Chapter 19
Perez, CPA, has been asked by a nonpublic company audit entity to perform a nonrecurring engagement involving implementing an IT information and control system. The entity requests that, in setting up the new system and during the period prior to conversion to the new system, Perez: ∙ Counsel on potential expansion of business activity plans. ∙ Search for and interview new personnel. ∙ Hire new personnel. ∙ Train personnel. In addition, the entity requests that, during the three months subsequent to the conversion, Perez: ∙ Supervise the operation of the new system. ∙ Monitor entity-prepared source documents and make changes in basic IT- generated data as Perez may deem necessary without the concurrence of the entity. Perez responds that he may perform some of the services requested but not all of them. Required: a. Which of these services may Perez perform, and which of them may Perez not perform?
*Services that Perez may perform:* • Counsel on potential expansion plans. • Search for and interview new personnel. • Train personnel. *Services that Perez may not perform:* • Hire new personnel. • Supervise the operation of the system. • Monitor client-prepared source documents and make changes in basic IT-generated data without the concurrence of the client.
How are the roles of the PCAOB inspection program and the AICPA peer review program similar, and how are they different?
*Similarities:* -AICPA and PCAOB quality control reviews are similar in that they both aim to ensure that firms comply with relevant quality control standards. -Both involve reviewing selected audit and review engagements of the firm. *Differences:* -The AICPA's Peer Review Program (PRP) is designed to review and evaluate those portions of firms' accounting and auditing practices that are not subject to inspection by the PCAOB. -Reviews are performed by firms and individuals approved by the Peer Review Board. -PCAOB inspections are conducted by the PCAOB's own inspection teams. -The PCAOB is only required to inspect firms that audit public U.S. companies, while any firm that is a member of the AICPA participates in the AICPA's PRP.
Financial interest.
-An ownership interest in an equity or a debt security issued by an entity, including rights and obligations to acquire such an interest and derivatives directly related to such interest. -A direct financial interest is a financial interest that is owned directly by an individual or entity, or is under the control of an individual or entity. -An indirect financial interest is a financial interest that is beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary does not control the intermediary or have authority to supervise or participate in the intermediary's investment decisions.
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.
Attest engagement.
An engagement that requires independence as defined in AICPA Professional Standards. Attest engagements include financial statement audits, reviews, and examinations of prospective financial information.
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.
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
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.
The following situation involves a possible violation of the Independence Rule of the AICPA's Code of Professional Conduct. Indicate whether each situation violates the Code. If it violates the Code, explain why: Jimmy Saad, a sole practitioner, audited Dallas Conduit, Inc.'s, financial statements for the year ended June 30 and was issued stock by the entity as payment of the audit fee. Saad disposed of the stock before commencing fieldwork planning for the audit of the next year's June 30 financial statements.
-Independence is impaired if a member has a direct financial interest in a client during the period of the professional engagement or at the time of expressing an opinion. -The period of professional engagement starts when the member begins to perform professional services requiring independence and ends with the client's or member's notification of that relationship's termination (see section 1.200.001).
Why are companies like Kmart able to continue in business after experiencing federal indictments, convictions of top executives, and bankruptcy, while accounting firms, like the once highly respected, financially strong Arthur Andersen, can be destroyed by a single federal indictment?
-Kmart has physical assets and trades in physical goods, but Arthur Andersen's primary asset was a reputation for competence, professionalism, and integrity. -While Kmart could file for bankruptcy and reorganize its business, Andersen's loss of reputation, its most important operating asset, could not be repaired, resulting in the loss of its clients. -Andersen's fate was essentially sealed long before the firm was convicted on obstruction of justice charges. -Interestingly, Andersen's conviction was later overturned on appeal, but it was too late for the accounting firm. -It is interesting to note that no major professional services firm has ever survived a federal indictment, much less a conviction, in the U.S.
