A6 Professional Responsibilities PT 2

Question 1

Define and provide an example of adverse interest threat.

Answer 1

The threat that a member will not act with objectivity because the member’s interest are opposed to the client or employing organization interests.

For example, a member experiences an adverse interest threat if he is commencing litigation against their client / employing organization.

Question 2

Define and provide an example of advocacy threat.

Answer 2

The threat that a member will promote the client’s or employing organization’s interest to the point that his objectivity or independence, as applicable is compromised.

Ex: A member experiences advocacy threat when he endorses a client’s services or product.

Question 3

Define & provide an example of familiarity threat.

Answer 3

The threat that, due to a long or close relationship with the client or employing organization, a member will become too accepting of the product or service and / or too sympathetic to the client’s or employing organization interests.

Ex: A member experiences familiarity threat when a close friend is employed by the client.

Question 4

Define & provide an example of management participation threat.

Answer 4

The threat that a member will take on the role of client management or otherwise assume management responsibilities.

Ex: A member experiences management participation threat if he or she serves as an officer or a director of an attest client. This threat exists for members engaged in attest engagements. This threat does not apply to members in business.

Question 5

Define & provide an example of self-interest threat.

Answer 5

The threat that a member could benefit financially or otherwise from an interest in or relationship with, a client or employing organization or persons associated with the client or employing organization.

For example, a self-interest threat occurs when a member is eligible for a profit or other performance-related bonus at the employing organization and the value of that bonus is directly affected by the member’s decisions.

Question 6

Define and provide an example of self-review threat.

Answer 6

The threat that a member will not appropriately evaluate:

1. The results of a previous judgement made or;
2. A service performed or supervised by the member or;
3. An individual in the member’s firm or employing organization; and
4. That the member will rely on that services in forming a judgement as part of another service.

Ex: A member in public practice would experience self-review threat when performing bookkeeper services for a client.

Question 7

Define & Provide an ex of undue influence threat.

Answer 7

The threat that a member will subordinate his judgement to an individual associate with a client or employing organization or any relevant 3rd party due to that individual’s reputation or expertise, aggressive or dominate personality, or attempts to coerce or exercise excessive influence over the member.

Ex: A member would experience undue influence threat if he or she is pressured to become associated with misleading information.

Question 8

What is an “issuer” and what group establishes standards for audit reports of issuers?

Answer 8

An issuer is an entity subject to the rules of SEC (this would include primarily public companies)

The PCAOB establishes standards for audit reports of issuers.

Question 9

Title 1 of the SOX requires that register firms must adhere to what auditing standards?

Answer 9

1. Audit WP must be maintained for 7 yrs
2. A concurring or 2nd partner review is required for each audit report
3. The audit report must describe the scope of the testing of the issuer’s internal controls.

Question 10

Under SOX title II and SEC Regulation S-X, what services must be preapproved by the audit committee?

Answer 10

All auditing services and permitted non-auditing services (including tax services) must be preapproved by the audit committee.

Note: Audit Committees may apply a de minimis exception to the preapproval requirements of non-audit services provided that those services:

1. Do not aggregate to more than 5% of total revenue form the audit client during the fiscal year when the services are provided.
2. Were not recognized as non-audit services at the time of the engagement; and
3. are promptly brought to the attention of the audit committee and approved prior to the completion of the audit.