Chapter 6 Deck 2 Flashcards
According to the ethical standards of the profession, a CPA’s independence would most likely be impaired if the CPA:
With regard to business relationships, independence is impaired if the member is an employee of an attestation client or is able to make management decisions on behalf of the client. Independence would, therefore, be impaired if a CPA contracted with the client to supervise the client’s office personnel (e.g., in the performance of normal recurring activities).
According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA’s independence?
Independence shall be considered to be impaired if, during the period of the professional engagement, the CPA had a direct or material indirect financial interest in the client.
Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?
A CPA in public practice should be independent in fact and appearance when providing auditing and other attestation services.
Under the provisions of the Sarbanes-Oxley Act of 2002, registered public accounting firms are required to prepare and maintain audit work papers and other information related to any audit report for a period of:
7 years
Under the provisions of the Sarbanes-Oxley Act of 2002, the lead audit or coordinating partner and the reviewing partner must rotate off the audit:
Every 5 years
Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchange Commission. How many annual audit period(s) must be completed before such employment can be accepted?
1 year
The Code of Professional Conduct, Independence Rule, does not consider which of the following circumstances to be a lack of independence:
Independence is impaired by a member, a member’s spouse or dependents, or a close family member who holds a key position in an audit client. According to the Code, a close relative is defined as a parent, sibling, or nondependent child. Since a brother-in-law and family of the brother-in-law are not considered to be close relatives, independence would not be impaired.
On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA’s net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client’s financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client’s December 31, Year 2, financial statements?
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.” Since this loan was fully secured and there was no indication of a “preference,” it appears to be in the ordinary course of business. Furthermore, the CPA was no longer a debtor of the financial institution at the time of the audit engagement. A CPA must be independent when providing auditing and attestation services, not compilation services.
According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company’s board of directors?
According to the Code of Professional Conduct, a CPA may only serve on the board of directors when the CPA does not audit the company and has no other business connections with the company. A CPA’s independence is impaired by business relationships with its client, including service on the client’s board of directors.
How many audits of public companies per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB?
more than 100 audits
An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions?
SEC and SOX rules prohibit an accounting firm from auditing an issuer’s financial statements if certain members of management of the issuer (members in financial oversight roles such as the CEO, CFO, or controller) had been members of the accounting firm’s audit engagement team within the one-year period preceding the commencement of audit procedures (the required “cooling off” period). A staff accountant would not be considered to be in a financial oversight role, thus could be hired without violating this requirement.
Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients’ express permission?
An ethics ruling related to the Confidential Client Information Rule states that it is permissible for a member to disclose the name of a client without the client’s consent unless the disclosure of the client’s name results in the release of confidential information. The specific example given in the ethics ruling states that if a member’s practice is limited to bankruptcy matters, the disclosure of a client’s name suggests that the client may be experiencing financial difficulties, which could be confidential client information. Confidential client information cannot be disclosed without the client’s consent.
Which of the following are true regarding communication requirements an auditor must follow when providing tax services to an audit client who is an issuer under the Sarbanes-Oxley Act of 2002?
The auditor must communicate to the audit committee, in writing, regarding the proposed tax services and related fees, and must discuss with the audit committee the potential effects of the proposed tax services on the firm’s independence. Tax services related to contingent fee arrangements, confidential tax transactions, and certain aggressive tax transactions are expressly prohibited.
The controller of a small utility company has interviewed audit firms proposing to perform the annual audit of their employee benefit plan. According to the guidelines of the Department of Labor (DOL), the selected auditor must be:
The DOL requires auditor independence when auditing and providing an opinion on the financial information submitted annually to the DOL.
Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following?
Management’s assessment of the effectiveness of internal control over financial reporting. Also requires the company’s external auditors to attest to, and report on, the internal control assessment made by management of the issuer.
