With reference to American Institute of Certified Public Accounting AICPA, Public Company Accounting Oversight Board PCAOB, Securities and Exchange Commission SEC, and Independence Stand
Trang 1MODULE B
Professional Ethics
LEARNING OBJECTIVES
ReviewCheckpoints
Exercise, Problems, and Simulations
1 Understand general ethics and a series of steps for
2 Reason through an ethical decision problem using
the imperative, utilitarian and generalization
principles of moral philosophy
55, 56, 57
3 Identify the different entities that make ethics
rules for CPAs and public accounting firms 5, 6
4 With reference to American Institute of Certified
Public Accounting (AICPA), Public Company
Accounting Oversight Board (PCAOB),
Securities and Exchange Commission (SEC), and
Independence Standards Board (ISB) rules,
analyze factual situations and decide whether an
accountant’s conduct does or does not impair
independence
7, 8, 9, 10, 11 45, 46, 47, 48, 53, 59,
62, 63, 65, 66, 67, 68
5 With reference to AICPA rules on topics other
than independence, analyze factual situations and
decide whether an accountant's conduct does or
does not conform to the AICPA Rules of Conduct
12, 13, 14, 15 49, 50, 51, 52, 58, 64
6 Explain the types of penalties that can be imposed
Trang 2A Note on Module B, relating to the "Generalization Argument":
In the interest of fairness, it should be noted that the generalization argument does not work in all cases, particularly in two circumstances: (1) When the argument is invertible, that is (a) when both doing something and not doing something would be undesirable and (b) when both everyone and not everyone doing something would be undesirable For example: "What if everyone was a full-time farmer?" The results would be
undesirable in our society because all other social functions would disappear, but this cannot mean that no one should be a farmer because then we would all starve (2) When the argument is reiterable, that is, when arbitrarytimes, places or measures can be inserted in such a way as to make a decision appear to be nonsense For example, "What if every auditor were permitted to own 1/10 of a share of each client's common stock?
Presumably, the consequences of such minor holdings would not be generally undesirable, and so ownership of 1/10 of a share could be permitted Now change the amount to 2/10, 3/10, 10, 100, 99%, and the problem becomes one of "where to draw the line."
SOLUTIONS FOR REVIEW CHECKPOINTS
B.1 A professional accountant must be prepared to be agent, spectator, advisor, instructor, monitor,
judge, critic
B.2 Conscience might not be a sufficient guide for personal ethics decisions because the individual's
indefinable mental processes may be based on caprice, immaturity, ignorance, stubbornness, or misunderstanding Conscience may fail to show the consistency, clarity, practicability, impartiality,and adequacy preferred in ethical standards and behavior Exactly the same can be said about
professional ethics decisions because a non-hypocritical individual can no more split his behavior between personal life and professional life than he can voluntarily split his or her own personality.B.3 The rule "Failure to tell the truth is wrong" would (a) require that the staff accountant refuse to
"enhance" the financial statements, and (b) not worry about the consequence that seem to be
predicted (They might not turn out bad anyway if the company can get the loan honestly or can find another lender or can develop other means of survival.) This rule may be called imperative because it requires the truth regardless of what you might personally feel about the consequences Strict imperative theory (e.g., Kant) excuses the individual from responsibility for undesirable
consequences as long as the decisions do not cause other people to be used as means
B.4 Utilitarian ethics theory requires that a decision maker recognizes value attributes of the
consequences of ethical choice alternatives (good v evil), somehow measure or weigh these, and then decide on the basis of the greater good (or the lesser evil) Imperative ethics does not require that consequences be considered
B.5 Rules of conduct for practicing public accounting come from:
• State boards of accountancy
• American Institute of CPAs
• State Societies of CPAs
• Public Company Accounting Oversight Board
• General Accounting Office
For practicing internal auditing:
• The Institute of Internal Auditors (IIA)
1 Standards for the Professional Practice of Internal Auditing
Trang 3For practicing management accounting:
• Institute of Management Accountants (IMA)
• Standards of Ethical Conduct for Management Accountants
For Fraud Examiners:
• The National Association of Certified Fraud Examiners
B.6 a The AICPA PEEC makes independence rules applicable to (1) CPAs who are members of
AICPA (not all CPAs are members) who (2) perform audits (of both public companies and private entities)
b., c The SEC and PCAOB make independence rules applicable to (1) all accountants (most
are CPAs but the law doesn’t specify CPAs), who (2) perform audits of public companies (only of public companies who file financial statements with SEC, not all other audits)
d The ISB’s jurisdiction was the same as the SEC and PCAOB
B.7 The intent of this question is to require students to study the SEC definitions Yolanda is in the
chain of command (item 3–person who evaluates performance or recommends compensation of
Javier, the audit engagement partner of Besame), and Yolanda is a covered person in the firm
Independence is impaired when Yolanda owns Besame stock, but independence is not impaired
when her close relative (brother) owns a small amount.
