Aud-6

Front 1

AUD-6-1

What are behind "AICPA CODE OF PROFESSIONAL CONDUCT"?

Back 1

governs any service that a member of the AICPA performs services: audits, special reports, compilations, reviews, and services performed on financial forecasts and projections, & attestation engagements
- addresses the question of what is "right" and
"just" BUT applicable to all members of the AICPA
- a distinguishing mark of a profession that accepts a
high degree of responsibility toward the public
- divided into two major sections: Principles and Rules

Front 2

AUD-6-2

What are "6 Principles of AICPA CODE OF PROFESSIONAL" CONDUCT"?

Back 2

Article I—Responsibilities
Article II—Public Interest
Article III—Integrity
Article IV—Objectivity and Independence
Article V—Due Care
Article VI—Scope and Nature of Services

Front 3

AUD-6-3

Discuss about the principle "4. Article IV—Objectivity and Independence"

Back 3

"A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in PUBLIC practice should be INDEPENDENT in fact and appearance when providing auditing and other attestation services."

Note:
key to remember:
objectivity applies to all srvc (as corp. emp/CPA) rendered BUT independence applies to attestation SRVC only: audits, special reports (examine fin forecast), and reviews

Front 4

AUD-6-4

Discuss about the principle "Article V—Due Care"

Back 4

"A member should observe the profession's technical and ethical std, strive continually to improve competence and the quality of srvc, and discharge professional responsibility to the best of the member's ability."

Front 5

AUD-6-5

Discuss about the principle "Article VI—Scope and Nature of Services"

Back 5

"A mem in public practice should observe the Principles of the Code of Prof. Conduct in determining the scope and nature of srvcs to be provided."

req mem to:
a. Have adequate internal quality cntrl measures to ensure quality work
b. Determine whether, for audit clients, conflicts of interest arise due to the scope and nature of other srvc
C. Assess whether the firm's activities are consistent w/ professionalism.

Front 6

AUD-6-6

What are "rules" of the CODE in AICPA CODE OF PROF. CONDUCT

Back 6

consists of rules, interpretations, and rulings that govern the specific performance of mem

Front 7

AUD-6-7

Discuss about: Rule 101—Independence

Back 7

A mem in PUBLIC practice: - independent in the performance of professional services “as required by standards promulgated by bodies
designated” by Council

(1) Ind: not req’d for compilations and nonattestation services, e.g., tax services, consulting services

Front 8

AUD-6-8

Discuss about what it means by "b. Independence Impaired by Financial Interests "?

Back 8

(1) impaired if a covered mem has a direct fin int, regardless of materiality or a material indirect fin int in an attestation client

(4) Ind NOT impaired in a fin srvc client by:
(a) Fully collateralized car loans with a fin srvc client
(b) Cash adv or credit card bal < $10k
(c) A bank acct fully insured by FDIC
(d) A passbook loan

General Rule:
- Cover'd mem: audit team, boss/office (chain of command)
- immediate family: spouse & dependent (non fin position = ok)
- close relatives: parents, siblings, adult kids

Front 9

AUD-6-9

List out eg. for "Direct financial int"

Back 9

EXAMPLE
• Stock o’ship, even if owned in a blind trust.
• Fin int in a client through a p’ship and the mem = a general partner
• Fin int in a trust when the mem = the trustee.

Front 10

AUD-6-10

List out eg. for "In-direct financial int"

Back 10

Examples would include:
• Mem owns shs in a mutual fund that invt in the attestation client.
• Mem owns a dir fin interest in Co. A w/ a dir fin int in the attestation client

Front 11

AUD-6-11

Discuss about "Independence Impaired by biz r'ship"

Back 11

(1) if an “formerly emp @ the client” participates on the engagement team or is in a position to influence the engagement during the any period of his or her former employment with the client.
(2) impaired by an immediate family member's emp with a client in a key position e.g.spouse = internal auditor @ the client's.
(3) if a p’er or professional emp leaves the firm and is employed by the client in a key position (unless the individual is no longer in a position to influence or participate in the firm's biz decisions and the amt due: immaterial to the firm
(4) if a mem of the engagement team or is in a position to influence the engagement seeking or discussing potential employment with the client or has been offered emp by the client

Front 12

AUD-6-12

Discuss about the situations when "Independence Impaired by Business Relationships " w/ e.g.

