Chapter 19 ACCT 4400

Professional Conduct, Independence, and Quality Control
STUDY
PLAY

Terms in this set (...)

Refers to a system or code of conduct based on moral duties and obligations that indicate how an individual should interact with others in society
Ethics
Refers to the conduct, aims, or qualities that characterize or mark a profession or professional person.
Professionalism
What 2 standards will a private company audit have?
1. Auditing Standards (AICPA)-GAAS
2. Standards of Professional Conduct (AICPA)-Code of Professional Conduct
What 2 standards will a public company audit have?
1. Auditing Standards (PCAOB)
2. Standards of Professional Conduct (PCAOB)-Code of Professional Conduct
Which standards of conduct include the following:

-Responsibilities
-Public Interest
-Integrity
-Objectivity and Independence
-Due Care
-Scope and Nature of Service
Principles of Professional Conduct
In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities.
Responsibilities (Principles of Professional Conduct)
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.
The public interest (Principles of Professional Conduct)
To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.
Integrity (Principles of Professional Conduct)
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.
Objectivity and Independence (Principles of Professional Conduct)
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.
Due Care (Principles of Professional Conduct)
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.
Scope and Nature of Services (Principles of Professional Conduct)
The AICPA Code of Professional Conduct includes what 4 parts?
1. Principles of Professional Conduct
2. Rules of Conduct
3. Interpretations of Rules of Conduct
4. Rulings by the Professional Ethics Executive Committee
Which part of the AICPA Code of Professional Conduct is the most general?
Principles of Professional Conduct
Which part of the AICPA Code of Professional Conduct is in between the other three parts in terms of general to specific?
Rules of Conduct
Which 2 parts of the AICPA Code of Professional Conduct is the most specific?
1. Interpretations of Rules of Conduct
2. Rulings by the Professional Ethics Executive Committee
Which part of the AICPA Code of Professional Conduct is not enforceable?
Principles of Professional Conduct
Which part of the AICPA Code of Professional Conduct is specifically enforceable?
Rules of Conduct
Which 2 parts of the AICPA Code of Professional Conduct are not specifically enforceable, but departures must be justified?
1. Interpretations of Rules of Conduct
2. Rulings by the Professional Ethics Executive
How would you describe the Principles of Professional Conduct?
The ideal attitudes and behaviors
How would you describe the Rules of Conduct?
Minimally accepted standards
Which standards of conduct include the following:

-Independence
-Integrity and Objectivity
-General Standards
-Compliance with Standards
-Accounting Principles
-Confidential client information
-Contingent fees
-Acts Discreditable
-Advertising and other forms of solicitation
-Commissions and referral fees
-Form of organization and name
Rules of Conduct
A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council.
Independence
In the performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgements to others.
Integrity and Objectivity
A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council:
A. Professional Competence
B. Due professional Care
C. Planning and Supervision
D. Sufficient Relevant Data
General Standards
A member who performs auditing, reviewing, compilation management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council.
Compliance with Standards
A member shall not (1) express an opinion...that the financial statements or other financial data of any entity are presented in conformity with GAAP or (2) state that he or she is not aware of any material modifications that should be made...in order for them to be in conformity with GAAP, if such statements or data contain any departure from an accounting principle...that has a material effect.
Accounting Principles
A member in public practice shall not disclose any confidential client information without the specific consent of the client.

Members shall not use to their own advantage or disclose any member's confidential client information that comes to their attention.
Confidential Client Information
A member in public practice shall not (1) perform for a contingent fee any personal services for...a client for whom the member or member's firm performs, an audit or review of a financial statement...or (2) prepare an original or amended tax return or claim for a tax refund for a contingent fee for any client.
Contingent Fees
A member shall not commit an act discreditable to the profession
Acts discreditable
A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, overreaching, or harassing conduct is prohibited.
Advertising and other forms of solicitation
A member in public practice shall not for a commission recommend or refer to a client any product or service, or for a commission recommend or refer any product or service to be supplied by a client, or receive a commission, when the member or the member's firm also performs for that client an audit or review of a financial statement.

Any member who accepts a referral fee for recommending or referring any service of a CPA to any person or entity or who pays a referral fee to obtain a client shall disclose such acceptance or payment to the client.
Commissions and referral fees
A member may practice public accounting only in a form of organization permitted by law or regulation whose characteristics conform to resolutions of Council.

A member shall not practice public accounting under a firm name that is misleading. Names of one or more past owners may be included in the firm name of a successor organization.

