 Hello and welcome to the session. This is Professor Farhad in which we would look at CPA exam questions that deal specifically with ethics On the auditing section of the CPA exam This topic is also covered in an auditing course as always I would like to remind you to connect with me on LinkedIn if you haven't done so YouTube is where you would need to subscribe. I have 1700 plus accounting auditing tax finance as well as Excel tutorial if you like my lectures, please like them Share them subscribe to my YouTube if they benefit you It means they might benefit other people share the wealth connect with me on Instagram on my website farhadlectures.com You have additional courses and supplemental material to pass your CPA exam For example today, we're looking at ethics if you want to learn more about ethics check out my auditing course Where I talk about this topic in details. Also, I have supplementary material To help you add 10 to 15 points to your CPA exam So you can put it behind you and pass the exam So let's take a look at the first question according to the rule one-on-one of the AI CPA code of professional conduct Independence will be impaired if a firm does which of the following Independence is very important for auditors. So you want to make sure, you know the rules When does when is your end? When is your independence is impaired? It means you lost your independence. It's mean you lost your credibility as far as the audit is concerned. So under what circumstances? your independence is concerned is compromised Or impaired one report to the board on behalf of management. Well, here's what you need to know about independence Well, guess what? You cannot be appearing or you cannot perform any operational or Financial decision on behalf of management. Here's what's happening here. You report to the board of directors on behalf of management That's on behalf of management. You're doing the management work. That's it. That's an operational thing So one will definitely impair your independence. So we keep a we keep C. We keep D We can take out B because B does not have one to Makes operational but not financial decision. No, no, no, it's both operational and Financial you cannot make so to would also impair your independence if two will impair your independence then One is out Because it doesn't include two so what we are left with is We just have to find out if three it does impair or it does not impair your independence So the answer is C or D performs non attest services for an audit client. Can you perform? non attest Services, what's a non attest services? Let's assume it's tax. Can you perform tax services? Well under certain circumstances you can you might have to get the pre approval of the from the audit committee But you can do Non attest services without compromising your independence. Therefore three does not Does not necessarily impair your independence. Therefore the answer will be One in two the answer will be D because three is does doesn't impair your independence. Okay, and Remember you have to be very careful for three the non attest function cannot involve any operational or financial Decision and what happened under those non attest services? Usually the board of directors or the audit committee usually the audit committee will have to approve it would have to approve it But it's not prohibited under certain circumstances. It is allowed The first three principles of the AI CPA code of professional conduct are responsibility Public interest and what's the third one? It's basically this is a Memory a memory memory memory issue. Is it independence? Is it objectivity? Is it integrity? Where does it do care? They're all part of the of the code of conduct, but which one? The first three and the first three are responsibility public interest And integrity basically you have to maintain the public confidence you have to perform your responsibilities as Professional person as an auditor with the highest sense of integrity notice integrity integrity means doing the right thing Doing what's right? Okay, independence and objectivity. They're also part of the code of conduct But that's part four and do care as part five. So they're all part of the Of the AI CPA code of conduct, which is something you have to be familiar with and this is what I talk about in my On my website farhatlectures.com. I explain this topic to help you understand Plus your CPA course will help you do that as well But it's something that you need to be familiar with before you set for the exam According to the AI CPA and the PCA OB standard Which of the following loans in the amount of 20,000 from a financial institution audit client to a CPA would and would impair Independence again independence is something very important. So that's why I have you know, couple questions about this a Cash advance of 20,000 Collateralized by money market deposit in the same financial institution of 27,000 so simply put they gave you $20,000, but you already have at that bank account The cash deposit of 27,000 that is so the loan is collateral eyes. Can you do that and the answer is yes It doesn't impair your independence because you have the collateral against that money. So a is out once a is out D is out because the all of the above. So now you're down to 50 50 B auto loan of 20,000 from a financial institution or the client made under normal lending policies Can you do that if you're auditing a comp if you're auditing the financial institution? Could you still get an auto loan under normal lending policies? Yes Not a problem as long as they are not treating you differently Usually the auto loan the loan usually the car usually is a collateral too. So that's not a big deal That's also out. So by process of elimination C is the answer But let's take a look at C cash advance same thing as a from a financial institution of 20,000 to be repaid within 10 10 days and here the amount is a problem cash advance of 20,000 will would impair your independence 10,000 you would have been fine. You would have been fine. So it has to be lower than 10,000. Okay, so you just have to memorize this that it has to be lower than 10,000 Therefore C will and will impair your independence as an auditor Let's take a look at this question, which of the following bodies ordinarily would not have Would not have the authority would not they don't have the authority to do what? To suspend or revoke your CPA license because eventually you're gonna get the license to practice public accounting No, my question to you is this who grants you the license who grants you the license the state some Jurisdiction under your state. So let's take a look at this one a state CPA society So here you have to be very careful. I just said a state and this answer has the word state. So Would not have the authority you'd say they would have the authority because it's a state Well, you have to be very careful those state CPA society like for example, I'm a part of PI CPA the Pennsylvania Institute of Certified Public Accountant. That's a that's a state CPA society That's basically a social organization. It promotes professional Professional networking it will help me get my CPE credits to maintain my license We have gathering we have committees But it doesn't it doesn't have the authority to revoke or suspend my license So the CPA society don't