A6, M6-M9 Flashcards
What procedure is required for interim statements for companies that file with the SEC (public)?
quarterly review of financial statements
Interim reviews may be performed for what two time periods?
- a fiscal term (less than a full year)
- rolling 12-month period (complete FS)
If an auditor conducts interim reviews without an annual audit, what standards are followed?
SSARS
An explanatory note on the review report (interim, nonissuer) should say what?
information does not represent complete FS and should be read with the latest annual FS
If selected quarterly data is included in annual reports (issuer), what procedure is required on the quarterly data?
review of interim financials
When is a written report required on a review of interim FS (issuer)?
If the client states that the auditor has reviewed the interim financial information, a written report is required. Otherwise, no written report is required.
For an issuer, does a review provide assurance regarding internal controls?
No, but communications will be made if any significant deficiencies or material weaknesses are identified.
Can significant deficiencies in IC make it impractiable for an auditor to conduct a review?
Potentially, yes.
Internal controls over interim financial information is (the same as/different from) internal controls over annual FS.
may differ
If a journal entry is super complex, what is the most appropriate thing an auditor should do?
Ask more questions about it! Sometimes a client makes something complex only to intimidate you.
The most common timing for fraudulent journal entries to be posted is …
at the end of the reporting period
Does an accountant in an interim review communicate with the client’s (internal) lawyers? What about external lawyers?
Yes for internal.
External is only communicated with if (1) no internal lawyers, and (2) auditor is aware that there is some litigation.
When are review procedures typically performed in relation to the completion of the preparation of interim financial statements?
before or during prepartion
What three steps should be taken if management refuses to provide the client representation letter?
- Discuss with mangement and board.
- Reevaluate integrity of management and risks.
- Consider whether to withdraw.
If management does not provide the representation letter, can a review report be issued?
No, the review is considered incomplete.
What should the auditor/accountant do in an interim review if an issuer or nonissuer issues the interim financial statements before the review was completed?
Report to the board.
If an auditor cannot complete a review, what three things are communicate to the board?
- the reason the review cannot be completed
- incomplete review means there will be no review report
- any material modifications
If an interim review cannot be completed, can an auditor complete a compilation report instead?
only for private companies, not public companies
What are the sections for the review report for a review of interim financial statements for a non-issuer (unmodified)?
- Results of Review of Interim Financial Information
- Basis for Review Results
- Responsibilities of Management for Interim Financial Information
What is the title of a review report (interim, non-issuer)?
Independent Auditor’s Review Report
What are the sections for the review report for a review of interim financial statements for an issuer (unmodified)?
- Results of Review of Interim Financial Information
- Basis for Review Results
(no responsibilities section)
What is the title of a review report (interim, issuer)?
Report of the Independent Registered Public Accounting Firm
Who is the addressee in a review report (interim, nonissuer)?
shareholders and board
When should the auditor in an interim review include a going concern section in the report, if there was a going concern in the prior year’s report as well (non-issuer)?
going concern is not alleviated
When should the auditor in an interim review include a going concern section in the report, if there was NOT a going concern in the prior year’s report but there is one this year (non-issuer)?
management has a statement in the FS that you are emphasizing in the paragraph
What should the auditor in an interim review do if disclosure about the going concern is adequate and there is a going concern issue this year (issuer)?
Explanatory paragraph can be included, but not required.
If the auditor determines that disclosure about going concern is inadequate, what are the effect on the report?
possibly modified
When interim financial information is included in the notes to annual FS, but they are not marked “unaudited,” what does the auditor do in their annual audit report?
disclaim an opinion on the interim FS
What three conditions need to be present in order to include an other -matter paragraph in relation to interim financial information in the audited financials?
- reviewed interim financial information is in a document containing audited FS, AND
- interim financial information is not presented in accordance with framework, AND
- separate review report that shows the departure is not presented with the interim financials
What should be included in the annual audit report if quarterly information that the SEC requires is omitted?
explanatory paragraph indicating that the company did not present the required information
If the report on interim financial statements is presented in a registration statement, what statement must be included in the prospectus?
report is not considered to be part of the registration statement
AICPA’s Code of Professional Conduct governs …
any service that a member of the AICPA performs
A significant change in control activities would likely result in the accountant employing analytical procedures with a (more/less) precise expectation.
