Chapter 2 -- Professional Standards

Question 1

Section 2.1: Code of Professional Conduct

What are the six principles of the AICPA Code of Professional Conduct?

Answer 1

“RIP-SOD”
Responsibilities
Integrity
Public Interest
Scope and nature of Service
Objectivity and Independence
Due Care

Question 2

Section 2.1: Code of Professional Conduct

What is included in the AICPA Code of Professional Conduct?

Answer 2

• General ethical principles that are aspirational in character
• Set of specific, mandatory rules describing minimum levels of conduct a member must maintain

Question 3

Section 2.1: Code of Professional Conduct

What are the threats in independence?

Answer 3

• Adverse Interest Threat
• Advocacy Threat
• Familiarity Threat
• Management Participation Threat
• Self-Interest Threat
• Self-Review Threat
• Undue Influence Threat

Question 4

Section 2.1: Code of Professional Conduct

What is adverse interest threat?

Answer 4

The CPA is working against the client

Examples
* Is the client, or a officer, director or shareholder of the client, suing the Auditor?
* A claim is filed against the firm to get back insurance payments made to the client
* A lawsuit filed against the client, its officers and directors, and the auditor firm

Question 5

Section 2.1: Code of Professional Conduct

What is advocacy threat?

Answer 5

The auditor is more interested in the client’s interest or position that would impair their independence

Examples
* Performing forensic accounting services to the client who is in litigation
* Acting as an investment adviser for an officer, director or 10% shareholder of the client
* Underwriting or promoting a client’s shares
* Act as a registered agent for the client
* Endorses a client’s service or products

Question 6

Section 2.1: Code of Professional Conduct

What is familiarity threat?

Answer 6

• The auditor has a long or close relationship with the client
• The auditor becomes too sympathetic to the client’s interest or accepts the client’s work without performing due diligence

Example
* An auditor’s immediate family or close relative is employed by the client
* An auditor’s friend is employed by a client
* A former employee of the audit firm is employed by the client in a key position
* The auditor has a close relationship with the office, director of a 10% shareholder of the client

Question 7

Section 2.1: Code of Professional Conduct

What is management participation threat?

Answer 7

• The auditor will act on behalf of the client or assume client’s management responsibilities
• The auditor cannot be act as the CEO of the company

Question 8

Section 2.1: Code of Professional Conduct

What is self-interest threat?

Answer 8

The auditor benefits with a client or persons associated with client

Examples
* The auditor has a financial interest in the client, and the audit will have an affect on the fair value of the company
* The auditor’s spouse enters into employment negotiations with the client
* The auditor’s firm has a contingent fee arrangement with the client
* The majority of the auditing firm’s revenue is based on the financial health of the client

Question 9

Section 2.1: Code of Professional Conduct

What is self-review threat?

Answer 9

• If the auditor performed the work, then there is no need to review it.
• The auditor may rely on the service performed when forming a judgement as part of the audit

Example
* The auditor creates the financial statements and then audits them in the same period.
* The auditor does bookkeeping for the client
* A partner in the auditor’s firm is also associated with the client’s company as an employee, officer, director or contractor

Question 10

Section 2.1: Code of Professional Conduct

What is undue influence threat?

Answer 10

The client threatens to fire the firm because of a disagreement over accounting principles

Question 11

Section 2.2: Independence

What is the difference between Independence of mind and Independence of appearance?

Answer 11

• Independence of mind allows the auditor to act with integrity, exercise objectivity and professional skepticism, and being free from bias.
• Independence in appearance is how the auditor is viewed by third parties.

Question 12

Section 2.2: Independence

What is an APS?

Answer 12

An alternative practice structure is a relationship between firms licensed to provide Attest Services and firms providing Non-Attest Services.

Question 13

Section 2.4: Professional Standards

What does an auditor report when the financial statements do not comply to GAAP and the departure is warranted, and the effects on the financial statements is material?

Answer 13

• The departure
• The approximate effects for the departure
• The reasons compliance would result in misleading financial statements

Question 14

Section 2.4: Professional Standards

How is reporting when the financial statements are not GAAP because they would be misleading?

Answer 14

If the information that is reported will be material, then the auditor includes the following information in the report (“DAR”):
* Departure
* Approximate effects of the departure (if practicable)
* Reasons compliance would result in misleading financial statements.

Question 15

Section 2.6: Other Responsibilities

What services cannot have contingent fee arrangement?

Answer 15

• Audits or reviews of financial statements
• An examination of prospective financial information
• Certain tax services
• Compilation that reasonably might be used by a third party that does not disclose lack of independence in the report

Question 16

Section 2.7: Other Pronouncements on Professional Responsibilities

What is the cooling-off period before a member of an issuer’s audit engagement team may begin working for the registrant in a key position?

Answer 16

One year

Question 17

Section 2.7: Other Pronouncements on Professional Responsibilities

What are the responsibilities and activities of the PCAOB?

Answer 17

• Registering public accounting firms
• Overseeing the audit of public companies that are part of the SEC
• Establishing or adopting standards on auditing, quality control, ethics and independence
• Inspecting audit firms. 1 year for over 100 audits/year; 3 years for less than 100 audits/year
• Conducting investigations and disciplinary proceeds that involve registered public accounting firms and those that are associated with the firms.

Question 18

Section 2.7: Other Pronouncements on Professional Responsibilities

When is an accountant not independent in regard to the Department of Labor guidelines ?

Answer 18

An accountant is not independent when:

• During the period of the engagement.
• At the date of the opinion.
• If any of the following relationships with the plan or plan sponsor existed: promoter, underwriter, investment advisor, voting trustee, director, officer, or employee.

Question 19

Section 2.7: Other Pronouncements on Professional Responsibilities

What does the PCAOB look for when inspecting audit firms?

Answer 19

• Examine selected audit and review engagements
• Evaluate the system of quality
• Test audit, supervisory and quality control procedures

Question 20

Section 2.7: Other Pronouncements on Professional Responsibilities

Under the PCAOB, what nonaudit services cause the independence to be impaired?

Answer 20

• Bookkeeping or other services related to financial statements
• Financial system design and implementation
• Appraisal or valuation services
• Actuarial Services
• Internal audit outsourcing services
• Management or human resources services
• Broker-dealer, investment adviser or investment banking services
• Legal and expert services unrelated to the audit
• Any other services that the PCAOB chooses

Question 21

Section 2.7: Other Pronouncements on Professional Responsibilities

Under PCAOB, what individuals can receive tax services?

Answer 21

• CEO
• President
• CFO
• COO
• Chief Accounting Officer
• Other individuals in equivalent positions