AUD

Types of Engagements

There are 5 different types of Engagements:

• Preparation
• Compilation
• Review
• Audit
• Agreed-Upon Procedures

Types of Engagements

	Preparation	Compilation	Review	Audit	Agreed-Upon Procedures
Type	Non-Attest	Non-Attest	Attest	Attest	Attest
Assurance Provided			Limited Assurance
Independence		Not required, but must state lack of independence in compilation report
Report Issued?
Requires CPA Signature?
Notes to Financial Statements Required?

Who Makes The Rules?

Before we begin, it's important to understand that there are two types of companies: (1) Public companies, and (2) Non-Public companies. Public companies are open for the public to invest in and trade shares on a stock exchange, while non-public companies do not. Public companies may also be referred to as issuers, and non-public companies may be referred to as non-issuers.

Before the enactment of the Sarbanes-Oxley Act of 2002 (SOX), the auditing profession was largely self-regulated, with the American Institute of Certified Public Accountants (AICPA) playing a key role in setting standards for audits. However, in the wake of major corporate scandals in the early 2000s, the Public Company Accounting Oversight Board (PCAOB) was established through SOX.

Public Companies (Issuers)

Today, the PCAOB sets the standards for public companies, while the AICPA still sets the standard for the non-public companies. In research, it is unclear what standards are used for engagements of public companies outside of the Auditing Standards (AS), which are used for audits of public companies. For testing purposes, whenever it asks about a public company, PCAOB standards apply.

Non-Public Companies (Non-issuers)

For non-public companies, the AICPA standards apply. The AICPA standards are broadly referred to as Generally Accepted Auditing Standards (GAAS). There are 2 rulemaking bodies within the AICPA that are on the exam.

• AICPA's Auditing Standard Board (ASB) = Handles reviews, audits, and agreed-upon procedures of both financial statement related engagements (SAS standards) and non-financial statement engagements (SSAEs standards).

• AICPA's Accounting and Review Services Committee (ARSC) = Handles preparation and compilations. This can only be for financial statements, as you are preparing and compiling the companies financials.

Assertions That Management Can Make

There are 8 Relevant Assertions that management can make. Those are:

Relevant Assertions

	Balance Sheet Assertions	Income Statement Assertions
Completeness
Accuracy
Presentation
Existence
Cutoff
Rights / Obligations
Occurrence
Classification

Helpful Mnemonics:

• CAPE CROC
• Balance Sheet items Exist, Income Statement items Occur.

Engagement

There's no real step-by-step guide, but here are the general steps of an attestation engagement:

1. Acceptance
2. Planning
3. Risk Assessment
4. Performing Further Audit Procedures
5. Evaluating Testing Results

There are certain things that are performed not at any one particular step, but rather are constantly considered and re-visited as needed throughout the attestation engagement. Those are:

• Audit Strategy
• Audit Plan
• Determining Materiality
• Monitoring Independence

Step 1: Acceptance

The formal acceptance of an engagement is with the signing of an Engagement Letter. This is written by the auditor and signed by the client. The Engagement Letter is signed for all 5 types of engagements.

There are 4 sections of the letter:

• Objective and Scope of the Engagement
• Responsibilities of the Auditor
• Responsibilities of Management
• Other Relevant Information

Below is a chart that has the terminology that could be used on the exam when asking where responsibility lies. Most of these terms are very difficult to understand, and some mean the same thing. These terms are explained in later steps.

Items each party is responsible for...

Management is Responsible for...	CPA is responsible for...
Preparation and fair presentation of financials in accordance with GAAP.	Conduct the engagement in accordance with applicable standards (ex. GAAS)
Financials are free of material misstatements	Identify and assess the risk of material misstatement
Design, implementation, and maintenance of internal controls	Obtain an understanding of internal controls
Unrestricted access to people and information	Obtain an understanding of the entity and its environment
---	Design and perform Further Audit Procedures
---	Obtain audit evidence that is sufficient to provide an opinion.

Step 2: Planning: Audit Strategy and Audit Plan

Planning the Audit consists of:

1. Establishing the overall Audit Strategy, and
2. Developing the Audit Plan.

Planning is a continual process that begins shortly after the completion of the previous audit and continues until the completion of the current audit engagement. AU-C 300.A11 states that "The audit strategy and audit plan are not necessarily discrete or sequential processes". It also states that they are "interrelated" and that "changes in one may result in consequential changes to the other." The auditor should update and change both the audit strategy and audit plan during the course of the audit as necessary.

