Question

Each of the following situations involves possible violations of
the AICPA Code of Professional Conduct. For each situation, state whether it is a violation of
the Code. In those cases in which it is a violation, explain the nature of the violation and
the rationale for the existing rule.
a. The audit firm of Miller and Yancy, CPAs, has joined an association of other CPA
firms across the country to enhance the types of professional services the firm can
provide. Miller and Yancy share resources with other firms in the association, including
audit methodologies, audit manuals, and common IT systems for billing and time
reporting. One of the partners in Miller and Yancy has a direct financial interest in
the audit client of another firm in the association.
b. Connor Bradley is the partner in charge of the audit of Southern Pinnacle Bank.
Bradley is in the process of purchasing a beach condo and has obtained mortgage
financing from Southern Pinnacle.
c. Jennifer Crowe’s audit client has a material investment in Polex, Inc. Crowe’s nondependent
parents also own shares in Polex, and Polex is not an attest client of Crowe’s firm.
The amount of her parent’s ownership in Polex is not significant to Crowe’s net worth.
d. Joe Stokely is a former partner in Bass and Sims, CPAs. Recently, he left the firm to
become the chief operating officer of Lacy Foods, Inc., which is an audit client of Bass
and Sims. In his new role, Stokely has no responsibilities for financial reporting. Bass
and Sims made significant changes to the audit plan for the upcoming audit.
e. Odonnel Incorporated has struggled financially and has been unable to pay the audit
fee to its auditor, Seale and Seale, CPAs, for the 2014 and 2015 audits. Seale and Seale
is currently planning the 2016 audit.

f. Jessica Alma has been serving as the senior auditor on the audit of Carolina BioHealth,
Inc. Because of her outstanding work, the head of internal audit at Carolina BioHealth
extended her an offer of employment to join the internal audit department as an audit
manager. When the discussions with Carolina BioHealth began, Jessica informed her
office’s managing partner and was removed from the audit engagement.
g. Morris and Williams, a regional CPA firm, is providing information systems consulting
to one of their publicly traded audit clients. They are assisting in the implementation
of a new financial reporting system selected by management.
h. Audrey Glover is a financial analyst in the financial reporting department of
Technologies International, a privately held corporation. Audrey was asked to prepare
several journal entries for Technologies International related to transactions that have
not yet occurred. The entries are reflected in financial statements that the company
recently provided to the bank in connection with a loan outstanding due to the bank.
i. Austin and Houston, CPAs, is performing consulting services to help management of
McAlister Global Services streamline its production operations. Austin and Houston
structured the fee for this engagement to be a fixed percentage of costs savings that
result once the new processes are implemented. Austin and Houston perform no
other services for McAlister Global

Answer 1

1. The audit firm of Miller and Yancy, CPAs, has joined an association of other CPA firms across the country to enhance the types of professional services the firm can provide. Miller and Yancy share resources with other firms in the association, including audit methodologies, audit manuals, and common IT systems for billing and time reporting. One of the partners in Miller and Yancy has a direct financial interest in the audit client of another firm in the association.

Violation rule 301. As per this rule, A member who is in practice should be independent of audit and shall not disclose any confidential information of client without consent of the client.

1. Connor Bradley is the partner in charge of the audit of Southern Pinnacle Bank.

Bradley is in the process of purchasing a beach condo and has obtained mortgage

financing from Southern Pinnacle

Ans:

Violation rule 101. if the mortgage is already one then there is no violation of independence. if it is not the existing finance then there is a violation of independence as per rule 101 because new loans between the member and client is not permitted.

A member should maintain intergrity and objectivity while performing an audit, he should not be the subordinate to the wishes of clients. He should be free from conflict of interest and should not misrepresent any facts knowingly.

1. Jennifer Crowe’s audit client has a material investment in Polex, Inc. Crowe’s non dependent    parents also own shares in Polex, and Polex is not an attest client of Crowe’s firm. The amount of her parent’s ownership in Polex is not significant to Crowe’s net worth.

          There is no violation and no restriction on holding shares in the client’s firm as long as he is not involved in attesting function as per AICPA code of conduct rules.

1.   Joe Stokely is a former partner in Bass and Sims, CPAs. Recently, he left the firm to become the chief operating officer of Lacy Foods, Inc., which is an audit client of Bass and Sims. In his new role, Stokely has no responsibilities for financial reporting. Bass and Sims made significant changes to the audit plan for the upcoming audit.

Joe is not part of any attesting function, now he is an employee of the audit client. so there is no violation as per code of conduct.

1. Odonnel Incorporated has struggled financially and has been unable to pay the audit fee to its   auditor, Seale and Seale, CPAs, for the 2014 and 2015 audits. Seale and Seale is currently planning the 2016 audit.

Ans:

Violation rule 101.

Non receipt of remuneration from audit client would be considered as a loan given to the audit client. in that case auditor shall not consider as independent. if the client were in bankruptcy then there would be no violation.

f . Jessica Alma has been serving as the senior auditor on the audit of Carolina BioHealth, Inc. Because of her outstanding work, the head of internal audit at Carolina BioHealth extended her an offer of employment to join the internal audit department as an audit manager. When the discussions with Carolina BioHealth began, Jessica informed her office’s managing partner and was removed from the audit engagement.

Ans: An offer is received by jesicca from client so the CPA firm is not independent of the client, it is a violation as per rule 101.

        g.

Morris and Williams, a regional CPA firm, is providing information systems consulting to one of their publicly traded audit clients. They are assisting in the implementation of a new financial reporting system selected by management.

Ans:

Providing information system and implemented system to the publicly traded audit client is prohibited and it is violation as per rule 102

A member should maintain intergrity and objectivity while performing an audit, he should not be the subordinate to the wishes of clients. He should be free from conflict of interest and should not misrepresent any facts knowingly.

h.    Audrey Glover is a financial analyst in the financial reporting department of Technologies International, a privately held corporation. Audrey was asked to prepare several journal entries for Technologies International related to transactions that have not yet occurred. The entries are reflected in financial statements that the company recently provided to the bank in connection with a loan outstanding due to the bank.

            Ans: A member cannot record the transactions for those events that have not occurred yet. there is a violation as per rule 203.

i. Austin and Houston, CPAs, is performing consulting services to help management of McAlister Global Services streamline its production operations. Austin and Houston structured the fee for this engagement to be a fixed percentage of costs savings that result once the new processes are implemented. Austin and Houston perform no other services for McAlister Globa

Consulting engagements provided by cpa to client doesnot amout to violation as long as the client does not provide any other services to the client such as examination or review or audit of prospective financial information.