More precise, because that is more effective at catching misstatements.
T/F: An accountant must maintain independence in mental attitude in all matters relating to the engagement in a review.
True.
T/F: Inconsistencies in the application of accounting principles require modification of the review report when the financial statements include adequate disclosure.
False, if there is adequate disclosure you do not need to modify.
Why is it essential to have a professional code of conduct?
It is a distinguishing mark of a profession that accepts a high degree of responsibility toward the public.
What does it mean if the standards say to “consider” something?
required to think about several matters
What does it mean if the standards say to “evaluate” something?
assess and weigh the significance of a matter
What does it mean if the standards say to “determine” something?
come to a conclusion and make a decision on a matter
What are the three sections of the Code of Professional Conduct, including the number code that identifies that section?
- Members in Public Practice (1.XXX)
- Members in Business (2.XXX)
- Other Members (3.XXX)
What is a member in public practice, generally?
someone who works for a public accounting firm
What are the three groups included in “members in public practice”?
- covered members
- immediate family
- close relatives
What is a “member in business,” generally?
someone who works in industry, not at a CPA firm
What are “other members”, generally?
people in voluntary retirement or between jobs
What are the six principles in the code of conduct?
- Objectivity and Independence
- Responsibilities
- Integrity
- Public Interest
- Due Care
- Scope and Nature of Services
What is involved in due care?
- strive to improve your services by improving competencies (education and experience)
- avoid negligence
What two functions of independence are required for a member in public practice?
independence in fact and appearance
What question should you ask when looking at independence in appearance?
(1) Would a reasonably prudent business person
(2) who is aware of all the facts and circumstances
(3) ultimately assess that you can still be objective and exercise professional skepticism?
What two major principles are always applicable, regardless of whether you are in public practice or in business?
integrity and objectivity
When is the only time the independence requirement applies?
working in public and attest services
What is the only rule in the AICPA Code of Professional conduct that applies to all three types of members?
the acts discreditable rule
Covered members are not allowed what types of interests in their clients?
direct or material indirect
What rules do immediate family members of covered members have to follow in terms of allowed interests?
the same rules as covered members
What is the general independence rule for close relatives?
Independence is impaired is you knew or should have known that they:
(1) hold a significant interest in your client
(2) have access to accounting records at your client
(3) have the ability to influence management
Who is included in the definition of immediate family under AIPCA rules (3)?
person’s spouse, spousal equivalent, and dependents
Who is included in the definition of close relatives under AIPCA rules (3)?
parents, siblings, and nondependent children
Does owning 1 share or 0.00004% directly in a client impair independence?
Yes, because it is a direct financial interest.
Does having a loan (either direction, to or from) a client impair independence for a covered member?
Yes.
Can a covered member accept a gift from a client without impairing independence?
Yes, as long as it is a token gift. Anything more than a token gift would impair independence.
Does having a fully collateralized car loan with a financial institution client impair independence?
No, as long as terms are not different from market and the loan remains fully colleteralized.
Does having a credit card with a financial institution client impair independence?
No, as long as your credit card balance is not over $10,000.
Does having a bank account with a financial institution client impair independence?
No, as long as it is fully insured by the FDIC.
Does having a passbook loan with a financial institution client impair independence?
No.
What is a passbook loan?
a loan that uses the balance of a savings account as collateral
If you own the assets of a company as a beneficiary of a blind trust (covered member is the beneficiary), is your independence impaired (if so, direct or indirect)?
Yes, this is a direct interest.
If you are a general partner in your client’s partnership, is independence impaired (if so, direct or indirect)?
Yes, direct.
If you have a financial interest in a trust where the covered member is the trustee, is independence impaired (if so, direct or indirect)?