Back 12

if a mem makes mgmt decisions for an attest client

e.g.
- Dir, officer, emp, or a position where the mem acts in a mgmt capacity.
- Promoter, underwriter, broker-dealer, voting trustee
- Stk t’fer or escrow agent
- General counsel
- Trustee for a client's pension or profit-sharing trust

e. with respect to a client who is > 1 yr due for prev srvc
Usually must be pd b/f the following year's work.

f. Actual or threatened litigation may impair independence, regardless of who is the plaintiff and who is the defendant.
(see notes for e.g.) but not for immaterial amt.

Front 13

AUD-6-13

Discuss about the situations when "Independence NOT Impaired by Business Relationships " w/ e.g.

Back 13

(2) by being a mem of or an honorary trustee for a nonprofit charitable, civic or religious group if the position is purely honorary and the member NOT participate in any mgmt func

(3) M’ship in the same trade association as a client does not impair ind unless the member serves in a mgmnt capacity.
e.g. country club

Front 14

AUD-6-14

discuss about the situation when "Rule 102: Integrity & Objectivity" applies

Back 14

"In the p’form of ANY prof. srvc, a mem shall maintain objectivity
and integrity, shall be free of conflicts of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others."

Front 15

AUD-6-15

List out some of "Rule 201: General Standards"

Back 15

a. Professional Competence Competence
“Undertake only” those prof. srvc: the mem or the mem's firm can “reasonably be expected to complete with professional competence”
e.g. the knowledge of technical SM or the ability to obtain that knowledge by research or by consulting with others.


b. Due Professional
(1) must possess the same degree of skill commonly possessed by others in the field.
(2) must act as a “reasonably prudent” acct would.

d. Sufficient Relevant Data

Front 16

AUD-6-16

Discuss about "Rule 202: Compliance w/ Standards"

Back 16

Must comply with
a. Auditing Standards Board and PCAOB (issue statements on auditing standards).
b. Mgmt Consulting Srvc Exe Committee (issues statements on standards for mgmt consulting services)
c. Accounting and Review Services Committee (issues statements on standards for
accounting and review services).
d. Government Accounting Standards Board (issues statements of governmental
accounting standards).
e. Tax Executive Committee (issues statements on tax services)

Front 17

AUD-6-17

Discuss about "5. Rule 203—Accounting Principles "

Back 17

a. A mem “shall not” express an opinion or state affirmatively or negatively: F/S are presented in conformity with GAAP if there is “any departure fr an acct prin” that has a “material effect” on F/S.

Exception: b. “Unusual circumstances may justify a departure from GAAP” if compliance would cause the F/S to be misleading.

Front 18

AUD-6-18

Discuss about "6. Rule 301—Confidential Client Information"

Back 18

a. A mem in public practice “shall not” disclose any confidential client info. “WITHOUT the specific consent” of the client

Exceptions—A member is obligated to disclose
(1) subpoena or summons.
(2) as a part of a quality review of the member's professional practices authorized by the AICPA
(3) in response to any inquiry either made by the ethics division or the trial board of the Institute or by a duly constituted investigative or disciplinary body of a state CPA society, or under authority of state statutes.
(4)your defense team when client suing you

Front 19

AUD-6-19

Discuss about "Rule 302—Contingent Fees (CF)"

Back 19

General = not allow'd

CF:
- unless a specific finding or result is obtained
- fee amt: dependent upon the finding or result obtained

c. CF permitted
- fix'd by courts or other pub authorities or in tax matters

Front 20

AUD-6-20

Discuss about "Rule 501—Discreditable Acts"

Back 20

b. The following acts are discreditable to the profession:

(1) Failure to rtn rec to a client after the client makes demand
(6) Solicitation or disclosure of CPA Examination questions and answers.

Front 21

AUD-6-21

Discuss about "Rule 502—Advertising and Other Forms of Solicitation"

Back 21

a. shall not seek to obtain clients by ad or other forms of solicitation in a manner: "false, misleading, or deceptive"

b. misleading or deceptive if:
- Create false or unjustified expectations of favorable results.
- Imply the ability to influence a court, regulatory agent or official.
-Intentionally underestimate fees.
- Would mislead or deceive a reasonable person.

