Module 1: AICPA Code of Professional Conduct: y y Applicable to all AICPA members, not just those in public sector/practice Compliance

depends on understanding and voluntary actions primarily & secondary on reinforcement by peers, public opinion and disciplinary proceeds Disciplinary proceedings: a) Joint trial board panel admonishment b) Suspension (up to 2 years) c) Expulsion from AICPA Principles: Responsibilities Public Interest Integrity Objectivity & Independence a. Public practice: independence in fact and in appearance b. Nonpublic practice: unable to maintain appearance but must maintain objectivity 5. Due Care 6. Scope & Nature of Services (internal quality control, assess whether activities are consistent with role as professional) Rules, Interpretations, and Rulings ET Section 100.01: Conceptual Framework for AICPA Independence Standards y y Risk based approach to analyzing independence Member not independent if there is unacceptable risk to their independence o Self-Review Threat- reviewing evidence that results from the member s own work (ex: preparing source documents for an audit client) (#4) o Advocacy Threat- actions promoting the client s interests or position (ex: promoting a client s securities) o Adverse Interests Threat- actions or interests between the member and the client that are in opposition (ex: litigation b/w client and the member) o Familiarity Threat- members having a close or longstanding relationship with client or knowing individuals or entities who performed non-attest service for client (ex: member of the attest engagement team whose spouse is in a key position at the client). o Undue Influence Threat- attempts by a client s management to coerce the member of exercise excessive influence over the member (ex: threat to replace member over a disagreement regarding an accounting principle). 1. 2. 3. 4.

Financial Self-Interest Threat potential benefit to a member from a financial interest in, or some financial relationship with, an attest client (ex: having a direct financial interest in the client). o Management Participation Threat- Assuming the role of management or performing management functions for the attest client (Ex: serving as an officer of the client). Offset threats w safeguards o Required continuing education o Effective governance structure o Active audit committee o

Rule 101 Independence: member in public practice shall be independent in the performance of professional services as required by standards promulgated by designated bodies (Ex: department of labor, etc.) Interpretation 101-1: Independence is impaired if: 1. During period of professional engagement a covered member a. Had or was committed to acquire any direct or material indirect financial interest in the client b. Trustee of any trust/executor/administrator of any estate c. Had joint closely held investment that was material to covered member d. Had any loan to or from client, officer, director, individual owning more than 10% of client s outstanding equity securities 2. Partner or professional employee of firm/member of immediate family or any group of such people owned more than 5% of outstanding equity 3. Simultaneously associated w/ client as: a. Director, officer, employee, member of management b. Promoter, underwrite or voting trustee c. Trustee for any pension or profit sharing trust of client 4. Client owes you money for more than 1 year Exceptions to Independence: independence is not impaired solely as a result of: y y y y Covered member s immediate family (spouse, dependent children) was employed by client in position other than key position. In connection w/ employment, immediate family member participated in retirement, savings, compensation sponsored by client or invests in a client Partner or manager providing 10+ hrs. of non-attest services OR Partner in office in which lead attest engagement partner primarily practices in connection with attest engagement.

Close Relatives: (siblings, non-dependent children, parents) Impaired if: a. Close relative has key position w. client (#5) OR b. Has financial interest in client that the individuals knows or has reason to believe was material to close relative or enabled close relative to exercise significant influence over client. c. Partner in office in which lead attest engagement partner primarily practices in connection with attest engagement has a close relative that has (a or b above). Covered Member: y y Individual on attest engagement team or in position to influence team Partner/mgr. providing non-attest services to attest client beginning once 10+ hrs. provide within fiscal year and ending on later of a. Firm sings report on fin. Statement for fiscal year during which services provided b. They no longer expect to provide 10+ hrs. of non-attest service to attest client on recurring basis Partner in office where lead attest engagement partner primarily practices Firm, including their employee benefit program

y y

Interpretation 101-3: When a CPA performs non-attest services for an attest client, it may or may not impair independence y y CPA must have non-attest services summarized in engagement letter CPA must be satisfied that client can take responsibility over service (so they are not practicing a management function)

Client Must: y y y y y Make management decision Designate competent employee (preferably senior mgmt.) to oversee services Evaluate adequacy & results Accept responsibility for results Establish &maintain internal controls

General Activities that Impair Independence: y y y y Authorizing, executing or consummating transactions Preparing source documents Having custody of assets Supervising employees

y y

Reporting to Board on behalf of management Serving as stock transfer agent, registrar, or general counsel

Interpretation 101-4: CPA who is director of non-profit organization where Board is large & representative of community leadership is not lacking independence if: a. Position purely honorary, or identified as such on external materials b. CPA participation restricted to use of name c. CPA doesn t participate in management affair , doesn t vote Rule 102: Integrity & Objectivity CPA s can t: y y Knowingly make or permit false & misleading entries in an entity s financial statements or records Have a significant relationship with another person, entity, product or service that could be viewed as impairing the member s objectivity

PCAOB: Has adopted all AICPA standards and have additional independence standards Registered public accounting firm is not independent if: y Provide service/product to client for a contingent fee or commission or received from client a contingent fee or commission ok to represent client for fee in an examination of federal tax return by IRS (#7) Provides any non-audit service to the audit client for marketing, planning or opining in favor of: a. A confidential transaction (tax transaction that is offered to client under conditions of confidentiality for which the client pas the firm a fee b. Or aggressive tax position transaction initially recommended by the accounting firm Provides tax work for high level management (fin. Reporting oversight role) or their family

AICPA General Standards: members must comply with following standards for all professional engagements Accounting Principles: members can t provide positive or negative assurance that financial statements are in conformity with GAAP (FASB, GASB, FASAB-federal accounting standards advisory board) if stalemates contain departures from GAAP having material effect on stmts taken as a whole except when unusual circumstances would make statements follow GAAP misleading. a. When unusual circumstances require departure from GAAP, CPA must disclose in report the departure its effects and reason why compliance would result in misleading statement.