Handling of human resource and compensation-related issues
-Lead and engagement quality review partners of public company audit firms are required to "roll off" their clients every five years so that there is a fresh perspective given to the audit on a regular basis. They cannot return to those clients until after a five-year "time-out" period. -If any client employee with a "financial reporting oversight role" was previously an audit team member within a one-year "cooling-off period," the firm is prohibited from auditing the client. -Audit partners must not receive compensation based on selling engagements to the client for services other than audit, review, and attest services, if they are to be considered independent.
2. How would your answer to requirement 1 differ if the potential client were not publicly held? In other words, what additional nonaudit services could Dean include in his proposal? What conditions would have to be met in order for the firm to provide the additional services?
-Most of the above non-audit services would not be prohibited if the client were not publicly held, though there are restrictions to be observed. -For example, see the discussion relating to the AICPA's restrictions regarding financial information systems design and implementation for a non-public client. -Also, auditors would have to make sure that they didn't make managerial decisions or audit their own work when deciding the nature of the services that they could provide.
Acceptance and continuance of client relationships and specific engagements:
-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.
The following situation involves a possible violation of the Independence Rule of the AICPA's Code of Professional Conduct. Indicate whether each situation violates the Code. If it violates the Code, explain why: Steve Rackwill, CPA, has been asked by his audit entity, Petry Plumbing Supply, to help implement a new control system. Rackwill will arrange interviews for Petry's hiring of new personnel and instruct and oversee the training of current entity personnel. Petry Plumbing is a privately held company. Petry will make all hiring decisions and supervise employees once they are trained.
-The CPA's independence is not impaired under these circumstances provided the client makes all significant management decisions related to the hiring of new personnel and the implementation of the system. -The auditor must also limit his or her supervisory activities to initial instruction and training of personnel and should avoid direct supervision of the actual operation of the system or related activities that would constitute undue involvement in or identification with management functions. -The auditor would be prohibited from providing these services for a public company audit client (see Section 1.200.001).
Who establishes standards and rules for the professional conduct of public accountants for auditors of public versus private companies?
-The SEC has the legal authority to oversee the public accounting profession, but has generally allowed private-sector entities such as the FASB and AICPA to set accounting and auditing standards. -However, in 2003 the PCAOB was established to set auditing standards for the audits of public companies. -The SEC and PCAOB have set rules regarding conduct and independence of public-company auditors, which differ from the AICPA rules and standards, but at present the Code of Professional Conduct maintained by the PCAOB is still very similar in most respects to that established by the AICPA in 2003 with the exception of the PCAOB's and SEC's additional independence requirements for auditors of public companies.
Provision of other professional services
-The SEC prohibits several types of professional services by accounting firms for public company audit and review entities "unless it is reasonable to conclude that the results of these services will not be subject to audit procedures during an audit of the entity's financial statements." -The rules do not limit the scope of nonaudit services provided by accounting firms to nonpublic companies or to public companies that are not audit entities. -Additionally, accounting firms are allowed to provide certain types of tax services to their audit entities. -Specific categories of nonaudit services that are considered to impair independence if provided to a public company audit entity are: o Bookkeeping or other services related to the accounting records or financial statements of the audit entity o Financial information systems design and implementation o Appraisal or valuation services, fairness opinions, or contribution-in-kind reports o Actuarial services o Internal audit outsourcing services o Management functions or human resources o Broker or dealer, investment adviser, or investment banking services o Legal services o Expert services
Period of the professional engagement.
-The period for which a member either signs an initial engagement letter or other agreement to perform attest services or begins to perform an attest engagement for an entity, whichever is earlier. -The period lasts for the entire duration of the professional relationship and ends with the formal or informal notification, either by the member or the entity, of the termination of the professional relationship or by the issuance of a report, whichever is later. -Accordingly, the period does not end with the issuance of a report and recommence with the beginning of the following year's attest engagement.
Why are false, misleading, or deceptive advertisements are of concern to the profession?
