Code Provisions Flashcards
Charlie is an auditor whose firm audits Sitton Corporation, a publicly-held company. Under Sarbanes-Oxley, which of the following are NAS that Charlie’s firm may perform for Sitton without impairing independence?
Actuarial services.
Tax advice.
Internal audit outsourcing services.
Broker/dealer services.
Tax advice.
Correct! Tax advice is allowed by SOX.
Looking at the “big picture” of Sarbanes-Oxley’s rules on NAS for public companies, which of the following is not one of SOX’s fundamental tenets?
Accounting firms should not audit their own work.
Auditing is hard, but nonaudit services are harder.
Auditors should not advocate for their clients.
Accounting firms should not serve as their clients’ managers.
Auditing is hard, but nonaudit services are harder.
This Answer is Correct
Correct! This choice is not one of SOX’s three fundamental ideas for NAS and it may not even make sense.
PCAOB rules issues pursuant to the Board’s charge in SOX allow an accounting firm to provide many tax services to a public company audit client. Nonetheless, some tax services impair independence when provided to audit clients. Which of the following services does not impair independence under PCAOB rules?
Entering into a contingent fee arrangement for tax services.
Providing an audit client with aggressive tax shelter advice.
Providing tax services to members of client management who serve in a financial reporting oversight role (FROR) for the client.
Preparing an audit client’s original federal income tax return.
Preparing an audit client’s original federal income tax return.
Correct! Neither SOX nor the PCAOB prohibit preparation of an audit client’s original return.
According to the ethical standards of the profession, a CPA’s independence would most likely be impaired if the CPA:
Accepted any gift from a client.
Became a member of a trade association that is a client.
Contracted with a client to supervise the client’s office personnel.
Served, with a client bank, as a co-fiduciary of an estate or trust.
Contracted with a client to supervise the client’s office personnel.
This answer is correct because supervision of the client’s office personnel would put the CPA in the role of management and impair independence.
The Sarbanes-Oxley Act of 2002 prohibits the performance of certain services for audit clients by auditors of public companies. Which of the following is not prohibited?
Bookkeeping services.
Appraisal services.
Tax preparation services.
Management functions.
Tax preparation services.
This answer is correct because the act does not prohibit the performance of tax preparation services.
A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA’s independence with respect to the client?
The CPA records transactions in accordance with classifications determined by management.
The CPA prepares financial statements from a trial balance provided by management.
The CPA posts adjusting journal entries prepared by management to the trial balance.
The CPA authorizes client transactions and reports them to management.
The CPA authorizes client transactions and reports them to management.
This answer is correct because the Code of Professional Conduct indicates that authorizing transactions impairs CPA independence.
According to the PCAOB, which of the following tax services may be provided jointly with the audit of an issuer’s financial statements without impairing independence?
Planning and issuing an opinion in favor of the tax treatment of an aggressive tax position.
Reviewing a proposed transaction and informing the client of the tax consequences.
Providing consultations under a contingency fee arrangement.
Preparing tax returns for an individual in a financial oversight reporting role during the audit period.
Reviewing a proposed transaction and informing the client of the tax consequences.
This answer is correct because the PCAOB allows the provision of a review of a proposed transactions and consideration of its tax consequences for an audit client.
Regarding nonaudit services (NAS), which of the following is not true?
The Code of Professional Conduct governs provision of NAS to privately-held companies.
Sarbanes-Oxley governs provision of NAS to public companies.
Covered members should monitor the total amount of their NAS to ensure that their total involvement with the client does not become so extensive that it would constitute performing a separate service.
Members may properly assume management responsibilities for audit clients.
Members may properly assume management responsibilities for audit clients.
Correct! One of the main lessons of NAS rules is that members may not properly assume management responsibility for audit clients.
Sipta knows that her audit firm should not perform management responsibilities for audit clients. Which of the following is an example of a permitted activity?
Setting strategic direction for the client.
Preparing source documents that evidence occurrence of a transaction.
Recommending a job description for a position that the client needs to fill.
Taking custody of client assets.
Recommending a job description for a position that the client needs to fill.
Correct! The activity described sounds like typical human relations consulting where the final decision as to whom to hire is made by the client.
The Pilden accounting firm wishes to sell some NAS to privately-held audit client Dimsdale Corporation. Which of the following is not true regarding independence rules for provision of NAS?
Pilden should require that Dimsdale’s management agrees to assume all management responsibilities, to oversee the service, to evaluate the adequacy and results of the services Pilden performs, and to accept responsibility for the results of the NAS.
Pilden must not only avoid assuming management responsibilities itself, it also must assure itself that Dimsdale’s managers are able to assume management responsibilities and oversee the services, make an informed judgment on the results of the NAS, and accept responsibility for making the judgments and decisions that are the proper responsibility of management.
Pilden must establish and document in writing its understanding with Dimsdale regarding the objectives of the engagement, the services to be performed, the Dimsdale’s acceptance of responsibilities, Pilden’s responsibilities, and any limitations on the engagement.
Pilden should never attend a Dimsdale board meeting, even as just nonvoting advisor.
Pilden should never attend a Dimsdale board meeting, even as just nonvoting advisor.
Correct! This choice is not true. If Pilden takes the proper steps (avoids management responsibilities, induces Dimsdale to assume such responsibilities and to oversee the NAS, documents its understanding in writing, etc.), then Pilden may attend board meetings as a nonvoting advisor.
Which of the following would be deemed by the code “management responsibilities” that would likely impair independence if a covered member performed them for an attest client?
Setting policy or strategic direction for the attest client.
Taking custody of client assets.
Preparing source documents that evidence the occurrence of a transaction.
All of the choices provided.
All of the choices provided.
Because the other three answer choices are all examples of “management responsibilities,” this is the best answer.
Which of the following are considered by the code to be nonaudit services that could impair independence if performed by a covered member for an attest client?
Discussing with the client selection and application of accounting standards or policies.
Discussing with the client the appropriateness of the client’s methods used to determine accounting and financial reporting.
Discussing with the client the form or content of the financial statements.
None of the choices provided.
None of the choices provided.
Because the other three answer choices are all examples of communications that are not deemed nonaudit services, this is the best answer.
The Flakel Accounting Firm audits ABC Co., a public company. ABC would like to fire its current tax consultant and replace it with Flakel. Which of the following is true?
I. This action would necessarily violate the Code.
II. This action would violate Sarbanes-Oxley rules, unless ABC’s audit committee preapproved the hiring.
III. This action would violate Sarbanes-Oxley rules even if ABC’s audit committee preapproved the hiring.
I only.
II only.
III only.
I and II.
II only.
Sarbanes-Oxley requires audit committee preapproval.
