Chapter 4 - Ethics and Independence

What is the 3-tiered structure of the AICPA Code of Professional Conduct?

1. Principles (aspirational, broad frameworks) -> 2. Rules (enforceable standards of behavior that members must justify departures from) -> 3. Interpretations (detailed guidelines on how to apply rules).

What are the 6 Principles of Professional Conduct in the AICPA Code?

1. Responsibilities ; 2. The Public Interest ; 3. Integrity ; 4. Objectivity and Independence ; 5. Due Care ; 6. Scope and Nature of Services.

What is the Principle of Responsibilities in the AICPA Code?

Members should exercise sensitive professional and moral judgments in all of their activities.

What is the Principle of Public Interest in the AICPA Code?

Members must accept the obligation to act in a way that serves the public interest, honors public trust, and demonstrates commitment to professionalism above personal or client interests.

What is the Principle of Integrity in the AICPA Code?

To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.

What is the Principle of Objectivity and Independence in the AICPA Code?

A member should maintain objectivity and be free of conflicts of interest. A member in public practice must be independent in fact (mind) and appearance when providing attest services.

What is the Principle of Due Care in the AICPA Code?

A member should observe technical and ethical standards, strive continually to improve competence and quality of services, and perform professional responsibilities with diligence.

What is the Principle of Scope and Nature of Services in the AICPA Code?

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.

What is Independence of Mind (Independence in Fact)?

An auditor's mental state that permits performing an audit service without bias or outside influences that compromise professional judgment, acting with integrity, objectivity, and professional skepticism.

What is Independence in Appearance?

Avoiding facts and circumstances so significant that a reasonable and informed third party, knowing all relevant information, would conclude the auditor's objectivity or skepticism is compromised.

What is the Reasonable Investor Rule regarding auditor independence?

The SEC/PCAOB conceptual test: In the absence of specific rules, would a reasonable investor with knowledge of all relevant facts conclude that the auditor is capable of exercising objective and impartial judgment?

What is a Covered Member under AICPA independence rules?

An individual or entity bound by independence requirements. Includes: 1. Attest team members (including 2nd review partner) ; 2. Individuals in a position to influence the team ; 3. Partners/managers providing >10 hours of nonattest services ; 4. Partners in the lead partner's office ; 5. The CPA firm and its benefit plans ; 6. Controlled entities.

Who is an 'individual in a position to influence' an attest engagement?

Anyone who: 1. Evaluates or recommends compensation for the engagement partner ; 2. Directly supervises/manages the engagement partner ; 3. Consults with the team on technical/industry issues ; 4. Participates in firm quality control activities.

Who is included in 'Immediate Family' for independence, and how do they affect independence?

A covered member's spouse (or equivalent) and dependents. Subject to covered member independence rules. Impairs independence if they have ANY financial interest in the client or hold a key position at the client.

Who is included in 'Close Relatives' for independence, and when is independence impaired?

A covered member's parents, siblings, or nondependent children. Impairs independence ONLY IF they: 1. Hold a key position at the client, or 2. Have a financial interest in the client that is material to them AND known to the auditor.

What is a 'Key Position' at an audit client?

A client position with primary responsibility for key accounting functions, preparation of financial statements, or ability to exercise influence over statement contents (e.g., CEO, CFO, Controller, Treasurer, General Counsel).

What is a Direct Financial Interest, and how does it affect auditor independence?

Direct ownership of equity or debt securities issued by an attest client (e.g., owning client stock directly). Materiality does NOT matter—ANY direct financial interest owned by a covered member or immediate family instantly impairs independence.

What is an Indirect Financial Interest, and how does it affect auditor independence?

Financial interest beneficially owned through an investment vehicle (e.g., mutual fund, blind trust) where the covered member has no control over investment choices. Impairs independence ONLY IF material to the covered member's net worth.

What is the Mutual Fund Rule for auditor independence regarding indirect financial interests?

If a covered member owns 5% or less of the outstanding shares of a diversified mutual fund, the underlying client stock held by the fund is considered an immaterial indirect financial interest and does NOT impair independence.

What are the AICPA lending and loan rules regarding audit client banks?

Covered members cannot obtain NEW loans or mortgages from an audit client bank. Pre-existing mortgages obtained before the bank became a client are grandfathered. Permitted new loans are limited to auto leases, cash-collateralized loans, and credit cards kept under $10,000.

What is the Unpaid Fees Rule regarding auditor independence?

Auditor independence is impaired if billed or unbilled fees for professional services delivered more than 1 year prior remain unpaid at the date the current year's audit report is issued.