-These acts are of concern to the profession because of the central role that reputation plays to a CPAs service. -Deceitful advertising will seriously damage the reputation of the CPAs involved as well as negatively affect the reputation of the profession as a whole. -Just as with Arthur Andersen, if CPAs are not seen as credible, competent professionals, the demand for a CPA's services will disappear.
What are the major differences between the AICPA's Code of Professional Conduct independence rules and the SEC's independence rules for auditors of public companies.
1) Provision of other professional services 2) Handling of human resource and compensation-related issues 3) Required communications
The following situation involves a possible violation of the Independence Rule of the AICPA's Code of Professional Conduct. Indicate whether each situation violates the Code. If it violates the Code, explain why: Julia Roberto, a sole practitioner, has provided extensive advisory services for her audit entity, Leather Ltd. She has interpreted financial statements, provided forecasts and other analyses, counseled on potential expansion plans, and counseled on banking relationships but has not made any management decisions. Leather is a privately held entity.
A CPA may provide such advisory services to an audit client and not impair independence because the member's role is advisory in nature and because the client is a privately held entity (see Section 1.200.001).
What is the purpose of a CPA firm's establishing a system of quality control?
A firm's system of quality control should be designed to provide the firm with reasonable assurance that the firm and its personnel comply with professional, legal, and regulatory requirements and that the partners issue appropriate reports (SQCS 8.12).
Scope and nature of services
A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided. This is the responsibility of all CPAs.
Objectivity and 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. Independence is the responsibility of "Part 1" CPAs, but objectivity is the responsibility of all CPAs.
Due care
A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability. This is the responsibility of all CPAs.
Covered member.
A member that is: a. An individual on the attest engagement team. b. An individual in a position to influence the attest engagement. c. A partner or manager who provides nonattest services to the attest entity beginning once he or she provides 10 hours of nonattest services to the entity within any fiscal year and ending on the later of the date (i) the firm signs the report on the financial statements for the fiscal year during which those services were provided, or (ii) he or she no longer expects to provide 10 or more hours of nonattest services to the attest entity on a recurring basis. d. A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement. e. The firm, including the firm's employee benefit plans. f. An entity whose operating, financial, or accounting policies can be controlled (as defined by generally accepted accounting principles for consolidation purposes) by any of the individuals or entities described in parts (a) through (e), or by two or more such individuals or entities if they act together.
Close relative.
A parent, sibling, or nondependent child.
Key position.
A position in which an individual: a. Has primary responsibility for significant accounting functions that support material components of the financial statements. b. Has primary responsibility for the preparation of the financial statements. c. Has the ability to exercise influence over the contents of the financial statements, including when the individual is a member of the board of directors or similar governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position. For purposes of attest engagements not involving an entity's financial statements, a key position is one in which an individual is primarily responsible for, or able to influence, the subject matter of the attest engagement, as described above.
Immediate family.
A spouse, spousal equivalent, or dependent (whether or not related).
Ethics.
A system or code of conduct based on moral duties and obligations that indicates how an individual should behave.
What additional guidance is provided for applying the Rules of Conduct?
Guidance for applying the Rules of Conduct is provided by the Interpretations of Rules of Conduct by the Professional Ethics Executive Committee (PEEC).
Responsibilities
In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities. This is the responsibility of all CPAs.
Holding out.
In general, any action initiated by a member that informs others of his or her status as a CPA or AICPA-accredited specialist constitutes holding out as a CPA. This would include, for example, use of the CPA designation on business cards or letterhead, or listing as a CPA in local telephone directories.
The following situation involves a possible violation of the Independence Rule of the AICPA's Code of Professional Conduct. Indicate whether each situation violates the Code. If it violates the Code, explain why: Dip-It Paint Corporation requires an audit for the current year. However, Dip-It has not paid Allen & Allen the fees due for tax-related services performed two years ago. Dip-It issued Allen & Allen a note for the unpaid fees, and Allen & Allen proceeded with the audit services.
