Test Your Knowledge of Professional Ethics

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Periodically the JofA publishes questions on ethics topics that have been raised by AICPA members via the Institute's Ethics Hotline. This set of questions and staff answers deals with the application of the Code of Professional Conduct (AICPA Professional Standards).

1. A CPA firm has a partner who is "semi-retired." The respective partner is present at the office at times, but has no clients of his own although the partner occasionally consults with other partners concerning issues regarding their clients. The "semi-retired" partner is on the board of directors for a charitable organization but rarely shows up for its board meetings and, when he does, has little to no participation. Can the CPA firm perform a review engagement for the charitable organization?

2. The facts are the same as question one, but now the partner is fully retired and no longer a partner of the firm. Can the CPA firm perform a review engagement for the charitable organization?

3. A CPA performs an audit for a private company. The sole owner of the company is involved heavily in day-to-day operations and makes all financial decisions. May the CPA refer, for a commission, life insurance products to the sole owner of the audit client?

4. A sole practitioner has an audit client, and the controller of the client resigned in February 2009. Can the sole practitioner contract the services of that ex-controller to assist in the 2009 audit of that client?

5. An audit client wants to set up a hotline in which the client's employees could anonymously report potential fraud. Can the CPA who performs the audit manage the hotline, including taking calls and reporting the potential fraud to the appropriate level of management?

6. A CPA's engagement letter for the audit of a privately owned bank includes an indemnification clause limiting the liability of the CPA in the event that losses occur due to a knowing misrepresentation of management. Would this impair the CPA's independence?

7. A client engages a CPA to provide bookkeeping services and provides the CPA with a client-prepared general ledger. The CPA prepares certain schedules including a depreciation schedule and fixed assets ledger for the client. The engagement is temporarily delayed, and the CPA returns no records to the client, as the client has not paid the CPA for any of the bookkeeping services. Five months later, the client requests that the CPA return the general ledger, depreciation schedule and fixed assets ledger. May the CPA withhold all of these records until the CPA is paid for services performed?

8. A manager of a CPA firm creates a sole proprietorship to perform bookkeeping services for clients separate from his normal activities with the firm. The sole proprietorship is a separate legal entity from the CPA firm with no common ownership. The CPA firm has an audit client that this particular manager does not work on. May the manager provide bookkeeping services for this audit client through his sole proprietorship that would impair independence under Interpretation 101-3, Performance of Nonattest Services, of the Code of Professional Conduct?

9. A CPA firm performs bookkeeping services only for a client for the years 2007, 2008 and 2009, including services that would impair independence under Interpretation 101-3. In January 2010, the client approaches the firm about performing an audit for year-end 2009. May the firm perform the audit if an entirely different engagement team from those who performed bookkeeping services is assigned to the audit?

10. A CPA firm has a review client who wishes to rent an office within the same building as the firm's office. The CPA firm owns the building. Would this impair independence?

ANSWERS

1. No, the "semi-retired" partner is still a partner of the firm, so the firm may not perform a review or any other attest service for the charitable organization of which the partner is a member of the board of directors. …