Professional Responsibilities

Question 1

What engagements are covered by the AICPA Code of Professional Conduct?

Answer 1

• AICPA Code of Professional Conduct outlines the profession’s rules of conduct and auditor’s responsibility to the profession
• Covers all professional engagements and is the minimum standard of conduct
• Member should additionally follow specific standards for a specific engagement
• codified using ET prefixes
• PCAOB adopt the AICPA code of professional conduct

Question 2

AICPA Code of Professional Conduct - Principles

Answer 2

• Article I - Responsibilities
• Article II - Public Interest
• Article III - Integrity
• Arctile IV - Objectivity and Independence
• Article V - Due Care
• Article VI - Scope and Nature of service

Question 3

What are threats (7) and safeguards (3) to independence?

Answer 3

_Threats _to independence:
(a) Self-review threat—Reviewing evidence that results from the member’s own work (e.g., preparing source documents for an audit client).
(b) Advocacy threat—Actions promoting the client’s interests or position (e.g., promoting a client’s securities).
(c) Adverse interest threat—Actions or interests between the member and the client that are in opposition (e.g., litigation between the client and the member).
(d) Familiarity threat—Members having a close or longstanding relationship with client or knowing individuals or entities who performed nonattest services for the client, (e.g., a member of the attest engagement team whose spouse is in a key position at the client).
(e) Undue influence threat—Attempts by a client’s management (or others) to coerce the member or exercise excessive influence over the member (e.g., threat to replace the member over a disagreement regarding an accounting principle).
(f) Financial self-interest threat—Potential benefit to a member from a financial interest in, or some financial relationship with, an attest client (e.g., having a direct financial interest in the client).
(g) Management participation threat—Assuming the role of management or performing management functions
for the attest client (e.g., serving as an officer of the client).

• *Safeguards of Independence**
  (a) **created by the profession, legislation, or regulation **(e.g., required continuing education on independence and ethics).
  (b) implemented by the client (e.g., an effective governance structure, including an active audit committee).
  (c) implemented by the firm/cpa (e.g., quality controls for attest engagements)

Threats > Safeguards ⇒ No Independence

Question 4

Independence

attestation engagement - ERA’s

Answer 4

• Auditor must maintain independent for attestation engagement (ERA’S): Audit/Examination; Review; Agreed-upon procedure engagements leading to findings; Special reports
• NO independent for compilation, taxes and consultation
• Independence should be maintained in both fact and appearance
• Independence is not impair for indirect** and immaterial financial interest** (e.g. an investment held through a regulated mutual fund) **

Question 5

What are the requirements for Non-attest engagements?

Answer 5

• Agreement must be in writing
• Independence not required - Must state if you are not independent

Question 6

When are contingent fees NOT allowed?

Answer 6

• ET section 302 - code of profesional conduct
• Not allowed if Member also performs services where independence is required, attest work (1) audit or review of financial statements, (2) compilation of financial statements expected to be relied upon by a third party or (3) examination of prospective financial information
• Commissions or referral fees for Covered Members are not allowed - Example - Audit firm gets a commission for recommending to Client that they implement a new A/P System…NOT Allowed
• Tax Preparation - Prepare an original or correction of original return (amended return), Payment according to refund amount is disallowed/NOT Allowed

Question 7

When are contingent fees allowed?

Answer 7

When fees are structured relative to judicial proceedings

• Example*:
• *-** representing client in an examination by a IRS agent
• *-** filing an amended tax return subject to tax case with a different taxpayer or where the tax authority is developing a position
• Representing a taxpayer in getting a private ruling

Question 8

Department of Labor (DOL)

Answer 8

• The DOL’s mission involves fostering and promoting the welfare of job seekers, wage earners, and retirees of the United States.
• The DOL conducts financial and performance audits following Government Auditing Standards - relating to its mission, including audits of: (1)Compliance with applicable laws and regulations (2)Evaluation of economy and efficiency of operations (3)Evaluation of effectiveness in achieving program results
• Employee benefit plans must be audited in accordance with the Employee Retirement Security Act of 1974 (ERISA), as enforced by DOL. **Independence requirements are in general similar to those of the AICPA, except that **Accountant or firm may be engaged on a professional basis by the plan sponsor and the accountant may serve as an actuary.
• In some circumstances (e.g., definition of “member” for purposes of those who must maintain independence within a CPA firm) DOL requirements differ from AICPA requirements—in such cases they are generally more restrictive.