Yes because as the trustee you can control the investments, direct.
What are two examples of indirect financial interests?
- owning shares in a mutual fund that invests heavily in your client (material)
- direct financial interest in a company who invests in your client
If a covered member’s immediate family or close relative is employed by the client, is independence impaired?
Only if they are working in a key position. (CEO, CFO, accounting role, etc.)
If a covered member has been offered employment by the client, are they independent?
No. They need to notify the firm and be removed from the engagement.
If a covered member is discussing employment with the client, are they independent?
No. They need to notify the firm and be removed from the engagement.
What is an honorary trustee?
a person who supports an organization but doesn’t have voting rights
Does being a member or honorary trustee of a NFP charitable, civic, or religious group impair independence?
No.
Does making management decisions for the client impair independence?
Yes.
Does being part of the same trade associations (ex: part of the same country club) as a client impair independence?
No.
Does having custody of the client’s assets impair independence?
Yes.
Does being an expert witness for a client impair independence?
Yes.
Independence is impaired when dues owed from the client are outstanding for …
over one year
Can a member still do the service (audit) if dues are still outstanding for over one year?
Yes, only if the client guarantees in writing that they will pay before the release of the new report.
What is the exception to when litigation does not create an independence issue?
- immaterial dollar amount AND
- unrelated to attestation service
Services can still be performed despite a conflict of interest when what two things are done?
- relationship is disclosed, AND
- consent of client is obtained
What four concepts are included under the general standards rule?
- professional competence
- planning and supervision
- sufficient relevant data
- due professional care
What two things could justify a departure from GAAP?
- new legislation
- new forms of business transactions
What does the confidential client information rule say (generally)?
do not disclose confidential client information without the client’s approval
What are four exceptions to the confidentiality rules?
(1) comply with validly issued subpoena - court order
(2) part of quality review from the AICPA
(3) response to inquiry by AICPA or state board
(4) for legal defence against a lawsuit that the client filed against you
What is a contingent fee?
when the fee received depends on some outcome
What is the general rule for contingent fees?
They are not allowed.
In what two scenarios are contingent fees allowed?
(1) fixed by a court or judicial proceeding
(2) fees mandated by law and legislation
Can you receive a contingent fee for representing a client in an examination of a tax return by an IRS agent?
Yes.
Can you receive a contingent fee for a compilation?
Yes, but you must disclose the lack of independence.
If a client has not paid you, can you hold on to their records when they request them back?
No, failure to return records is an act discreditable to the profession.
Do you have to return your audit workpapers and any documentation created by the auditor when the client asks for their records?
No, you only need to return the client’s records.
Which rule under the AICPA Code of Conduct does failing to file a timely personal or firm tax return fall under?
acts discreditable
Is a CPA firm allowed to do advertising? What are the limits on this advertising?
Allowed, but not in a manner that is false, misleading, or deceptive.
What four things can make an advertisement false, misleading, or deceptive?
- create false or unjustified expectations of favorable results
- imply the ability to influence a court or official
- intentionally underestimate fees
- mislead/decieve a reasonable person
What is the fundamental rule about commissions and referral fees?
They impair independence.
When you are not required to be independent, you can receive a referral fee, but you also have to do what other thing?
disclose to the client that they are receiving a referral fee for their reccomendation
A firm may not designate itself as “Members of the AICPA” unless …
all of its CPA owners are members of the AICPA
A firm may not designate itself as “CPAs” (plural) unless…
all of its owners are CPAs
If an owner has passed, can you continue to use their name as the name of the firm?
Yes.
Can the firm use the name of owners who are not associated with the firm (never were associated)?
No!
If only one partner remains after the others leave or pass away, how long can keep using the partnership name as a sole practitioner?
for up to two years
What rules does someone follow if they work in multiple domains (public practice and business)?
Look at all applicable parts and apply the most restrictive provisions.
What three steps does the conceptual framework (threats and safeguards approach) require?
- Identify threats to compliance with the fundamental principles (7 of them).
- Evaluate the significance of each identified threat.
