Chapter 6 Flashcards
immediate family
spouse and dependents
Objectivity vs independence
Objectivity applies to All services rendered but independence applies to attestation services only
Covered Member
Audit team and boss/office “chain of command”
close relatives
parents, siblings and adult kids
Independence NOT impaired when:
1) Fully collaterized car loans with a bank client
2) credit card balances no more than $10K
3) A bank account that is fully insured by the gov’t
4) A passbook loan
5) being a member of or an honorary trustee
6) membership in the same trade association as a client does not impair (country club)
Impairment of independence
1) one year overdue in the payment of professional fees
2) Actual or threatened litigation may impair independence
3) member makes management decisions for an attest client
4) commissions or referral fees
General Standards - member must:
1) exhibit professional competence (technical qualifications)
2) exercise due care (possess the same degree of skill commonly possessed)
3) Adequately plan and supervise
4) Obtain sufficient relevant data to afford reasonable basis
Must disclose confidential client information (even without client consent) when:
1) subpoena or summons
2) quality review (peer review)
3) in response to any inquiry either made by the ethics division or trial board
4) your defense team (when client is suing you)
Contingent fees generally not allowed, but permitted when:
1) fixed by courts
2) compilation of FS expected to be used by third parties only if the member includes a stmt that member is not independent
CPA not obtain clients in a matter that is false or misleading/deceptive. That is:
1) create false or unjustified expectations of favorable results
2) imply the ability to influence a court or regulatory agent
3) Intentionally underestimate fees
4) would mislead or deceive a reasonable person
Registration with PCAOB - only registered pub accounting firm can audit SEC issuer. Application mentions:
1) names of issuers audited in the preceding and current year
2) a statement of the firms quality control policies
3) a list of all firm accountants who will participate in the audit
4) legal or disciplinary proceedings pending against the firm
5) disclosures filed by audited issuers concerning accounting disagreements
Auditor Independence: Prohibited services when auditing ‘issuer’:
1) bookkeeping
2) Financial Info systems and design implementation
3) Appraisal and valuation services
4) Actuarial services
5) mgmt functions
6) Internal audit outsourcing services
7) Services as a broker, dealer, investment adviser
8) Legal services
9) expert services unrelated to audit
10) tax services OK if pre-approved by audit committee
Registered Public Accounting Firms must:
1) maintain audit documentation for 7 years
2) provide a second partner review of each audit report
3) describe in audit reports the scope of the testing of the issuers IC structure
PCAOB is subject to the SEC and has duty to:
1) register public accounting firms that prepare audit reports for issuers
2) establish rules relating to the preparation of audit reports for issuers
3) conduct inspection, investigations, and disciplianary proceedings concerning registered public accounting firms
PCAOB - annual inspections
must conduct for registered public accounting firms that regularly provide reports for more than 100 issuers; if less than 100 issuers then inspect at least once every 3 years
The Rules
Rule 101 - Independence Rule 102 - Integrity and Objectivity Rule 201 - General Standards Rule 202- Compliance with standards Rule 203- Acccounting Principles Rule 301 - Confidential client info Rule 302 - Contingent Fees Rule 501 - Discreditable Acts
Enhanced Financial Disclosures
- Disclosures in periodic reports
- off-balance sheet transactions
- disclosure of transactions - officers/directors or 10% + S/H
- mgmt assessment of IC
- Code of Ethics for Senior Financial Officers
- Disclosure of Audit Committee Financial Expert
Non-audit services - preapproval not required when:
non-audit services do not exceed 5% of total revenues from the audit client
Required Auditor Reporting to the Audit Committee
1) Critical accounting principles and practices used
2) alternative accounting treatments
3) material written communications between the audit firm and mgmt
Employee benefit plan - Independence impaired
1) any direct financial interest or a material indirect financial interest in the plan or the plan sponsor
2) connection to the plan or the plan sponsor as a promoter, underwriter, investment advisor, voting trustee
3) an accountant or a member of the accounting firm maintains financial records for the employee benefit plan
Employee benefit plan - Independence NOT impaired
1) former officer is employed by firm and completely disassociated from the plan
2) the accountant firm was engaged by the plan sponsor during the engagement
3) an actuary associated with the account firm rendered services to the plan
Purpose of audit documentation
1) basis for the auditors report and the conclusion about the achievement of the objectives
2) evidence that the audit was conducted in accordance with GAAS and applicable legal requirements
