4-14 (continued)
2. A reputation of doing high quality work usually pays off in more clients
and a more profitable practice.
3. Potential legal liability is also a deterrent to substandard work. 4. The Code of Professional Conduct requires a high quality of
performance.
4-15 A member is permitted to advertise by Rule 502 except in a false, misleading, or deceptive manner. Interpretation 502-2 clarifies the meaning of false, misleading or deceptive acts, including activities that:
1. Create false or unjustified expectations of favorable results. 2. Imply the ability to influence any court, tribunal, regulatory agency
or similar body or official.
3. Contain a representation that specific professional services will be
performed for a stated fee, when it was likely at the time of the representation that such fees would be substantially increased and the prospective client was not informed of that likelihood.
4. Contain any other representations that would be likely to cause a
reasonable person to misunderstand or be deceived.
When engagements are obtained through the efforts of third parties, Interpretation 502-5 indicates that the member has the responsibility to ascertain that all promotional efforts are within the bounds of the Rules of Conduct.
4-16 Prohibiting paying commissions to obtain clients who receive attestation services in Rule 503 is intended to discourage overly aggressive obtaining of clients by giving \rather than on the basis of competitive and other qualifications. Prohibiting receiving commissions for referrals to other CPAs or other providers of services where attestation services are provided is intended to discourage referrals to others on the basis of a \offering services. Commissions when attestation services are not provided are permitted to encourage competition for these types of services.
4-17 A CPA may practice in one of the following forms:
1. A proprietorship 2. A general partnership 3. A general corporation (if permitted by state law) 4. A professional corporation 5. Limited liability company (if permitted by state law) 6. Limited liability partnership (if permitted by state law)
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?
4-18 a. (1) b. (3) c. (1)
4-19 a. (1) b. (3) c. (3)
? Discussion Questions And Problems
4-20
Service a. Multiple Choice Questions From CPA Examinations
Violation? Yes No No No * Providing bookkeeping services to a public company. The services were pre-approved by the audit committee of the company. Providing internal audit services to a public company that is not an audit client. Implementing a financial information system designed by management for a private company. Recommending a tax shelter to a client that is publicly held. The services were pre-approved by the audit committee. Providing internal audit services to a public company client with the pre-approval of the audit committee. Providing bookkeeping services to an audit client that is a private company. b. c. d. e. f. Yes No * Recommending tax shelters is not prohibited as long as the service does not
4-21 a.
meet the characteristics of an abusive tax avoidance strategy and does not have the potential to impair independence.
b. c.
Rule 101 - Independence. No violation. If the services performed conform to the requirements of Interpretation 101-3, independence of Emrich would not be considered to be impaired. There would be a violation of SEC rules if the client were publicly held.
Rule 101 - Independence. No violation. Franz Marteens is not a partner nor is he assigned to the engagement team for the audit client. Rule 201 - General Standards. Violation. Interpretation 201-1 states that a member who accepts a professional engagement implies that he or she has the necessary competence to complete the engagement according to professional standards. Wilkenson has violated the rule since he does not have the expertise to review the work of the consultant hired by Wilkenson. Wilkenson should have suggested that the company hire the consultant directly.
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4-21 (continued) d. e. f. g. h.
4-22 a. b. c.
Rule 102 - Integrity and Objectivity. Violation. This rule states that
in tax practice, a member may resolve doubt in favor of his or her client as long as there is reasonable support for his or her position. In the example case, the client has provided no support for the unusual deductions. Sarah Milsaps has violated Rule 102 by not requiring reasonable support for the deductions.
Rule 203 (Accounting Principles). Violation. This rule designates that
the International Accounting Standards Board (IASB) is the established body for issuing international financial accounting standards. Roberta Hernandez’s assertion that the financial statements are based on international financial accounting standards would be in violation of Rule 203 because she did not use standards issued by the IASB.
Rules 101 (Independence) and 102 (Integrity and Objectivity).
Violation. Appearance of independence has been impaired by Steve Custer’s agency’s financial dealing with his audit clients and participation in a business, which impairs his objectivity. It is also a conflict of duties to recommend his own firm to review the adequacy of the existing insurance coverage of existing clients
Rule 301 - Confidential Client Information. Violation. The client
should have been notified that the review was to take place, and an attempt should have been made to obtain the client's permission for such review because the review was not a part of an AICPA, state CPA society or Board of Accountancy review program. The firms violated Rule 301 by not obtaining consent from the client for the review.
Rule 501 - Acts Discreditable. No violation. The rule is vague and the
interpretation would be made by the state Board of Accountancy. In most states this will be a civil action and would not likely be a violation.
Violation of Rule 101 – When audit firms create a network with
other firms to share certain characteristics, such as the sharing of audit methodologies and audit manuals, interpretations of Rule 101 require each network firm to be independent of audit and review clients of other network firms. The ownership by Miller and Yancy who are partners in one of the network firms in the stock of a client of another network firm would impair independence.
Violation of Rule 501 – An interpretation of Rule 501 prohibits the
inclusion of indemnification clauses and other limitations of liability provisions in engagement letters for audit and other attest services.
No violation – While Jennifer’s audit client has a material investment
in Polex, her non-dependent parents’ investment in Polex represents an indirect financial interest that is not material to her parents or Jennifer.
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4-22 (continued) d. e. f. g. h. i. j.
4-23 a. b. No violation – Because Joe has no responsibilities for financial
reporting in his new role and because the audit firm modified audit procedures to reduce the risk that Joe has knowledge of the audit plan, independence would not be impaired.
Violation of Rule 101 – Interpretations and rulings under Rule 101
note that independence is impaired if billed or unbilled fees remain unpaid for professional services provided more than one year before the date of the auditor’s report. Because the report date for the 2011 financial statement audit would likely be in 2012, more than one year would have transpired.
Violation of Rule 101 – Only pre-existing mortgages provided by a
new audit client that is a bank are permissible. No new mortgage loans are permitted, however.
No violation – Because Jessica promptly notified her office’s
managing partner of the offer and because she was removed from the audit engagement, no violation has occurred.
Violation of Rule 501 – Rule 501 prohibits the solicitation and
disclosure of the Uniform CPA examination questions and answers without permission of the AICPA.
Violation of Rules 102 and 203 – Both Rules 102 and 203 would be
violated by Audrey’s actions whereby she knowingly included false and misleading transactions in the financial statements that were provided to the bank.
No violation – The prohibition of contingent fees does not extend to
consulting services engagements as long as the CPA does not perform any other services for that client that might include audit, review, compilation, examinations of prospective financial information or certain tax return services.
An audit committee is a special committee formed by the board of
directors and made up of board members. The Sarbanes–Oxley Act requires that all the members of the audit committee be independent directors, and the committee should include at least one member who is a financial expert. The audit committee serves as a liaison between the independent auditor and the board of directors. The audit committee assists and advises the full board of directors, and, as such, aids the board in fulfilling its responsibility for public financial reporting.
The functions of an audit committee may include the following:
1. Select the independent auditor; discuss audit fee with the
auditor; review auditor's engagement letter.
2. Review the independent auditor's overall audit plan (scope,
purpose, and general audit procedures).
3. Review the annual financial statements before submission to
the full board of directors for approval.
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