Front 22

AUD-6-22

Discuss about "Rule 503: Commissions and Referral Fees"

Back 22

a.
(1) An audit or review of F/S
(2) A compilation of F/S expected to be used by 3rd pty, when the mem NOT disclose a lack of independence.
(3) An exam of "prospective" fin info.

b. Other srvc(Compilation, tax, advisory) = OK but must be disclosed to the client
c. A member who receives a referral fee for recommending another CPA or pays a referral fee to obtain a client "must disclose" this to the client

Front 23

AUD-6-23

Discuss about "Rule 505—Form of Organization and Name"

Back 23

Misleading (size: sole proprietor, more than 1) Firm Names Not Allowed:

(5) If all partners except 1 died or left the firm, the remaining p'er may continue to practice under the p'ship name for up to 2 years
aft becoming a sole practitioner

Front 24

AUD-6-24

Discuss about "SOX Title I: PCAOB"

Back 24

2. The Board is s.t. oversight by the SEC and has the duty to:

a. "Register pub" acct firms: prepare audit reports for issuers (Pub Co.)
b. Est. rules r.t. the preparation of audit reports for Pub Co.
c. "Conduct inspections, investigations, & disciplinary proceedings" re: registered pub acct firms

3. Reg with PCAOB: Only Register'd Firms Can Audit Pub Co.

4. Ea Register'd Firm Must Adhere to:
a. Audit doc. must be kept
for seven years (pub co.)
b. Provide a concurring or 2nd p'er review of ea. audit rpt.

Front 25

AUD-6-25

Re "B. SOX Title II—Auditor Independence"- 1. list out "Prohibited Services"

Back 25

(1) Bookkeeping;
(2) Financial info. sys design and implementation;
(3) Appraisal and valuation srvc;
(4) Actuarial srvc;
(5) Mgmt functions or HR srvc;
(6) IA outsourcing srvc;
(7) srvc as a broker, dealer, invt adviser, or invt banker;
(8) Legal srvc; and
(9) Expert srvc unrelated to the audit.

Front 26

AUD-6-26

Re: SOX Title II—Auditor Independence"- discuss about "3. Audit Partner Rotation"

Back 26

The lead audit or coordinating p'er and the reviewing p'er: must rotate off the audit every 5 years.

Front 27

AUD-6-27

Re: SOX Title II—Auditor Independence"- discuss about "5. Conflicts of Interest"

Back 27

cannot have emp'd the issuer's CEO, CFO, Controller, or Chief
Accounting Officer, or any person serving in an equivalent position for a 1 yr
period preceding the audit

Front 28

AUD-6-27

discuss about "SOX Title III—Section 303—Improper Influence on Conduct of Audits"

Back 28

unlawful for any officer or director of an issuer, or any person acting under the direction of an officer or director
- to take any action to fraudulently influence, coerce, manipulate, or
mislead any independent pub or certified accountant engag'd in the performance of an audit of the F/S of the Pub Co. for the purpose of rendering such F/S materially misleading

Front 29

AUD-6-28

list out & discuss about some of "SOX Title IV—Enhanced Financial Disclosures"

Back 29

1. Disclosures in Periodic Rpts
- material adj

2. Off-B/S Trans

3. Disclosure of Trans.
Officers, Directors, or 10% + Shareholders (Relaed Pty)

4. Mgmt Assessment of IC
a. Mgmt's responsibility for est. an adequate IC structure and procedure for fin rpt'ng

b. An assessment of the "effectiveness of the current year's control structure" over fin rpt'ng

5. Code of Ethics for Senior Fin Officers

6. Disclosure of Audit Committee Financial Expert

7. Real Time Issuer Disclosures

Front 30

AUD-6-29

Discuss about circumstance that "Impair Auditor Independence" in SEC

Back 30

1. Financial R'ships'
a. Investments in Audit Clients
b. Other Fin Interests in Audit Clients
(1) Loans to or from an audit client, or ..., or
beneficial owners of >10% of the audit client's equity
securities
(2) Savings and checking account balances: > max by FDIC
(5) Credit card bal. > $10k

3. Biz R'ships': Direct or material indirect business r'ships

4. Non-audit Services
5. Contingent Fees

6. Partner Rotation
the lead audit p'er and the concurring p'er': aft. 5 yrs
other audi p'ner's: aft. 7 yrs

a. Required "Time Out" Period (stay-off): after 5 yrs

7. Audit Committee Admin of the Engagement: failure to admin the engagement by:
not rpt'ng
(1) Critical acct principles and practices used
(2) Alt. acct treatments discussed with management
3) Material written comm. btw the audit firm and mgmt

Front 31

AUD-6-30

Discuss about some of standards for "INDEPENDENCE" by PCAOB

Back 31

4. Tax Trans: Registered pub acc't firms may not provide to audit clients any tax srvc r.t. certain confidential or aggressive tax trans

5. Tax Srvc for Persons in Fin Reporting Oversight Roles Registered pub acct firms may not provide any tax srvc to corporate
officers of audit clients, or to immediate family mem of corporate officers

Front 32

AUD-6-31

Discuss about some of situations when for "INDEPENDENCE NOT IMPAIR'd" by DOL

Back 32

1. A former officer or emp of the plan or plan sponsor is employ'd by the firm,
the ind has completely disassociated from the plan or plan sponsor, and the
ind does not participate in auditing the F/S of the plan covering any period of his or her emp by the plan or plan sponsor.