- Apply safeguards to eliminate threats or reduce threats to an acceptable level, whenever possible.
At what three levels or areas can safeguards be applied?
- profession, legislation, and regulation
- your company
- client
If threats cannot be reduced to an acceptable level, can the member still conduct the engagement?
No!
What are the seven threats to compliance with the fundamental principles (AICPA)?
- adverse interest threat
- advocacy threat
- familiarity threat
- management participation threat
- self-interest threat
- self-review threat
- undue influence threat
What is the adverse interest threat?
not acting objectively because your interests are opposed with the client (ex: litigation)
What is the advocacy threat?
promoting the client to the point that objectivity/independence is compromised
What is the familiarity threat?
becoming too sympathetic or too accepting because of a long or close relationship with the client
What is the management participation threat?
taking on the role of client management or taking on management responsibilities
What is self-interest threat?
benefitting financially from an interest in a client
What is self-review threat?
not properly evaluating the results of a previous judgement made or the service that you performed for the client (looking at your own work)
What is undue influence threat?
subordinating your judgement because management is being aggressive/dominant
Regularly accepting gifts from the client gives rise to which of the seven threats?
familiarity threat
Relying excessively on revenue from a single client gives rise to which of the seven threats?
self-interest threat
Does due care involve consulting with experts? Does it involve obtaining speciality accreditation?
Yes, No
The attainment of the proper balance between professional experience and formal education is related to the (training and proficiency requirement/due care requirement).
training and proficiency requirement
Independence is impaired based on … that a member can exert over the investment.
control or appearance of control
T/F: Due care in performing an audit requires a member to plan and supervise adequately any professional activity for which he or she is responsible.
True.
Is an investment in a mutual fund a direct or indirect financial interest?
Indirect, because you do not control the investments made within the mutual fund.
A member’s independence is impaired if a member has a loan with a client and …
that loan is preferential in relationship to “other borrowers.
What is included in the definition of a covered member?
- All partners in the office that the lead attest engagement partner primarily practices in.
- Firm, including the firm’s benefit plan
- The managing partner of the firm
- All people on the engagement team
- any employee that provides more than 10 hours of non-audit work for the client or expects to on a recurring basis
What distinguishes something as a bookkeeping activity that impairs independence?
exercising judgement (authorizing, executing or consummating a transaction on behalf of a client or preparing source documents or originating data)
If you book entries according to management’s instructions, is independence impaired?
Not necessarily, this is what you do in a compilation.
If someone goes from working at the client to working at the CPA firm, when can they participate in an audit engagement for that client they used to work at?
when the engagement begins (is awarded) after the dissociation from the client
Is it permissible for a member to disclose the name of a client without the client’s consent?
Only if disclosure does not release confidential information.
What is an example of a time that disclosure of the client’s name would release confidential information?
You work specifically for bankruptcy or M&A.
Does the use of a records retention agency to store client records violate client confidentiality?
No.
It (would/would not) be acceptable for a covered member to join the board of directors of a local bank where several of their clients have savings accounts.
would
It (would/would not) be acceptable for a covered member to join the board of directors of a local bank where several of their clients have loans.
would not
Is there an independence concern here: “A new administrative staff member at a CPA firm sits on the board of trustees at a nonissuer audit client. The staff member performs routine clerical functions related to the engagement.”
No, because only clerical functions are done.
If a firm cannot return documentation to the client for some reason, what should they do at minimum?
communicated to company management the reason for the delay or returned the documentation after the initial company request
While an auditor cannot be an expert witness without impairing independence, what information can they provide in court for a client?
factual accounts to explain positions taken during their performance of the engagement
T/F: Management of the internal audit function is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting.
Management of the internal audit function is not responsible for this, management in general is responsible for this.
A written code of conduct promotes … (4 things)
honest/ethical conduct,
teamwork,
compliance, and
appropriate disclosure
If you own stock through a removed investment (invested in something that invests in the client), this is a direct or indirect interest?
indirect
What was the intent of SOX?
to imrpove the accuracy and reliability of financial information
What does SOX Title I do?
establish the PCAOB
What does the PCAOB do?
examine the auditors
How many members are on the PCAOB?
five
Of the five members on the PCAOB, __ must be CPAs and __ cannot be CPAs.
