Ethics Professional Responsibilities General Principles

Question 1

PCAOB
GAAS
SSARS
SSAE

Answer 1

PCAOB AS
GAAS SAS AU
SSARS AR
SSAE AT

Question 2

SSARS - Statements on Standards for Accounting and Review Services
(types, assurance for each type, independence for each type, opinion/conclusion/report?)

Answer 2

SSARS - preparation, compilation (of either historical OR proforma) & reviews of historical FS (of unaudited FS for nonissuers)

Statements on Standards for Accounting and Review Services codified in AR-C

Preparation- no assurance, no independence, no opinion/conclusion/report

Compilation- no assurance, no independence but must disclose if not, no opinion or conclusion but yes report

Review- limited (negative) assurance, independence required, no opinion but yes conclusion

Question 3

Compilation Report (SSARS) wording

Answer 3

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting
principles generally accepted in the United States of America. I (We) have performed compilation engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of
the AICPA. I (We) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.
[Signature of accounting firm or accountant, as appropriate]
[Accountant’s city and state]
[Date of the accountant’s report]

Question 4

Review Report (SSARS) (wording)

Answer 4

Independent Accountant’s Report
[Appropriate Addressee]
We have reviewed [identify the subject matter, for example, the accompanying schedule of investment returns of XYZ Company for the year ended December 31, 20XX]. XYZ Company’s management is responsible for [identify the subject matter, for example, presenting the schedule of investment returns] in accordance with (or based on) [identify the criteria, for example, the ABC criteria set forth in Note 1]. Our responsibility is to express a conclusion on [identify the subject matter, for example, the schedule of investment returns] based on our review. Our review was conducted in accordance with attestation standards established by the AICPA. Those standards require that we plan and perform the review to obtain limited assurance about whether any material modifications should be made to [identify the subject matter, for example, the schedule of investment returns] in order for it to be in accordance with (or based on) the criteria. The procedures performed in a review vary in nature and timing from, and are substantially less in extent than, an examination, the objective of which is to obtain reasonable assurance about whether [identify the subject matter, for example, the schedule of investment returns] is in accordance with (or based on) the criteria, in all material respects, in order to express an opinion. Accordingly, we do not express such an opinion. Because of the limited nature of the engagement, the level
of assurance obtained in a review is substantially lower than the assurance that would have been obtained had an examination been performed. We believe that the review evidence obtained is sufficient and appropriate to provide a reasonable basis for our conclusion.

We are required to be independent and to meet our other ethical responsibilities in accordance with relevant ethical requirements related to the engagement. [Include a description of the work performed as a basis for the practitioner’s conclusion.]
[Include a description of significant inherent limitations, if any, associated with the measurement or evaluation of the subject matter against the criteria.]
[Additional paragraphs may be added to emphasize certain matters relating to the attestation engagement or the subject matter.]
Based on our review, we are not aware of any material modifications that should be made to [identify the subject matter, for example, the accompanying schedule of investment returns of XYZ Company for the year ended December 31, 20XX], in order for it be in accordance with (or based on) [identify the criteria, for example, the ABC criteria set forth in Note 1].
[Signature of accounting firm or accountant, as appropriate]
[Accountant’s city and state]
[Date of the accountant’s review report]

Question 5

SSAE - Statements on Standards for Attestation Engagements

(types, independence for each type, assurance for each type, opinion/conclusion?)

Answer 5

SSAE - examinations, agreed-upon procedures, and proforma projections/forecasts (anything that IS NOT historical FS)

Statements on Standards for Attestation Engagements

Attest engagements - exam, review, or AUP (agreed upon procedures) on a subject matter or assertion about a subject matter - WRITTEN CONCLUSION/WRITTEN ASSERTION

AUP, forecasts/projections, proforma FS, compliance, MD&A, reporting on controls at a service organization

agreed upon procedures - independence required, no assurance, list of procedures and findings

review (not historical FS) - independence required, limited (negative) assurance, conclusion

examination (not historical FS) - independence required, reasonable (positive) assurance, opinion

Question 6

Which standards apply to REVIEW engagements?

