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Accountants are subject to the rules and regulations of what three types of entities?
- Professional organizations
- Federal governmental entities
- State governmental entities
Three different types of professional organizations
- State CPA society
What organizations ethics code is a foundation for the AICPA ethics code?
- Empowered by Congress to regulate financial reporting by publicly-held companies
- Establish and enforce rules on accounting and auditing
- Rules on auditor independence
- Created by SOX
- Overseen by the SEC
- Establish rules with respect to auditing and attestation engagements, quality control of audits, and independence.
Issue rules with respect to government audits. Yellow Book
Issues rules with respect to the audit of employee benefit plans
Which rules prevail?
The most restrictive requirements
To whom does the AICPA code of professional conduct apply?
- All members, including those in:
- Public practice
- Private industry
AICPA definition of Ethics
Rules or standards governing the conduct of members of a profession.
What distinguishing feature sets a profession aside?
Acceptance of responsibility to the public.
What is the public interest?
The collective well-being of the people and institutions the profession serves
Six principles of the AICPA code
- Public interest
- Objectivity and Independence
- Due Care
- Scope and Nature of Services
Exercise sensitive professional and moral judgement in all your activities
AICPA: Public Interest
- Act in a manner that:
- Serves the public interest
- Honors the public trust bestowed on you
- Demonstrates your commitment to professionalism
In order to maintain and broaden public confidence, you must perform all your professional responsibilities with the highest sense of integrity
- Maintain objectivity and be free of conflicts of interest in discharging your professional duties. You are:
- Intellectually honest
- Free of conflicts of interest
Be independent in fact and in appearance. You are not involved in relationships that may appear to impair your objectivity.
AICPA: Due Care
- Follow the technical and ethical standards of the profession.
- Always try to improve: your competence and the quality of your service
- Carry out your professional responsibilities to the best of your ability.
AICPA: Scope and Nature of Services
Observe all the principles in determining the scope and nature of services you will provide.
- In performing professional services, you must:
- Maintain objectivity and integrity
- Be free of conflicts of interest
- Not knowingly misrepresent facts or subordinate your judgement to others.
Violations of AICPA interpretations on integrity
- Misleading entries in financial statements
- You fail to correct financial statements that are false and misleading when you have the authority to record an entry.
- You sign, permit, or direct someone else to sign a document that has materially false and misleading information.
AICPA interpretations on integrity
In preparing financial statements or records, you can't knowingly misrepresent information.
Steps to take if you and your supervisor disagree about the preparation of financial statements.
- Consider whether the approach your boss wants is an acceptable alternative that doesn't materially misrepresent the facts. (If so done, else step 2)
- If you still disagree, make your concerns known to appropriate higher level of management.
- If the appropriate actions are not taken:
- Consider you continuing relationship with the employer
- Consider responsibilities you may have to communicate to third parties.
- Consult with your lawyer.
What should you consider when you offer or accept gits or entertainment?
Whether your objectivity is impaired.
What is the basic rule concerning gifts and entertainment?
Your objectivity is not considered to be impaired if the gift or entertainment is reasonable in the circumstances
Factors that impact reasonableness of gifts and entertainment
- Nature of
- occasion giving rise to it
- Cost or value
- Nature, frequency, and value of other gifts
- Whether entertainment was associated with active conduct of business
- Who participated
When can you perform a service with an apparent conflict of interest?
- You believe you can perform it with objectivity
- You disclose the relationship to your client, employer, and other appropriate parties
- Obtain consent
What if two clients are merging? Conflict of interest?
- Not necessarily.
- Must: disclose to both and have an agreement from both to let you represent the other.
What does due care and competence mean?
- Observe the technical and ethical standards of the accounting profession
- Always strive to improve your competence and service quality
- Carry out your professional responsibilities to the best of your ability
What does due care and competence require you to do?
- Do your job with competence and diligence
- Perform services to the best of your abilities
- Serve the best interest of those for who services are performed
How do you assess your competence?
By evaluating whether your education, experience, and judgment are adequate
Diligence means you must...
- Render services promptly and carefully
- Be thorough
- Observe technical and ethical standards
When can you depart from GAAP?