Firm may not designate itself as member of AICPA unless all partners or shareholders individually are members y y Non-CPA ownership of a CPA firm is allowable if: 66% (super majority of ownership (both voting rights and financial interest) must belong to CPAs. Non-CPA owners must be involved in own principal occupation, not practice accounting and not hold selves out as CPAs CPAs must have ultimate responsibility in firm Non-CPA members must abide by AICPA code of Conduct, CPE requirements and hold BA degree NON CPA members not eligible to be members of AICPA

y y y

SOX y Set up PCAOB (5 members (2 are CPAs or have been CPAs, 3 are NOT CPAs, none can receive pay or profits from CPA firms) n an audit of internal control in addition to the audit of financial statements for issuers o Register and conduct inspections of public accounting firms o Set or adopt standards on auditing, quality control, independence or preparation of audit reports o Enforces compliance w professional standards, securities laws relating to accountants and audits o May regulate no audit services CPA firms perform for clients o Performs investigations and disciplinary findings on registered public accounting firms o Accounting firms must have second partner review and approve each audit report o Must report on internal control in addition to audit of financial statements o Workpapers must be saved for 7 years

Auditor Independence under PCAOB: Can t provide services such as:  Bookkeeping or other services relating to financial statements or accounting records  Financial information systems design or implementation  Appraisal serviced  Internal audit outsourcing services  Management functions  Actuarial services  Investment or broker-dealer services  Certain tax services, such as tax planning for potentially abusive tax shelters  Audit partner for the job and the audit partner who reviews the audit can do the audit service for only 5 consecutive years

Audit Committee must approve permissible no audit services. PCAOB rules state the firm must: y y y Describe those services in writing to the audit committee Discus any possible effects on independence with the audit committee Document the substance of the discussion

International Standards Ethics set by IESBA (international ethics standards board for accountants) and has 3 parts: 1. Framework applies to all professional accountants 2. Applies to professional accountants in public practice 3. Applies to professional accountants in business International Standards Auditing/Assurance: developed by IASB (international auditing and assurance standards board) of the IFAC (international federation of accountants) Differences b/w US and International: y y y y International do not require an audit of internal control, while PCAOB standards do International do not allow reference to another audit firm involved in portion of the audit while PCAOB standards do International standards for documentation are less detailed than PACAO standards, leaving more to professional judgment International standards in the area of going concern include time horizon of at least, but not limited to, 12 months while PCAOB standards limit the foreseeable future for a going concern consideration of up to 12 months.

Other Differences:

Topic
Confirmation of A/R

International
Not required Intentional act by one or more individuals among management, those charged w governance, employees, or 3rd parties, involving the use of deception to obtain an unjust illegal advantage. Auditors should obtain written representation from management that it has disclosed to the auditor the results of its assessment of the risk of fraud.

US Standards
required unless immaterial

Fraud Definition

Intentional act that results in material misstatement in financial statements that are the subject of an audit. Both aim at obtaining reasonable assurance that fin statements are free of material misstatements.

Fraud

Not required. However, various representation on fraud are obtained (mgmgts knowledge of fraud, allegations, mgmnt's knowledge of their responsibility etc. )

Illegal Acts Sending letter of audit inquiry to lawyers reviewing predecessor auditor's work papers for evidence on beginning balances terms of audit engagement change, and auditor is unable to agree on new terms audit report modification for consistency related to changes in accounting principles inclusion of emphasis of a matter paragraph in an audit report providing location the auditor practices in an audit report

Auditor s concern is with whether laws and regulations may material affect the financial statements. NO explicit distinction is made /bw direct and indirect illegal acts Only required when auditor "assesses a risk of material misstatement"

Audit obtains reasonable assurance of detection of illegal acts that have direct material effect on financial statement amounts; if evidence about illegal acts with an indirect effect comes to the auditor's attention it is considered.

presumptively required

Standard states that this may provide sufficient appropriate audit evidence on opening balances.

this statement is not included in standards

Auditor should withdraw and consider whether there is an obligation to contact other parties.

there is no explicit obligation to consider contacting other parties

not required

Audit reports are modified for changes with a material effect on the financial statements.

preferably after the opinion paragraph

no such statement (may be before or after opinion paragraph)

dating the audit report for a subsequent event

required when mgmt amends financial statement for a subsequent event the auditor should perform necessary procedures and change the date of the audit report to no earlier than the date the financial statements were accepted as amended

not required

auditors may "dual date" report

GAO independence requirements: some are more restrictive in some areas than those of the AICPA: y y CPA firm can t allow personnel working on nonattest engagements to also work on the audit GAS places restrictions on the nature of nonattest services to be performed for an audit client nonattest services must be deemed not significant or material to the subject matter of the audit

Department of Labor: involves fostering and promoting welfare of job seekers, wage earners, and retirees of the US. Conduct financial and performance audits following GAS. o Employee benefit plans must be audited in accordance with the ERISA (employee retirement security act of 1974). Independence requirements are generally similar to AICPA, except that accountant or firm may be engaged on a professional basis by the plan sponsor and the accountant may serve as an actuary