Question

Each of the following situations involves a violation of the AICPA Code of Professional Conduct. For each, state what rule is violated and why.

1. Timothy Bradley, CPA is the partner in charge of the audit of Tisson Company. The CEO and Timothy Bradley are on the same team in a small bowling league that compete locally on Thursday nights. What possible rule does this violate and why?

2. McNamara Corp. has been struggling financially and has had a loss on their income statement for the past three years. In addition, McNamara has not paid their audit fees for 2018 or 2019. The current CPAs are still scheduled to complete the 2020 audit. What possible rule does this violate and why?

3. Joseph Carpenter, CPA decides to leave the CPA firm he is working for to open his own practice. He decides to name his new firm Dudley's Best tax Services. What possible rule does this violate and why?

4. Booth, CPAs has been auditing a client that makes and sells cleaning supplies called Sparkle Clean. Booth CPAs decides to refer several clients to Sparkle Clean and charges them a 15% referral fee. What possible rule does this violate and why?

5. A non-public audit client requests assistance of Watcher CPAs, in the instillation of a new accounting information system. The CPA firm has no employees with an IT specialization or experience with this type of accounting work. The job is considered technical and Watchman, CPAs takes on the engagement. What possible rule does this violate and why?

6. Several small city CPA firms have become involved in a project where they take part in an inter-firm, work-paper review (not affiliated with the AICPA peer review process). Under that program, each firm designates two partners to review the audit files, and the financail 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. The group and CPA firms did not obtain authorization from the audit clients before the review takes place. What possible rule does this violate and why?

7. Matthew Johnson, CPA, purposely falsifies his tax return in order to get a larger refund. What possible rule does this violate and why?

Answer 1

1.Timothy Bradley, CPA is the partner in charge of the audit of Tisson Company. The CEO and Timothy Bradley are on the same team in a small bowling league that compete locally on Thursday nights. What possible rule does this violate and why?

Since this situation affects a firm in public practice, Timothy needs to start his search in

Part 1 of the Code. Timothy must also consider which of the principles may be violated if he takes the action of investing in this company. Therefore, Timothy believes that the

Independence principle will be violated, which falls within 1.200 in the code. Scanning through

the independence principle, Timothy sees a section discussing Financial Interests in section

1.240. This section states that “if a covered member had or was committed to acquire any direct financial interest in an attest client during the period of the professional engagement, the self-interest threat to the covered member’s compliance with the independence rule”, would not be at an acceptable level and could not be reduced to an acceptable level by the application of Safeguards. Accordingly, independence would be impaired”. Considering this may impact his

Independence.

2. McNamara Corp. has been struggling financially and has had a loss on their income statement for the past three years. In addition, McNamara has not paid their audit fees for 2018 or 2019. The current CPAs are still scheduled to complete the 2020 audit. What possible rule does this violate and why?

CPA, is member of public practice, he would refer to Part 1 of the Code of Professional Conduct. This example has to do with fees and other types of remuneration, therefore, the section 1.500 should be referred. As a subsection, the member would refer to section 1.510.001 "Contingent Fees Rule".

3. Joseph Carpenter, CPA decides to leave the CPA firm he is working for to open his own practice. He decides to name his new firm Dudley's Best tax Services. What possible rule does this violate and why?

Since this situation affects a firm in public practice, Joseph needs to start his search in Part 1 of the Code. Joseph must also consider which of the principles may be violated if he takes the action for open his own practice. Therefore, Joseph believes that the independence principle will be violated, which falls within 1.200 in the code. Scanning through the independence principle, Joseph sees a section discussing Financial Interests in section 1.240. This section states that “if a covered member had or was committed to acquire any direct financial interest in an attest client during the period of the professional engagement, the selfinterest threat to the covered member’s compliance with the independence rule”.

4. Booth, CPAs has been auditing a client that makes and sells cleaning supplies called Sparkle Clean. Booth CPAs decides to refer several clients to Sparkle Clean and charges them a 15% referral fee. What possible rule does this violate and why?

Since this situation affects a firm in public practice, Booth needs to start his search in Part 1 of the Code. From this point, searching through the codification, it is not immediately clear where rules may be present for marketing the firm. Therefore, Booth enters the term “marketing” in the search field of the codification. Once entered, Booth sees that there are three references to marketing relating to members in public practice: Acts Discreditable, Advertising and Other Forms of Solicitation, and Confidential Information. Booth proceeds to read into these three references. Under Acts Discreditable (1.400.090), states that “A member would be in violation of

the “Acts Discreditable Rule” if the member promotes or markets the member’s abilities to provide professional services or makes claims about the member’s experience or qualifications in a manner that is false, misleading, or deceptive”. False, misleading or deceptive refers to the claim or representation would most like cause potential clients to be misled or deceived. As a result of this finding, Booth decides to discuss with his partner that his plans for marketing the firm in a false manner is a violation of the AICPA Code of Professional Conduct and the act should not be taken.

5. A non-public audit client requests assistance of Watcher CPAs, in the instillation of a new accounting information system. The CPA firm has no employees with an IT specialization or experience with this type of accounting work. The job is considered technical and Watchman, CPAs takes on the engagement. What possible rule does this violate and why?

This is a Code of Professional Conduct should be at the forefront of determining the scope and nature of services. If there is a probability that any of the aforementioned principles will be violated in providing professional services to the client, then it is assumed that violations of the code will exist.

6. Several small city CPA firms have become involved in a project where they take part in an inter-firm, work-paper review (not affiliated with the AICPA peer review process). Under that program, each firm designates two partners to review the audit files, 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. The group and CPA firms did not obtain authorization from the audit clients before the review takes place. What possible rule does this violate and why?

This is a Code of Professional Conduct should be at the forefront of determining the scope and nature of services. If there is a probability that any of the aforementioned principles will be violated in providing professional services to the client, then it is assumed that violations of the code will exist.

7. Matthew Johnson, CPA, purposely falsifies his tax return in order to get a larger refund. What possible rule does this violate and why?

Matthew believes that the independence principle will be violated, which falls within 1.200 in the code. Scanning through the independence principle, Matthew sees a section discussing Financial Interests in section 1.240. This section states that “if a covered member had or was committed to acquire any direct financial interest in an attest client during the period of the professional engagement, the self-interest threat to the covered member’s compliance with the independence rule”, would not be at an acceptable level and could not be reduced to an acceptable level by the application of safeguards.