5 - I: Requirement of SEC and PCAOB

Question 1

What qualification does the SEC require for a CPA to audit a public company?

Answer 1

Must be registered and in good standing under the laws of his or her state.
Must be and appear to be independent and capable of exercising objective and impartial judgment.

Question 2

What are the SEC’s primary concerns regarding ethics and independence?

Answer 2

Conflict of interest.
Audit own work (self-review).
Management participation (act as a manager).
Being advocate.

Question 3

SEC’s definition of IMFs?

Answer 3

Spouse, spousal equivalent, dependents.

Question 4

What’s the term SEC uses for close relatives (CR)? Definition?

Answer 4

Close family members.

Spouse, spousal equivalent, parent, dependent, nondependent child, and sibling.

Question 5

Covered members under AICPA?

Answer 5

Audit team members, PTIs, 10 hour persons, OPIOs, the firm itself, any entity controlled by the first 5.

Question 6

SEC’s equivalent for covered members? who?

Answer 6

Covered persons.
Audit team members, chain of command (PTIs), 10 hour persons, OPIOs.

The firm and any entity controlled by above not specifically mentioned. But they will be probably covered when an issue arises.

Question 7

Financial relationships: when and who does it impair independence?

Answer 7

When CP and their IMFs have direct financial investment (own stocks, even in immaterial amounts).

Question 8

When does direct investment through an intermediary impair independence?

Answer 8

When the firm, CP, IMFs either supervise or participate in investment decision OR
the intermediary is non diversified mutual fund that has invested 20% or more of its money in an audit client.

Question 9

Investment by people other than CP: when is independence impaired?

Answer 9

When they own 5% or more of an audit client’s stock.

Question 10

When is independence impaired regarding serving as trustee for the firm, CPs, IMFs?

Answer 10

When they have authority for investment decisions.

Question 11

When can the firm, CPs, or IMFs own indirect interests?

Answer 11

When it is immaterial.

Question 12

Is the independence impaired when the firm, CPs, IMF invest in an entity that an audit client either has a material investment or has the ability to control? And vice verse.

Answer 12

Yes.

Question 13

When can the firm, CPs, IMF borrow or loan money from audit client, its officers/directors, or its 10% shareholders?

Answer 13

OK from a financial institution under normal procedures and terms.
Auto loan collateralized by the car.
Loan fully collateralized by surrender value of an ins policy or cash deposit.
Mortgage collateralized by borrowers PRIMARY residence if obtained when borrower was not a CP.

Question 14

When can the firm, CPs, or IMF have a saving or checking account at a financial institution client?

Answer 14

The account balance is fully insured ($250,000 limit) by the FDIC.
If there is an uninsured balance, the likelihood of it experiencing financial difficulties must be remote.

Question 15

When can the firm, CPs, or IMF have a credit card issued by an audit client?

Answer 15

Account balance is less than $10,000.

Question 16

When can the firm, CPs, or IMF buy insurance products from an audit client?

Answer 16

Obtained before the person became a CP AND

the likelihood of insolvency is remote.

Question 17

When can the firm, CPs, or IMF receive unsolicited gift?

Answer 17

If disposed as soon as practicable, but no later than 30 days after obtaining the right to dispose it.

Question 18

When can a partner, principal, shareholders or professional employee (even non CP) of the accounting firm be employed by the client or serve as a member of the board of directors?

Answer 18

Never.

Question 19

In what roles can close family members of a CP work for an audit client?

Answer 19

NOT Accounting role or FROR (financial responsibility oversight roles.)

Question 20

When can an accounting firm employee work for an audit client in accounting role or FROR?

Answer 20

The individual does not influence the firm’s operation or financial policies.
has no capital balance in the firm.
has no financial arrangement except regular payment with fixed dollar amount.

Serve one year cooling period plus entire audit cycle.

Question 21

Who does the cooling period not applied to?

Answer 21

Persons who provide 10 or fewer hours of attest service.
Persons employed by the client as a result of a merger.
Persons employed by the client as a result of an emergency.

Question 22

Cooling period: audit cycle May 1 through Apr. 30.

When can an employment with an audit client being if one leaves on Feb 1, 2020. On June 14, 2020?

Answer 22

May 1, 2021.

May 1, 2022.

Question 23

When can an audit client employee work for an accounting firm?