A firm may not designate itself as "Members of the American Institute of Certified Public Accountants" unless all of its CPA owners are members of the Institute
Form of organization and name
Interpretation 101-1 states that "______" must be independent.
Covered members
Covered Members include:
1. An individual on the attest engagement team
2. An individual in a position to influence the attest engagement
3. A partner or manager who provides nonattest services to the attest client beginning once he or she provides 10 hours of nonattest services
4. A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement.
5. The firm, including the firm's employee benefit plan
6. An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described above or by two or more such individuals or entities if they act together.
2 Types of prohibited financial relationships
1. Direct
2. Material Direct
Direct financial relationship
Results when a covered member has a financial interest in an attest client, such as ownership of stock or a loan to or from the client
Material indirect financial relationship
Results when a covered member has a financial interest in an entity that is associated with an attest client, for example when an investment in a mutual fund that owns the clients' stock
Rule 101 and relevant interpretations essentially indicate that the independence of a CPA is impaired if the CPA performs a managerial or other significant role for a client's organization ________ time period covered by an attest engagement.
during the
Interpretation 101-2 indicates that a firm's independence will be considered impaired if a partner or professional employee leaves the firm and what?
is subsequently employed by a client in a key position unless a number of conditions are met.
A covered member's family includes:
Spouse, spousal equivalent, or dependent
Close relatives include:
Nondependent children, brothers, sisters, parents, grandparents, parents-in-law, and their respective spouses
Two major situations with close relatives that can impair independence are:
1. A close relative has a financial interest in the client that is material to the close relative, and the CPA participating in the engagement is aware of the interest
2. An individual participating in the engagement has a close relative who could exercise significant influence over the financial or accounting policies of the client
In what 3 instances, with regard to the effect of actual or threatened litigation, would independence be considered to be impaired?
1. The commencement of litigation by management alleging deficiencies in audit work for the client would
2. An expressed intention by management to commence litigation against the CPA alleging deficiencies in audit work (if the auditor concluded that it is probable that such a claim will be filed)
3. The commencement of litigation by the CPA against management alleging management fraud or deceit
Who has the more restrictive independence rules for audits of companies, AICPA or SEC?
SEC
The SEC's rules are predicated on 3 basic principles of auditor objectivity and independence. What are they?
1. An auditor should not audit his or her own work
2. An auditor should not function in the role of management
3. An auditor should not serve in an advocacy role for his or her client.
9 Categories of prohibited nonaudit services
1. Bookkeeping
2. Financial Information Systems Design and Implementation
3. Appraisal Valuation Services
4. Actuarial Services
5. Internal Auditing Outsourcing Services
6. Management Functions or Human Resources
7. Broker or Dealer
8. Legal Services
9. Expert Services
Partners are limited to ______ consecutive years according to SEC independence requirements.
5
A one year "cooling off" period if required for _______.
Employees in a "financial reporting oversight role" who previously worked with the CPA firm performing the audit
A firm (is/is not) independent if an audit partner's compensation is based on selling engagements to that client for services other than audit, review, and attest services.
Is not
SEC required communications for audits of public companies
SEC rules require additional communication between auditors and their clients' audit committees and require public-company audit clients to publicly reveal information regarding the fees (audit and otherwise) paid to their auditors
4 General Standards and Compliance with Standards
1. Professional competence
2. Planning and Supervision
3. Due professional care
4. Sufficient relevant data
Why is the General Standards and Compliance with Standards important?
Because it requires that members of the AICPA comply with professional standards when performing professional services, whether or not they are practicing in public accounting
5 situations where CPAs an disclose confidential information
1. To meet GAAP or GAAS disclosure requirements
2. To comply with a valid subpeona
3. As required by an authorized peer review body
4. As part of an investigative or disciplinary proceeding
5. In connection with a purchase, sale, or merger of the practice
What are examples of Acts Discreditable?
-Inappropriate response to requests by clients and former clients for certain records
-Discrimination and harassment in employment practices
- Failure to follow standards and/or procedures or other requirements in government audits
- Negligence in the preparation of financial statements or records
-Failure to follow the requirements of government bodies, commissions, or other regulatory agencies in performing attest or similar services
-Confidential information obtained from employment
-Financial Interests
-False, misleading, or deceptive acts in promoting or marketing professional services
What is considered prohibited advertising?
-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 willbe substantially increased and the prospective client is not advised of that likelihood
-Making any other representations that would be likely to cause a reasonable person to misunderstand or be deceived
What 2 disciplinary actions can happen if you do not follow the standards, rules, and principles?
1. Termination of AICPA membership
2. Suspension of AICPA membership
3 Quality Control Standards
1. CPA firms are required to implement policies and procedures to monitor the firms' practices and ensure that professional standards are being followed.

2. In 2004, PCAOB assumed the AICPA's responsibilities relating to firms that audit public clients and instituted a mandatory quality inspection program for those firms.

3. The AICPA continues to administer a quality review system in order to enable firms to meet their state licensing, federal regulatory, and AICPA membership requirements and to serve firms that audit only privately held clients.
6 Elements of Quality Control
1. Leadership: Tone at the Top
2. Relevant Ethical Requirements
3. Client Acceptance and Continuance
4. Human Resources
5. Engagement Performance
6. Monitoring
Which of the following agencies/organizations govern the independence rules for audits of public companies?