Answer 6

SSAE - applies to anything that’s not historical financials so applies to review of management assertions
PCAOB - applies to quarterly reviews/interim for issuers that have annual audit
SAS - applies to quarterly reviews/interim for NON-issuers that have annual audit
SSARS - applies to reviews for NON-issuers annual financial statements that do NOT also get audited

Question 7

Which standards apply to an AUDIT of a NON-issuer?

Answer 7

SAS - Statements on Auditing Standards published by Auditing Standards Board is comprised of Generally Accepted Auditing Standards (GAAS)

Question 8

Which standards apply for compilations (regardless of whether it is a compilation of historical OR proforma/projections)

Answer 8

SSARS

Question 9

Unconditional vs presumptively mandatory requirements

Answer 9

unconditional requirements = “must”

presumptively mandatory requirements = “should” (comply in all cases when relevant, except in rare circumstances when procedure ineffective and alternate procedures achieve the requirement’s intent

Question 10

performance principle (assurance)

Answer 10

reasonable assurance must be obtained about whether FS as a whole are free of material misstatement, whether due to fraud or error

Question 11

reporting principle (opinion)

Answer 11

based upon the sufficient appropriate evidence obtained (auditor should issue a written report expressing an opinion or make a statement that an opinion cannot be expressed)

Question 12

Inherent limitations of audit (conditions that create inability to provide absolute assurance)

Answer 12

nature of financial reporting, nature of audit procedures, need for audit to be conducted in reasonable period of time with balance of benefit and cost

Question 13

Government Auditing Standards conducted under Government Accountability Office (GAO)

Generally Accepted Government Auditing Standards GAGAS or “Yellow Book” - what is this framework? What are the GAGAS requirements in addition to?

Answer 13

‘Yellow Book/GAGAS provides a framework for auditors of government entities, entities that receive government awards, and other audit organizations conducting governmental audits.

GAGAS requirements are in addition to the requirements contained in the AICPA standards.

Question 14

Government Auditing Standards conducted under Government Accountability Office (GAO)

Generally Accepted Government Auditing Standards GAGAS or “Yellow Book”

Responsibilities for auditor (framework, IC, laws/regs, fraud/abuse)

Answer 14

a. Financial statements in conformity with applicable financial reporting framework
b. Understanding of internal control, to assess risk of material noncompliance in the financial statements as a whole
c. Identified noncompliance with laws and regulations that have a direct and material effect on the financial statements as a whole
d. Other matters, such as identified material fraud and abuse

Question 15

Government Auditing Standards conducted under Government Accountability Office (GAO)

Generally Accepted Government Auditing Standards GAGAS or “Yellow Book”

Single Audit Act, threshold?

Answer 15

a. Single audits are more extensive than GAAS or GAGAS audits. A single audit encompasses an examination of a recipient’s financial records, financial statements, federal award transactions and expenditures, the general management of its operations, internal control systems, and federal assistance it received during the audit period (the time period of recipient operations examined in the single audit, which usually covers a natural or fiscal year).
b. The single audit is divided into two areas: compliance and financial. The Compliance Supplement is the document that provides guidance to auditors who are engaged to test for compliance with program requirements

Threshold of $750,000 is related to expenses, not revenues. An organization may receive more than $750,000 and not be required to undergo a single audit if it does not spend more than $750,000.

Question 16

Government Auditing Standards conducted under Government Accountability Office (GAO)

Generally Accepted Government Auditing Standards GAGAS or “Yellow Book”

Type A program vs Type B program? Minimum coverage rule?