Javier is a member of the audit engagement team.
B.8 No Audit independence is impaired when the audit firm’s employees render legal services of this
type
B.9 The SEC believes that people who use financial statements and auditors’ reports can be
enlightened with information about auditors’ fee arrangements with clients (The “enlightenment” involves users’ perceptions of auditor independence in light of the relation of non-audit and audit revenues from an audit client.)
What must be disclosed: (1) total audit fees, (2) total fees to the audit firm for consulting services
on financial information systems design and implementation, plus (3) total fees to the audit firm for all other consulting and advisory work (over and above the audit fees and the information systems fees above) In addition, the disclosure rules also require: (1) tell whether the those charged with governance (including the audit committee or the board of directors) considered the audit firm’s information systems work and other consulting work to be compatible with
maintaining auditors’ independence, and (2) if greater than 50 percent, the percentage of the audit hours performed by persons other than the principal accountant's full-time, permanent employees (“leased employees” in an “alternative practice structure” arrangement)
B.10 They both want to ensure that those charged with governance (including the public company audit
clients’ audit committees and boards of directors) consider their auditors’ independence in general and in connection with non-audit services
B.11 The threat to independence is that the auditor considering a job offer from a client might not
perform audit work properly while on the audit team (out of some newfound loyalty and interest inthe audit client’s success via financial reporting)
B.12 Ethical responsibility for acts of nonmembers under a member's supervision A member shall not
permit others to carry out on his behalf, either with or without compensation, acts which, if carriedout by the member, would place a member in violation of the Rules of Conduct
Trang 4B.13 Rules specifically applicable to members in government and industry:
Rule 102 (Integrity and Objectivity): Members in government and industry cannot subordinate their judgment to superiors and produce misleading financial statements Members in government and industry must be candid and not omit information when dealing with external auditors Members in government and industry cannot have undisclosed conflicts of interest in their jobs.Rule 203 (Accounting Principles): When members in government and industry represent their companies' financial statements as being "in conformity with GAAP," they are expressing an
"opinion" and subject to Rule 203 that requires disclosure of any material departure from
accounting principles promulgated by a body designated by Council (FASB and GASB)
Rule 501 (Acts Discreditable): Participation in the production of false and misleading financial statements is a discreditable act
B.14 Control of accounting services:
1 CPAs shall have majority (50% or more) ownership and voting rights
2 CPAs must have ultimate responsibility for attest services
3 Non-CPAs cannot be passive investors must be active in the practice
Non-CPAs cannot hold themselves out as CPAs
Non-CPAs must abide by the AICPA Code of Professional Conduct
Non-CPAs must have the same educational levels and meet the same continuing
education requirements as CPAs
B.15 This checkpoint is just a reminder that rules cannot cover all ethical decisions that an accountant
may encounter
B.16 This question is about self-regulation penalties AICPA and the state societies can:
• Admonish a violator (slap on the wrist)
• Suspend the violator's membership
• Expel the violator from membership in AICPA and a state society of CPAs
• Require CPE hours to be undertaken by the violator
• Publish the violator's name in a report of proceedings (e.g., in CPA Letter and a state
society newsletter or magazine B.17 This question is about public regulation by government agencies State boards of accountancy can:
1 Admonish a license holder (slap on the wrist)
2 Suspend the violator's license to practice in the state
3 Revoke the violator's license to practice
The U.S Securities and Exchange Commission can deny (temporarily or permanently) the privilege of practice before the SEC with a "Rule 102(e)" proceeding (The SEC can also
"censure" a CPA, which amounts to a slap on the wrist and settle for an injunction in which the CPA promises not to violate the rules of conduct in the suture.) In addition, where laws are broken (e.g rule 501) the SEC can initiate legal proceedings resulting in fines and/or
imprisonment
Trang 51 Suspend a CPA from practice before IRS
2 Disbar a CPA from practice before IRS (revoke the right to represent clients before IRS)
SOLUTIONS FOR MULTIPLE-CHOICE QUESTIONS
B.18 a Incorrect Independence in fact is a mental quality
b Correct Appearances influence the public
c Incorrect Standards of field work do not mention independence
d Incorrect This is the first of the GAAS standards of field work
B.19 c Correct Sarbanes-Oxley and PCAOB have placed the responsibility for
ensuring that the external auditors are independent on those charged with governance (including the audit committee)
B.20 a Correct Imperative means that a rule is always followed
b Incorrect Utilitarian means that some exceptions based on a calculation of good
and bad outcomes is sometimes used
c Incorrect This is the second best answer because generalization can resemble
imperative thought
d Incorrect The firm is following a rule, not listening for "inner voices."
