[jeff]

Trying something new …

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Shay]

I am taking exam this friday!

[Nevergiveup2012]

@Shay – good luck! keep my fingers crossed for you

I have a question: which of the following activities would most likely not impair a CPA's independence?

a. providing extensive advisory services for a client

b. contracting with a client to supervise the client's office personnel

c. signing a client's checks in emergency situations

d. Accepting a luxurious gift from a client

I answered b, because it's only an office function

but Becker answer a, quoting that the only CPA is only advising the client.

I am confused because it's stated under sox rules that services as a broker, dealer, investment adviser, investment banker impair independence. How is it that providing advisory service does not impair independence when you audit their Financial statements? I actually think that a lot of the issues/situations surrounding “Independence” is not as clear cut/black & white as Becker and AICPA make it to be. I used to work for the big 4 and ever year we had to fill out this long questionnaire that would determine whether your independence is impaired. a quite complex process and subjective, to a certain degree.

I thought that just supervising an office personnel doing admin staff can't be worse than providing an advisory service. I hate this kind of question because the answer options are all “correct” , just have to choose the best answer.

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[Soon2BCPA127]

deleted a repeated post.

[Soon2BCPA127]

@ nevergiveup – I believe when a CPA gives advisory services they do not get involved in the auditing of Financial Statements. Hence, it's considered a “separate” function. Choice B would mean that CPA is having a “supervising” position and in a role of making decisions for its client which automatically would impair his/her's independence. That's the logic i'm seeing. Hope it helps.

[Nevergiveup2012]

Contd from my last post: Becker's answer: A “provide extensive advisory service to a client”.

wouldn't the auditor essentially audit his/her own work?

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[Soon2BCPA127]

I'm having difficulty understanding and “tracking” Kitting and Lapping. I always get those questions wrong. Can someone help me understand the difference how to uncover what's taking place?

[Nevergiveup2012]

@Soon2BCPA – ok..I see. although not clearly stated in the question that the CPA does not audit their FS, I understand your view. Thank you!!

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[Soon2BCPA127]

**deleted post**

[Soon2BCPA127]

@nevergiveup – no because a Client is not going to take a CPA's “advise” as their decision. Advisory personnel would not be allowed to participate with auditing of a client's FS. In a way it is not considering auditing your own work. It goes back to firm's quality control and who are the covered members. I think independence would be impaired if a covered member was also providing advisory services.

[Nevergiveup2012]

@soon2BCPA

Lapping: is the situation where you collect money from your customer#1 but decided to keep the money to yourself. But to hide it, you collect another money from customer#2 and use the money from customer#2 to apply the payment to customer#1.

The way to discover lapping is by “timing” of payment. Look at the bank deposit slip (check the date and amount) compared with the customer remittance (from customer). The dates and amount would be off. The bank deposit slip would show a much later date than the customer remittance. This would not work though if the employee destroys the remittance. Another way to audit is through A/R confirmation requesting customers to also verify the dates. (not the most effective)

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[Soon2BCPA127]

@nevergiveup – thank you for clarifying lapping. Would you know anything about Kitting?

[Nevergiveup2012]

@soon2BCPA – I think certain “advisory” is not permitted for example like “investment advisory” impairs independence. Other advice is probably fine because like you said: 1)the CPA doesn't audit the company 2) advising does not translate to the client taking our advice. I think I just looked at the question too hard.

---

Kitting – commonly occurs during “bank transfer” . Client wants to transfer money from bank#1 to bank#2. Take the money from bank#1 and deposited into bank#2. The purpose of kitting is to inflate their cash position before year-end. So, the client would record the deposit (bank#2) right before year-end, but failed to record the disbursement (out of bank#1) within the same period. Instead, the disbursement is recorded after year-end.

To discover kitting: do you see the date of deposit precedes the date of disbursement? you can validate this timing difference by preparing a bank transfer schedule and request the copy of the check itself to look at the date stamped on the back of check. hope this helps

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[Nevergiveup2012]

@Soon2BCPA – the simplest term for kitting is writing a bad check when you know there's no money in your account. It's illegal to write a bad check.

BEC - 86 (8/31/12)
AUD - 97 (11/18/12)
REG - 83 (5/12/13)
FAR - 91 (12/2/13)
Done!!!

[Soon2BCPA127]

@nevergiveup – yeah sometimes i too have that problem when i think too hard at a question. You're right it's not black and white as Becker/AICPA make it to be but i try to pick the most black n white answer taking any “suspicious” consideration that might alter the black/white answer. Investment advisory would affect FS so that would probably impair independence.

Thank you for clarifying Kitting and Lapping 🙂 now i'm hoping i get those questions right!

[Soon2BCPA127]

Can anyone help me understand the following question?

An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:

a. An error in recording amortization of the excess of the investor’s cost over the investment’s underlying book value.

b. The investee’s decision to reduce cash dividends declared per share of its common stock

c. An error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities

d. A substantial fluctuation in the price of the investee’s common stock on a national stock exchange.

I selected C as my answer but the correct answer is A.

how can amortization would be excess of the invest costs? Would that overstate the investment account?

[Author]

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