2, 3
The PCAOB is subject to the oversight by …
the SEC.
What three things does the PCAOB have the duty to do?
- register public accounting firms
- establish rules for preparation of audit reports
- conduct inspections of registered public accounting firms
Annual inspections by the PCAOB occur for firms that provide audit reports for how many issuers?
more than 100 issuers
If a firm provides reports for 100 or less issuers, how often should they be inspected by the PCAOB?
once every three years
Can a firm not registered with the PCAOB prepare an audit report for an SEC issuer?
No, only registered firms can.
How often does the application for registration need to be updated?
annually
What does the Holding Foreign Companies Accountable Act do?
If a client’s CPA firm’s audit has not been fully reviewed for 2-3 years, the securities of the company can be delisted on the US exchange (common for foreign companies).
According to PCAOB standards, audit documentation must be maintained for __ years.
7
Each audit report requires a what type of review, according to SOX Title I?
a concurring or second partner review
Registered public accounting firms must have what in place in their organization?
quality control standards
If a CPA firm is considered to have committed a wrongdoing, what are some of the sanctions the PCAOB can enforce?
- temporary suspension or revocation of registration
- bar a person from associating with firm
- limit activities of firm
- civil monetary penalties
- censure
- professional education/training
What is the maximum civil fine for intentional or knowing conduct, including reckless conduct, resulting in violations OR repeated instances of negligent conduct (for individuals and company)?
Individuals: 750K
Company: 15M
What is the maximum civil fine for other wrongdoings (for individuals and company)?
Individual: 100K
Company: 2M
Are tax services permissable to be perfomed by the auditor?
only if preapproved by the audit committee
Can the auditor perform tax services for the CEO of their client?
No.
Can the auditor perform tax services for the CEO’s immediate family of their client?
No.
Can the auditor perform tax services for a board member of their client?
Yes.
The lead audit/coordinating partner and reviewing partner must rotate off an audit engagement every __ years, with a __ year cool off period.
5, 5
Other partners on the engagement must rotate off an audit engagement every __ years, with a __ year cool off period.
7, 2
The name of which partner must be disclosed under PCAOB standards?
the name of the engagement party
What is SOX Title II about?
auditor independence
Which types of services performed need to be preapproved by the audit committee of an issuer?
all auditing and non-audit services
When someone leaves the audit firm to work for the client, the audit firm CANNOT audit them for a __-year cool off if the person leaving goes into which positions?
1-year cool off; CEO, CFO, controller, CAO
When does the 1-year gap related to independence start?
when you last audited them
(You can also look back 1 year from the current date and if you were still employed on the audit engagement in that period, your year is not over yet.)
What is SOX Title III about?
corporate responsibility
What two things are included in the corporate responsibility section of SOX?
- establish audit committee
- representations made by key corporate officers
The auditor reports directly to who?
the audit commitee
The __ __ is responsible for resolving disputes between the auditor and management.
audit commitee
Can an audit committee member accept compensation for consulting or advisory services to the company?
No, they must be independent.
Can an audit committee member have the ability to influence financial decisions?
No.
What does it mean to be affiliated with a company?
have the ability to influence financial decisions
The audit committee needs to establish a system for what (hint: reporting)?
whistleblower hotline for complaints on audit, accounting, or IC issues
The whistleblower hotline must accomodate ___, ___ reports.
confidential, anonymous
What else does the whistleblower hotline system need to be able to do?
- receive and retain complaints
- method to address complaints
What is a way that a whistleblower issue can be addressed?
engage a forensic auditor
T/F: The CEO and CFO must sign representations on the annual, but not the quarterly financials.
False, they must sign representations for both!
What assertions are signed on by the CEO/CFO?