AICPA standards notes:

• The Audit Plan is more detailed and formal than the Audit Strategy.
• The Audit Strategy and Audit Plan are "interrelated" and that "changes in one may result in consequential changes to the other."

Planning

	Audit Strategy	Audit Plan
Selection of Engagement Team
Determining Allocation and Deployment of Resources
Determine Nature, Timing, and Extent of Risk Assessment Procedures
Determine Nature, Timing, and Extent of Further Audit Procedures

Step 3: Risk Assessment

The overall goal of the audit is to reduce Audit Risk to an acceptably low level. To do this, the auditor must assess the risk of material misstatement (RMM). The test will also refer to this step as "Obtaining the Understanding of the Client" or just "obtaining an understanding". The auditor is assessing two types of risk here:

• Inherent Risk
• Control Risk

Audit Risk Model

Audit Risk Model

Type of Risk	Definition	Example / Formula	Can CPA Control?
Inherent Risk	Risk that a misstatement could exist before considering client's internal controls	Petty cash has a high inherent risk due to ease of theft.
Control Risk	Risk that misstatement will not be caught by the client's controls	Poorly designed controls will have a higher control risk.
Detection Risk	Risk that the procedures performed by the auditor will not detect misstatements	The more procedures performed, the lower the detection risk
Risk of Material Misstatements	Whenever you see this term, you should read it as "assessing inherent risk and control risk"	Inherent Risk + Control Risk.
Audit Risk	Risk that the auditor expresses an inappropriate positive opinion on financial statements that are actually materially misstated.	Inherent Risk + Control Risk + Detection Risk

Since both Inherent Risk and Control Risk are not controlled by the auditor, the auditor must determine the risk level that exists for each. The auditor determines this by performing the following procedures:

• Perform Risk Assessment Procedures
  • Inquiries to management, internal audit, and others, both within and outside of the entity, who could assist in assessing inherent and control risk (a.k.a. RMM).
  • Analytical Observations
  • Observation and Inspection
• Understand nature of the client: business operations, investment and financing activities, ownership structure, and governance structure.
• Understand external factors: Industry conditions & government regulations that affect the entity.
• Understand operating strategy.
• Understand financial performance.

The risk assessment determines the nature, timing, and extent of Further Audit Procedures.
Part of risk assessment is evaluating the design of internal controls and determining whether they have been implemented. This can also be termed "Gaining an Understanding of Internal Control"
The auditor is not yet assessing the effectiveness of internal controls. That will be performed in the next step.
The risk of assessing control risk too low is the auditor's biggest fear, as this could lead to providing incorrect assurance.
Once we understand the RMM, we can set the detection risk, so that the Audit Risk will be at an acceptably low level. Setting the detection risk can be thought of as "how much work will we have to do".

Step 4: Performing Further Audit Procedures

"Further Audit Procedures" is the term provided by the AICPA, but we can think of it as "performing audit procedures." After we've made our initial assessment about inherent and control risk, we can begin designing and performing the audit procedures. There are two types of Further Audit Procedures:

• Substantive Procedures
• Test of Controls

Test of Controls

If we determined in the Risk Assessment phase that controls were designed well and are currently functioning at the client, we may rely on those controls to avoid having to perform substantive procedures. To what extent we can rely on the control depends on how effective we judge the control to be at preventing, detecting, and/or correcting a material misstatement.

Internal Controls

	Risk Assessment Phase	Further Audit Procedures Phase
Evaluating Design of Control
Determining if they have been Implemented
Determining Operational Effectiveness

To test the effectiveness of controls, the auditor will do the following:

• Make inquiries
• Make inspections
• Make Observations
• Reperformance
• Perform Recalculation
• Attribute Sampling (only when controls are relied on heavily)

The auditor is not required to do all of the above, but must do more than just make inquires. Inquiries alone are not sufficient to determine effectiveness.
For private companies (a.k.a. "non-issuers"), the auditor is NOT required to attest to internal control effectiveness unless management requests and auditor agrees.
For publicly traded companies (a.k.a. "issuers"), the auditor is required to report on the effectiveness of internal controls.