B.21 a Incorrect FASB makes accounting principles (not independence rules)
b Incorrect GAO makes auditing standards for government audits
c Correct The PCAOB (in cooperation with SEC) makes independence rules for
auditors of public companies
d Incorrect ARSC makes practice standards for accountants’ work on unaudited
financial statementsB.22 a Incorrect Merely auditing competitors does not impair independence
b Correct This item is written to imply that the auditor subordinated judgment to
the client’s officer,
c Incorrect Lack of competence itself is not an impairment of independence While
facts may be misrepresented, the auditors didn’t know it
d Incorrect Another example of lack of competence In this case the auditors
misrepresented facts (giving the unqualified report when the audit was not entirely in conformity with GAAS), but they did not knowingly do so
B.23 b Correct Sarbanes-Oxley and the PCAOB have placed the responsibility for
auditors’ independence on the audit committee Primary in this responsibility is the monitoring of all engagements contracted with the external auditors to ensure that the auditors are not performing any assignments that are prohibited by PCAOB standards or otherwise impair the auditors’ independence
B.24 a Incorrect Rule 101 begins “A member in public practice ”
b Correct Integrity and objectivity are required of all members
c Incorrect Rule 301 begins “A member in public practice ”
d Correct Prohibition of discreditable acts applies to all members
Trang 6B.25 a Incorrect: Independence is impaired by this type of bookkeeping service.
b Correct: Independence is not impaired for nonfinancial-statement related
internal audit services when the client has its own Director of Internal Auditing in charge
c Incorrect Independence is impaired when the audit firm performs more than 40%
of financial-related internal audit work (for clients with more than $200million assets)
d Incorrect: Independence is impaired when auditors perform important actuarial
work, then audit their own work product (the client’s actuarial calculations based on the audit team-prepared assumptions)
B.26 a Incorrect The answer is both (a) and (b) Independence is not impaired in (a)
Managers not on the engagement can own shares in nonclient sister funds
b Incorrect The answer is both (a) and (b) Independence is not impaired in (b)
Independence is not impaired Close family members of audit partners can own shares in audit client sister funds not audited by the close family member’s kin, so long as the shares are held through the family member’s employee benefit plan
c Correct: Independence is not impaired in both (a) and (b)
d Incorrect Independence is not impaired in both (a) and (b)
B.27 a Incorrect A spouse is defined as an immediate family member
b Incorrect A spousal equivalent is defined as an immediate family member
c Correct A parent is defined as a close relative, but is not an immediate family
member
d Incorrect An uncle is neither an immediate family member nor a close relativeB.28 a Incorrect The audit organization may not reduce the scope of its audit.
b Incorrect There are restrictions concerning where in the organization the
nonaudit work can be performed
c Incorrect The audit organization must document why the nonaudit service does
not affect independence; not the government organization
d Correct The scope of the audit work cannot be reduced because of the nonaudit
services
B.29 a Incorrect Auditors freedom to talk with clients about employment is not denied
The audit firm simply must compensate for the threat to quality audit work
b Incorrect Maybe a second-best answer, but the “efficiencies” are offset by the
extra review the audit firm is obligated to perform
c Incorrect Former audit partners can retain material retirement accounts only if
they are fixed as to amount and timing (The “variable” word in the question is supposed to negate the “fixed” requirement.)
d Correct Discussion of former firm employees now employed in accounting and
reporting roles in the client is a matter for the independence reporting
to the board
B.30 d Correct Along with the ASB and MCS Executive Committee
Trang 7B.31 b Correct Along with the FASB and GASB.
