AICPA Ethics Exam Verified With Complete Solutions

Ethical decision-making model Step 1 Recognize the ethical issue Step 2 Gather critical facts Step 3 Identify Stakeholders Step 4 Consider Alternatives Step 5 Consider the effect of Stakeholders Step 6 Consider your comfort level Step 7 Consider rules, regulations, and laws Step 8 Make a decision Step 9 Document efforts Step 10 Evaluate the outcome The accounting profession 1. In Public Practice-public accounting practice 2. In Business-not for profit or private firm Professional and regulatory bodies 1. American Institute of Certified Public Accountants (AICPA)-In fulfilling its mission, the AICPA works with state CPA societies and state accountancy boards, giving priority to those areas where public reliance on CPA skills is most significant. -The AICPA Professional Ethics Executive Committee (PEEC) promulgates and enforces ethics and independence rules that apply to all members. 2. U.S. Securities and Exchange Commission (SEC)-Its mission is to improve the professional performance of public company auditors to ensure that financial statements are presented fairly and have credibility. 3. Public Company Accounting Oversight Board (PCAOB)-The Sarbanes-Oxley Act of 2002 created and authorized the PCAOB to establish auditing and related attestation, quality control, ethics, and independence standards for public company auditors. The SEC oversees the PCAOB's activities. 4. U.S. Government Accountability Office (GAO)-The GAO issues ethics and independence rules that apply to engagements performed under generally accepted government auditing standards (GAGAS). These governmental standards are published as Government Auditing Standards, commonly referred to as the “Yellow Book.” 5. U.S. Department of Labor (DOL)-Auditors of employee benefit plans that file reports with the DOL should be aware of the DOL interpretive bulletin on independence. 6. U.S. Department of the Treasury/Internal Revenue Service (IRS)-The Internal Revenue Code (IRC) authorizes the Secretary of the Treasury to set rules and regulations necessary to enforce the U.S. tax laws. Treasury Department Circular No. 230 governs federal tax practice before the IRS by CPAs, enrolled agents, attorneys, and actuaries and the IRS Office of Professional Responsibility (OPR) that enforces these regulations. 7. State boards of accountancy-State boards of accountancy are charged with issuing CPA licenses and overseeing the ethical conduct of CPAs in 55 jurisdictions in the United States. It is critically important for CPAs to know their state board's requirements. If you are licensed by more than one state board or practice in other states under their mobility laws, you should familiarize yourself with each state's requirements. 8. International Federation of Accountants (IFAC)-The IFAC supports four independence standard-setting bodies that develop standards for auditing, education, ethics, and public sector financial reporting in the accounting profession globally. IFAC also promotes good ethical practices by encouraging professional accounting organizations throughout the world to adopt high ethical standards and helps foster meaningful debate on ethical issues that accountants face. The IFAC's International Ethics Standards Board for Accountants (IESBA) develops ethical standards and guidance for use by professional accountants. The IESBA ethical standards appear in the International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA code), which serves as a global benchmark for codes of ethics. Member bodies, such as the AICPA in the United States, agree to maintain ethics and other professional standards that meet this global benchmark. As a result, the IESBA code has influenced and will continue to influence the AICPA code. 9. Others-In addition, banking, and insurance regulators, such as the U.S. Federal Deposit Insurance Corporation (FDIC) and state insurance regulators, incorporate the AICPA, SEC, and PCAOB rules into their regulatory requirements. Finally, state CPA societies also have ethics codes (often, they adopt the AICPA code) that state society members agree to abide by.In some cases, you may be subject to rules of different bodies. For example, auditors of public companies need to comply with the independence rules of the AICPA, the SEC, and the PCAOB. If more than one rule applies to a situation, you should apply the most restrictive requirement. Although we will address many of these rules, this course focuses primarily on a CPA's obligations under the AICPA code. Code of Conduct When something is “ethical,” it is in accordance with the accepted principles of right and wrong governing the conduct of a person or the members of a profession.1 -In general, a code of professional conduct describes the basic tenets of ethical conduct in a profession, whether accounting, medicine, or engineering. Professions that serve the public interest adopt a code of conduct to help maintain public confidence in the profession. The AICPA Code of Professional Conduct (the code) 1. Membership in the AICPA is voluntary. By accepting membership, a member assumes an obligation of self-discipline above and beyond the requirements of laws and regulations. 