Substantive Procedures

Substantive Procedures are performed to detect material misstatements. There are 2 types:

• Test of Details
• Analytical Procedures

Analytical Procedures

This is sometimes referred to as "Substantive Analytical Procedures". Analytical Procedures is simply using numbers and ratios to determine whether the balances are in line with expectations or not. The expectation can come from:

• Industry expectation
• Prior period or interim period financials.
• Budgets and forecasts
• Expected relationships.

Analytical procedures should be performed on high volume, relatively predictable transactions.
Analytical procedures alone may be sufficient to reduce Audit Risk to an acceptably low level. This means in certain situations, applying Analytical Procedures can avoid having to perform Test of Details.

Test of Details

Due to the amount of details, this has been given it's own section. Scroll down to find.

Test of Details

Test of Details are procedures performed to obtain evidence regarding the "relevant assertions" provided by management. Relevant assertions is a term that encompasses everything management is asserting and having the auditor review. For example, when the client gives the auditor their financial statements, one assertion that management is making is that the balances are accurate. It is up to the auditor to collect evidence and form an opinion on the accuracy of that assertion. Exactly what tests are done depends on:

• The type of engagement: An audit would involve more extensive work than a review.
• The assertions that are made: Different tests are applied for each assertion.
• The accounts being reviewed (a.k.a. "cycles"): There are 3 general cycles covered:
  • The Revenue and Sales Cycle
  • The Purchases and Inventory Cycle
  • The Payroll Cycle

Because it would be inefficient to test all 100% of the activity, sampling is typically done. Tests of Detail are then performed on the sample to obtain reasonable assurance.

Internal Controls

	Procedure Timing	Sampling Size
High Risk of Material Misstatement	End of year or at unpredictable times
Low Risk of Material Misstatement	Before end of year (interim date)

Sampling and Performing Tests

Steps for Sampling:

1. Consider the purpose of the audit procedures

• Determining materiality levels for a deviation/misstatement

2. Identify the population from which the sample will be taken from

	As the rate goes...	The sample size goes...
Sampling Risk
Tolerable Deviation Rate
Expected Deviation Rate

• Determine expected rate of deviation.
  • Based on auditor's professional judgement.
  • The amount will likely be provided in the problem.
• Determine the tolerable rate of deviation.
  • Based on the auditor's professional judgement.
  • The amount will likely be provided in the problem.

3. Determine acceptable levels of sampling risk

	Sampling Risk	Confidence Level	Sample Size
Less Sampling Risk
More Sampling Risk

• Sampling Risk = 1 - Confidence Level
• The lower the sampling risk, the higher the confidence interval.

4. Determine sample size

5. Choose the sample selection method.

6. Perform auditing procedures on sample.

• Types of Variable Sampling Methods

7. Evaluate results.

8. Document the work performed and results obtained in the working papers.

Risk Types: Sampling Risk vs. Non-Sampling Risk

Sampling & Non-Sampling Risk

	Sampling Risk	Non-Sampling Risk
Definition	Risk that auditor's conclusion from the sample is different than the conclusion that would've been reached if the entire population was tested.	Risk that wrong conclusion is reached from something other than sampling.
Think of as...	When the auditor does everything right, but the sample results lead you to an incorrect conclusion.	When the auditor makes an error with sampling.
Examples	None Provided	(1) Auditor applies inappropriate procedure (2) Auditor misinterprets audit evidence (3) Auditor fails to recognize misstatements or control deviations.

With sampling risk, the questions will probably focus on the two types of wrong conclusions that can be drawn:

• Audit Efficiency Error
• Audit Effectiveness Error

Affects of Wrong Conclusions from Sampling

	Audit Efficiency Error	Audit Effectiveness Error
Synonym	Unnecessary Audit Effort	Potential Audit Failure
Definition	Sample test results indicates issues when there actually are none.	Sample test results indicate there are no issues when there actually are.
Result	Additional unnecessary audit procedures.	The lack of indication can lead to giving a wrong opinion. Most serious.
What does "issues" mean?	(1) For tesing controls, an issue means the control is not working correctly. (2) For testing of details (a.k.a. testing an account balance), an issue would be a material misstatement.