What are the 8 prohibited nonaudit services for public company auditors under SOX / PCAOB rules?

1. Bookkeeping ; 2. Financial IT design/implementation ; 3. Appraisal/valuation services ; 4. Actuarial services ; 5. Internal audit outsourcing ; 6. Management or HR functions ; 7. Broker-dealer or investment advisor services ; 8. Legal or expert services.

When can an auditor provide nonaudit services (e.g., bookkeeping or tax) to a private company client under AICPA rules?

Allowed for private clients IF client management assumes all management responsibilities, designates a competent employee to oversee the services, evaluates the adequacy of results, and accepts responsibility.

What does the AICPA Integrity and Objectivity Rule require?

Members shall maintain objectivity and integrity, be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate their professional judgment to others.

What are the 4 general standards required on ALL professional engagements under Rule 1.300.001?

1. Professional Competence ; 2. Due Professional Care ; 3. Planning and Supervision ; 4. Sufficient Relevant Data.

What is the Professional Competence General Standard (Rule 1.300.010)?

Undertake only those professional services that the member or firm can reasonably expect to complete with technical qualifications and professional competence.

What is the Due Professional Care General Standard (Rule 1.300.001b)?

Exercise due professional care in the performance of professional services, requiring diligence, a quest for excellence, and proper planning and supervision.

What is the Planning and Supervision General Standard (Rule 1.300.001c)?

Adequately plan and supervise the performance of professional services on any engagement.

What is the Sufficient Relevant Data General Standard (Rule 1.300.001d)?

Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.

What is required by the Accounting Principles Rule (Rule 1.320.001)?

Members must follow Council-designated accounting principles (GAAP, IASB). Members cannot state statements are GAAP-compliant if there is a material departure, unless unusual circumstances would make GAAP misleading (must disclose reasons and effects).

What is required by the Compliance with Standards Rule (Rule 1.310.001)?

Requires members performing auditing, review, compilation, consulting, tax, or other professional services to comply with standards promulgated by Council-designated bodies (ASB, PCAOB, FASB).

What is prohibited by the Acts Discreditable Rule (Rule 1.400.001)?

Prohibits acts discreditable to the profession. Examples: retaining client-provided records after a demand, employment discrimination/harassment, and failing to file personal/firm tax returns.

What are the rules regarding Commissions and Referral Fees (Rule 1.520.001)?

No commissions allowed for recommending products/services to or from an attest client. Referral fees for CPA services are allowed but must be fully disclosed to the client.

What is prohibited by the Advertising and Solicitation Rule (Rule 1.600.001)?

No obtaining clients through advertising or solicitation that is false, misleading, or deceptive. Solicitation using coercion, over-reaching, or harassment is strictly prohibited.

What are the requirements of the Form of Organization and Name Rule (Rule 1.800.001)?

Members may practice only in permissible organizational forms (e.g., LLP, LLC) and cannot practice under a misleading firm name.

What are the 4 exceptions allowing disclosure of confidential client information without client consent (Rule 1.700.001)?

1. Valid enforceable subpoena or summons ; 2. Quality/peer review ; 3. AICPA Ethics Division or State Board inquiry ; 4. Complying with GAAP or professional standards disclosure obligations.

What are the 7 conceptual framework threats to auditor independence?

1. Self-Review Threat ; 2. Advocacy Threat ; 3. Adverse Interest Threat ; 4. Familiarity Threat ; 5. Undue Influence Threat ; 6. Financial Self-Interest Threat ; 7. Management Participation Threat.

What is the Self-Review Threat to independence?

Threat that an auditor will not objectively evaluate their own firm's previous work or judgment when auditing (e.g., auditing client F/S prepared by the firm).

What is the Advocacy Threat to independence?

Threat that a member will promote a client's interest to the point of compromising objectivity (e.g., promoting client IPO, representing client in tax court).

What is the Adverse Interest Threat to independence?

Threat that auditor interests are in direct opposition to client's (e.g., actual or threatened lawsuit between client and CPA firm).

What is the Familiarity Threat to independence?

Threat that a long/close relationship makes auditor too sympathetic to client or too accepting of work (e.g., close friend or relative in key client position).

What is the Undue Influence Threat to independence?

Threat that auditor subordinates judgment to client due to coercion, aggressive client personality, or threats of termination.

What is the Financial Self-Interest Threat to independence?

Threat that auditor benefits financially from client relationship (e.g., owning direct financial interest, or client fee represents excessive % of firm revenue).