2. engaged by the plan sponsor during the
period of the prof. engagement with the emp benefit plan

3. An actuary @ acct's firm rendered srvc to the plan

Front 33

AUD-6-32

Discuss about "Licensing & Disciplinary Sys" by State Boards of Accountancy

Back 33

Sole Power to License:
- can revoke, suspend your CPA license with disciplinary actions:
(3) Criminal conviction
e.g., commission of a felony, failure to file tax rtn,
crimes r.t. the practice of accounting, etc..

Penalties:
(1) Suspension or revocation of license;
(2) A monetary fine;
(3) A reprimand or censure;
(4) Probation; and
(5) Requirement for CPE courses

NOTE: The AICPA and state CPA societies can sanction their members, but they canNOT suspend or revoke a CPA's license BUT may suspend or terminate m'ship

Front 34

AUD-6-33

Discuss some of highlighs in "Äudit Doc"

Back 34

should
3. Demonstrate "compliance with the std of fieldwork" by showing that the work
performed was adequately planned and supervised, that a sufficient understanding of
the entity and its environment was obtained, and that sufficient appropriate audit evidence was obtained to provide a reasonable basis for the opinion

Front 35

AUD-6-33

Discuss about doc release date & retantion period of "Audit Rpt/Doc"

Back 35

1. Report Release Date: the date on which the auditor grants the client permission to use the rpt. (deliverd to the client)

2. Document Retention
SAS (For Private Co): 5 yrs
PCABO (For Pub Co): 7 yrs

Front 36

AUD-6-34

Discuss about doc completion date "Audit Rpt"

Back 36

# days following the rpt release date (Aft. this date, existing doc must not be deleted but any changes add'd)

SAS (For Private Co): 60 days
PCABO (For Pub Co): 45 days

Front 37

AUD-6-35

Discuss about "Use of an IT Professional" in highly IT environment

Back 37

2. The CPA's responsibility to guide IT professionals is the same as for other acct
assistants.

Front 38

AUD-6-36

Discuss about the term & situations re: "Auditing Around the Computer"

Back 38

1. tests the input data, processes the data independently, and then
compares the independently determined results to the program results. (focus: input & outputs)
3. Risks: insufficient, paper-based evidence and
insufficient audit procedures

Front 39

AUD-6-34

Discuss about the term "Transaction Tagging" in: "Auditing THRU the Computer (CAAT)"

Back 39

1. Transaction Tagging: uses to e-mark or "tag" specific trans and follow them thru the client's sys

Front 40

AUD-6-35

Discuss about the term "Embedd' Audit Module" in: "Auditing THRU the Computer (CAAT)"

Back 40

2. Embedded Audit Modules: a. sec of the app prog. code, collecting trans data for the auditor
b. most often built into the app prog. when the program is developed, for use in ensuring that controls are operating effectively.

Front 41

AUD-6-36

List out some of techniques in "Auditing THRU the Computer (CAAT)"

Back 41

1. Transaction Tagging
2. Embedded Audit Modules
3. Test Data (test deck)
4. Integrated Test Facility (ITF)
5. Parallel Simulation (reperformance test)

Front 42

AUD-6-37

Discuss about the term "3. Test Data (test deck)" in: "Auditing THRU the Computer (CAAT)"

Back 42

techniques using the app to process a set of test data, the results of which are already known.
- client's sysused to
process the auditor's data, off-line under the auditor's control
adv: the live computer files NOT affected in any way.

Front 43

AUD-6-38

Discuss about the term "ITF" in: "Auditing THRU the Computer (CAAT)"

Back 43

similar to "the test data" BUT
- audit'rs input data on client system while ON-line

e.g. processing test data to dummy acc't
- clinet NOT infom'd

Front 44

AUD-6-39

Discuss about the term "Parallel Simulation" in: "Auditing THRU the Computer (CAAT)"

Back 44

(reperformance test)
- client's data @ audit's own software

a. With controlled processing: observes an actual processing run &
compares the actual results to the expected results

b. With controlled re-processing: uses an archived copy of the program
in question (generally the auditor's control copy) to re-process transactions

Front 45

AUD-6-40

Discuss adv of "Generalized Audit Software Packages (GASPs)"

Back 45

softwares allowing to p''form TC and ST directly on the client's sys
a. to sample & test a much higher % of trans with more reliable audit
b. req'' little technical knowledge
c. significantly reduce audit time