2. The principles of the Code of Professional Conduct of the AICPA express the profession's recognition of its responsibilities to the public, to clients, and to colleagues. They guide members in the performance of their professional responsibilities and express the basic tenets of ethical and professional conduct. The principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage. 3. The first two principles in the code, “Responsibilities" and “The Public Interest,” say, in part, that “[m]embers of the AICPA have responsibilities to all those who use their professional services.” The code also notes that “a distinguishing mark of a profession is acceptance of its responsibility to the public.” The public interest is defined as “the collective well-being of the community of people and institutions the profession serves.” 4. These principles also indicate, in part, that “members should exercise sensitive professional and moral judgments in all their activities.” Members should also act in a manner that serves the public interest and honors the public trust that is bestowed upon them as a member of the accounting profession. Structure of the code 1. Preface-Applies to all members of the AICPA. The preface includes an overview of the code, describes the principles, structure and application of the code, sets forth the definitions, and provides information about changes to the code and nonauthoritative guidance. 2. Part 1-Applies to members in public practice. These members work in audit, tax, and consulting firms that provide professional services to clients. 3. Part 2- Applies to members in business. These members work in organizations in executive, staff, governance, advisory, or administrative capacities. 4. Part 3-The code is available online at Members of the AICPA agree to comply with the code as a condition of membership, but the code applies to many non-AICPA members, too. Most state accountancy boards adopt the code or parts of the code under their laws or regulations, making the AICPA rules applicable to the CPAs who practice public accounting in those states and territories. Principles of Professional Conduct The Principles of Professional Conduct (ET sec. 0.300) 1. Responsibilities-In carrying out your professional responsibilities, you should exercise sensitive professional and moral judgment. 2. Public Interest-You should act in a way that will serve the public interest, honor the public trust, and demonstrate your commitment to professionalism. 3. Integrity-To maintain and broaden public confidence, you should perform all professional responsibilities with the highest sense of integrity. 4. Objectivity and Independence-You should maintain objectivity and be free of conflicts of interest in discharging your professional duties. If you work for a public accounting firm that provides audit and other attestation services, you should be independent in fact and appearance. 5. Due Care- You should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of your ability. When performing audits or other attest services, due care requires CPAs to exercise professional skepticism. 6. Scope and Nature of Services-As a member in public practice, you should observe the principles of the Code of Professional Conduct in determining the scope and nature of services to be performed. Rules of conduct 1. Part 1: Members in public practice: 1.100 — Integrity and Objectivity 1.200 — Independence 1.300 — General Standards 1.310 — Compliance with Standards 1.320 — Accounting Principles 1.400 — Acts Discreditable 1.500 — Fees and Other Types of Remuneration 1.600 — Advertising and Other Forms of Solicitation 1.700 — Confidential Information 1.800 — Form of Organization and Name 2. Part 2: Members in business: 2.100 — Integrity and Objectivity 2.300 — General Standards 2.310 — Compliance With Standards 2.320 — Accounting Principles2.400 — Acts Discreditable 3. Part 3: Other members (neither in public practice nor business) panel text: 3.400 — Acts Discreditable “Interpretations and Other Guidance” (ET sec. 0.100.020) Interpretations of the rules of conduct are adopted after exposure to the membership, state societies, state boards, and other interested parties. The interpretations of the rules of conduct, “Definitions” (0.400), “Application of the AICPA Code” (0.200.020), and “Citations” (0.200.030), provide guidelines about the scope and application of the rules but are not intended to limit such scope or application. A member who departs from the interpretations shall have the burden of justifying such departure in any disciplinary hearing. Conceptual framework You will find the following three conceptual frameworks in the code: 1. Conceptual Framework for Members in Public Practice, which applies to all rules in Part 1 of the code (except independence). 