What is the Management Participation Threat to independence?

Threat that auditor acts as client management or takes management decisions (e.g., serving as officer/director, hiring/firing, or designing internal controls).

What are independence Safeguards, and what are their 3 sources?

Controls that eliminate or mitigate threats to independence to an acceptable level. Sources: 1. Created by profession, legislation, or regulation ; 2. Implemented by the client ; 3. Implemented by the CPA firm.

What is NOCLAR, and what must a CPA do upon detecting noncompliance?

NOCLAR = Noncompliance with Laws and Regulations. Public CPAs who detect NOCLAR must alert client management/governance to allow correction, act with integrity, and evaluate whether to withdraw from the engagement.

[Source: AICPA Independence Case Scenarios] Scenario: An auditor considering employment with an audit client immediately discloses job negotiations to managing partners and is removed from the team. Violation or No?

NO VIOLATION. Immediately disclosing employment negotiations and being removed from the engagement team safeguards independence.

[Source: AICPA Independence Case Scenarios] Scenario: An audit partner in charge of auditing a commercial bank client obtains a NEW mortgage loan from that bank to purchase a personal vacation home. Violation or No?

VIOLATION of Independence Rule. Covered members cannot obtain NEW mortgage loans or credit lines from an audit client bank. Only pre-existing loans obtained before client status are grandfathered.

[Source: Lecture Slides & Reading] Scenario: A former audit firm partner leaves the firm to become Chief Operating Officer (COO) of an audit client. The former partner has no financial reporting oversight, and the audit firm modifies its audit procedures. Violation or No?

NO VIOLATION. Because the former partner has no financial reporting oversight and the audit firm modified audit procedures to safeguard against knowledge leaks, independence is maintained.

[Source: AICPA Independence Case Scenarios] Scenario: A CPA firm provides financial IT system design and implementation to a PUBLICLY TRADED audit client. Violation or No?

VIOLATION of Independence Rule (SOX / SEC rules strictly prohibit financial IT design and implementation for public audit clients).

[Source: AICPA Independence Case Scenarios] Scenario: A CPA working as an internal financial analyst at a corporation is asked by executives to prepare fictitious journal entries for non-existent transactions to secure a bank loan. Violation or No?

VIOLATION of Integrity and Objectivity Rule & General Standards (knowingly preparing false/misleading financial statements for a bank loan).

[Source: AICPA Independence Case Scenarios] Scenario: An audit partner in an office not auditing a client has a sister who owns 6% of the client's stock. The sister is not in a key position and the partner is not on the audit team. Are partner and firm independent?

Firm and Partner are INDEPENDENT. The sister is a Close Relative. Close relative financial interests impair independence ONLY IF the relative is in a key position or the interest is material to the relative AND known to a covered member on the engagement team.

[Source: AICPA Independence Case Scenarios] Scenario: A client fails to pay audit fees for professional services delivered more than 1 year prior to the current year's audit report date. Violation or No?

VIOLATION of Independence Rule (Unpaid Fees Rule: Independence is impaired if fees for services delivered >1 year prior remain unpaid before issuing the current audit report).

What is the independence rule regarding depository / bank accounts held with an audit client that is a bank?

Depository account balances (checking, savings, CDs) held with an audit client bank are permitted ONLY up to the FDIC insured limit ($250,000). Any balance exceeding the FDIC insured limit impairs independence.

What is the independence rule regarding holding insurance policies with an audit client that is an insurance company?

Covered members and CPA firms are prohibited from holding insurance policies with an audit client, including firm professional liability policies or policies offering self-directed investment cash options.

What is the AICPA Contingent Fees Rule regarding audit and attest engagements?

Members in public practice cannot perform any professional service for a contingent fee (fees dependent on finding a specific result or issuing a clean opinion) for an audit or attest client.

What CPA firm services require independence, and which do not?

Independence is REQUIRED for all Attestation Services (financial statement audits, reviews, agreed-upon procedures, and internal control attestations). Independence is NOT required for non-attest services (such as tax preparation, tax consulting, or management advisory services).

What are the 4 SEC/PCAOB overarching principles used to determine if auditor independence is impaired?

An auditor is not independent if they: 1. Have a mutual or conflicting interest with the audit client ; 2. Audit their own work ; 3. Function as management or an employee of the audit client ; 4. Act as an advocate for the audit client.

When does an individual's independence impairment affect the entire CPA firm?

When a Covered Member's independence is impaired, the independence of the ENTIRE CPA firm is also automatically impaired for that attest engagement.