Sampling Approach, Types, and Methods

Sampling Approaches: Statistical vs. Non-Statistical

	Statistically	Non-Statistically
Key Word(s)*	Scientifically, Statistically, Quantify	Subjective Judgement
Determine Sample Size	(See Key Words)	(See Key Words)
Make Sample Selections	(See Key Words)	(See Key Words)
Design an Efficient Sample
Measure Sufficiency of Evidence
Evaluate Sample Results
Ability to Measure Confidence Level
Ability to Measure Precision

* Key Term(s) are terms that the questions will use to describe each approach.

Delegating Work

The auditor can delegate tasks by using the work of:

• Internal Auditors
• Service Auditors
• Specialists

When using the work of someone else, the auditor must ensure the following:

Requirements for Reliance on Others

	Internal Auditors	Specialist	Service Auditor
Competent
Independent
Objective*			Independence Required

* Objectivity is a term generally used when the person is not required to be independent, but is still expected to be impartial. An example would be Internal Auditor's work for the company, but answer to the audit committee instead of company management.

Internal Auditors

The Internal Auditor (IA) can be given some work as long as the external auditor does the following:

• Auditor determines IA are competent.
• Auditor determines IA are objective.
• Auditors applies a systematic and disciplined approach, including quality control.
• Receives written acknowledgement from management stating that IA's are permitted to follow instructions of auditor, and management will not interfere with the work.

Permitted Functions For Internal Auditors

	Permitted
Preparing Schedules
Compiling Documents
Performing Non-Judgement Tasks
Making Judgements
Performing Critical Audit Procedures (Fraud)

The external auditor should make all significant judgements. Tasks that involve assessing, selection, determination, valuation, etc. are not able to be performed by IA.
External Auditors always have sole responsibility for the audit opinion expressed. The external auditor should oversee the work that the IA does.

Using Service Auditors

A service auditor is used when a company outsources a business function to another business. An example would be hiring a payroll company to process their payroll. The auditor of the business (a.k.a. User Auditor) will need to receive a report from a Service Auditor attesting to the controls in place at the service organization. This is done through a report from the service auditor titled a SOC Report.

There are 3 types of SOC reports:

Service Auditor Reports

	SOC 1	SOC 2	SOC 3
Attestation Matters	Controls relating to financial reporting	Controls relating to security, availability, processing, integrity, confidentiality, and privacy.	Controls relating to security, availability, processing, integrity, confidentiality, and privacy.
Who Can Use Report	User Auditor Only	Only Parties Stated in Report	Anyone

Any one of those SOC reports can be 1 of 2 "types". The type depends on whether the report attests to the effectiveness of controls or not:

Service Auditor Report Types

	Type 1	Type 2
Suitability of Controls
Design of Controls
Effectiveness of Controls

A common question will be "which of these reports attest to the effectiveness of internal controls relating to financial reporting", which would be a SOC 1 Type 2 report.

Using Work of Specialist

If a client has a situation that is rare and complex, the auditor may need to find a specialist who can provide the auditor with evidence that the situation is not materially misstated. Examples include:

• Actuarial Calculations
• Estimation of oil and mineral reserves.
• Valuation of environmental cleanup costs.

The auditor should assess the specialist's objectivity and competence. The auditor should only refer to work of the specialist if issuing a qualified or adverse opinion.

Transaction Cycle Testing

The auditor's ultimate goal is to obtain evidence to form an opinion on the relevant assertions made by management. The auditor will do this for all accounts. In the process of business, many of these accounts are involved in the same business function. For example, when a company makes a sale, it not only affects the revenue account, but also the cash account, the accounts receivable account, and the sales return account. These groups of interworking accounts are referred to as "Transaction Cycles". The auditor will seek evidence for the transaction cycles to obtain reasonable assurance over all of the accounts.

There are 5 "cycles" covered:

• • The Revenue and Sales Cycle
  • The Cash Receipts Cycle
  • The Purchases and Inventory Cycle
  • The Cash Disbursement Cycle
  • The Payroll Cycle

An important aspect of the transaction cycles is proper Segregation of Duties. These 3 activities should be done by different people/departments:

• Authorize
• Records (a.k.a. Recording or Recordkeeping)
• Custody

Authorize = They may keep records outside of the financial statement accounts, such as list of employees or summary of hours worked, but they authorize by forwarding their records to the appropriate departments for processing. Beginning of Cycle.