Independence is impaired under section 1.200.001 of the Code because the note is a prohibited loan from the member to the client.
What types of personal loans from a financial institution are allowed by the Rules of Conduct?
Interpretation 1.260 permits the following types of personal loans from a financial institution: • Automobile loans and leases collateralized by the automobile. • Loans fully collateralized by the cash surrender value of an insurance policy. • Loans fully collateralized by cash deposits at the same financial institution. • Credit cards and cash advances on checking accounts where the aggregate outstanding balance is reduced to $10,000 or less by the payment due date.
Briefly describe why the SEC's requirements diverged from those of the AICPA in the early 2000s.
Many of the independence restrictions for public company auditors were in response to specific circumstances that came to light in the frauds of the early 2000s. The changes, many of which were required by the Sarbanes-Oxley Act, are designed to correct these circumstances.
Generally accepted auditing standards.
Measures of the quality of the auditor's performance.
The public interest
Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate commitment to professionalism. This is the responsibility of all CPAs.
The question that follows is based on the Independence Rule of the AICPA Code of Professional Conduct as it relates to independence and family relationships. Check yes if the situation violates the rule, no if it does not: A partner assigned to a firm's New York office is married to the president of an entity for which the firm's Connecticut office performs audit services. If the partner does not perform services out of or for the Connecticut office, cannot exercise significant influence over the engagement, and has no involvement with the engagement, such as consulting on accounting or auditing issues, is the firm's independence impaired?
No
The following situation involves a possible violation by a member in industry of the AICPA's Code of Professional Conduct. Indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and explain why: Brian Thorough, CPA, is currently employed as controller of TransLouisiana Oil Company. He has discovered that TransLouisiana has been illegally paying state environmental employees so that they will not charge TransLouisiana with dumping highly toxic chemicals into the bayous. Thorough discloses this information to the state attorney general.
No. Section 2.400.070 states that if a member in industry concludes that the financial statements or records could be materially misstated and do not comply with professional standards, the member should consider whether any responsibility exists to communicate the problem to third parties, such as regulators. However, the CPA should consult his attorney prior to any disclosure.
What is meant by normal *lending procedures, terms, and requirements* within the Rules of Conduct?
Normal lending procedures, terms, and requirements are defined as lending procedures, terms, and requirements that are reasonably comparable to those relating to loans of a similar character given to other borrowers during the period in which the loan to the member is given.
The following situation involves a possible violation of the Independence Rule of the AICPA's Code of Professional Conduct. Indicate whether each situation violates the Code. If it violates the Code, explain why: Zeker & Associates audits a condominium association in which the parents of a member of the firm own a unit and reside. The unit is material to the parents' net worth, and the member participates in the engagement.
Section 1.200.005 of the Code indicates that an auditor's independence would be considered impaired if a close relative (e.g., a parent) has a material financial interest in an enterprise of which the auditor is participating in the engagement and has knowledge of the financial interest.
Generally, a CPA is not allowed to disclose confidential entity information without the consent of the entity. Identify four circumstances in which confidential entity information can be disclosed under the Rules of Conduct without the entity's permission.
Section 1.700 specifies five situations when a CPA can disclose confidential information without the client's consent: (1) to meet disclosure and performance requirements under GAAP and GAAS, (2) to comply with a valid subpoena, (3) to allow a review of a member's professional practice under the authority of the AICPA, a state CPA society, or a state board of accountancy (4) to comply with an investigative or disciplinary proceeding, and (5) to allow a review of a CPA's professional practice in conjunction with the purchase, sale, or merger of the practice.
What are the four major sections of the AICPA Code of Professional Conduct?