What limited exceptions / safeguards apply to inadvertent independence violations under AICPA Quality Control rules?

An inadvertent violation does not impair independence if: 1. The individual did not know of the violation ; 2. The violation is corrected promptly once discovered ; 3. The firm has a quality control system providing reasonable assurance of independence. Example: Unsolicited financial interests (gifts/inheritances) do not impair if disposed of within 30 days of knowledge.

What are the 2 Proxy Disclosure requirements regarding non-audit services provided by the external audit firm?

Public companies must disclose in their proxy filings: 1. Total fees paid to the audit firm broken down into 4 categories (Audit, Audit-related, Tax, All Other) ; 2. Explicit statement on whether the Audit Committee considered whether non-audit services are compatible with maintaining auditor independence.

What specific Tax Services are prohibited for public company audit clients under PCAOB / SOX rules?

1. Tax services provided to executives in financial reporting oversight roles (and their immediate family) ; 2. Tax services performed on a contingent fee basis ; 3. Marketing, planning, or opinion services for aggressive or confidential tax shelter transactions.

Scenario: A CPA firm partner in Atlanta (not on the audit team and not in management) has a sister who owns 6% of a new client landed by the Las Vegas office (Sunset Enterprises). Are the partner and firm independent?

NEITHER the partner nor the firm is independent. A close relative (sister) owning >5% of an audit client's equity impairs independence for all partners in the firm and the firm itself.

What are the 3 common rationalization methods that lead to unethical conduct?

1. 'Everybody does it' (assuming popularity makes it right) ; 2. 'If it's legal, it's ethical' (confusing legal minimums with ethics) ; 3. 'Likelihood of discovery and consequences' (evaluating risk of getting caught rather than morality).

What is the 6-step framework for resolving an ethical dilemma?

1. Obtain relevant facts ; 2. Identify ethical issues from facts ; 3. Determine who is affected and how ; 4. Identify available alternatives ; 5. Identify likely consequences of each alternative ; 6. Decide appropriate action.

How is the AICPA Code of Professional Conduct structured, and who does each part apply to?

Preface: Applies to ALL members (Principles & Definitions) ; Part 1: Members in Public Practice (firm auditors & advisors) ; Part 2: Members in Business (CPAs employed as CFOs, controllers, internal auditors) ; Part 3: Other Members (retired or unemployed). Dual roles apply the most restrictive rules.

What are Interpretations in the AICPA Code of Conduct, and how do they differ from Rules?

Rules are strict, enforceable ethical standards that members must follow. Interpretations are official guidelines issued by the AICPA Ethics Division to explain how specific rules apply to real-world scenarios. Members departing from an interpretation bear the burden of justifying the departure.

What must a CPA do under the AICPA Conceptual Framework when no specific rule or interpretation exists?

The member must evaluate potential threats to independence/ethics and apply safeguards to reduce threats to an acceptable level, guided by the Reasonable Investor Rule (whether a reasonable, informed third party would conclude objectivity is compromised).

What is the applicability of AICPA Rules of Conduct across member categories (Table 4-4)?

1. Acts Discreditable (Sec 400): Applies to ALL members (Public Practice, Business, Other) ; 2. Independence (Sec 200) & Contingent Fees (Sec 510): Applies ONLY to Members in Public Practice ; 3. Integrity & Objectivity (Sec 100), General Standards (Sec 300), Compliance (Sec 310), Accounting Principles (Sec 320): Applies to Public Practice & Business members.

What is the applicability and summary of Sections 520, 600, 700, and 800 in the AICPA Rules of Conduct (Table 4-4 Part 2)?

All four sections apply ONLY to Members in Public Practice (No for Business or Other Members). 1. Commissions & Referrals (Sec 520): Prohibited for attest clients; disclosure required for permitted non-attest. 2. Advertising (Sec 600): False, misleading, or coercive solicitation prohibited. 3. Confidential Info (Sec 700): Client consent required except for 4 exceptions. 4. Org Form & Name (Sec 800): State law compliance required; misleading firm names prohibited.

What are the 11 sections/topics included in Table 4-4 of the AICPA Rules of Conduct?

Sec 100: Integrity & Objectivity ; Sec 200: Independence ; Sec 300: General Standards ; Sec 310: Compliance with Standards ; Sec 320: Accounting Principles ; Sec 400: Acts Discreditable ; Sec 510: Contingent Fees ; Sec 520: Commissions & Referral Fees ; Sec 600: Advertising & Solicitation ; Sec 700: Confidential Client Information ; Sec 800: Form of Organization & Name.