When otherwise would make information misleading.
When can you disclose confidential information about your client?
- If your client specifically allows it.
- To comply with requirements of other professional standards.
- To respond to a valid subpoena or summons or to comply with a law or regulation.
- In conjunction with a peer review
- To initiate a complaint with or respond to inquires made in connection with an investigation or disciplinary proceeding.
What are acts discreditable to the profession?
Acts that could harm the good name or reputation of the accounting profession
By when do you need to give a client's records back if they ask?
If the engagement isn't complete or they owe you money for specific engagements you may withhold
- Records prepared by you
- Supporting records
What must you do if you outsource services? (Public firms)
- Inform the client
- Oversee the provider's work and ensure that all applicable professional standards are met
- Enter into a contractual agreement with the contractor to maintain confidentiality
Advertising and solicitation for CPAs in public practice
- You can't advertise in a manner that is false, misleading, or deceptive
- You can't solicit through the use of coercion, over-reaching, or harassing conduct.
Form of organization and firm name for public firms
- Use only a form of organization that's permitted by law or regulation
- Firm name can't be misleading
- Firm name can include past owners
- Can't designate your firm as a member of the AICPA if not all owners are AICPA members
Applying the AICPA framework for independence
- Identify threats to independence that arise from the circumstances
- Consider whether there are safeguards that could reduce or eliminate threats
- If you can't reduce or eliminate the threat, your independence is impaired
What is a covered member?
Anyone in the firm who must avoid certain financial and business relationships with an attest client to maintain independence
Who is a covered member?
- The firm
- An individual on the client's attest engagement team
- A partner/manager in the firm who provides 10+ hours of non-attest services to an attest client
- Partners who practice in the same office in which the lead engagement partner practices
- Individuals in a position to influence the engagement
Who does independence extend to for covered members?
Immediate family members
Under the AICPA independence framework, who is immediate family?
When are the exceptions to the AICPA independence covered member family rules?
- If the covered member is one because they are a partner/manager who provides 10+ hours of non-attest services
- They are a partner in the same office in which the lead attest partner practices, but they don't influence the engagement.
Can a family member be employed by an attest client without impairing your independence?
Yes, as long as they don't hold a key position
What is a key position?
- Has primary responsibility for significant accounting functions that support material components of the FS
- Has primary responsibility for preparing the FS
- Can exercise influence over the content of the financial statements
Under the AICPA independence rules who are close relatives
- Non-dependent children
- Brothers and sisters
If you are a covered member when is the employment of a close relative subject to AICPA independence rules? If you are...
- On the client's attest engagement team
- Able to influence the attest engagement
- A partner in the office with the lead engagement partner
On what types of engagements is independence required?
- Financial statement audits
- Financial reviews
- Other attestation services
On what types of engagements is independence not required?
- A compilation
- Tax preparation and advice
- Financial planning
What is the period where independence is required?
- Begins when a firm accepts a new attest client
- Continues through professional engagement
- Ends when the firm/client terminates the professional engagement.
Is there a materiality threshold on direct investments in the client?
Not for covered members.
Is there a materiality threshold on indirect investments in the client?
If material to the covered member's net worth
Owning shares in a mutual fund is:
- A direct financial interest in the mutual fund
- An indirect financial interest in the companies whose stock makes up the mutual fund portfolio (5% or less is not material)
Who do the AICPA's independence rules covering financial interests apply to?
Apply to a covered member's immediate family
If you acquire a financial interest unexpectedly through gift or inheritance
Independence is not considered impaired as long as you dispose of the interest as soon as possible but no later than 30 days after you became aware.
If an individual was hired by your firm and they previously worked for your client are they independent?
Impaired if they participated in the attest engagement or was in a position of influence for any period that covered his affiliation with the client.
How to disassociated from a client: (former employee of client)
- Disposing of any financial interests in the client
- Collecting/repaying any loans to/from the client
- Ceasing to participate in the client's benefit plans
- Liquidating/transferring all vested benefits in the client's compensation and benefit plans.
Is independence impaired if a covered member has an investment in a non-client that has a significant relationship with an attest client?
