AUD 1: Ethics, independence, and professional responsibilities

Three roles of professional conduct

1. Members in public practice - cpa firms

2. Members in business - internal accountants

3. Other members

Seven Threats for Members in public practice

1. Adverse interest threats - cpa v. client conflict

2. Advocacy threats - cpa defends client

3. Familiarity threats - close relationship with client

4. Management participation threats - cpa acts as management

   • Not a threat for members in business since cpa is management

5. Self-interest threats - personal financial interest

6. Self-review threats - reviewing own work

7. Undue influence threats - client pressure affects judgement

When a member has invested in a separate business providing accounting services, what is the key determinant of whether owners and professional employees must all comply with the code?

Whether the member controls the separate business

If the code and its interpretations do not resolve an independence issue, what should a member do?

Apply the Conceptual Framework.

Three steps to applying the conceptual framework

1. Identify threats.

2. Evaluate the significance of the threats.

3. Identify and apply safeguards.

In which four areas are threats to independence concentrated?

1. Financial interests

2. Family relationships

3. Employment relationships

4. Nonaudit services

Covered members

someone who is covered by AICPA independece rules and must stay independent from the audit clients

Which types of covered members are limited in their ability to consider going to work for an attest client?

Team members and those in positions to influence

10-hour people

• If a partner or professional spends less than 10 hours total on an attest client, they are sometimes treated more like a low-involvement covered member.

• They are still covered members, but they typically have fewer restrictions than engagement team members or key partners.

• has no restrictions on close relatives

What types of financial interests impair independence?

• Direct and material

• Direct and immaterial

• Indirect and material

Why are the owners of 529 accounts used for savings deemed to have a direct financial interest in both the plans and their investments?

Because they can determine before investing which firms the plan has invested in

What two primary independence concerns do the Department of Labor independence rules address?

1. Financial ties

2. Employment ties

List the types of audit impairments that are the focus of the Government Accountability Office.

• Personal impairments

• External impairments

• Organizational impairments

Name the four categories of records in the records request rules.

1. Client-provided records

2. Member-prepared records

3. Member's work products

4. Working papers

Name the code's exception(s) to what would normally be treated as a contingent fee.

a contingent fee may be allowed if it is:

• determined by a court, or

• determined by a government agency outcome (like IRS findings)

Name two types of loans a covered member may have without impairing independence.

• Car loan (secured by the car)

• Loan backed by life insurance cash value

• Passbook/savings-secured loan

• Credit card/overdraft under $10,000

Why should covered members monitor the total amount of their nonaudit services?

Nonaudit work becomes an independence issue when the auditor starts to look like management, either by doing too much overall work or too many different types of services that together create that role.

If a CPA firm is auditing a public company, there are certain tax services they are NOT allowed to provide to that audit client.

• Confidential tax transactions: Tax strategies or positions that are kept private and not disclosed when required, often because they could be controversial or questioned.

• Aggressive tax transactions: Tax positions that push the limits of tax law to minimize taxes, even if they are risky or could be challenged by the IRS.

List the three steps to obtaining approval from audit committee to provide permissible nonattest services (NAS).

1. Describe the NAS service

2. Discuss it with the audit committee

3. Document the approval

If a covered member learns that he has inherited the securities of an attest client, what should the member do?

Sell the securities as soon as practicable but definitely within 30 days

Acts discreditable to the profession

• refusing to return client records

• negligence in preparation

• illegal acts

• Solicitation or disclosure of CPA exam questions

• false or misleading marketing (material)

• failure to follow requirements of governing bodies

• mishandling confidential information

when can an AICPA-awarded designation appear on firm letterhead?

Only if all partners hold the designation.

Prospective client acceptance checklist

• Legal and ethical standards

• Integrity of the client

• Capabilities of the firm

Legal and ethical standards

• verifying auditor independence

• verifying engagement does not violate laws or code

Integrity of the client

• Communicate with the previous auditors

• assess the client’s reputation

• No scope limitations

• Management tone at the top (management sets examples)

Capabilities of the firm

• adequate training, skills, and experience

• firm’s staffing resources

• there’s a reasonable deadline

CPA independence as a trustee or executor

Independence is impaired if the trust or estate has direct or material indiredt financial interest and if any of the following are true:

• cpa can make investment decisions for the trust or estate

• trust or estate holds more than 10% of the client

• The client makes up over 10% of the trust’s or estate’s total investments/assets.

Contingent fees are prohibited when:

• preparation of tax return or refund claim

• engagements where the cpa performs:

  • audit or review of F/S

  • compilation of F/S

  • examination of financial information

CPA firms: form of organization and name

• Must use legal organizational form

• Firm name cannot be misleading

• May use past owners’ names

• “Members of the AICPA” only if all CPA owners are AICPA members

Audit Committee members

Independent members of the entities board of directors who are not employed by the entity and unattached to the entity. Audit Committee members may not:

• Accept any other consulting, advisory, or compensatory fee from the company (they’re already compensated for serving on the board)

• Be affiliated with the company

The audit committee oversees:

• Financial reporting

• Hiring and paying auditors

• Internal controls and fraud prevention

• Ethics rules for top financial employees

• Anonymous employee fraud/accounting complaints

• Hiring outside experts or lawyers if needed

SOX prohibited non audit services for audit clients: Self-review threat

auditors review these during an audit:

• Services related to accounting records (bookkeeping)

• Informations system design or implementation

• Appraisal/valuation services

• Actuarial services

SOX prohibited non audit services for audit clients: Preceived as conflict

• performing the internal audit

• functioning as management

• acting as the client’s investment advisor or banking servicer

• providing legal services and expert services unrelated to the audit

PCAOB

• was established in 2002 to regulate public company auditors.

• board members appointed by the SEC 2/5 are cpas

• Private sector nonprofit org responsible for enforcing SOX

• accounting firms must register with the PCAOB to perform audits

Powers of the PCAOB

• Registers audit firms for issuer audits

• Sets audit, ethics, and quality control standards

• Investigates and disciplines firms

• Inspects registered audit firms

• Enforces SOX compliance through sanctions

one year cool off period

SOX says an audit firm can’t audit a company if someone in a key financial oversight role at the company worked for the audit firm on that client’s audit in the past year.

PCAOB Inspections

• Every 3 years if 100 or fewer audits per year

• Every year if more than 100 audits per year

Department of Labor Independence Requirements

Independence may be impaired by the following:

• Direct or indirect financial interest in the plan

• Acting as a promoter, underwriter, investment advisor, voting trustee, director, officer, or employee

• Maintaining financial records for the plan

GAGAS ethical Principles

• public interest

• integrity

• proper use of government:

  • information

  • resources

  • positions

• professional behavior

• independence

Structural position threat

(GAO only, not AICPA)

A structural threat is an independence/objectivity threat that exists specifically in government auditing because of how government entities are organized.

Ex. A government auditor works inside a city government and reports to the same officials whose department they are auditing. Because of the government’s structure and reporting lines, the auditor may feel pressured to avoid reporting problems objectively.

GAGAS threats to independence different from AICPA

• Bias - Auditor’s convictions or beliefs influence auditor’s judgement

• Structural Positions - Auditor’s reporting structure can influence audit results