Exam 4: Ethics and Professional Judgment in Accounting

Correct Answer:

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Nonattest services can cloud objective judgment and make it more difficult to exercise professional skepticism. A major issue related to independence includes whether certain nonattest services should be provided to audit clients. Section 201 of SOX provides that the following nonattest services may not be performed for attest clients in addition to bookkeeping or other services related to the accounting records or financial statements of the audit client:
1. Financial information systems design and implementation
2. Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
3. Actuarial services
4. Internal audit outsourcing services
5. Management functions or human resources
6. Broker or dealer, investment adviser, or investment banking services
7. Legal services and expert services unrelated to the audit
8. Any other service that the board of directors determines, by regulation, is impermissible
SOX allows an accounting firm to "engage in any nonaudit service, including tax services," that is not listed above, only if the activity is preapproved by the audit committee of the issuer company. The preapproval requirement is waived if the aggregate amount of all such nonaudit services provided to the issuer constitutes less than 5 percent of the total amount of revenues paid by the issuer to its auditor.
As previously mentioned, concern exists in Congress and the SEC about a possible impairment of audit independence when the firm also provides nonaudit services for the client. An example of a prohibited activity under AICPA and SEC rules is that a CPA should not perform management functions or make management decisions for an attest client. The relationship creates a management participation threat that places the CPA in the compromising position of making decisions for the client and then auditing those decisions. On the other hand, the CPA may provide advice, research materials, and recommendations to assist the client's management in performing its functions and making decisions.
The Code establishes requirements that must be met during the period covered by the financial statements and the period of the attest engagement by the CPA in order to conduct nonattest services for the client without impairing audit independence. Under Code Section 1.295, individual nonatttest services may be permitted because adequate safeguards are provided by the Interpretation. However, when performing multiple services there may be unacceptable threats (i.e, management participation, self-review) to independence.
General requirements exist for the attest client when a CPA performs nonattest services, including:
Assume all management responsibilities.
Oversee the service, by designating an individual, preferably within senior management, who possesses suitable skill, knowledge, and/or experience.
Evaluate the adequacy and results of the services performed.
Accept responsibility for the results of the service.
Other requirements exist, including to clearly establish the objectives of the engagement, services to be performed, and client's acceptance of its responsibilities, member's responsibilities, and any limitations of the engagement.