A) AICPA.
B) Public Company Accounting Oversight Board.
C) FASB.
D) Auditing Standards Board [ASB].
B) Public Company Accounting Oversight Board.
A CPA is aware that a sole proprietor client has "skimmed" [unrecorded] cash receipts and thus not reported them to the Internal Revenue Service. If the CPA signs the client's tax return as a CPA after preparing the return, he/she would be violating which AICPA Rule of Conduct?

A) Rule 101 Independence.
B) Rule 102 Integrity & Objectivity.
C) Rule 203 Accounting Principles.
D) Rule 301 Confidential Client Information.
B) Rule 102 Integrity & Objectivity
A CPA, while performing an audit, strives to achieve independence in appearance in order to

A) Reduce risk and liability.
B) Comply with the generally accepted standards of fieldwork.
C) Become independent in fact.
D) Maintain public confidence in the profession.
D) Maintain public confidence in the profession.
A violation of the profession's ethical standards is most likely to occur when a CPA

A) Issues an unqualified opinion on a client's financial statements when fees for the prior year audit have not been paid in full.
B) Serves as an honorary member of the board of directors of a charitable organization for which he or she also audits the entity's financial statements.
C) Arranges with a financial institution to collect notes issued by a client in payment of fees due.
D) Compiles the financial statements of a client that employs the CPA's spouse as a bookkeeper.
A) Issues an unqualified opinion on a client's financial statements when fees for the prior year audit have not been paid in full.
Which of the following is not considered an act discreditable to the profession?

A) Solicitation of CPA exam questions.
B) Failure to file a personal tax return on a timely basis.
C) Billing an audit client an amount in excess of the originally quoted fee.
D) Discrimination or harassment of employees.
C) Billing an audit client an amount in excess of the originally quoted fee.
The SEC and the Sarbanes-Oxley Act of 2002 prohibit public accounting firms from providing certain services to audit clients that are public companies. Which of the following services is not prohibited?

A) Internal audit outsourcing services.
B) Information system design services.
C) Tax preparation services.
D) Business valuation and appraisal services.
C) Tax preparation services.
Without first receiving consent from the client, a CPA firm should not disclose confidential client information contained in its working papers to
(a)

A) Another client looking for benchmarking information.
B) PCAOB inspection team.
C) Disciplinary body created under state statute.
D) Federal court that has issued a subpoena.
A) Another client looking for benchmarking information.
Which of the following is not an element of quality control as defined by the AICPA's Statement of Quality Control Standards No. 8?

A) Monitoring.
B) Human resources.
C) Reliability.
D) Acceptance and continuance of clients and engagements.
C) Reliability.
A CPA firm should establish monitoring procedures to provide reasonable assurance that the policies and procedures over each of the other elements of quality control are suitably designed and are being applied effectively. To achieve this goal, the firm would most likely establish procedures for

A) Evaluating prospective and continuing client relationships.
B) Reviewing engagement audit documentation and reports.
C) Requiring personnel to adhere to the applicable independence rules.
D) Maintaining personnel files containing documentation related to the evaluation of personnel.
B) Reviewing engagement audit documentation and reports.
Which of the following statements is false concerning PCAOB and AICPA inspections of public accounting firms?

A) The AICPA peer review program is mandatory for participating firms.
B) The AICPA peer review process is conducted more frequently and in more depth in comparison with new PCAOB guidelines.
C) These inspections focus on the system of quality controls put in place by the CPA firms.
D) The "Big 4" CPA firms are a good example of a "registered" firm with the PCAOB.
B) The AICPA peer review process is conducted more frequently and in more depth in comparison with new PCAOB guidelines.
In order to maintain independence from a public company audit client, the partner on the engagement must rotate off from the client

A) Every year.
B) Every 5 years.
C) Every 7 years.
D) There is no requirement for the partner to be reassigned from any public company audit client after any specified period of time.
B) Every 5 years.
Which of the following is not one of the SEC's three basic principles of auditor objectivity and independence?

A) An auditor should not audit his or her own work.
B) An auditor should not enter into contingent fee arrangements.
C) An auditor should not function in the role of management.
D) An auditor should not serve in an advocacy role for his or her client.
B) An auditor should not enter into contingent fee arrangements.
For which of the following services is an auditor not required to be independent?

A) Financial statement audits.
B) Financial statement reviews.
C) Any attest service.
D) A compilation of financial statements.
D) A compilation of financial statements.
Which of the following is not a covered member according to Interpretation 101-1?

A) An individual in a position to influence the attest engagement.
B) The firm, including the firm's employee benefits plans.
C) A firm staff member in the office servicing the audit client, but who doesn't participate in the client's audit.
D) An individual on the attest engagement team.
C) A firm staff member in the office servicing the audit client, but who doesn't participate in the client's audit.
Each of the following pairings includes a category of rules and a specific rule which may or may not pertain to that category. Choose the pairing which is correctly matched.

A) Independence; Confidential client information.
B) General standards; Contingent fees.
C) General standards; Due professional care.
D) Responsibilities to clients; Acts discreditable.
C) General standards; Due professional care.