Question

For the following situations indicate whether a rule of the AICPA Code of Conduct applies; if yes, state which rule, whether the rule has been violated, and why or why not.

(a)Walker, CPA, is purchasing a home and received a large mortgage, under normal lending procedures, with a bank that became an audit client after the mortgage was set up; the mortgage amount is material to him.

(b)Logan, CPA, accepted as an audit client a modeling agency that signs up and places models primarily using Internet interactions. Logan has never audited a modeling agency before.

(c)Letchworth and Miller, a local CPA firm, advertised that its audits will always save clients money because the increased efficiencies resulting from audit recommendations will be more than the audit fee.

(d)The firm of Masser & Masser disclosed confidential client information during the course of its inspection by the PCAOB.

(e)Jiggs, CPA, always sets audit fees that are contingent on the number of hours it takes to perform the audit.

(f)Srygley, CPA, pays an attorney, Bill Suttle, a “finder’s fee” if Suttle refers a company to him that becomes an audit client.

(g)Cutter and Gaspar, CPA, are having some cash shortages because they recently remodeled their offices. Consequently, they issued an unqualified financial statement audit opinion as a result of an integrated audit, even though they concluded that some of the accounting treatments were not GAAP. They were concerned that if they issued anything other than an unqualified opinion they would lose the client.

(h)A local CPA firm is named “Best Buy Audits.”

Answer 1

a. Rule 101 Interpretation 101A would be applicable in the given case. Such a transaction would cause an independence violation unless it is covered by exception under rule 101-5.

b. Rule 201A, Professional competence would be applicable in the given case. Logan, CPA can take on the engagement as long as the firm can reasonable expect to complete the assignment with professional competence.

c. Rule 502, Advertising and other forms of soliciting would be applicable in the given case. This would be a violation because it would be considered misleading and deceptive.

d. Rule 301, Confidential client information would be applicable in the given case. It is not a violation because the PCAOB is a recognized authoritative investigative body and providing the information to above said body falls within the applicable rules and regulations.

e. Rule 302, Contingent fees would be applicable in the given case. In the given case, setting the audit fees based on the number of hours taken to perform the audit is not a violation.

f. Rule 503, Commission and referral fees would be applicable in the given case. It is alright to pay a referral fees as long as you disclose it to the client.

g. Rule 203, Accounting principles would be applicable in the given case. It is a violation.

h. Rule 505, Form of organization and name would be applicable in the given case. It is a violation.