What are the 3 key distinctions in independence rules regarding stock ownership?

1. Covered Member vs. Non-Covered Member (who is bound) ; 2. Direct vs. Indirect Interest (holding equity directly vs. through an intermediary) ; 3. Materiality Role (Direct = ANY amount impairs regardless of materiality ; Indirect = impairs ONLY IF material to net worth).

Can a CPA firm establish stricter independence policies than the AICPA Code of Conduct minimums?

Yes. CPA firms can establish stricter independence rules than AICPA minimums (e.g., prohibiting all firm staff from owning stock in any client, regardless of office or engagement team status).

What is the 1-year cooling-off period required under SOX for auditor employment?

A 1-year cooling-off period is required before a former audit team member can accept a key management position (CEO, CFO, CAO, Controller) at a public audit client. Independence is impaired if they participated in an audit during the preceding year.

What are the partner rotation requirements under SOX and SEC rules?

Lead and concurring (2nd review) audit partners must rotate off after 5 years and undergo a 5-year 'time out' period. Other partners with significant involvement must rotate after 7 years with a 2-year 'time out'.

What is 'Opinion Shopping' (Shopping for Accounting Principles), and how do auditing standards prevent it?

Opinion shopping occurs when management consults secondary auditors to obtain a favorable accounting opinion. To prevent this, standards require the consulted CPA firm to communicate with the existing auditor to learn all relevant facts before rendering an opinion.

What is the difference between US and European Union (EU) audit rotation requirements?

The US requires audit partner rotation (every 5 years), but NOT mandatory firm rotation. The European Union requires mandatory audit firm rotation after a specified period of years.

What 4 steps should a CPA take when facing pressure to subordinate judgment or misrepresent financial results?

1. Discuss the matter with the individual exerting pressure ; 2. Discuss with a supervisor (if not involved) ; 3. Escalate to higher management or those charged with governance ; 4. Disclose under organizational ethics/whistleblowing policies or hotline.

What are the rules regarding audit partner compensation for nonaudit services under SOX?

A CPA firm's independence is impaired if an audit partner receives compensation based on selling nonaudit services to their public company audit client.

What are the enforcement mechanisms and social sanctions for violating AICPA rules of conduct?

Failure to follow rules can lead to expulsion from the AICPA (an important social sanction). Additionally, AICPA bylaws require automatic suspension or expulsion for crimes punishable by >1 year imprisonment or tax-related crimes.

What are the two levels of disciplinary action taken by the AICPA Professional Ethics Division?

1. Remedial/Corrective Action: For minor/unintentional violations (e.g., small F/S disclosure omissions), requiring additional CPE hours ; 2. Joint Trial Board Action: Hearing for serious violations with authority to suspend or expel members publicly.

What authority do State Boards of Accountancy have over CPAs regarding enforcement?

State Boards grant CPA licenses. Breaches of state codes of conduct can result in loss of the CPA certificate and license to practice public accounting. States may adopt AICPA rules or implement stricter state rules.

What enforcement actions and sanctions can the PCAOB impose on public company audit firms?

The PCAOB can suspend/revoke firm registration, suspend or bar individuals, impose monetary penalties, and mandate quality control improvements or remedial training for SOX / SEC rule violations.

[Source: HW Problem 4-9] Homework 4-9: What consulting or nonaudit services are prohibited for auditors of public companies under SOX/PCAOB, and what other restrictions apply?

Prohibited: 1. Bookkeeping ; 2. Financial IT design/implementation ; 3. Appraisal/valuation ; 4. Actuarial ; 5. Internal audit outsourcing ; 6. Management/HR ; 7. Broker-dealer/investment banker ; 8. Legal/expert services ; 9. Any PCAOB-prohibited service. Other restrictions: Audit committee must pre-approve permitted nonaudit services, and tax services for financial oversight executives or aggressive tax shelters are prohibited.

[Source: HW Problem 4-18 / CPA Exam] Homework 4-18a: What is the meaning of the rule requiring an auditor to be independent?

The auditor must be without bias with respect to the client under audit (maintaining an impartial, unbiased mental attitude in fact and appearance).

[Source: HW Problem 4-18 / CPA Exam] Homework 4-18b: Which nonaudit service CAN be offered to public company audit clients under SEC and SOX rules?

Tax planning services that do NOT involve aggressive tax shelters (provided they are pre-approved by the audit committee).

