1 Chapter 3 Homework

Violation of Commission Rule CPA cannot accept any form of commission related to a client for which he/she also audits or reviews F.S., or does compilation of F.S. with 3rd party reliance or examination of prospective F.S. Relates to an “audit” client.

3 Chapter 3 Homework 3-34a - (4) National partner doing marketing least likely a covered member. Answer choice (3) probably a covered member as ability to influence audit or provides more than 10 non-attest hours.

4 Chapter 3 Homework 3-34b - (1) Advertising has limited restrictions. CPAs can advertise in newspapers. Answer choice (2) appears to be a referral fee rather than a commission under the AICPA Code of Conduct and may be no violation if disclosed. Commission Rule appears to only address receipt of a commission.

5 Chapter 3 Homework 3-34c - (1) Continent fees are prohibited for any service if CPA also performs F.S. audits or reviews, does compilation of F.S. with 3rd party reliance or examination of prospective F.S. Relates to an “audit” client.

6 Chapter 3 Homework 3-34d - (1) Fully insured bank accounts normally do NOT cause an impairment to independence.

7 Chapter 3 Homework 3-34e - (1) Declaration is that return is not misleading based on preparer’s knowledge. Tax preparation is not attest work. We do not audit the return. GAAP is N/A. CPA only has to be objective, not impartial.

8 Chapter 3 Homework 3-34f - (3) All of the other answers relate to exceptions for quality reviews or investigations.

9 Chapter 3 Homework 3-34g - (2) Firm name is misleading as it implies multiple CPAs in the firm and that it is likely a partnership which it is not – Form of Organization and Name Rule.

10 Chapter 3 Homework 3-34h - (3) General Standards Rule prohibits a CPA firm from accepting an engagement that the firm is not competent to perform. But, CPA could also become competent (training, hiring) and keep the engagement (not given in the answer choices). The Code of Conduct does allow a CPA to become competent during an engagement.

11 Chapter 3 Homework 3-34i - (4) PCAOB does not prohibit preparation of audit client’s tax return, but does prohibit the services in the other answer choices.

12 Chapter 3 Homework 3-34j - (2) CPAs can provide training to attest client employees, but canNOT perform in an employee or management role under the Independence Rule.

13 Chapter 3 Homework 3-34k - (4) There are no Statements on Responsibilities for Assurance Services.

14 Chapter 3 Homework 3-34 l - (3) The IIA’s Code of Ethics does NOT include anything on specific audit techniques, such as sampling.

15 Chapter 3 Homework 3-35a Provide internal audit outsourcing, as well as perform the audit. (Public) Not allowed by PCAOB rules

16 Chapter 3 Homework 3-35b Prepare the corporate tax return, as well as perform the audit. (Public) Allowed

17 Chapter 3 Homework 3-35c Prepare the corporate tax return, as well as perform the audit. (Nonpublic) Allowed

18 Chapter 3 Homework 3-35d Provide bookkeeping services, as well as perform the audit; WW will not determine journal entries, authorize transactions, or prepare or modify source documents. (Nonpublic) Allowed

19 Chapter 3 Homework 3-35e Provide financial information systems design and implementation assistance; WW provides no attest services for that company (Public) Allowed (no attest or audit work)

20 Chapter 3 Homework 3-35f Serve on the board of directors of the company; WW provides no attest services for the company. (Public) Allowed (no attest or audit work)

21 Chapter 3 Homework 3-35g Implement an off-the-shelf accounting package, as well as perform the audit. (Nonpublic) Allowed

22 Chapter 3 Homework 3-35h Provide actuarial services related to certain liabilities, as well as perform the audit; the subjectively determined liabilities relate to a material portion of the financial statements (Nonpublic) Not Allowed (AICPA rules prohibit this when amounts are subjectively determined and material)

23 Chapter 3 Homework 3-35i Provide actuarial services related to certain liabilities, as well as perform the audit; the subjectively determined liabilities relate to a material portion of the financial statements (Nonpublic) Not Allowed (AICPA & PCAOB rules prohibit this when amounts are subjectively determined and material)

24 Chapter 3 Homework 3-35j Provide tax planning services for corporate executives of an audit client (not for the company). (Public) Not Allowed by PCAOB rules

25 Chapter 3 Homework 3-37a CPA: Independence Impaired Firm: Independence Impaired Violation for CPA – employment during F.S. period or period engaged. Husband is immediate family so it transfers to the CPA because husband is in a Key Position at the audit client. Firm independence impaired because of Category C because a professional CPA firm employee cannot be simultaneously an officer (Treasurer).

26 Chapter 3 Homework 3-37b CPA: Independent Firm: Independent Will’s father is a close relative, but since Will is NOT aware of the investment (and there is no indication he has reason to believe the investment is Material to the close relative or enabled the close relative to exercise of significant influence over client ), Will is not impaired. Note: Will is a partner and participates in the audit & is probably in the same office as the lead partner for the audit, so Will is a covered member.

Effects of Relative Business and Financial Interests on Auditor Independence Close Relatives (Parents, Siblings, Nondependent Children) Relationship or impairment only flows to the CPA when: 1. On attest engagement team and a close relative has either:  A key position with the attest client during the period covered by the financial statements or during the period of the professional engagement.  A financial interest in the attest client during the professional engagement period that: –the individual knows or has reason to believe was material to the close relative or –enabled the close relative to exercise significant influence over the attest client. Independence

28 Chapter 3 Homework 3-37c CPA: Independence Impaired Firm: Independent (unless > 5%) Cat A – direct investment. So CPA is not independent. But, since the senior auditor is not on the engagement team, no problem for firm since he is probably not a covered member.

29 Chapter 3 Homework 3-37d CPA: Independent Firm: Independent Relative Employment. No problem since uncles are usually non-close relatives. If uncle would be considered a close relative by a reasonable person, then the CPA would lack independence because the uncle is in a key position at the audit client. Then, the firm would also lack independence since CPA works on the audit and is a covered member.

30 Chapter 3 Homework 3-37e CPA: Independence Impaired Firm: Independence Impaired Category B – No professional employee or group of employees and immediate family members can own more than 5% of the attest client equity securities.

31 Chapter 3 Homework 3-40a CPA: Independent Firm: Independent Code does not prohibit personal relationships. But, since CPA is on the audit team, there is a potential lack of independence for Appearance, esp. if negligence is subsequently alleged. Firm should assess closeness and risks to engagement team as partner is a covered member (partner in the office where the audit is performed).

32 Chapter 3 Homework 3-40b CPA: Independence Impaired Firm: Independent IF... Past employment applies to F.S. period and period engaged. So, the CPA lacks independence. Firm will not lack independence as along as the CPA is totally disassociated with audits for period employed.

33 Chapter 3 Homework 3-40c CPA: Independence Impaired Firm: Independent Father is a close relative and in a Key Position at the audit client, so it transfers to the son CPA. Firm is independent as long as the CPA is not a covered member.

34 Chapter 3 Homework 3-40d CPA: Independence Impaired Firm: Independence - Impaired Cat A – Joint Investment with client director, so CPA lacks independence. Firm lacks independence since the partner is a covered member – in same office (LA) as the lead partner on the audit.

35 Chapter 3 Homework 3-40e CPA: N/A Firm: Lacks Independence Audit fees for last year’s audit MUST be actually paid before the CPA can issue this year’s audit report without stating a lack of independence.