B.32 a Correct He is "holding out" as a CPA and performing services other CPAs
perform
b Incorrect Mere partnership with another CPA is not enough if the other CPA does
not "hold out."
c Incorrect same idea as b
d Incorrect If he does not "hold out" as a CPA, he is not in public accounting,
according to the AICPA
B.33 a Incorrect CPAs generally prefer to compete on the basis of quality of service
rather than price
b Incorrect The conventional wisdom is the opposite
c Correct The FTC dragged the AICPA kicking and screaming into the
agreement
d Incorrect The AICPA "principles" statements assert that objectivity is always
necessary
B.34 a Incorrect Independence is impaired by a direct financial interest in the client
b Incorrect Independence is impaired by the attribution of the financial interest of
the spouse
c Incorrect Independence is impaired by having a nondependent close relative in
an audit-sensitive position with the client
d Correct This is a situation of having an immaterial financial interest in a
nonclient investee that is immaterial to the client's financial statements.B.35 a Incorrect "Must" is wrong The public accounting firm can explain why the
departure is necessary and then give an unqualified opinion paragraph
in the auditors’ report
b Correct Rule 203 permits the explanation and the unqualified opinion
c Incorrect "Must" is wrong The public accounting firm can explain why the
departure is necessary and then give an unqualified opinion paragraph
in the auditors’ report
d Incorrect The opinion paragraph can be unqualified, but with the explanation, the
report is not "standard."
B.36 a Incorrect You cannot even tell a credit agency about the client's payment record
b Incorrect The actuarial assumptions are not required to be disclosed by GAAP or
GAAS in tax engagements
c Incorrect Plans of this nature are not required by GAAP or GAAS
d Correct Client permission is not needed for information required by GAAP in
audited financial statements
B.37 a Correct These are generally considered outside the reach of professional
conduct rules
b Incorrect Failing to file one's own tax return is discreditable
c Incorrect Filing a fraudulent tax return, even for a client in financial difficulty, is
discreditable under AICPA interpretation
d Incorrect Employment discrimination is discreditable
Trang 8B.38 a Incorrect Selling products for profit is not forbidden by any rule.
b Incorrect Authorship itself is not forbidden
c Correct Rule 503 prohibits commission compensation for referring products or
services to clients for whom the CPA performs attest services
d Incorrect Rule 503 permits CPAs to pay fees to obtain clients (This answer is
"close" to correct forbidden because the CPA must also disclose the fee payment to the new client.)
B.39 a Incorrect The AICPA does not grant licenses to practice
b Incorrect The state CPA societies do not grant licenses
c Incorrect The ASB does not grant licenses
d Correct The state board is the regulatory agency that grants a license to practice
and can revoke one
B.40 a Incorrect Withholding client records is an “acts discreditable”
b Incorrect Failing to file or remit tax payments is a felony and as such is an “acts
discreditable”
c Incorrect Failure to follow standards during an SEC audit is “acts discreditable”
d Correct Violating the advertising standards is a violation of rule 502 not rule
501 “acts discreditable”
B.41 a Correct A direct financial interest disposed before the auditor-client relationship
arises does not impair independence
b Incorrect A short sale creates the commitment to acquire the client's stock which
impairs independence
c Incorrect Service in the capacity of management during the period covered by
the financial statements impairs independence
d Incorrect Performing accounting services and preparing financial statements
when the client cannot take responsibility for them impairs independence
B.42 a Incorrect Rule 301 Confidential Client Information is not relevant because the
CPA did not tell anyone else about the omission
b Correct Rule 102 Integrity and Objectivity The CPA knowingly
misrepresented facts
c Incorrect Rule 101 Independence Independence is not required in tax practice
d Incorrect Rule 203 Accounting Principles is not relevant because the CPA is not
giving an opinion on financial statements' conformity with GAAP.B.43 a Correct This is a commission – a percentage paid in connection with a business
activity
B.44 a Correct A Non-CPA can be a partner if he or she does not have a majority
interest and is not have ultimate responsibility for the firm’s services
b Incorrect A CPA must have ultimate responsibility for the firm services A
non-CPA cannot be the managing partner
c Incorrect A majority owner and partner in the firm cannot own stock in an audit
client
d Incorrect Non-CPA owners of the firm must hold a bachelor’s degree
Trang 9SOLUTIONS FOR EXERCISES, PROBLEMS, AND SIMULATIONS
B.45 SEC Independence Rules
In these solutions, the responses below do not try to contemplate all the “maybe” exception conditions cited in the text related to the SEC independence rule exceptions
a Yes A member of the engagement team cannot hold a direct financial interest
b Yes No other partner in the Santa Fe office (covered persons) can own direct financial
interest in CCC
c Yes Immediate family members of covered persons in the firm cannot hold direct
financial interest in CCC
d Yes The son (presumed a dependent) is also an immediate family member
e No Now according strictly to the definition, the father is a close family member (not an