Front 46

AUD-6-41

List out "SOURCES OF GOVERNMENT AUDITING STANDARDS"

Back 46

A. GAAS

B. GAGAS: Generally Accepted Government Auditing Std (Yellow Bk)
2. includes designing the audit to provide reasonable assurance of detecting
MM resulting from noncompliance

Front 47

AUD-6-42

Discuss about "Audit Req' for Fed Fin Assistance"

Back 47

1. Expanded ÍC doc and testing requirements
2. Expanded reporting: formal written rpts on the consideration of IC and the assessment of CR
3. Expanded rpt''ng: whether the fed fin assistance has been administered acc''d to applicable laws and reg
4. Application of single audit to fed fin assistaance

Front 48

AUD-6-43

Discuss about "Attestation Enagements" for Gov

Back 48

2 types of audits: fin/p'formance

expanded req:
1. Compliance with specified laws, regulations, rules, contracts, or grants.
2. Effectiveness of internal control over compliance with specified requirements

Front 49

AUD-6-44

Discuss obj. of "P'formance Audits" for Gov

Back 49

1. Effectiveness, Economy, and Efficiency:
a. Achievement of legislative, regulatory, or org goals.
b. Evaluation of cost benefit or cost effectiveness.

2. IC
a. Org missions, goals, and obj achieved efficiently and
effectively.
b. Resources used in compliance with laws, rules, and reg

3. Compliance
- target criteria met
- target pop served

Front 50

AUD-6-45

Discuss about "Increased Mgmt Responsibilities Id'by GAGAS" as part of "EFFECTS OF LAWS ON FINANCIAL STATEMENTS"

Back 50

1. Id of applicable laws and reg
2. est. of IC
3. Prep of supplementary fin rpt
4. Obtaining an audit satisfying relevant legal,reg, or contractual req.

Front 51

AUD-6-46

Discuss about "Increased Auditor Responsibilities Identified by GAGAS" as part of "EFFECTS OF LAWS ON FINANCIAL STATEMENTS"

Back 51

1. Obtaining reasonable assurance

3. Assessing whether mgmt has id' laws and reg

Front 52

AUD-6-47

Discuss about some of "GAAS REQUIREMENTS FOR COMPLIANCE AUDITS"

Back 52

A. Objectives of Compliance Audits
1. Obtain sufficient evidence to form an opinion on whether the entity complied w/ the compliance req applicable to its prog.

B. Assumptions
mgmt will:
1. Id gov. prog and understand and comply
2. Maintain effective cntrls
3. conduct ongoing evaluation & monitoring of compliance req
4. Appropriate corrective action on findings

C. Overall Standards for Compliance Audits
4. Obtain written rep from mgmt.

Front 53

AUD-6-47

Discuss about the situation in which "Tests of the operating effectiveness of controls may be required" as part of "Responses to Risk Assessment for Gov Audit"

Back 53

any one of conditions exists:
a. The risk assessment incl. an expectation of the operating effectiveness of
controls over compliance.

b. Substantive procedures not provide enuf evidence to support a conclusion.

c. TC req'd by the applicable gov audit req.

Front 54

AUD-6-48

req for a writen rpt on IC for gov audit

Back 54

The assertion:
• evaluating compliance with laws, rules, and reg with a direct and material effect on the F/S is part of developing an opinion on F/S.
• specific controls r.t. fin rpt'ng considered.
• An indication either no weaknesses found or that significant deficiencies (reportable conditions) found, and an indication whether those deficiencies were material

Front 55

AUD-6-49

What are "Responsibilities under the Single Audit Act (OMB CIRCULAR A-133)"?

Back 55

1. Entities s.t. the Single Audit Act
have audit for an entity w/
expendiure w/ total fed
assistance >= $500k in a fiscal yr

2. Obj of the Single Audit
a. Audit of the entity's F/S & rpt'ng on a separate schedule of expenditures
b. Compliance audit of fed awards on compliance r.t. major prog.

3. Materiality Req
the materiality of the transaction or other compliance finding: consider'd separately in r.t. ea major prog
a. classification for major prog: expend >= $300k in fed fin assistance (materiality threshold) or classified as "high risk" (risk-based approach)

Front 56

AUD-6-50

Discuss how to "Obtain an Understanding of IC Pertaining to the Compliance
Req for Federal Prog" under OMB CIRCULAR A-133 audit?

Back 56

2. TC
must be p'rform'd to evaluate the effectiveness of the IC unless the control = ineffective


Note:
General
effective control: test
Inefective: rpt