Question 9

Due Care

Answer 9

AICPA Code of Professional Conduct - ET Section 56 - Article V–Due Care.

the principle of due care requires the member to observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge responsibility to the best of the member’s ability.

(1) Competence is derived from both education and experience.
(2) Each member is responsible for assessing his or her own competence and for evaluating whether education, experience,
and judgment are adequate for the responsibility taken.

• Technical abilities mirror those held by peers in the profession (Education and experience)
• Follow GAAS (Generally Accepted Audit Standards)
• Obtain a Reasonable Level of Assurance
• Maintain Reasonable Level of Skepticism
• Supervise Audit Staff
• Review judgment at every level

Question 10

Interpretation 101-1. - Independence is impaired if

Answer 10

Interpretation 101-1. Independence is impaired if

(1) During the period of the professional engagement a covered member
(a) had or was committed to acquire any direct or material indirect financial interest in the client
(b) was a trustee of any trust or executor or administrator of any estate if such trust or estate had or was committed to acquire any direct or material indirect financial interest in the client
(c) had a joint closely held investment that was material to the covered member.
(d) except as specifically permitted in interpretation 101-5, had any loan to or from the client, any officer or director of the client, or any individual owning 10% or more of the client’s outstanding equity securities or other ownership interests.
(2) During the period of the professional engagement, a partner or professional employee of the firm, his or her immediate family, or any group of such persons acting together owned more than 5% of a client’s outstanding equity securities or other ownership interests.
(3) During the period covered by the financial statements or during the period of the professional engagement, a partner or professional employee of the firm was simultaneously associated with the client as a
(a) Director, officer, or employee, or in any capacity equivalent to that of a member of management;
(b) Promoter, underwriter, or voting trustee; or
(c) Trustee for any pension or profit-sharing trust of the client.

Question 11

Employee Retirement Security Act of 1974 (ERISA)

Answer 11

Employee benefit plans must be audited in accordance with the Employee Retirement Security Act of 1974 (ERISA), as enforced by the Department of Labor (DOL).

For purposes of auditing these plans, the DOL has issued guidelines to determine whether the accountant is independent.

Question 12

Which standards apply to consulting engagements?

Answer 12

Consulting engagements are covered by Statements on Standards for Consulting Services (SSCS)

General Standard Rule 201 :
• Professional Competence
• Due Professional Care
• Planning & Supervision
• Obtain Sufficient Data
• Must Serve Client Interest – with integrity & objectivity
• Must have written or oral agreement
• Must communicate with client

Question 13

List some common consulting engagements.

Answer 13

• Advisory Services
• Transaction Services
• Implementation Services
• Consultation
• Staff and other support services
• Product services

Question 14

When is a GAAP departure appropriate?

Answer 14

Departure from GAAP is appropriate only when GAAP would cause Financial Statements to be misleading

Departure must be explained & disclosed

Example of possible circumstance justifying departure are **New form of business and New legislation **

Question 15

Confidentiality

Rule 301

Answer 15

• Information is considered confidential NOT privileged
• Must not reveal information without client permission
  
  • ​Exceptions
    • Valid subpoena or summons
    • Inquiry by AICPA trial board
    • Quality control peer review program
• ​A member may use a records retention agency to store client records as long as confidentiality is maintained

Question 16

What is the effect of not returning all client-provided documents upon request?

Answer 16

This is an discreditable act.

• You MUST return all documents the client gives you even if they don’t pay their bill.
• If you create a document- however- like a work paper- you are not required to give the client a copy of papers you created if they haven’t paid their bill - they are the firm’s work papers- BUT are still confidential

Question 17

What are the rules with respect to CPA firm names?

Answer 17

CPA firm names must not be misleading.

If partner dies- remaining partner has two years to change name if partnership dissolved.

If partner dies and more than one partner still remains (i.e. 1 dies and you still have 2 or more partners...you don’t need to change the name) -

All Partners/Shareholders must be members of the AICPA in order to hold themselves out as members of the AICPA. Non-CPAs can be owners- but 2/3 of Ownership must be CPAs.

Non-CPA owner must not be involved with the accounting- and is still bound by AICPA code of conduct- must maintain CPE requirements and have Bachelor’s degree.

Question 18

What is the consequence of disclosing CPA exam material post-1996?

Answer 18

It is an Act Discreditable.