What is a controlling interest?
One entity owns more than 50% of outstanding voting stock
Can a covered member invest in a non-client subsidiary of a client parent?
Can a covered member invest in a non-client parent?
If the subsidiary is material to the parent
What is significant influence?
When the investor owns 20-50% of the investee
Can a covered member loan money or be loaned money from a client?
Independence of a covered member is impaired under the AICPA, by any loans to or from:
- An attest client
- Any officer or director of the attest client
- A stockholder of the attest client who has an interest of 10%+ in the client
Exceptions to the independence requirements for loans:
- Car loans
- Credit cards where the balance is reduced each credit cycle to $10,000 or less
- Loans that are fully collateralize by cash deposits
Is independence impaired if a covered member has a joint, closely-held investment with an attest client?
If it is material to the covered member's worth
Who is prohibited from having financial interests in an attest client that constitutes more than 5% of the client's outstanding equity securities?
All partners and professional employees, not just covered members.
When doing services with a client what should you do first?
Use a memo or engagement letter to document in writing a clear understanding with the client
Memo or engagement letter should include:
- Services to be performed
- CPA's responsibilities
- Client's acceptance of its responsibilities
- Any limitations of the engagement
What if you fail to do an engagement letter?
- Doesn't impair independence as long as you've established a clear understanding
- In violation of Rule 202
- Designate someone with suitable skill, knowledge, and/or experience
- Evaluate the adequacy and results of services
- Make management decisions and perform management functions.
When performing non-attest services for an attest client, you may not:
- Authorizing transactions, or exercising authority on behalf of the client
- Preparing source documents that evidence the occurrence of a transaction
- Having custody of client assets
- Supervising client employees in performing normal activities
Bookkeeping services that would not impair independence
- Recording transactions for which management has determined the appropriate accounting classifications or posting them to the general ledger
- Preparing FS based on information in the trial balance
- Posting client-approved entries to a client's trial balance
- Proposing standard, adjusting, or correcting journal entries
Bookkeeping services that would impair independence
- Determining or changing journal entries, accounting codings, or classification without obtaining client approval
- Authorizing or approving transactions
- Preparing source documents
- Making changing to source documents without client approval
Covered member cannot serve as trustee of a trust or administrator or executor of an estate it:
- that trust or estate had or was committed to acquire any:
- Direct financial interest in an attest client
- Material indirect financial interest in an attest client
Partners and professionals in the firm may not be associated with the client as:
- A director, officer, employee, or any capacity equivalent to a member of management
- A promoter, underwriter, or voting trustee
Independence is considered to be impaired if any partner or professional in the firm:
- Has a financial interest in an attest client exceeding 5% of the entity's outstanding securities
- Is a director, officer, or employee of the client
- Is a promoter, underwriter, or voting trustee of the client
- Is a trustee of any pension or profit-sharing trust of the client.
You must promptly report to the appropriate person in your firm if any employement negotiations with the client occur if:
- Your a member of the attest engagement team or
- Someone who can influence the engagement
If you assume a key position with a client you must:
Cut all financial and professional ties to the firm
Actions the client can take that would likely impair independence.
- Takes legal action
- Threatens to take legal and you think its probable they will.
Actions the client can take that would not likely impair independence.
- Threatens legal action that does not relate to performance of an attest engagement; and
- Amount involved is not material to either you or the client
What does indemnification mean?
Clause in the engagement letter indicating that the client would release you from liability and costs resulting from knowing misrepresentations by management.
When is indemnification impair independence?
When the client asks you to agree to indemnify them for costs that relate to legal action that arises directly or indirectly from client acts.
What is a contingent fee arrangement?
- You don't charge the client unless a specific result attained; or
- The amount of the fee depends on the results.
If you perform what may you not have a contingent fee arrangement with clients for any professional services.
- Audit or review of FS
- Compilation of FS when you do not disclose a lack of independence in the report
- Examination of prospective FS
What can you not perform for a contingent fee?
- An original or amended tax return
- A claim for a tax refund
When aren't fees regarded as contingent fees?