The AICPA Code of Professional Conduct consists of four major sections: a preface that is applicable to all CPAs, and three "Parts": *• Preface:* applies to all CPAs; defines ideal Principles of Professional Conduct that are expected of all CPAs. *• Part 1:* applies to CPAs in public practice, including auditors practicing in public accounting firms and government auditors who issue audit and other assurance reports on government entities. Part 1 requires the CPA to be independent on the entities on which he or she is providing assurance. *• Part 2:* applies to CPAs who are working in business but who are not working as auditors that issue assurance reports on which the public will rely. Part 2 of the Code does not require independence but does require integrity and objectivity on the part of CPAs working in any business capacity. *• Part 3:* applies to CPAs who are neither functioning as an auditor nor in business. In such cases the profession expects that CPAs will behave in certain ways and not engage in any act that would be discreditable to the profession.
What entities are involved in establishing standards and rules for the professional conduct of public accountants?
The AICPA establishes auditing standards for nonpublic-company audits (through the ASB) and maintains a Code of Professional Conduct, mapping out the primary areas in which ethical conduct is expected of public accountants.
The question that follows is based on the Independence Rule of the AICPA Code of Professional Conduct as it relates to independence and family relationships. Check yes if the situation violates the rule, no if it does not. An audit partner has a brother who owns a 60 percent interest in an audit entity, which is material to the brother's net worth. If the partner participates in the audit engagement, but does not know about his brother's investment, is the firm's independence impaired?
Yes
Dean Wareham, an audit manager, is preparing a proposal for a publicly held company in the manufacturing industry. The potential client is growing rapidly and introducing many new products yet still has a manual accounting system. The company also has never undertaken any tax planning activities and feels that it pays a higher percentage of its income in taxes than its competitors. Additionally, it is concerned that its monitoring activities are inadequate because it does not have an internal audit department. Dean knows that the SEC has rules regarding auditor independence. Required: 1. Prepare a summary of nonaudit services that Dean can include in his proposal that do not violate the SEC's independence rules.
The client clearly needs help with the following nonaudit services: -Developing an automated accounting system. -Providing tax-planning advice. -Outsourcing the internal audit function. -Developing projections and/or forecasts for the company's new products. -However, because the client is a public company audit client, the firm would be prohibited from helping the client design or implement a software system and from providing internal audit outsourcing. -Provision of tax-planning advice is allowed by SEC independence rules. -Assisting the client to develop projections and/or forecasts for the company's new products and other nonaudit work would be subject to approval by the audit committee and would be strictly limited by the principles of not performing a management function, not auditing one's own work, and not performing an advocacy role.
Professionalism.
The conduct, aims, or qualities that characterize or mark a profession or professional person.
The question that follows is based on the Independence Rule of the AICPA Code of Professional Conduct as it relates to independence and family relationships. Check yes if the situation violates the rule, no if it does not: A CPA's father acquired a 10 percent interest in his son's audit entity. The investment is material to the father's net worth. If the son is aware of his father's investment and the CPA participates in the audit engagement, is the firm's independence impaired?
Yes
What are the eleven major sections of the Rules of Conduct in Part 1 of the Code of Professional Conduct?
The eleven major sections of the Rules of Conduct in Part 1 of the Professional Code of Conduct are: 1) Integrity and Objectivity. 2) Independence 3) General Standards 4) Compliance with Standards 5) Accounting principles 6) Acts discreditable 7) Contingent fees 8) Commissions and referral fees 9) Advertising and other forms of solicitation 10) Confidential client information 11) Form of organization and name
Give three examples of acts that are considered discreditable under the Rules of Conduct
The following acts are considered discreditable under Section 1.400: • Discrimination and harassment in employment practices (.010). • Solicitation or disclosure of CPA examination questions and answers (.020) • Failure to file tax return or pay tax liability (.030) • Negligence in the preparation of financial statements or records (.040) • Failure to follow requirements of governmental bodies, commissions, or other regulatory agencies (.050) • Confidential information obtained from employment or volunteer activities (.070) • False, misleading, or deceptive acts in promoting or marketing professional services (.080) • Improper use of the CPA credential (.100) • Failure to comply with records requests (.200)
A CPA is allowed to advertise as long as the advertising is not false, misleading, or deceptive. Provide three examples of advertising that might be considered false, misleading, or deceptive.
