A6 Professional Responsibilities PT 3

Question 1

Title I of the SOX requires that registered firms must adhere to what auditing standards?

Answer 1

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 2

Under SOX title II and SEC Regulations S-X, what service must be pre-approved by the audit committee.

Answer 2

All auditing services and permitted non-auditing services (including tax services) must be pre-approved 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 more than 5% of the total revenue from the audit client during the FY when 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.

Question 3

Under SOX Title II, what services may not be provided to an audit client?

Answer 3

Prohibited services include:

1. Bookkeeping
2. Financial information systems design and implementation
3. Appraisal and valuation services
4. Actual services
5. management function and HR function
6. Internal audit outsourcing services
7. Investment related services
8. Legal services

Question 4

What are the audit partner rotations rules under SOX Title II and SEC Regulation S-X?

Answer 4

1. Both Sox and Regulations S-X require the lead and the concurring partner to rotate off the audit ever 5 years. Lead and concurring partners are subject to a 5 year “time out” period.
2. Requires other partners to rotate off every 7 yrs. Other partners are subject to a 2 year time out period.

Question 5

What is the required cooling-off period under SOX Title II and SEC Regulation S-X?

Answer 5

The audit firm cannot have employed an issuer’s CEO, CFO, controller, CAO, or other employee in a financial reporting oversight role during the one year preceding the audit.

Question 6

What is the required content of management’s internal control report under SOX Title IV?

Answer 6

1. Management’s responsibility for establishing an adequate internal control structure for financial reporting.
2. An assessment of the effectiveness of the current year’s control structure.

Question 7

The SEC requires issuers to disclose whether or not (and if not, why not) the audit committee has at least one member who is a financial expert. What qualifies as an financial expert?

Answer 7

1. Education and experience as a principal financial officer, principle accounting, controller, public accountant or auditor or experience in one or more position that involve the performance of similar function.
2. Experience actively supervising a principle financial officer, principle accounting officer, controller, public accountant, auditor or other person performing similar function, or experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, or evaluation of financial statements, or
3. other relevant experience.

Question 8

What knowledge should a financial expert on the audit committee have?

Answer 8

1. An understanding of F/S and GAAP.
2. An ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserve.
3. Experience preparing, auditing, analyzing, or evaluating F/S that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s F/S or experience activity supervising one or more persons engaged in such activity.
4. An understanding of internal controls and procedures for financial reporting and
5. An understanding of audit committee functions.

Question 9

What are the PCAOB’s tax related independence rules?

Answer 9

1. Registered firms may not provide confidential or aggressive tax transactions to audit clients.
2. Registered firms may not provide tax services to corporate officers or audit clients or their immediate family members.
   3 Audit committee must pre-approve tax services and related fees.

Question 10

Under the SEC’s principles of independence, a client relationship or service provided to an audit client would create independence issue if it:

Answer 10

1. Creates a mutual or conflicting interest between the auditor and client.
2. Results in the auditor acting as management or an employee of the audit client.
3. Places the auditor in a position of auditing his or her own work.
4. Makes the auditor an advocate for the audit client.

Question 11

Explain the conceptual framework approach under IFAC’s Code of Ethics and identify threats to compliance with its fundamental principles.

Answer 11

IFAC’s Code is based on a conceptual framework (versus a set of rules) that requires entities to identify, evaluate, and address threats to compliance, with its fundamental principles. These threats include:

1. Self-interest threat
2. Self-review threat
3. Advocacy threat
4. Familiarity threat
5. Intimidation threat