- Fixed by courts or other public authorities
- For taxes, if they're determined based on the results of judicial proceedings or findings of governmental agencies
What is a commission fee?
A fee you receive for recommending someone's products or services to someone else.
If you're in public practice and performing attest services for a client, you may not do what for a commission?
- Recommend someone else's products or services to a client
- Recommend a client's products or services to someone else.
- Perform services for your client
Is your independence impaired if your client hasn't paid fees?
Yes, unless the client is bankrupt.
When does the SEC consider independence impaired?
- You are not independent in fact; or
- You are not independent in appearance.
What four basic principles may the SEC look to in evaluating independence in a particular situation?
- Does the relationship create a mutual or conflicting interest between the firm and client?
- Does it place the firm in a position where it subsequently audits its own work?
- Does the firm effectively act as management or as an employee of the client?
- Does it place the firm in a position where it acts as an advocate for the client?
Under the SEC rules individuals who consult with the attest engagement team on technical or industry-related matter are regarded as...
Members of the attest engagement team
Under SEC rules jointly-held investments impair independence...
Regardless of materiality
As a covered member, under the SEC rules can you have an insurance policy with the client?
- Yes, if it was taken out before you were a covered member; and
- The likelihood of the insurer becoming insolvent is remote
Under the SEC rules, when can a covered member have a checking, savings or other depository account with the client?
If the balance does not exceed federal or state insurance limtis
Under the SEC rules, when can immediate family members have a financial interest in a client through their employer's retirement or benefit plan?
- If it results as an unavoidable consequence of participation in the employer's benefit plan; and
- It is disposed of as soon as practicable and within 30 days
Under the SEC rules, who are close relatives?
- Non-dependent children
Under the SEC rules, independence is impaired for a covered member if they have a close relative...
- In a key position with the client
- No exceptions
Under the SEC rules, if a partner of professional employee is subsequently employed by the attest client what is required?
A one year cooling off period before a former employee can be in a position of financial reporting oversight for an audit client.
Under the SEC rules, what are non-attest services that you may not perform if you client is an SEC registrant?
- Valuation, appraisal, and actuarial services
- Financial information system design
- Human resources services
- Legal services
- Expert services
- Internal audit services
What is a confidential transaction?
The client pays a fee to an advisory and then agrees not to disclose the advisory's strategy, tax treatment, or structuring. The secrecy suggests a potentially abusive transaction.
What is an aggressive tax position?
One whose significant purpose is tax avoidance.
Under SEC rules is your independence impair if your involved in a confidential transaction or aggressive tax position?
Under SEC rules, an audit firm cannot provide personal tax services to who?
Members of the clients management who are in financial reporting oversight roles, or to their immediate families.
Under SEC rules, what are the audit partner rotation periods?
- Lead and concurring partners - 5 on 5 off
- Other audit partners - 7 on 2 off
- Exceptions for firms with < 6 public clients and < 10 partners
Under SEC rules, audit partners cannot have compensation based on what?
The selling of non-audit services to audit clients
Under SEC rules, the clients audit committee must pre-approve all what?
All services before they can be performed.
Under SEC rules, what type of indemnification clause impairs your independence
A contractual clause that releases you from liability for your own negligent acts
The PCAOB requires that you must at least annually communicate what to the client's audit committee?
- All relationships between the auditor and the client that may reasonably be thought to bear on independence
- A statement confirming that in your professional judgement the firm is independent of the client
GAO audits involve what?
Governmental entities or government contracts
DOL audits are for what?
Who do GAO standards apply too?
- Auditors employed by the federal government
- Auditors and audit firms in public accounting who audit a governmental entity or government contract.
What is the book of GAO standards referred to as?
The Yellow Book
What are the five ethical principles that the Yellow Book addresses?
- Public interest
- Professional behavior
- Proper use of government information, resources, and position
Who is a covered member (called a member) under DOL guidelines?
- All owners, partners, or shareholders in the firm
- All professional employees who participate in the audit
- All professional employees who are located in an office that participates in a significant portion of the audit.
Under DOL guidelines, what service impairs your independence?
If you maintain financial records for the employee benefit plan.
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