Records = Receives documents from the initial sources and updates appropriate journals. Mid-Cycle.

Custody = Maintains control over the asset. End of Cycle.

Revenue and Sales Cycle

Below is a gif walkthrough of the Revenue Cycle:

The documents in the cycle are:

Documents

Document	Description
Customer Order	Order customer submits to the company.
Sale Order	Sales Department uses Customer Order to create Sales Order.
Approved Sales Order (ASO)	Sales Order is reviewed by Credit Department. If credit is approved, Credit Department issues Approved Sales Order.
Acknowledgment	Sent by Sales Department to Customer once Credit is approved.
Bill of Lading (BOL)	Similar to a title. Title of goods.
Packaging Slip	Details what is being shipped.
Remittance Advice	Details the charges and the total amount due. Similar to invoice, but it's mailed back with payment.
Daily Invoice Summary	A/R Department keeps list of invoices it receives each day. Forwards to GL Department for updating the General Ledger at days end.

Cash Receipts Cycle

Below is a walkthrough of the steps in the Cash Receipt Cycle:

Here is a more easily readable and memoizable flowchart:

Purchases and Inventory Cycle

Documents

Document	Description
Purchase Requisition	Document created by Warehouse that shows what items need to be reordered.
Purchase Order	Document created by Purchasing Dept. and sent to Vendor to place an order.
Receiving Report	Filled out by the Receiving Dept. to show what items were received from Vendor.

Cash Disbursements Cycle

The Cash Disbursements cycle picks up where the purchasing cycle ended. It begins when the company receives the invoice from the vendor.

Documents

Document	Description
Vendor Invoice	document that recaps what was purchased and the total cost to be paid.
Approved Vendor Invoice	Invoice is considered "approved" after the Purchasing Department confirms its accuracy with what was received.
Tickler File	File folders organized by date. Allows to easily pull and pay at correct day.

Payroll Cycle

Documents

Document	Description
Authorized Employees' Rates and Deductions	List that shows what each employee should be paid.
Employee Clock Cards	Employees record the start and end times of their workday on this card. Used for Summary of Hours Worked by Employee.
Job Time Tickets	Employees record time worked on each task/job on this card. Used for Summary of Hours Worked by Job.
Payroll Register	Shows how much each employee should be paid for the work period.
Payroll Voucher	Show's how much should be paid out for the payroll.

Evaluating

Potential Results

Type	Definition
Unmodified	No issues with audit. "F/S are presented fairly"
Modified	Small issue(s) with audit. "F/S are presented fairly, with the exception of..."
Adverse	F/S are not presented fairly.
Disclaimer	Not able to collect enough evidence to form an opinion/conclusion.
Withdraw	Cancels the engagement.

Disclaimer

Scope Limitations

A scope limitation means the auditor was not able to obtain all the information needed.

• A piecemeal opinion is giving a disclaimer of opinion only on the particular financial statements that are affected by the scope limitation. For the non-affected financials, the auditor gives an unmodified opinion on those.
• For management-imposed scope limitations, the auditor should do the audit and qualify the opinion if they determine that the issue is not "pervasive". If it is pervasive, they should withdraw if possible, or disclaim an opinion.

Auditor's Report

Add On Paragraphs

There are specific situations that could be tested on. Those are:

Report Layout

Due to Wiki's basic formatting options, there's currently no good way to show the various reports on here. See the report tabs at the excel file below for coverage of the report language specifics

Government Audits

Nothing here. To begin editing, scroll to the top and hit the edit button.

Professional Responsibilities

The AICPA Code of Professional Conduct has 3 different sets of standards based on the member's job.