Question 19

What are the consequences for a CPA who commits an Act Discreditable?

Answer 19

• Licenses are granted at the State level
• If State revokes certificate - AICPA Ban
• Felony Conviction - AICPA Ban
• Prepares Fraudulent Tax Return - AICPA Ban
• Intentionally failing to file return - AICPA Ban
• SEC can get involved with discipline

Question 20

Who must approve non-audit work performed by a firm for a client?

Answer 20

• Client Audit Committee must approve non-audit work performed by Firm
• Firm must disclose any potential independence issues to Audit Committee

Question 21

Which organization is in charge of determining if federal funds are being misappropriated?

Answer 21

GAO - Government Accountability Office

• The GAO develops additional requirements for audits of organizations that receive federal financial assistance. These are included in Government Auditing Standards, referred to as the “Yellow Book.” (The Government Auditing Standards outline follow the PCAOB outlines)
• GAO does conduct operational audits and report the results to Congress

Question 22

What rules must auditors follow for governmental audits?

Answer 22

• Auditors must follow both GAAS and GAS aka the Yellow Book
• materiality threshold is usually lower
• More detail is required on working papers
• More stringent CPE rules and requirements - 24 hours of continuing education must be related to governmental auditing every 2 years
• Compliance with Regulations is a requirement of the Audit Report
• GAO independence requirements
• *CPA firm cannot allow personnel working on nonattest engagements to also work on the audit.**

Question 23

The Sarbanes-Oxley Act of 2002 prohibits the performance of certain services for audit clients by auditors of public companies

(7)

Answer 23

Act lists several specific service categories that issuer’s public accounting firm cannot legally do, even if approved by audit committee, such as

• Bookkeeping or other services relating to financial statements or accounting records
• Financial information systems design and/or implementation
• Appraisal services
• Internal audit outsourcing services
• Management functions
• Broker, dealear,
• legal and expert service unrelated to audit

Note that Act does not restrict auditor from performing these services to nonaudit clients or to private companie

Act intended to restrict specified categories performed for public audit clients

Act permits auditor as a registered public accounting firm to perform nonaudit services not specifically prohibited (e.g., tax services) when approved by issuer’s audit committee

Question 24

Payment prior year fees and independence

Answer 24

Independence is impaired when prior year fees for professional services, whether billed or unbilled, remain unpaid for more than one year prior to the date of the report

Year 1 audit fees must be paid before the Year 2 report is issued

Question 25

Areas where there are **substantive differences between IAASB** (International Auditing and Assurance Standards Board)** and US PCAOB** auditing standards (7)

Answer 25

* International standards **do not require an audit of internal control**, while PCAOB standards do so require. * International standards **do not allow reference to another audit firm involved in a portion of the audit**, while PCAOB standards allow the principal auditor to so report - * International standards for **documentation are less detailed** than PCAOB standards, leaving more to professional judgment. * International standards **in the area of going concern include a time horizon of at least, but not limited to twelve months** **from the date of the audit report**, while PCAOB standards limit the foreseeable future for a going concern consideration to up to twelve months. - * International standards **are based on a risk assessment approach** (obtaining a broad understanding of an entity and its environment in order to identify where there may be risks of material misstatements), while the PCAOB standards currently are not. *This difference will soon disappear* as the PCAOB is in the process of adopting such standards. * **The audit opinion may indicate that the financial statements present fairly or they give a true and fair view**. * International auditing standards **require identification of the location of the auditor’s office that performed the audit in the audit report** * International auditing standards - **confirmation accounts receivable is considered an optional procedure** that may be performed based on the auditor’s judgment * International auditing standards **a lawyer’s letter is only required when the auditor assesses a related risk of material misstatement, wherease in **PCAOB or AICPA Sending letter of audit in­quiry to lawyers is presumptively required

Question 26

Public Company Accounting Oversight Board Main functions (4)

Answer 26

**Main functions** of Board are to **(1)** Register and conduct inspections of public accounting firms **(2)** Set standards on auditing, quality control, independence, or preparation of audit reports **(3)** Enforce compliance with professional standards, securities laws relating to accountants and audits **(4)** Perform investigations and disciplinary proceedings on registered public accounting firms Monitors CPA Firms who audit SEC clients All SEC Audit firms must registerIssues standards for firms to follow - usually stricter than AICPA standards

Question 27

PCAOB inspections

Answer 27

* Inspections generally **focus on selected quality control issues and may also consider other aspects of practice management**,_such as how partner compensation is determined_ * In selecting the engagements for inspection, the PCAOB staff **uses a risk assessment process to identify those engagements that have a higher risk of lack of compliance with professional standards** * **The inspection focuses on the high-risk aspects of that engagement,** such as revenue recognition and accounting estimates. * When a lack of compliance with professional standards is identified, **the PCAOB staff attempts to determine the cause,** which may lead to identification of a defect in the firm’s quality control system. * CPA firms that audit more than 100 issuers must have an annual inspection by the PCAOB.

