Question

4-22 (OBJECTIVES 4-5,4-7) Each of the following situations involves a possible violation of the AICPA Code of Professional Conduct. For each situation, state the applicable rule of conduct and whether it is a violation.

a. Emrich, CPA, provides tax services, management advisory services, and bookkeeping services and also conducts audits for the same nonpublic client. Because the firm is small, the same person often provides all the services.

b. Steve Custer, CPA, set up a casualty and fire insurance agency to complement his auditing and tax services. He does not use his own name on anything pertaining to the insurance agency and has a highly competent manager, Jack Long, who runs it. Custer often requests Long to review the adequacy of a client's insurance with management if it seems underinsured. He believes that he provides a valuable service to clients by informing them when they are underinsured.

c. Seven small Seattle CPA firms have become involved in an information project by taking part in an interfirm working paper review program. Under the program, each firm designates two partners to review the audit files, including the tax returns and the financial statements, of another CPA firm taking part in the program. At the end of each review, the auditors who prepared the working papers and the reviewers have a conference to discuss the strengths and weaknesses of the audit. They do not obtain authorization from the audit client before the review takes place.

d. Franz Marteens is a CPA, but not a partner, with three years of professional experience with Roberts and Batchelor, CPAs. He owns 25 shares of stock in an audit client of the firm, but he does not take part in the audit of the client, and the amount of stock is not material in relation to his total wealth.

e. A nonaudit client requests assistance of M. Wilkenson, CPA, in the installation of a local area network. Wilkenson has no experience in this type of work and no knowledge of the client's computer system, so he obtains assistance from a computer consultant. The consultant is not in the practice of public accounting, but Wilkenson is confident of his professional skills. Because of the highly technical nature of the work, Wilkenson is not able to review the consultant's work.

f. In preparing the personal tax returns for a client, Sarah Milsaps, CPA, observed that the deductions for contributions and interest were unusually large. When she asked the client for backup information to support the deductions, she was told, "Ask me no questions, and I will tell you no lies."Milsaps completed the return on the basis of the information acquired from the client.

g. Roberta Hernandez, CPA, serves as controller of a U.S.-based company that has a significant portion of its operations in several South American countries. Certain government provisions in selected countries require the company to file financial statements based on international standards. Roberta oversees the issuance of the company's financial statements and asserts that the statements are based on international financial accounting standards; however, the standards she uses are not those issued by the International Accounting Standards Board.

h. Archer Ressner, CPA, stayed longer than he should have at the annual holiday party of Ressner and Associates, CPAs. On his way home he drove through a red light and was stopped by a police officer, who observed that he was intoxicated. In a jury trial, Ressner was found guilty of driving under the influence of alcohol. Because this was not his first offense, he was sentenced to 30 days in jail and his driver's license was revoked for one year.

Answer 1

Requirement a.

Rule 101 - Independence. No Violation. If the services executed obey to the requirements of Interpretation 101-3, independence of Emrich would not be considered to be reduced. There would be a defilement of SEC rules if the client were publicly held.

Requirement b.

Rules 101 and 102 - Independence, and Integrity and Objectivity. Violation. Ihas been Impaired by Steve Custer's agency's financial trade with his audit clients and involvement in a business, which prejudices his independence. It is also a clash of duties to endorse his own firm to appraise the sufficiency of the current insurance coverage of existing clients.

Requirement c.

Rule 301 - Confidential Client Information. Violation. The client should have been alerted that the appraisal was to take place, and an effort made to get the client's consent for such review since the review was not a part of an AICPA, state CPA society, or Board of Accountancy review program. The firms dishonoured Rule 301 by not procuring permission from the client for the analysis.

Requirement d.

Rule 101 - Independence. No Violation. Franz Marteens is not a partner nor is he allotted to the engagement team for the audit client.

Requirement e.

Rule 201 - General Standards. Violation. Interpretation 201-1 says that a member who consents a professional engagement infers that he or she has the required ability to complete the engagement according to professional standards. Wilkenson has dishonoured the rule since he does not have the know-how to analyse the work of the advisor employed by Wilkenson. Wilkenson should have recommended that the company hire the consultant directly.

Requirement f.

Rule 102 - Integrity and Objectivity. Violation. This rule says that in tax practice, a member may clear uncertainty in favor of his or her client as long as there is rational provision for his or her point. In the example case, the client has provided no backing for the unusual inferences. Sarah Milsaps has violated Rule 102 by not necessitating rational backing for the inferences.

Requirement g.

Rule 203 - Accounting Principles. Violation. This rule entitles that the International Accounting Standards Board (IASB) is the recognized body for allotting international financial accounting standards. Roberta Hernandez's claim that the financial statements are created on international financial accounting standards would be in defilement of Rule 203 because she did not use standards issued by the IASB.

Requirement h.

Rule 501 - Acts Discreditable. No violation. The rule is unclear and the clarification would be made by the state Board of Accountancy. In most states this will be a civil action and would not likely be a defilement.