or values
state the allowable forms of organization a CPA firm may assume
1. A proprietorship 2. A general partnership 3. A general corporation (if permitted by state law) 4. A professional corporation 5. Limited liability company (if permitted by state law) 6. Limited liability partnership (if permitted by state law)
which of the following is not a provision of the SOX act of 2002 1. the auditor of an issuer may not provide internal audit outsourcing services for the issues 2. audit documentation must be maintained for five years 3. the lead and reviewing partners must rotate off the audit after five years 4. tax services must be preapproved by the audit committee
2. audit documentation must be maintained for five years
The concept of materiality is least important to an auditor when considering the 1. adequacy of disclosure of a clients illegal act 2. effects of a direct financial interest in the client on the CPAs independence 3. discovery of weaknesses in a clients internal control structure 4. types of evidence to use in testing account receivable
2. effects of a direct financial interest in the client on the CPAs independence
which of the following services can be offered to public company audit clients under SEC requirements and the SOX act 1. tax serves for executives involved in financial reporting 2. tax planning not involving tax shelters 3. internal audit outsourcing 4. bookkeeping and other accounting services
2. tax planning not involving tax shelters
the AICPA Code of profession conduct state that a CPA shall not disclose any confidential client information obtained in the course of a professional engagement except with the consent of the client. In which one of the following situations would disclosure by a CPA be in violation of the code? 1. disclosing confidential information in compliance with a subpoena issued by a court 2. Disclosing confidential information in order to properly discharge the CPAs responsibilities in accordance with the profession's standards 3. disclosing confidential information to another accountant interested in purchasing the CPAs practice 4. disclosing confidential information during an AICPA authorized peer review
3. disclosing confidential information to another accountant interested in purchasing the CPAs practice
A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is 1. not addressed by the AICPA code of professional conduct 2. acceptable if sanctioned by the state laws 3. prohibited under the AICPA rules of conduct 4. a violation of generally accepted auditing standards
3. prohibited under the AICPA rules of conduct
An auditor strives to achieve independence in appearance to 1. comply with auditing standards related to audit performance 2. become independent in fact 3. maintain public confidence in the profession 4. maintain an unbiased mental attitude
4. maintain an unbiased mental attitude
what is the meaning of the rule that requires the auditor be independent 1. the auditor must adopt a critical attitude during the audit 2. the auditors sole obligation is to third parties 3. the auditor may have a direct ownership interest in the clients business if it is not material 4. the auditor must be without bias with respect to the client under audit
4. the auditor must be without bias with respect to the client under audit
identify two examples of acts or behavior by CPAs that would be considered acts discreditable to the profession
Acts that would be considered discreditable to the profession include conviction of a crime punishable by imprisonment for more than one year, the willful failure to file any income tax return that the CPA is required to file by law, or the filing (or aiding in filing) of a false or fraudulent tax return on behalf of the CPA or a client. In addition, it is considered discreditable to retain a client's records after a demand is made for them, to violate any antidiscrimination laws, or to solicit or disclose questions or answers of the Uniform CPA examination without permission of the AICPA.
explain the role of the audit Committee in enhancing auditor Independence
All members of the audit committee are required to be independent. Several audit committee activities help maintain auditor independence. The audit committee is responsible for the appointment, compensation, and oversight of the work of the auditor. The audit committee must preapprove all audit and nonaudit services, and is responsible for oversight of the work of the auditor, including resolution of disagreements involving resolution of disagreements involving financial reporting between management and the auditor.
What consulting services are prohibited for auditors of public companies? What other restrictions and requirements apply to auditors when providing non-audit services to public companies
bookkeeping and other accounting services, financial information systems design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing, management or human resource functions, broker, dealer investment adviser, or investment banker services, legal and expert services unrelated to the audit, any other service that the PCAOB determines by regulation is impermissible
confidential client information
client information that may not be disclosed without the specific consent of the client except under authoritative professional or legal investigation
privileged information
client information that the professional cannot be legally required to provide; information that an accountant obtains from a client is confidential but not privileged
what are the three categories of members under the AICPA code of professional conduct
members in public practice, members in business, and all other members
describe some of the reasons why there have been calls for mandatory rotation of audit firms. how could an investor of a public company determine how long an audit firm has served at the company's auditor
partner rotation and second partner review, help ensure that the engagement partner does not become too close to management or succumb to management pressure. By doing this, auditors' judgments would no longer be influenced by fear of being fired or by hope of extending the engagement. And knowledge that auditors from a rival accounting firm would soon review the client's accounting records would be a strong inducement toward audit quality
explain how the rules concerning stock ownership apply to partners and professional staff. give an example of when stock ownership would be prohibited for each
partners and staff involved in the audits cannot own stock in a client due to a direct financial interest
audit committee
selected members of a client's board of directors whose responsibilities include helping auditors to remain independent of management
what is the purpose of the principles of professional conduct? identify the six principles
sets forth ideal attitudes and behaviors and provides a framework for the rules of conduct 1. Responsibilities (professionals should exercise sensitive professional and moral judgement in all their activities) 2. Public Interest (act in a way that will serve the public interest) 3. Integrity (perform professional responsibilities with the highest sense of integrity) 4. Objectivity & Independence (maintain objectivity and be free of conflicts) 5. Due Care (observe technical and ethical standards) 6. Scope and Nature of Services (comply with services allowed by the code of conduct)
independence in appearance
the auditor's ability to maintain an unbiased viewpoint in the eyes of others
direct financial interest
the ownership of stock or other equity shares by members or their immediate family
what is an auditors independence so essential
without independence, auditing reports can be biased and cannot be fully trusted
Identify the circumstances under which a CPA can disclose confidential information without client permission
1. Obligations related to technical standards 2. Subpoena or summons or compliance with laws and regulations 3. Participation in peer review 4. Response to AICPA Ethics Division
after accepting an engagement, a CPA discovers that the clients industry is more technical than she realized and that she is not competent in certain areas of the operation. what the CPA's options
1. Withdraw from the engagement. 2. Obtain the expertise through continuing education and self-studies. 3. Hire someone who has the expertise. 4. Work on a consulting basis with another CPA firm.
