The Code rests on six principles: responsibilities, public interest, integrity, objectivity and independence, due care, and scope and nature of services. Principles are aspirational. The enforceable parts are the rules and interpretations that explain how rules apply.
KEY: Principles set tone. Rules and interpretations are enforceable. When the exam asks "which rule did the CPA violate," it means a numbered rule (§1.100, §1.510, §1.700), not a principle.
Rules cannot anticipate every situation, so the Code includes a process for gray areas. Apply the Framework only when no specific rule covers the facts. If a rule directly prohibits the conduct, the rule decides.
Three steps: identify threats, evaluate significance, apply safeguards (or decline if no safeguard works).
The Code lists seven threat categories:
- Self-review: auditing your own prior work (firm prepared the deferred tax computation; audit team must test it)
- Advocacy: promoting the client's position past objectivity (representing the client in tax court while auditing)
- Familiarity: long or close relationship breeds sympathy (12 years on engagement, godparent to the CFO's child)
Common mistakes
- Treating a small direct financial interest as immaterial. A covered member's direct interest of any size impairs independence. 10 shares worth $300 = impaired. The materiality test is for indirect interests only. Trap: "not impaired because immaterial."
- Confusing immediate family with close relatives. Spouse and dependents = same rules as the covered member. Parents, siblings, nondependent children = direct interest impairs only if material or the relative has significant influence. Mixing these flips the answer.
- Believing disclosure cures a threat. Disclosing a contingent fee or self-interest does not eliminate the threat. "Disclose and proceed" is the trap when the underlying conduct is prohibited.
Bottom line
- The Conceptual Framework lists seven threats (self-review, advocacy, familiarity, undue influence, self-interest, adverse interest, management participation); apply it whenever no specific rule covers the situation
- Direct financial interest in an attest client always impairs independence; indirect only if material to the covered member
- "Covered member" gates the rules: engagement team, chain of command, 10+ hour nonattest providers, the office, the firm
- Bookkeeping, valuations, and internal audit outsourcing for an audit client are prohibited for issuers; permitted with safeguards for nonissuers
Exam shortcut
For any financial-interest question, walk three steps: (1) covered member or not, (2) immediate family or close relative, (3) direct or indirect. The answer falls out of step three. Most common trap: "small direct interest, immaterial, not impaired." That answer is wrong; direct interests have no materiality exception.
The full lesson (about 4,903 words, 33 min read) adds 10 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- I.A1
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