The following are examples of advertising activities that are prohibited by the Rules of Conduct, as outlined in Interpretation 1.600: • Creating false or unjustifiable expectations of favorable results. • Implying an ability to influence any court, tribunal, regulatory agency, or similar body or official. • Claiming that specific professional services in current or future periods will be performed for a stated fee, estimated fee, or fee range when it is likely at the time of representation that such fees will be substantially increased and the prospective client was not advised of that likelihood. • Making any other representations that would be likely to cause a reasonable person to misunderstand or be deceived.
The following situation involves a possible violation of the Independence Rule of the AICPA's Code of Professional Conduct. Indicate whether each situation violates the Code. If it violates the Code, explain why: Kraemeer & Kraemeer recently won the audit of Garvin Clothiers, a large manufacturer of women's clothing. Jock Kraemeer had a substantial investment in Garvin prior to bidding on the engagement. In anticipation of winning the engagement, Kraemeer placed his shares of Garvin stock in a blind trust.
The independence of the auditor, according to section 1.200.001 of the Code, would be considered impaired whether or not the financial interest is placed in a blind trust.
The question that follows is based on the Independence Rule of the AICPA Code of Professional Conduct as it relates to independence and family relationships. Check yes if the situation violates the rule, no if it does not: A partner's dependent parent is a 5 percent limited partner in a firm entity. Does the parent's direct financial interest in the entity impair the firm's independence?
Yes
Justice-Based Ethics
The justice-based theory is concerned with issues such as equity, fairness, and impartiality. Decisions made within this theory should lead to a fair and equitable distribution of resources among those individuals or groups affected. There may be difficulty in trying to apply this theory in practice because the rights of one or more individuals or groups may be affected when a better distribution of benefits is provided to others.
Practice of public accounting.
The performance for an entity, by a member or a member's firm, while holding out as CPA(s), of the professional services of accounting, tax, personal financial planning, litigation support services, and those professional services for which standards are promulgated by bodies designated by Council.
What are the three theories of ethical behavior that can be used to analyze ethical issues in accounting.
The three theories of ethical behavior are: (1) utilitarianism, (2) rights-based approach, and (3) justice-based approach.
Rights-Based Ethics
The rights-based theory assumes that individuals have certain rights and that other individuals have a duty to respect those rights. Thus, a decision maker who follows a theory of rights should undertake an action only if it does not violate the rights of any individual.
b. Before undertaking this engagement, Perez should inform the entity of all significant matters related to the engagement. What are these significant matters that should be included in the engagement letter?
The significant matters related to an engagement generally include: (a) the engagement's objectives, (b) the scope, (c) the approach, (d) the role of all personnel, (e) the manner in which results are to be communicated, (f) the timetable, and (g) the fee.
What are the six Principles of Professional Conduct?
The six Principles of Professional Conduct are: 1) Responsibilities 2) The public interest 3) Integrity 4) Objectivity and independence 5) Due care 6) Scope and nature of services
List the six elements of quality control and provide one example of a policy or procedure that can be used to fulfill each element.
The six elements of quality control and examples of policies or procedures that can be used to fulfill each element are: 1) Leadership responsibilities for quality within the firm ("tone at the top") 2) Relevant ethical requirements 3) Acceptance and continuance of client relationships and specific engagements 4) Human resources 5) Engagement performance 6) Monitoring
Integrity
To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity. This is the responsibility of all CPAs.
Utilitarianism
Utilitarian theory recognizes that decision making involves trade-offs between the benefits and burdens of alternative actions, and it focuses on the consequences of an action on the individuals affected. The theory proposes that the interests of all parties affected, not just one's self-interest, should be considered
The following situation involves a possible violation by a member in industry of the AICPA's Code of Professional Conduct. Indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and explain why: Janet Jett, CPA, formerly worked for Delta Disk Drive, Inc. She is currently interviewing for a new position with Maxiscribe, Inc., another manufacturer of disk drives. Jett has agreed to provide confidential information about Delta's trade secrets if she is hired by Maxiscribe.