Answer 23

He or she does not participate in and is not in the chain of command the audit of financial stmts covering any period he or she was employed by the audit client.

Question 24

When can a CP have a direct or material indirect business relationship with an audit client?

Answer 24

Never.

Buying or providing goods in the ordinary course of business is not a business relationship.

Question 25

Can an auditor provide NAS to a public company that is not an audit client or to a private company that is an audit client?

Answer 25

Yes.

Question 26

What NAS services are not permitted to an audit client?

Answer 26

Book keeping services.
Financial information systems design and implementation.
Appraisal/valuation.
Actuarial services.
Internal audit outsourcing services.
Management functions.
HR.
Broker-dealer, investment advice or investment banking service.
Legal services.
Expert services unrelated to audit.

Question 27

When can an accountant accept contingent fees or commissions from a public company audit client?

Answer 27

Never.

Question 28

Does a company have to rotate an accounting firm for audit? What must be rotated? What’s the numbers for exempt firms?

Answer 28

No.
Accounting firms must rotate lead and concurring audit partners every 5 years (5 on 5 off).
Other partners providing more than 10 hrs of attest service must rotate every 7 yrs (7 on, 2 off).

Fewer than 5 audit clients and fewer than 10 audit partners.

Question 29

What is the role of the audit client’s audit committee?

Answer 29

Pre-approve hiring and firing of the auditor, the auditor’s provision of NAS.

Question 30

What does SOX address about auditor compensation?

Answer 30

A firm is not independent if an audit partner earns or receives compensation based on selling NAS to the audit client.

Question 31

When does a CP’s impaired independence not impair the independence over all?

Answer 31

CP didn’t know the circumstances that led to impaired independence.
Lack of independence corrected as promptly as possible once it became known.
The accounting firm has a quality control system in place that provides reasonable assurance that independence rules will be complied with.

Question 32

What must quality control systems include? Who does this apply to?

Answer 32

Written independence policies/procedures.
An automated system tracking investments of partners and managers that might impair independence.
For all professional, a system that provides timely information about the entity from which the accountant is required to maintain independence.
Firm-wide training on independence.
Annual internal inspection and testing program.
Notification to all firm employees of the name and the title of the member of senior management responsible for compliance with independence rules.
A disciplinary mechanism to ensure compliance.

For firms annually auditing more than 500 companies.

Question 33

What does PCAOB stand for?

Answer 33

Public company accounting oversight board

Question 34

Who must approve PCAOB rules?

Answer 34

SEC

Question 35

What kind of circumstances does the tax service limited to audit clients for PCAOB?

Answer 35

Services related to marketing, planning, opinion in favor of tax transactions that are confidential, aggressive (tax avoidance is a significant purpose unless the treatment is at least more likely than not to be allowable.

Question 36

Can auditor provide tax service to an audit client’s FRORs (financial responsibility oversight roles) or IMF of those people?

Answer 36

No.

Question 37

Who are FRORs?

Answer 37

A person who can or does exercise influence over the contents of financial stmt or anyone who prepares them.

Question 38

What are 3 exceptions to tax service rules to FRORs?

Answer 38

1. The person is FROR because he/she is a member of the client’s board of directors.
2. …because of a relationship to an affiliate of the entity being audited where the affiliate’s financial stmts are not material to the consolidated stmts of the audit client or are audited by a different audit firm.
3. The person was not FROR before hiring, promotion or similar change in employment AND tax services are provided pursuant to an engagement in process before the change in employment and completed on or before 180 days after the employment event.

Question 39

What are requirements for provision of tax services to an audit client: PCAOB?

Answer 39

Pre-approval by the client’s audit committee with 3 Ds.
Describe in writing: scope, fee structure, related agreements, compensation agreement.
Discuss with the audit committee the potential effects of the services on the firm’s independence.
Document the discussion.

Question 40

Are the requirements for getting pre-approved of other permitted NAS similar to the tax requirements?

Answer 40

Yes.

Question 41

Is the independence review an ongoing obligation?

Answer 41

Yes, at least annually.

Question 42

Are there any other PCAOB independence rules to keep mind?

Answer 42

Yes, public accountants must not knowingly or recklessly, by action or omission contribute to the violations of SOX, PCAOB rules, Federal securities laws, professional studs.

Question 43

PCAOB was established by which?

Answer 43

The Sarbanes-Oxiley Act of 2002.