Transcript Harry`s Chapter 3 Homework Solutions

Chapter 3 Homework
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Chapter 3 Homework
3-18- 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.
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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.
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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.
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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.
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Chapter 3 Homework
3-34d - (1)
Fully insured bank accounts
normally do NOT cause an
impairment to independence.
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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.
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Chapter 3 Homework
3-34f - (3)
All of the other answers relate to
exceptions for quality reviews or
investigations.
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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.
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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.
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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.
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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.
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Chapter 3 Homework
3-34k - (4)
There are no Statements on
Responsibilities for Assurance Services.
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Chapter 3 Homework
3-34l - (3)
The IIA’s Code of Ethics does NOT
include anything on specific audit
techniques, such as sampling.
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Chapter 3 Homework
3-35a
Provide internal audit outsourcing, as
well as perform the audit. (Public)
Not allowed by PCAOB rules
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Chapter 3 Homework
3-35b
Prepare the corporate tax return, as
well as perform the audit. (Public)
Allowed
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Chapter 3 Homework
3-35c
Prepare the corporate tax return, as
well as perform the audit. (Nonpublic)
Allowed
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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
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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)
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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)
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Chapter 3 Homework
3-35g
Implement an off-the-shelf accounting
package, as well as perform the audit.
(Nonpublic)
Allowed
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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)
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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)
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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
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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).
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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.
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Independence
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.
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.
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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
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and is a covered member.
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.
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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).
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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.
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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.
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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.
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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.
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