Yes. If a member in industry uses confidential information obtained from an employer for his or her personal benefit, disclosure of the information is considered an act discreditable to the profession in violation of section 1.400.001 of the Code. The member also violates section 1.700.001 of the Code, which prohibits disclosing confidential client information with few exceptions.
The following situation involves a possible violation by a member in industry of the AICPA's Code of Professional Conduct. Indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and explain why: Jack Jackson is a CPA and controller of Acme Trucking Company. Acme's external auditors have asked Jackson to sign the management representation letter. Jackson has signed the management representation letter, even though he knows that full disclosures have not been made to Acme's external auditors.
Yes. Signing such a letter would be a known misrepresentation of fact in violation of section 1.100.001 of the Code.
The following situation involves a possible violation by a member in industry of the AICPA's Code of Professional Conduct. Indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and explain why: Mary McDermott, CPA, is employed in the internal audit department of the United Fund of America. The United Fund raises money from individuals and distributes it to other organizations. McDermott has audited Children's Charities, an organization that receives funds from United Fund.
Yes. This would be a violation of section 1.200.001 of the Code because McDermott's employer is the source of the revenues for the entities being audited.
The following situation involves a possible violation by a member in industry of the AICPA's Code of Professional Conduct. Indicate whether it violates the Code. If it violates the Code, indicate which rule is violated and explain why: Jill Burnett, CPA, was hired by Cooper Corporation to supervise its accounting department in preparing financial statements and presenting them to senior management. Due to considerable time incurred on other financial activities, Burnett was unable to supervise the accounting staff adequately. It is later discovered that Cooper's financial statements contain false and misleading information.
Yes. Under 1.400.040, a member who, through his or her negligence, makes or permits another to make false and misleading entries in the financial statements has committed an act discreditable to the profession.
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. A system of quality control.
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. Engagement performance. c. Supervision responsibilities. d. Review responsibilities.
a. Performance evaluation.
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.
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.
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 interest 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. 2 and 3.
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. CPA firm that has been engaged to audit a former audit entity. c. Federal court that has issued a valid subpoena. d. Disciplinary body created under state statute.
b. CPA firm that has been engaged to audit a former audit entity.
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 more 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. 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. Requiring an adjustment to the allowance for doubtful accounts would give stockholders access to fair and adequate information.
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. Set of specific, mandatory rules describing minimum levels of conduct a CPA must maintain.
An audited entity company has *not paid its 2015 audit fees*. According to the AICPA Code of Professional Conduct, for the auditor to be considered *independent* with respect to the *2016 audit*, the 2015 audit fees must be paid *before* the a. 2015 report is issued. b. 2016 fieldwork is started. c. 2016 report is issued. d. 2017 fieldwork is started.
c. 2016 report is issued.
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. A justice-based perspective.
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. Actual litigation by the auditor against the present management, alleging management fraud or deceit.
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. 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.
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 nonaudit services performed by the audit firm. d. Only fees for systems implementation and design and nonaudit services pefformed by the audit firm.
c. Fees for the external audit, audit-related fees, tax fees, and fees for other nonaudit services performed by the audit firm.
All of the following nonaudit services are identified by the SEC as generally *impairing an auditor's independence 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. Some specific tax services.
Required communications
• The auditor of a public company must report to the company's audit committee all "critical accounting policies" used by the company, all alternative treatments within GAAP related to material items discussed with management, and other material written communications between the auditor and management. • The audit committee must be responsible for the appointment, compensation, and oversight of the external auditor's work. • Proxy statements and annual reports issued by public companies must disclose 1) audit fees, 2) audit-related fees, 3) tax fees, and 4) all other fees billed during the prior two fiscal years by the principal auditor.