Question 28

**International Standards on Auditing (ISA) **are issued by

Answer 28

* International auditing standards are **developed by the International Auditing and Assurance Standards Board** (**lAASB) of** t**he International Federation of Accountants (IFAC**) * IFAC was *established to* help foster a coordinated worldwide accounting profession with harmonized standards. Its boards also establish ethical and quality control standards for accounting professionals and accounting firms. * International auditing standards are issued as a series of statements referred to as **International Standards on Auditing (ISA) ** * **ISAs are intended for use in all audits**—publicly traded companies, private business of all sizes and government entities at all levels. * The **IAASB’**s pronouncements **_apply to_** audit, review, other assurance, and quality control and related services engagements that are conducted in accordance with international standards.

Question 29

Auditors involved in governmental auditing should follow

Answer 29

Auditors must **comply with all relevant AICPA** _and_ **Government Auditing Standards** (GAS) established by GAO

Question 30

Quality Control * Objective * Monitoring

Answer 30

* **Monitoring **Documentation to demonstrate compliance with its policies and procedures * **Objective**: Firm will undertake to continue relationships and engagements o_nly where the firm_: ## Footnote 1. Has considered client integrity. 2. Is competent to perform the engagement. 3. Can comply with legal and ethical requirements. ​

Question 31

What a CPA must **do** **before** it can participate in the preparation of an audit report of a company registered with the Securities and Exchange Commission (SEC)?

Answer 31

Must be register with the Public Company Accounting Oversight Board. NOTE Financial Reporting Releases are issued by the Securities and Exchange Commission

Question 32

Objectivity and Independence

Answer 32

* **_CPA not in public_ practice need _not adhere_ to the _independence_ standards _but must_ _adhere_ to the _objectivity_ standards** * Code of Professional Conduct requires **objectivity and freedom from conflicts of interests** in the performing of **all services**

Question 33

Cooling off period

Answer 33

Section 206 of the Sarbanes-Oxley Act requires a **one-year "cooling off" period** f**or auditors hired by clients in the position of CEO, controller, CFO, chief accounting officer or person in a similar capacity**; it _does not include a staff accountan_t. * **NOTE: **The audit partner for the job and the audit partner who reviews the audit can do the audit services for only 5 consecutive years.

Question 34

Elements Quality control (6)

Answer 34

**NOTE **the quality control standards apply to the CPA firm itself 1) Leadership responsibilities for quality with 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 - Documentation

Question 35

Other permitted loans from a financial institution attest client

Answer 35

Other permitted loans from a financial institution attest client 1]Automobile loans and leases collateralized by automobile 2]Loans of surrender value under an insurance policy 3]Borrowings fully collateralized by cash deposits at same financial institution (e.g., "passbook loans") 4]Aggregate outstanding balances from credit card and overdraft accounts that are reduced to $10,000 on a current basis.

Question 36

Independence standards of the **GAO** for audits in accordance with generally accepted government auditing standards describe **three types of impairments of independence**?

Answer 36

1) **Personal impairments** result from relationships or beliefs that might bias the auditors in performing the audit work. 2) **External impairments**, which occur when auditors are deterred from acting objectively or performing an effective audit. 3) **Organizational impairments** result from reporting responsibilities or other functions that the auditors perform that may affect their independence or performance of an effective audit.

Question 37

Covered member

Answer 37

A covered member 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 client beginning once he or she provides ten hours of nonattest services to the client within any fiscal year and ending on the later of the date (1) The firm signs the report on the financial statements for the fiscal year during which those services were provided; or (2) He or she no longer expects to provide ten or more hours of nonattest services to the attest client 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; or (f) An entity whose operating, financial, or accounting policies can be controlled (as defined by generally accepted accounting principles [GAAP] for consolidation purposes) by any of the individuals or entities described in (a) through (e) or by two or more such individuals or entities if they act together.