2. Conceptual Framework for Independence, which applies to the independence rule, which is addressed in Part 1 of the code. 3. Conceptual Framework for Members in Business, which applies to all rules in Part 2 of the code. The conceptual framework includes the following key terms: 1. Threats. Relationships or circumstances that could compromise a member's compliance with the rules. These include adverse interest, advocacy, familiarity, management participation, self-interest, self-review, and undue influence. See the appendix “Conceptual Framework for Members in Public Practice” for detailed definitions of each threat. 2. Acceptable level. A level at which a reasonable and informed third party who is aware of the relevant information would be expected to conclude that a member's compliance with the rules is not compromised. 3. Safeguard. May partially or completely eliminate a threat or diminish the influence of a threat. To be effective, safeguards should eliminate the threat or reduce it to an acceptable level. See the appendix “Conceptual Framework for Members in Public Practice” for a full description and list of safeguards. You should use the following process when applying the framework 1. Identify threat(s) to compliance with one or more rules. 2. Evaluate whether the threat (or threats in the aggregate, if applicable) is significant. -If threat is not significant — Stop, no further consideration is needed. -If threat is significant — Proceed to next step. 3. Identify and apply safeguards.​ -If safeguard(s) would eliminate the threat or reduce the threat to an acceptable level, proceed with professional services and or engagement. -If safeguard(s) is not available or is insufficient (that is, it does not reduce threat(s) to an acceptable level), decline or discontinue professional service or resign from the engagement. Integrity and Objectivity “Integrity and Objectivity Rule” (ET sec. 1.100.001) “Integrity and Objectivity Rule” interpretation Applicable to members in business, the “Knowing Misrepresentations in the Preparation and Presentation of Information” interpretation (ET sec. 2.130.010) states (in part) the following: .05 Threats to compliance with the “Integrity and Objectivity Rule” [2.100.001] would not be at an acceptable level and could not be reduced to an acceptable level by the application of safeguards, and the member would be considered to have knowingly misrepresented facts in violation of the “Integrity and Objectivity Rule,” if the member 1. makes, or permits or directs another to make, materially false and misleading entries in an entity's financial statements or records; 2. fails to correct an entity's financial statements or records that are materially false and misleading when the member has the authority to record the entries; or 3. signs, or permits or directs another to sign, a document containing materially false and misleading information. [Prior reference: paragraph .02 of ET section 102]. .06 Preparing or presenting information may require the exercise of discretion in making professional judgments. Preparing or presenting such information in compliance with the “Integrity and Objectivity Rule” [2.100.001] requires the member not to exercise such discretion with the intention of misleading. First, Sara should think about the following: 1. Comfort level. How comfortable would she be making a particular decision? If her decision became public knowledge, would she have any reservations about it? 2. Rules, regulations, and laws. Is the course of action she decides on consistent with the profession's codes of conduct and its regulatory and legal requirements? 3. Next steps. Having thought about these factors, it's time for Sara to decide. Remember that when dealing with complex ethical matters, there could be more than one reasonable and honorable solution. Let's see how Sara responds after she has mulled over the preceding considerations. -Comfort level: Don suggests providing Gerald, the donor, with financial statements that Sara has manipulated to make Helping Hands appear healthy. It would only be temporary, Don says. However, in removing the C.A. Transport liability from the charity's financial statements, Sara would be sharing a document she knows to be false. To give Gerald misleading financial information is to act in in bad faith. For these reasons, Sara would not feel comfortable doing as Don suggests. -Rules, regulations, and laws: Were Sara to doctor the financial statements, she would be in violation of AICPA's requirement that members maintain their integrity when performing professional services; this is because Sara would know that the statements were based on false information.(Note: The fact that Don is holding out hope that his friend Charles, the president of C.A. Transport, will waive the liability is irrelevant; it may be removed from the books only if and when Charles agrees to permanently waive the liability.) -Next steps: Sara decides that she must not misstate the financial statements as Don suggests. Under no circumstances should she subordinate her judgment to Don's and create false and misleading entries in the financial statements. To do so would represent a breach of her professional ethics; it also might subject her to disciplinary action by the AICPA and her state accountancy board and CPA society. This could threaten her ability to practice as a CPA.