- review the report
- report does not contain untrue statements or omit material information
- fairly present in all material respects the financial condition
- assumed responsibility for IC
- disclosed IC weaknesses and fraud to auditor
- disclosed significant changes in IC to auditor
What are three assertions that are signed on by the CEO/CFO regarding internal controls?
- material information available
- IC evaluated for effectiveness as of a date within 90 days prior to the report
- report includes conclusions about effectiveness of IC
The internal controls must be evaluated for effectiveness as of a date ___ days prior to the report.
90
T/F: The CEO/CFO only have to report material fraud involving management and those with a significant role in IC to the auditor.
False, they must report ALL fraud that involves senior management or those with a significant role in IC.
If an issuer has to restate their financials due to material noncompliance with financial reporting requirements, what does the CEO/CFO have to do?
Reimburse the company for (1) bonuses or equity-based compensation and/or (2) gains on sale of securities during that 12-month period.
This is called the clawback provision.
What is SOX Title 4 about?
enhanced financial disclosures
Additional financial disclosures are required around what three areas?
- financial statements
- internal controls
- operations of audit committee
The financial statements should disclose all material ___-____ ___ ____.
off-balance sheet transactions
What are three examples of off-balance sheet transactions?
- operating leases
- contingent obligations
- relationships with unconsolidated subsidiaries
What is the more common term you see for “pro-forma” financials?
non-GAAP financials
What three things must be true of pro-forma financials?
- no untrue statements
- no omitted material information
- reconciled with GAAP basis financial statements
Should the use of special purpose entities be disclosed?
Yes.
Disclosures are required for people who have (direct/indirect/both) of more than ___% of any class of an equity security in a company.
both direct and indirect; 10%
Statements are filed for principal shareholders at which three times (relating to ownership interests)?
- at the time of registration
- when a person achieves 10% ownership
- if there has been a change in ownership
Management’s assessment of IC under SOX is referred to as Section ___.
404
What is included in management’s report on IC (2)?
- statement that they are responsible for IC
- assessment of IC
Which types of companies are exempted from enhanced disclosure requirements?
Investment companies, because their activities are inherently more secretive.
What is the requirement for a code of ethics, under SOX Title IV?
Issuers must disclose whether the issuer has adopted a code of conduct for its senior officers.
What should the issuer do if no code of conduct has been adopted?
disclose the reasons
Changes to or waivers from the code of conduct are reported where?
on a Form 8-K
How many members of the audit committee need to be financial experts?
at least one
What disclosure is required related to the financial experts on the audit committee?
The financial reports should disclose that a financial expert exists on the committee, or the reasons why there is no member that is a financial expert.
Does the financial expert’s name need to be disclosed in the filing?
Yes.
Can the disclosure state that collectively all the members of the audit committee make up one audit member?
No, a single person needs to be the financial expert.
What three things can qualify a financial expert as a financial expert?
- education
- past experience as a public accountant
- past experience in a key financial position
What entity is required to review disclosures of issuers on 10Ks under Title 4 of SOX?
the SEC
Which company would have more SEC reviews of disclosures, those that had issued material misstatements in the past or one that did not?
had MM in past
Which company would have more SEC reviews of disclosures, those that have more volatility or less volatility?
more volatility
Which company would have more SEC reviews of disclosures, those that have higher or lower market capitalization?
higher market capitalization
What other two types of companies are more likely subject to SEC reveiew?
- emerging companies with disparities in price-to-earnings
- operations significantly affect any material sector of the economy
What is SOX Title 8 about?
corporate and criminal fraud accountability
Individuals who alter, destroy, mutilate, conceal, cover up, falsify, or make false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence an investigation will be … (fines and imprisonment)
fined and/or imprisoned for up to 20 years
What is the maximum imprisonment for an auditor who does not keep documentation for all seven years?
up to 10 years
What is the statute of limitations for securities fraud?
The earlier of:
- 2 years after discovery of the violation, or
- 5 years after the violation
Who does an employee file a complaint with if they have been fired or discriminated against for providing evidence of fraud?
