Chapter 19 - Chapter 19 Professional Conduct Independence...

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Chapter 19 - Professional Conduct, Independence, and Quality Control 19-1 CHAPTER 19 PROFESSIONAL CONDUCT, INDEPENDENCE, AND QUALITY CONTROL Answers to Multiple-Choice Questions 19-14 c 19-21 a 19-15 d 19-22 c 19-16 c 19-23 b 19-17 b 19-24 b 19-18 b 19-25 a 19-19 c 19-26 a 19-20 c Solutions to Problems 19-27 1. The client clearly needs help with the following nonaudit services. Developing an automated accounting system. Providing tax-planning advice. Outsourcing the internal audit function. Developing projections and/or forecasts for the company’s new products. However, because the client is a public company audit client, the firm would be prohibited from helping the client design or implement a software system and from providing internal audit outsourcing. Provision of tax-planning advice is allowed by SEC independence rules. Assisting the client to develop projections and/or forecasts for the company’s new products and other nonaudit work would be subject to approval by the audit committee and would be strictly limited by the principles of not performing a management function, not auditing one’s own work, and not performing an advocacy role. 2. Most of the above non-audit services would not be prohibited if the client were not publicly held, though there are restrictions to be observed. For example, see the discussion relating to the AICPA’s restrictions regarding financial information systems design and implementation for a non-public client. Also, auditors would have
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Chapter 19 - Professional Conduct, Independence, and Quality Control 19-2 to make sure that they didn’t make managerial decisions or audit their own work when deciding the nature of the services that they could provide. 19-28 a. A ruling of the Professional Ethics Executive Committee allows an auditor to provide such advisory services to an audit client and not violate Rule 101. Independence would be not considered impaired because the member's role is advisory in nature and because the client is a privately held entity. b. A ruling of the Professional Ethics Executive Committee indicates that the auditor's independence under Rule 101 is not impaired under these circumstances provided the client makes all significant management decisions related to the hiring of new personnel and the implementation of the system. The auditor must also limit his or her supervisory activities to initial instruction and training of personnel and should avoid direct supervision of the actual operation of the system or related activities that would constitute undue involvement in or identification with management functions.
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