Sets of Standards

	Applies To	Example
Part 1	Members in Public Practice	Employed at CPA Firm.
Part 2	Members in Business	Employed in a Corporate Business
Part 3	All Others	Retired or Unemployed

Rules of Conduct

Rule	Sections	Definition	Part 1	Part 2	Part 3
Integrity & Objectivity Rule	1.100 2.100	Member Shall: (1) Maintain objectivity and integrity, (2) Be free of conflicts of interest, (3) Not misrepresent facts, and (4) Not subordinate their judgement to others.
Independence Rule	1.200	Defined by bodies appointed by AICPA
General Standards Rule	1.300 2.300	When accepting and performing professional services, a member shall: (1) Only accept tasks that the professional, or their firm, can reasonably expect to complete with professional competence, (2) Exercise professional care while performing the service, (3) Adequately plan and supervise the service, and (4) Obtain sufficient relevant data in completing the task.
Compliance with Standards Rule	1.310 2.310	A member must comply with standards issued by professional bodies designated by the AICPA.
Accounting Principles Rule	1.320 2.320	Cannot provide positive or limited assurance when there are material misstatements. You are not violating this rule if you can demonstrate that you performed the attestation engagement appropriately.
Acts Discreditable	1.400 2.400 3.400	See Below
Contingent Fees Rule	1.510	A contingent fee is an agreement between two parties where a fee will only be assessed as long as a certain outcome is attained. Not permitted for auditing work. Permitted in rare situations with tax work. See below for more details.

Independence

A member must be both:

• Independent in Fact (a.k.a. Independence of Mind)
• Independent in Appearance

Situations that will impair that independence are:

• Loans to and from attest client (includes client's officers, directors, and >10% shareholders)
  • Exception: If the client is a financial institution, then the member can have:
    • Credit card(s) through the institution as long as the balance is $10K or less.
    • Auto loan and lease as long as the auto is collateral.
    • Loans fully collateralized by the cash surrender value of insurance cash deposits.
• Member owns 5% or more of client during the period of the engagement.
• Employed, or appear to be acting in the capacity of, an employee of the client.
• Employee of member's firm holds directorship or trusteeship with not-for-profit client, unless it is honorary with no power to affect management decisions.
• Actual or threatened litigation between client and covered member.
• Unpaid fees from the client, if the unpaid fees were for services performed > 1 year from the attest report date.
  • Does not apply if client is in bankruptcy.
• Receives and accepts gift from client where the value of the gift is clearly significant to the recipient.

Additionally, certain people and/or organizations that could influence a member are also prohibited from certain situation in order for the member to maintain independence. This is called a "covered member".

Relevant Definitions

Term	Definition
Independent In Fact	Also referred to as "Independence of Mind". Must avoid situations that could compromise professional judgement.
Independent in Appearance	Must avoid circumstances that would cause a reasonable and informed person to conclude that the independence has been compromised.
Direct Financial Interest	An ownership interest in an equity or a debt security issued by an entity, including rights and obligations to acquire such an interest and derivatives related to such interest. Examples include stock, bonds, stock options, warrants, and mutual fund shares, among other.
Indirect Financial Interest	A financial interest owned through an investment vehicle, an estate, a trust, or other intermediary where the beneficiary [does not participate] in the intermediary's investment decisions.
Covered Member	See Below
Immediate Family	Spouse, spousal equivalent, or tax return dependents. Dependents do not have to necessarily be related to you to fall under this definition, they just have to have been claimed as a dependent on your most recent tax return.
Close Relative	A parent, sibling, or a non-dependent child. A non-dependent child means a child who you didn't claim as a dependent on your most recent tax return.
Key Position	A position in which an individual has the ability to exercise influence over the financial statements. These include positions of CEO, CFO, President, other leadership position that affects the financial statements, Controller, Treasurer, Internal Audit, General Counsel, or Member of the Board

Covered Member

A covered member is any of the following:

• An individual on the attest engagement team.
• Individual in a position to influence the attest engagement
• A partner, partner equivalent, or manager who provides more than 10 hours of non-attest services to the attest client.
• A partner or partner equivalent in the same physical office as the lead attest engagement partner.
• The firm
• Any entity that can be controlled by any of the individuals or entities listed above.

A covered member cannot have either of the following in the attest client:

• A direct financial interest, or
• A material indirect financial interest. (they are allowed to own a non-material indirect financial interest.)

What is the difference between a material indirect vs non-material indirect?
The AICPA does not provide specific guidance on determining materiality. Instead, they instruct that professional judgement should be used.