Answer 16

Type A program - federal program that exceeds a quantifiable amount of federal awards expended, then determined whether high or low risk

minimum coverage rule:
high risk - recipient that has high risk of noncompliance with federal laws and regulations; audit 40% of total awards expended
low-risk - recipient that has low risk of noncompliance with federal laws and regulations; audit 20% of total federal awards expended

Type B program - any program that doesn’t meet Type A requirement

Question 17

AICPA Code of Professional Conduct: (“SPROID”)
* scope and nature of services principle
* public interest principle
* responsibilities principle
* objectivity & independence principle
* integrity principle
* due care principle

Answer 17

Scope and nature of services principle - “A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.”

Public interest principle - “Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism.”

Responsibilities principle - “In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities”

Objectivity and Independence principle - “member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services.”

Integrity principle - “To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity.”

Due care principle - “A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability.”

Question 18

AICPA Code of Professional Conduct
Independence Rule
Steps

Answer 18

1) identify threats to independence
2) evaluate significance of threats, both individually and in aggregate
3) apply safeguards to eliminate or reduce threats

Question 19

AICPA Code of Professional Conduct
Independence Rule
Adverse Threat (claim/litigation)

Answer 19

The threat that a member will not act with objectivity because the member’s interests are opposed to the client’s interests
1. The client has expressed an intention to commence litigation against the member
2. A client or officer, director, or significant shareholder of the client participates in litigation against the firm
3. A subrogee asserts a claim against the firm for recovery of insurance payments made to the client
4. A class action lawsuit is filed against the client and its officers and directors and the firm and its professional accountants

Question 20

AICPA Code of Professional Conduct
Independence Rule
Advocacy Threat

Answer 20

The threat that a member will promote a client’s interests or position to the point that their objectivity or independence is compromised
1. A member provides forensic accounting services to a client in litigation or a dispute with third parties
2. A firm acts as an investment adviser for an officer, a director, or a 10 percent shareholder of a client
3. A firm underwrites or promotes a client’s shares
4. A firm acts as a registered agent for a client
5. A member endorses a client’s services or products

Question 21

AICPA Code of Professional Conduct
Independence Rule
Familiarity Threat

Answer 21

The threat that, due to a long or close relationship with a client, a member will become too sympathetic to the client’s interests or too accepting of the client’s work or product
1. A member’s immediate family, close relative, or close friend is employed by the client
2. A former partner or professional employee joins the client in a key position and has knowledge of the firm’s policies and practices for the professional services engagement
3. Senior personnel have a long association with a client
4. A member has a significant close business relationship with an officer, a director, or a 10 percent shareholder of a client

Question 22

AICPA Code of Professional Conduct
Independence Rule
Management Participation Threat

Answer 22

The threat that a member will take on the role of client management or otherwise assume management responsibilities, such as may occur during an engagement to provide nonattest services

Question 23

AICPA Code of Professional Conduct
Independence Rule
Self-Interest Threat

Answer 23

The threat that a member could benefit, financially or otherwise, from an interest in, or relationship with, a client or persons associated with the client
1. The member has a financial interest in a client, and the outcome of a professional services engagement may affect the fair value of that financial interest
2. The member’s spouse enters into employment negotiations with the client
3. A firm enters into a contingent fee arrangement for a tax refund claim that is not a predetermined fee
4. Excessive reliance exists on revenue from a single client

Question 24

AICPA Code of Professional Conduct
Independence Rule
Self-Review Threat

Answer 24

The threat that a member will not appropriately evaluate the results of a previous judgment
made, or service performed or supervised by the member, and that the member will rely on that service in forming a judgment as part of another service
1. The member relies on the work product of the member’s firm
2. The member performs bookkeeping services for a client
3. A partner in the member’s office was associated with the client as an employee, an officer, a director, or a contractor

Question 25

AICPA Code of Professional Conduct
Independence Rule
Undue Influence Threat

Answer 25

The threat that a member will subordinate their judgment to an individual associated with a client, or any relevant third party, due to that individual’s reputation or expertise, aggressive or dominant personality, or attempts to coerce or exercise excessive influence over the member
1. The firm is threatened with dismissal from a client engagement
2. The client indicates that it will not award additional engagements to the firm if the firm continues to disagree with the client on an accounting or tax matter
3. An individual associated with a client or any relevant third party threatens to withdraw or terminate a professional service unless the member reaches certain judgments or conclusions