Secretary of Labor
What are three of the compensatory damages for a employee that has been retaliated for whistleblowing?
- reinstate with the same level of seniority
- back pay (of salary) with interest
- compensation for any special damages as a result of discrimination (litigation costs)
An individual who knowingly executes, or attempts to execute, securities fraud will be fined and/or imprisoned for not more than ___ years.
25
T/F: Anyone who attempts to commit something has the same penalties as someone who commits an act.
True.
What is the max jail time for mail and wire fraud under SOX? What was it before SOX?
20 years, 5 years
What is the max jail time for violating ERISA under SOX? What was it before SOX?
1 year to 10 years
What is the max fine for violating ERISA under SOX? What was it before SOX?
5K to 100K
Fines imposed upon persons who are not individuals (companies) cannot exceed what amount?
$500,000
Which entity is responsible for reviewing and amending the jail times and fines?
United States Sentencing Commission
Any issuers periodic report that contains financials that is filed with SEC must contain a written statement signed by the CEO and CFO that says the periodic report fully complied with …
the Securities Exchange Act og 1934
If a corporate officer (CEO/CFO) signs the financials knowing that they do not comply, what is the max find and jail time?
$1M, 10 years
If a corporate officer (CEO/CFO) signs the financials willfully knowing that they do not comply, what is the max find and jail time?
$5M, 20 years
What is the difference between doing something “knowingly” and “willfully”?
Knowingly = You know it is wrong.
Willfully = You know it is wrong + intentionally act against the law.
What is SOX Title 9 about?
white collar crime penalty enhancements
What is SOX Title 10 about?
corporate fraud accountability
What does temporary freeze authority for the SEC mean?
If it is likely that penalty will have to paid, the payments have to be escrowed into an interest-bearing account for 45 days.
When can the SEC prohibit someone from serving on the board or as an officer (2)?
- individual violated securities laws, AND
- SEC determine they are unfit to serve
If someone knowingly takes harmful action against another person to retaliate for them providing information to the SEC, what is the maximum jail time?
10 years
Rule ___ of the SEC Regulation ___ outlines the independence rules that apply to SEC registrants.
2-01, S-X
Generally, what ownership interest percentage is considered to be material?
over 5%
What are four considerations of the SEC when looking at whether there is an independence issue?
- mutual or conflicting interest
- auditor acting as management
- auditor is auditing their own work
- auditor is an advocate for client
Are student loans and mortgage loans on a primary residence allowed from a financial institution client without an independence issue?
Yes, as long as they were taken before the individual became a covered person.
If a financial interest is received as an unsolicited gift or an inheritance, does this raise an independence issue?
No, as long as it is disposed of no later than 30 days after the person has knowledge of and the right to dispose of the financial interest
If you are getting a new audit client but you have an interest that would create an independence issue, you have to get rid of it before the earlier of which two dates?
- singing of initial engagement letter
- commencement of any audit, review, or attestation service
If an immediate family member receives a financial interest as an unavoidable consequence of participating in their employer’s compensation plan, how long do they have to dispose of the interest?
No later than 30 days after the person has knowledge of and the right to dispose of the financial interest.
Is there an independence issue if the client is an investee in the auditor’s business?
Yes.
What are the three broad categories of circumstances that impair auditor independence under SOX?
- financial relationships
- employment relationships
- business relationships
Is independence impaired if the covered member is on the management or board of directors at their client?
Yes.
Technically, how many hours do you have to work on the audit to be considered part of the engagement team?
more than 10 hours
Employment of a former-engagement team member at the client does not create an independence issue when what three criteria are met?
- can’t affect the firm’s decisions or policies, AND
- they don’t own shares or have a financial stake in the accounting firm, AND
- don’t receive payments from the audit firm (except from retirement plan or immaterial)
Under what two conditions is there NO independence issue when going from the client to working at a CPA firm?
- not allowed to participate in the audit engagement of their former employer, and
- not in a position to influence an audit covering a period when they were at the client
Small firms with fewer than __ clients who are (issuers/non-issuers) and have fewer than ___ partners may be exempted from the partner rotation requirement.