immediate family member) and the financial interest in CCC does not impair SIDA & Co.’s independence
f Yes Controlling interests in audit clients when held by close family members of covered
persons in the firm impair independence
g Yes Independence is impaired when close family members of a covered person in the
firm (Javier) holds a job with a client in a accounting or financial reporting role
B.46 SEC Independence and Nonaudit Services
In these solutions, the responses below do not try to contemplate all the “maybe” exception conditions cited in the text related to the SEC-prohibited non-audit services
a Independence appears to be impaired because the SEC does not allow bookkeeping or
other services by the audit team to prepare financial statements
b Independence appears to be impaired because the SEC does not allow “covered persons’”
involvement in financial information systems design and implementation work to includedesigning or implementing a software system or supervising the client’s system
c Independence appears to be impaired because the audit firm audited its own work
d Independence is not impaired Auditors can audit actuarial calculations when they have
been originally prepared by clients’ actuaries (just like auditing a client-prepared depreciation schedule)
e Independence is not impaired According to the literal rule, the out-sourced internal audit
work does not cover financial controls and financial statements, and Section has in place its own internal audit director with complete authority for all aspects of the work
f Independence is impaired Churyk is a covered person (having authority in the chain of
command), and she performs a management function by signing stock option documents
on behalf of Section
Trang 10g Independence is impaired because the SEC rule seems to be very strict to prohibit all
aspects of executive search activity for audit clients
h This item is written to induce thought without keying directly to SEC-prohibitions on
broker-dealer services However, a conservative conclusion is that independence is impaired because the audit firm (albeit indirectly) performed broker-dealer services for the audit client
i Independence appears not to be impaired While these export-import tax services have
feathers like legal services, waddle like legal services, and quack like legal services, they
do not involve strict legal work that requires admission to a lawyer’s bar association (admission to practice before a U.S court)
B.47 Audit Simulation: Independence, Integrity, and Objectivity Cases
a Interpretation Honorary Directorships and Trusteeships The CPA will not be considered
independent unless:
1 the position is in fact purely honorary, and
2 listings of directors show she is an honorary director and
3 she restricts participation strictly to the use of her name, and
4 she does not vote or participate in management functions
b No violation, but students should note that Wolfe is "practicing public accounting" by
virtue of "holding out as a CPA" and performing the types of services offered by other public accountants
c Interpretation Accounting Services
The CPA must be careful to know whether outsiders would perceive relationships that would indicate status as an employee, hence impairing the appearance of independence
In particular, the CPA must:
1 Not have any business connection with Harper Corp or with Marvin Harper that
would in fact impair independence, objectivity and integrity, and
2 Impress Marvin Harper (and the board of directors) that they must be able and
willing to accept primary responsibility for the financial statements as their own,and
3 Not take managerial responsibility for conducting operations of the Harper
Corp (although the CPA's supervision of the bookkeeper seems to have this characteristic), and
4 Conduct the audit in conformity with GAAS and not fail to audit records simply
because they were processed under the CPA's supervision
This case assumes Harper Corp is not reporting to the SEC, in which case the CPA's audit independence would certainly be impaired as a result of participating in the bookkeeping work
Trang 11d Interpretation of Rule 101.A.4
Independence is not impaired Poirot's loan is "grandfathered," since it was acquired before 1992 and because it was obtained from a financial institution for which independence was not required (Farraway was not a client before merger with Nearby) but which later became part of an audit client's portfolio
e Interpretation of Rule 101.A.4
Independence is impaired Not even home loans made under normal lending conditions are exempt from the prohibition Paying off the old grandfathered loan does not matter
f Interpretation of Rule 101.A.4
Independence is impaired Since the accounting firm and its partners own more than 50%
of the partnership, the loan is considered to be a prohibited loan from a client
g Interpretation of Rule 101.A.4
Independence is not impaired The CPAs own less than 50% of the partnership
h Independence is impaired Interpretation 101-1 Since Schultz can order the investment
under the insurance contract, the financial interest is a prohibited “direct” financial interest
B.48 Audit Simulation: Independence, Integrity and Objectivity Cases
(a, b, c, d, e, f) Interpretation Effect of Actual or Threatened Litigation on Independence
In general, when the present management of a client commences or expresses an intention to commence legal actions against its public accounting firm, the public accounting firm and the client management may be placed in adversary positions in which the management's willingness tomake complete disclosures and the auditors’ objectivity may be affected by self-interest