Exceptions

There are certain carved-out exceptions for people who are close to the member, like family. See chart below for classification, and the specific rules below the chart.

Type	Immediate Family	Close Relative	Employment Exemption	Financial Interest Exemption
Spouse (or equivalent)
Dependent Child
Dependent Relative
Parent
Sibling
Non-Dependent Child
Other Non-Dependent Relative

Immediate Family

An immediate family member may be employed by the attest client as long as they don't hold any of the following:

• They are not in a key position at the attest client.
• They cannot own, at any time, 5% or more of the attest client's outstanding shares.

Close Relatives

A close relative can be employed by the attest client as long as they are not in a key position at the attest client.

A close relative can have a financial interest in the client as long as the meet all of the following:

• The investment is not material to the close relative. If the member is not aware of the close relative's finances, then they meet this requirement as long as they have no reason to think it's material to the relative.
• The financial interest does not allow the close relative to exert influence over the attest client.

Acts Discreditable

.400.005.01 says that, with the exception of certain acts that are explicitly stated as "Acts Discreditable", a member should follow the "Conceptual Framework" steps laid out in the member's applicable part (part 1, 2, or 3) in order to determine whether it is an acts discreditable or not. .000.010.01 says that not every relationship and circumstance that a member could face can be explicitly stated in the code of conduct, and therefore a member should follow the "Conceptual Framework" steps laid out in making a determination. .400.005.02 says that a member must be able to demonstrate that safeguards were applied that eliminated or reduced significant threats to an acceptable level, or else a member will be considered to be in violation of the Acts Discreditable Rule.

Explicitly stated Acts Discreditable are:

• Discrimination and harassment in employment practices.
• Solicitation or disclosure of CPA exam questions and answers.
• Failure to file a tax return or pay a tax liability.
• Negligence in the preparation of financial statements or records.
• Failure to follow the requirements of applicable financial reporting framework and the requirements of regulatory bodies (SEC, PCAOB, etc.).
• False, misleading, or deceptive acts in marketing professional services.
• Using the CPA credential in a jurisdiction where they have not been approved by the state to use it.
• Provide written notice to clients and return/safely store client records upon sale, transfer, or disposal of the firm.
• Removing client files or proprietary information from a firm without their permission upon termination of employment.
• Disclosure of confidential information obtained without permission.
• Failure to provide required documents within 45 days of request from client, unless approved reason to withhold (see chart).

Record Types and Your Right to Withhold

Type	Definition	Example	Right to Withhold
Client-Provided	Records that were provided by the client	Quickbooks File, Tax Form W-2	Cannot Withhold
CPA's Work Product	Item(s) that the client seeks from the CPA.	Audit Report, Tax Return	Can only withhold if: (1) Fees relating to that specific work product are unpaid, (2) The work product is not finished yet, (3) Litigation involving the work product is ongoing, or (4) For purposes of complying with professional standards.
CPA-Prepared Records	Item(s) that the client doesn't seek but will need.	Adjusting Journal Entries	Can only withhold if fees relating to that specific work product are unpaid.
CPA Working Papers	These are items created by the CPA to "show their work"	Word Files, Excel Files	Have right to withhold unless legal or contractual obligation to provide.

Contingent Fee

A contingent fee is an agreement between two parties where a fee will only be assessed as long as a certain outcome is attained. This is prohibited for attestation engagements. For tax work, basing the fee on the outcome of your work is generally prohibited, with a few exceptions:

• Representing client in an IRS audit or other judicial proceeding.
• Claim for refund filed with the IRS relating to assessed penalties and interest.
• Obtaining a Private Letter Ruling from the IRS.
• Outcome of court case or other governmental agency finding.
• Fixed by public authority.
• Based on a price quotation submitted in competitive bidding.
• Investment advising.
• Some other very specific situations. See Code of Professional Conduct Section 1.510.010.04.

All other tax related work is prohibited from charging contingent fees. This includes filing a tax return, filing an amended tax return, or filing a claim for refund (outside of just penalties/interest).

A member's spouse is NOT prohibited from charging a contingency fee for work the spouse does. However, the work can in no way be associated with the member. The code lays out the following 2 rules:

• The contingent fee activity must be separate from the member's practice, and
• The member must not be significantly involved in the spouse's activity.