have that authority, which is that's what they're asking Therefore a is a potential answer. C is a potential answer B and D are out because they're asking us which of them cannot do it cannot do it the state the CPA State society can do it. Now what I suggest you do since we're talking about this with whatever state you are in So if you are in New York, New York, CPA, if you are in California, CA CPA Join those organization even before becoming a CPA. They do have a Student student chapter. So make sure you join them. This is where you go and you meet actual CPAs your network if you're looking for a job you grow your professional network and you get to know people and They will tell you what they're looking for in future CPAs and you would learn about the industry as well So I strongly suggest you check out your state CPA society, which is I'm part of the PA PI CPA So they can do that too AI CPA so rather than Pennsylvania. This is the American AI CPA Do they have the authority to revoke your license if the answer is yes, then that's an answer if the answer is no I'm sorry if the answer is yes, they can that's not the answer if the answer is no, then two is a correct answer Can they revoke so what does the what does the AI CPA do for one thing? You need to know they write your CPA exam. Okay, that's one thing that they do They also conduct hearing in case you violate the AI CPA code of professional conduct now This sounding like they can suspend or revoke your license and the answer they cannot they can hold the hearing kick you out of the AI CPA as a member if they want to but they cannot Suspend or revoke your CPA license. They could make a recommendation to someone to do so But they can do it the I CPA cannot revoke your license to practice They can kick you out of the organization, but that's not suspending your license. It's also a professional organization Also, they do have a student addition. I strongly suggest you join that as well. So two is also a correct answer Why because they can those two cannot cannot cannot provoke your license. Okay So obviously we have the last one So two so basically Two is the answer. We don't have one two three. It seems it's a but let's just make sure A state board of accountancy and the answer is yes Remember when you apply for your CPA when you apply for your CPA you apply under state jurisdiction Therefore the state itself you apply with the state board of accountancy of a particular jurisdiction Well, if they grant you the license they can take it away from you. Therefore the state board of accountancy Has the has that power therefore the first two those two don't have that power in the answer Which one don't have the power it's one and two if they ask if the question asks which one has the power Three has the power. So you have to be very careful Don't have the power and on the CPA exam. You don't want to miss a question an easy question like this one Let's take a look at this question a CPA Is not allowed to have a fee contingent upon results in which of the following engagement What is a fee fee contingent basically painy based on performance? That's basically what a fee contingent is and here is they're asking us which one you cannot you cannot have that contingency thing, okay Well, let's take a look at let's take a look at the first answer Examination of perspective. First of all, let's let's let's in general you want to know the rules in general you cannot do an audit And say you a la well, I'll give you a pay me based on my audit opinion. Hopefully, you know this you can't do that Same thing with reviews So audit and reviews because one is one is a positive one is a negative assurance. You can you can you can't so audit and reviews I'm telling you if they appear anywhere in the Question you can't do that. Okay Also, uh, well, we'll talk about this. Okay, so I just want to make sure you know this right away One examination of perspective financial statement. Also, that's prohibited clearly prohibited. You cannot examine Mean perspective. It means future financial statements What if financial statements and get a contingency because you might biased your opinion therefore one is deaf Would is not allowed. So one is not allowed. We keep a we keep c we keep d we can take out b Okay, because one is not allowed Review of historical financial statements. I told you reviews. You have to be independent in a review Okay, so we need one and two so One and three is out because two So we're still now between a and d Three filing an original tax return form 1040. Well, can you file a tax return? Original tax here. We have to we have to be very careful here. It's an original tax It's an original tax return. Can you file an original tax return and tell the client? Look, just pay me based on the refund I can get you and the answer you can't do that because now you have every incentive to get them the highest refund And that may push make you push the envelope and lose your integrity Because your fee is based on that original return. Therefore, you can't have that as well We can't have that as well. So for all three you cannot you cannot have a fee contingent Now you have to be very careful here because the language is important now What happened if you Are examining if you are helping them You or you or you are represent representing the client On a previously filed tax return being audited by the IRS. So somebody filed the tax return originally It's being audited by the IRS. They hired you to represent them. Can you charge? Can you charge a fee if you're representing them? And the answer is yes Remember if you are representing them on a previously filed return not original original is out That's being audited by the IRS. You tell them look, I will help you Now I'm gonna have to fight it hand-to-hand combat with the IRS Whatever I can get you I'm gonna get I'm gonna get a piece of it because now what's happening You're doing the work and the eye somebody at the IRS is questioning everything that you're doing So now you have every incentive to work on behalf of your client and based on that Refound or based on the lower tax bill that the IRS will send you're gonna you're gonna get a portion of it You have the right to do so but not based on the original return And if it was rather than a review if this was a compilation Okay, remember if it's a compilation of financial statement And they are expected to be used by by a third party And you let them know that you lack independence. That's okay So compilation as long as you disclose in the compilation that you lack independence and it's being used by a third party You can charge a contingent fee but not with a review not with an audit not with the original tax return Not with an examination of prospective financial statements very important to know these rules again What I do I'm gonna I'm gonna suggest I'm gonna invite you To go to my auditing course on my website farhatlectures.com If you want to learn more about this topic as well as many other topics whether it's an auditing advanced accounting governmental intermediate You name it finance courses Additional resources for your CPA exam. Look, you're gonna study for your CPA exam once in your lifetime It's a lifetime investment. Take it seriously study hard Good luck and stay safe if we're still going through this coronavirus