In which one of the following situations would a CPA be in violation of the AICPA code of professional conduct in determining the audit fee 1. a fee based on whether the CPAs report on the clients financial statements results in the approval of a bank loan 2. a fee based on the outcome of a bankruptcy proceeding 3. a fee based on the nature of the service rendered and the CPAs expertise instead of the actual time spent on the engagement 4. a fee based on the fee charged by the prior auditor
1. a fee based on whether the CPAs report on the clients financial statements results in the approval of a bank loan
explain the rule on contingent fees. Why is this rule necessary?
A contingent fee could tempt the practitioner to issue the wrong opinion; the contingent fees rule does not apply to non attestation services because of the competition with other professions
assume that an auditor makes an agreement with a client that audit fee will be contingent upon the number of days required to complete the engagement. is this a violation of the AICPA code of professional conduct? what is the essence of the idle of professional conduct dealing with contingent fees and what are the reasons for the rule?
A fee based upon the amount of time it takes to complete is not a violation of the contingent fees rule, which states that professional services for clients receiving assertion opinions shall not be offered or rendered under an agreement whereby no fee will be charged unless a specific finding or result is attained, or where the fee is otherwise contingent upon the findings or results of such services. The purpose of the rule is to prevent sacrificing the quality of audits because of the pressure felt by the auditor in producing the required audit outcome. An example would be the fee being dependent upon the issuance of an unmodified opinion or the obtaining of a loan by a client.
According to the profession's ethical standards, which of the following events may justify a departure from GAAP? I. New legislation II. Conflicting industry practices III. Evolution of a new form of business transaction
I and III
Distinguish between independence of mine and Independence in appearance. Identify an activity that may not affect independence of mine but it's likely to affect Independence in appearance
Independence of mind exists when the auditor is actually able to maintain an unbiased attitude throughout the audit, whereas independence in appearance is dependent on others' interpretation of this independence and hence their faith in the auditor. Activities which may not affect independence of mind, but which are likely to affect independence in appearance are: (Notice that the first two are violations of the Code of Professional Conduct.) 1. Ownership of a financial interest in the audited client. 2. Directorship or officer of an audit client. 3. Performance of management advisory or bookkeeping or accounting services and audits for the same company. 4. Dependence upon a client for a large percentage of audit fees. 5. Engagement of the CPA and payment of audit fees by management
independence of mind
The auditors state of mind that enables an unbiased viewpoint in the performance of professional services
Explain the conceptual framework for the rules of conduct and how it should be applied
The conceptual framework for the Rules of Conduct is designed to assist members in situations where the interpretations of the rules do not address a threat to compliance with the rules. Using the conceptual framework, the member identifies threats, evaluates the significance of the threat, and identifies and applies safeguards to eliminate the threat or reduce it to an acceptable level.
why is there a special need for professional conduct by CPAs? How does this differ from the need for special conduct in other professions?
There is a special need for ethical behavior by professionals to maintain public confidence in the profession, and in the services provided by members of that profession. The ethical requirements for CPAs are similar to the ethical requirements of other professions. All professionals are expected to be competent, perform services with due professional care, and recognize their responsibility to clients. The major difference between other professional groups and CPAs is independence. Because CPAs have a responsibility to financial statement users, it is essential that auditors be independent in fact (also known as independence of mind) and appearance. Most other professionals, such as attorneys, are expected to be an advocate for their Clients.
what types of disciplinary action may be taken if a member has violated the AICPA code of professional conduct
Violations of the AICPA Code of Professional Conduct may result in a remedial or corrective disciplinary action, such as requiring additional continuing education. More serious violations may require appearance before the Joint Trial Board, and may result in suspension of membership or expulsion from membership in the AICPA.
many people believe that a CPA cannot be truly independent when payment of fees is dependent on the management of the client. explain 2 approaches that could reduce this appearance of lack of independence
Ways to reduce the appearance of the lack of independence are: the use of an audit committee to select auditors made up of directors who are not a part of management; a requirement that all changes of auditors and reasons therefore be reported to the SEC or other regulatory agency; and approval of the CPA firm by stockholders at the annual meeting. The Sarbanes-Oxley Act requires that the audit committee of a public company consist only of independent members and be responsible for the appointment, termination, and compensation of the audit firm.