Independence may be impaired whenever the auditors and the client or its management are in positions of material adverse interest by reason of actual or threatened litigation Various situationsare hard to generalize, and the responses offered below are guidelines expressed in AICPA Ethics Interpretations (Effect of Litigation)
a An expressed intention by the client to begin litigation alleging deficiencies in audit work
is considered to impair independence if the public accounting firm concluded that there is
a strong possibility that such a claim will actually be filed
b The commencement of litigation alleging deficiencies in audit work impairs
independence
c The commencement of litigation by the public accounting firm alleging management
fraud or deceit impairs independence
d The claim under subrogation by the insurance company would not "normally" affect
auditors’ independence In this case, the client and members of management are not the nominal plaintiffs However, the idea of "normally" needs to be evaluated If members of Contrary management are going to testify on behalf of the insurance company's interest and thus act in an adversary relation to the public accounting firm, independence would seem to be impaired The substance of the situation is essentially the same as if Contrary Corporation was the named plaintiff
Trang 12e Litigation not related to the audit work, whether threatened or actual, for an amount that
is not material to the audit form or to the financial statements of the client would not usually be considered to affect the CPA-client relationship in such a way as to impair independence However, according to the SEC, this situation might impair
independence.)
f The class action lawsuit against both public accounting firm and company in itself would
not alter fundamental relationships between the management and directors and the public accounting firm and therefore would not be considered to have an adverse impact on the auditors’ independence These situations, however, should be examined carefully
Actions to be taken
When independence is considered impaired, the public accounting firm should (a) withdraw from the audit engagement in order to avoid the appearance that self-interest would affect his objectivity or (b) disclaim an opinion because of lack of independence,
as prescribed by GAAS
g Interpretation Investor or Investee Relationships with Nonclients
The CPA's financial interest in Dove Corp (investor) is sufficiently large to allow him to influence the actions of Dove, and the CPA's (and the public accounting firm's)
independence would be considered impaired The CPA's ability to influence Dove Corp
could permit him to exercise a degree of control over Tale Company (the investee, a
client) that would place the CPA in a capacity equivalent to that of a member of
management
B.48 Audit Simulation: Independence, Integrity and Objectivity Cases (Continued)
h Interpretation Investor or Investee Relationships with Nonclients
Independence is impaired The exception does not apply: The nonclient investee (Hydra)
is material to the investor (Sabrina); no matter whether the investment is or is not material to the CPAs' wealth The reasoning is that the client investor (Sabrina) has the ability to influence the nonclient investee (Hydra, in which the Queens have ownership), and Sabrina can therefore increase or decrease the CPAs' wealth Since the CPAs are associated with Sabrina, the firm may appear to lack independence in relation to being able to interact with the management that can influence the CPAs wealth (via Hydra)
i Rule 101 Interpretation 101
1 Assuming that the First National Bank is a profit-seeking enterprise, the
independence of the auditors is not impaired by the association of the two individuals who served both as members of the auditing firm and as directors forthe client during the period examined as long as they have ended all ties with thebank and are not involved in the audit
Trang 132 The auditors’ services may consist of advice and technical services, but he must
not make management decisions or take positions which might impair his objectivity The independence of the auditing firm would be compromised by any partner making a decision on loan approvals and the minimum balance checking account policy, but normally not by his performing a computer feasibility study
If the former controller's participation in the feasibility study was objective and advisory, and his advice was subject to effective client review and decision, the firm's independence has not been compromised It is desirable, however, that theformer controller not participate in the audit of the First National Bank's financial statements (AICPA Adapted)
j Rule 101 The acceptance by the CPA of the unsecured interest-bearing notes in payment
of unpaid fees would not be construed as discrediting the CPA's independence in his relations with his client because the notes are merely a substitution for an open account payable The rule of professional conduct that prohibits a CPA from having any financial interest in a client does not extend to the liability for the CPA's fee Under SEC rules, however, a definite arrangement for paying the notes must be stated by the client However, the acceptance of two shares of common stock (or prior commitment to accept stock) would be a violation of Rule 101 Any direct financial interest such as common stock holdings are construed as discrediting the CPA's independence (AICPA adapted)
k Ruling Acceptance of a Gift (Not in text Use common sense.)
