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The Conceptual Framework for AICPA Independence Standards Adopts a -------------------- approach to analysis of independence matters.
Adopts a risk-based approach to analysis of independence matters.
The risk-based approach evaluates the risk that a CPA is not independent or is perceived by a reasonable and informed third party with knowledge of all relevant information as not independent. That risk must be reduced to an acceptable level to establish independence. Risk is acceptable when threats are acceptable. They may be acceptable because of the types of threats and their potential effect. Moreover, threats may be sufficiently mitigated or eliminated by safeguards. Threats are acceptable when it is not reasonable to expect that they will compromise professional judgment.
Would the following activity performed as nonattest service for a nonpublic attest client, impair a CPA’s independence?
Determining which recommendations for improving internal control should be implemented.
Yes ------ Performing nonattest services for a nonpublic attest client generally does not impair independence if the AICPA member does not assume management responsibilities. However, the client must agree to make all such decisions and perform all such functions. Moreover, the client must agree to (1) designate an individual with suitable skill, knowledge, or experience to oversee the services; (2) evaluate their adequacy and results; (3) accept responsibility for the results; and (4) establish and maintain internal control. Also, the member should have a documented agreement with the client about the objectives and limitations of the engagement, the services to be performed, and mutual responsibilities. Accordingly, determining which, if any, recommendations for improving internal control should be implemented impairs independence because it is a management decision.
Which of the following services may a CPA perform in carrying out a consulting service for a client?
Analysis of the client’s accounting system
Review of the client’s prepared business plan
Preparation of information for obtaining financing
All of them may be preformed.
Each of the three services may be performed as a consulting service. AICPA standards describe analysis of an accounting system as an advisory service, review of a client’s prepared business plan as a consultation, and preparation of information for obtaining financing as a transaction service. Other possible services are implementation services, staff and other support services, and product services.
Fenn & Co., CPAs, has time available on a computer that it uses primarily for its own internal record keeping. Aware that the computer facilities of Delta Equipment Co., one of Fenn’s audit clients, are inadequate for the company’s needs, Fenn offers to maintain on its computer certain routine accounting records for Delta. If Delta were to accept the offer and Fenn were to continue to function as independent auditor for Delta, Fenn most likely would be in violation of the SEC or AICPA or Both
SEC, but not AICPA, provisions pertaining to auditors’ independence.
Under the Sarbanes-Oxley Act of 2002 and the SEC rules promulgated under it, performing bookkeeping or accounting services for a public company audit client impairs the independence of the audit firm. The major exception to this rule is for results that are not subject to audit. The AICPA view is that the firm ordinarily may retain its independence while keeping client accounting records, provided certain requirements are met. For example, when providing bookkeeping services, independence would not be impaired if the member records transactions for which management has approved the account classifications, posts coded transactions to the general ledger, prepares financial statements based on the trial balance, posts client-approved entries to the trial balance, or proposes entries or other changes in the financial statements if they are reviewed by the client and its management understands their nature and effects. However, determining or changing entries, account codings or classifications for transactions, and other accounting records without client approval; authorizing or approving transactions; preparing source documents; and making changes in source documents without client approval are activities that would impair independence. The application of these inconsistent positions seldom causes conflict because large clients, which are the most likely to report to the SEC, usually have their own accounting and computer systems and need not request these services from their auditors. Moreover, the SEC rules apply to publicly traded companies only.