5 clients, issuers, 10 partners
T/F: When the audit committee does not do its job, the independence of the auditor is impaired.
True! So weird, but this is the case.
Preapproval isn’t needed for non-audit services if what requirements are met (3)?
- they make up 5% or less of the audit client’s total revenue for that year, AND
- they are communicated to the audit committee and approved before audit completion
Auditor independence is impaired if an audit partner has what arrangement for the amount of non-audit services sold to the client?
Audit partner gets paid more compensation for selling more non-audit services to the client.
How much do the PCAOB independence standards and SOX standards align for ethics and independence?
PCAOB has incorporated all SOX standards, with a few additions.
Which types of tax engagements are not allowed under PCAOB standards?
involve confidential or aggressive tax transactions
What independence discussion does the auditor need to have with the audit committee? How often does this discussion need to happen?
Annual Discussion:
- describe all relationships
- discuss effects of those relationships
- document relationships
- affirm independence in writing
What are the five ethical principles of governmental accounting?
- serving the public interest
- integrity
- objectivity
- proper use of governmental information, resources, and positions
- professional behavior
The general standard under GAGAS address what four areas (related to ethics)?
- independence
- professional judgement
- competence
- quality control and assurance
What does integrity involve in governmental ethical principles?
objective, fact-based, nonpartisan, non-ideological
What does objectivity involve in governmental ethical principles?
independence in mind and appearance
What does proper use of governmental information, resources, and positions involve?
provide services without taking advantage of any insider information for personal gain
What does professional behavior in governmental ethical standards involve?
conduct in a manner that is appropriate and does not bring discredit to the profession
OR honest effort in the performance of professional services in accordance with the relevant technical and professional standards.
For quality control and assurance related to governmental accounting, an external peer review is required at least once every __ years.
3
What are the seven threats to independence recognized under GAGAS?
- self-interest threat
- self-review threat
- bias threat
- familiarity threat
- undue influence threat
- management participation threat
- structural threat
What is the bias threat in GAGAS?
As a result of political, ideological, or social convictions, the auditor will not be objective.
What is structural threat in GAGAS?
when an audit organization is part of the same government entity it is auditing
What is a critical component to consider when offering non-audit services to a governmental client (GAGAS)?
management’s ability to effectively ovesee the non-audit service to be performed
T/F: If auditor begins to assume management responsibility (GAGAS), there is no safeguard that can reduce the threat to an acceptable level.
True. This automatically results in an independence issue and the auditor should not perform the audit service.
What are three types of “management” responsbilities that would impair independence of an auditor?
- setting policies and strategic direction
- directing and supervising employees
- having custody of assets
Is independence required for an ERISA audit?
Yes.
Who (what entity) is financial information being submitted to in an ERISA audit?
the Employee Benefits Security Administration of the DOL
Can the auditor maintain financial records for an employee benefit plan without impairing independence (DOL)?
No.
Can an actuary at the auditor’s firm render services to the employee benefit plan without impairing independence (DOL)?
Yes.
Can a former officer/employee of the plan or plan sponsor be employed by the CPA firm without impairing independence (DOL)?
Yes, if they are completely dissociate and do not participate in the auditing of the FS.
T/F: The code of conduct requirement under SOC applies to all employees.
False, this is only centered on senior management.
Is providing a comfort letter to a client an allowable non-audit service?
Yes, as long as it is pre-approved by the audit committee.
Does recommending internal control procedures to management constitute the auditor acting as management?
No, because management has the ultimate deicsion on whether to accept the procedures.
The assumption of accounting duties and taking possession of the books and records represents which type of threat?
management participation threat
T/F: If the auditor relies on the services of the company they are auditing, they are not independent and not allowed to do the audit (DOL/ERISA audit).
False.
Management must communicate significant control deficiences with (the auditor/the audit committee/both).
both
Mortgage loans material to the auditor’s net worth do NOT impair independence if they originated before what date?
February 5, 2001