The Code of Ethics does not apply to Debra She's neither a CPA nor a member of AICPA The ruling applies to independence of a firm if an employee accepts a gift that is more than token Independence is impaired because a member cannot permit his
employees to break rules he himself is obligated to observe
l Rule 101.4.A: Ruling 52 (ET 191.104) Past Due Fees
Independence is considered impaired At the time a member issues a report on financial statements, the client should not be indebted for more than one year's fees In the Groanercase, the debt would be for last year and the current year audit fees Groaner will have to pay the fees for last year when the current year report is ready (or else get a
non-independent disclaimer) The past due fees take on characteristics of a loan within the meaning of Rule 101, and collection may depend on the nature of the auditors’ report
on the financial statements
B.48 Audit Simulation: Independence, Integrity and Objectivity Cases (Continued)
m Rule 102 Integrity and Objectivity
The CPA has violated the rule The CPA (1) lacked integrity, (2) knowingly misrepresented facts by omitting the gain in the current-year tax return, and (3) subordinated CPA judgment to another (the client) The proper action is to file an amended return for last year and request a refund, then file a correct return for this year
n Rule 102 Integrity and Objectivity
Both CPAs probably violated Rule 102 Lestrade has a conflict of interest in owning another business that provides services to her employer and (apparently) not disclosing the business to Baker's board of directors The "prepaid expenses" classification is wrong.Lestrade has falsified an entry in the accounts and in the financial statements (a violation
of Rule 501) Both CPAs have fooled the external auditors by lying about the related party loan and the repayment terms
Trang 14B.49 Integrity and Objectivity
This is a true case It is clear that Deloitte subordinated its judgment to the judgment of the other firms This is clearly against the standards interpretation of integrity and objectivity Students’ opinions may vary as to the need for other auditors’ opinion However, it should be emphasized that while you may be persuaded by others that based on the facts of the case a change in your position is warranted, you should not change your judgment solely because someone else makes a different judgment based on the facts
The transaction in question was one of the focal points during an investigation of Liven and regulatory bodies and experts in accounting and auditing took exception with regards to recording any of this as revenue
B.50 Audit Simulation: General and Technical Rule Cases
a Rule 201 Professional Competence
The competence provision of Rule 201 is probably not violated A CPA can learn about a technical area while work is in progress Anyway, Cheese acquired significant technical expertise (competence) by placing Gilliam on the audit team
b Rule 202: GAAS Fourth Standard of Reporting
The CPA violated Rule 202 by not following the fourth GAAS Standard of Reporting The CPA prepared financial statements and (apparently) did not render a report of the work and the degree of responsibility as required by GAAS The CPA should have attached a compilation report to the unaudited financial statements, declaring lack of independence The CPA is "associated with" the financial statements, practices public accounting, and should render a report
c Rule 203 Accounting Principles
No violation of Rule 203 Students may not know enough accounting to answer this question well Rule 203 refers to official pronouncements made by bodies designated by Council (i.e., FASB), not to GAAP in general GAAP is "all the accounting that has authoritative support." SEC requirements hold the place of highest level of authoritative support for public companies, but Monty is not a public company The SEC-required tax reconciliation disclosure is not in FASB pronouncements The financial statements contain no departure from an FASB financial accounting standard If Monty were a public company, the financial statements would be "in accordance with FASB pronouncements," but not "in accordance with GAAP."
B.50 Audit Simulation: General and Technical Rule Cases (Continued)
d Rule 203 Accounting Principles
No violation Chapman is following the exception clause of Rule 203 believing a departure from FASB pronouncements is necessary to prevent financial statements from being misleading, explaining the departure, then giving the unqualified opinion (This topic is also covered in Chapter 12.)