[Source: HW Problem 4-18 / CPA Exam] Homework 4-18c: Why does an auditor strive to achieve independence in appearance?

To maintain public confidence in the integrity and objectivity of the accounting profession.

[Source: HW Problem 4-19 / CPA Exam] Homework 4-19a: Which audit fee arrangement violates the AICPA Code of Professional Conduct?

A fee contingent upon whether the CPA's report on the client's financial statements results in the approval of a bank loan (Contingent Fee Rule violation).

[Source: HW Problem 4-19 / CPA Exam] Homework 4-19b: Which situation represents a violation of the Confidential Client Information Rule?

Disclosing confidential client information to another accountant who is interested in purchasing the CPA's practice without obtaining specific client consent.

[Source: HW Problem 4-19 / CPA Exam] Homework 4-19c: Is a CPA permitted to retain client-provided records to enforce payment of overdue audit fees?

NO. Retaining client-provided records after a demand is made is strictly PROHIBITED under the Acts Discreditable Rule, regardless of unpaid fees.

[Source: HW Problem 4-23a] Homework 4-23a: A CPA provides tax, management advisory, and bookkeeping services and also audits the same nonpublic client. Violation or No?

NO VIOLATION of Independence Rule, provided the CPA evaluates threats/safeguards and client management assumes all management responsibilities (overseeing services and preparing source documents).

[Source: HW Problem 4-23b] Homework 4-23b: A non-partner staff CPA with 3 years experience owns 25 shares of stock in a firm audit client (immaterial to her), but does not work on the audit and is not in the lead partner's office. Violation or No?

NO VIOLATION of Independence Rule. She is not a Covered Member (not on the engagement team, not a partner in the lead partner's office, and not providing >10 hours nonaudit services).

[Source: HW Problem 4-23c] Homework 4-23c: A CPA accepts a LAN installation engagement for a nonaudit client, lacks technical competence, hires an outside computer consultant, but cannot review the consultant's work due to lack of expertise. Violation or No?

VIOLATION of General Standards Rule (Professional Competence). A member must possess the technical qualifications to supervise and review all work completed on an engagement.

[Source: HW Problem 4-23d] Homework 4-23d: In preparing a tax return, a CPA takes unusual deductions requested by the client that have zero supporting documentation. Violation or No?

VIOLATION of Integrity and Objectivity Rule. While a CPA may act as a client advocate in tax matters, tax deductions must have reasonable support. Taking unsupported deductions misrepresents facts.

[Source: HW Problem 4-23e] Homework 4-23e: A CPA sets up a fire/casualty insurance agency, recommends her agency to audit clients to evaluate insurance adequacy, and earns commissions. Violation or No?

VIOLATION of Independence, Integrity & Objectivity, and Commissions Rules. Financial dealings with audit clients impair independence in appearance, and recommending her own agency creates a conflict of interest.

[Source: HW Problem 4-23f] Homework 4-23f: Seven small CPA firms participate in an interfirm working paper review program to evaluate each other's audit files without obtaining client authorization. Violation or No?

VIOLATION of Confidential Client Information Rule. Client authorization is required before sharing audit files, unless the review is part of an official AICPA, State Society, or State Board quality review program.

[Source: HW Problem 4-10] Homework 4-10: How can the appearance of a lack of independence caused by fee dependency on a major client be reduced?

1. Establishing an active Audit Committee to oversee hiring and fees ; 2. Submitting to external peer reviews and PCAOB quality control inspections ; 3. Setting firm limits on total revenue percentage from a single client.

[Source: HW Problem 4-11] Homework 4-11: What must a CPA do if she discovers after accepting an engagement that she lacks technical competence in the client's industry?

1. Withdraw from the engagement ; 2. Obtain the necessary competence through study or research ; or 3. Consult with or engage a qualified outside expert to assist on the engagement.

[Source: HW Problem 4-12] Homework 4-12: Is an audit fee based on the number of days required to complete the audit a violation of the Contingent Fees Rule?

NO. A per-diem or time-based fee is NOT a contingent fee. Contingent fees (basing fees on finding a specific result or issuing a clean opinion) are prohibited for attest clients to preserve auditor objectivity.

[Source: HW Problem 4-14] Homework 4-14: What are examples of acts that violate the Acts Discreditable Rule (Rule 400)?

1. Retaining client-provided records after a demand is made ; 2. Employment discrimination or harassment ; 3. Disclosing or soliciting Uniform CPA Exam questions/answers ; 4. Failing to file personal or firm tax returns.