Question 26

AICPA Code of Professional Conduct
Independence Rule
Professional Safeguards

Answer 26

Safeguards created by the profession, legislation, or regulation
1. Training and continuing education requirements on independence and ethics
2. Professional standards and the threat of discipline
3. External review of a firm’s quality control system
4. Legislation establishing prohibitions and requirements for a firm or a firm’s professional employees
5. Competency and experience requirements for professional licensure

Question 27

AICPA Code of Professional Conduct
Independence Rule
Client Safeguards

Answer 27

Safeguards implemented by the client that would operate in combination with other safeguards
1. The client’s personnel have suitable skills, knowledge, or experience to make managerial decisions, and consult third-party resources as needed
2. The tone at the top emphasizes the client’s commitment to fair financial reporting and compliance with the applicable laws, rules, regulations, and corporate governance policies
3. Policies and procedures are in place which address ethical conduct and compliance with applicable laws, regulations, rules, and corporate governance policies

Question 28

AICPA Code of Professional Conduct
Independence Rule
Firm Safeguards

Answer 28

Safeguards implemented by the firm
1. Firm leadership that stresses the importance of complying with the rules and the expectation that engagement teams will act in the public interest
2. Policies and procedures that are designed to implement and monitor engagement quality control
3. Documented policies regarding the identification of threats to compliance with the rules, the evaluation of the significance of those threats, and the identification and application of safeguards that can eliminate identified threats or reduce them to an acceptable level

Question 29

AICPA Code of Professional Conduct
Independence Rule
Network Firms (characteristics of)

Answer 29

An association would be considered a network if it is formed for the purpose of cooperating to enhance the firms’ capabilities to provide professional services, AND one or more of the following characteristics exist:
1. Shares a common brand name
2. Shares common control
3. Shares profits or costs
4. Shares a common business strategy
5. Shares significant professional resources
6. Shares common quality control policies and procedures

Question 30

AICPA Code of Professional Conduct
Independence Rule
Network Firm requirements

Answer 30

1. A network firm is required to comply with the Independence Rule with respect to the financial statement audit and review clients of the other network firms if the use of the audit or review report for the client is not restricted by professional standards.
2. For all other attest clients, the member should consider any threats that may be created by another network firm’s interests and relationships.
   a. If those threats are not at an acceptable level, the member should apply safeguards to
   eliminate the threats or reduce them to an acceptable level
   b. If safeguards cannot be applied to eliminate or reduce the threats to an acceptable
   level, independence will be impaired

Question 31

AICPA Code of Professional Conduct
Independence Rule
-unpaid fees threat
-financial interest threat
-mutual funds threat
-retirement/savings account threat

Answer 31

-unpaid fees threat: compliance with independence rule would not/could not be reduced to acceptable level = impaired
-financial interest threat: direct or material indirect financial interest in client or firm employee or their immediate family own >5% of client’s securities = impaired
-mutual funds threat: owns >5% of shares in diversified mutual fund, need to evaluate whether ownership is material indirect financial interest
-retirement/savings account threat: employee or immediate family member self-directs investments or has ability to supervise or participate = direct financial interest = impaired; if interest is defined benefit plan = not considered a financial interest unless they can direct or supervise or participate

Question 32

AICPA Code of Professional Conduct
Independence Rule
Partnerships
LLC
Trust/estate

Answer 32

Partnerships: direct financial interest = impaired (limited partnership = indirect financial interest as long as no control/supervise/participate)
LLC: managing interest = direct financial interest = impaired; non-managing = indirect interest
Trust/estate: investment decision-making, >10% of client’s securities or total assets = impaired

Question 33

AICPA Code of Professional Conduct
Independence Rule
-deposit accounts
-loans
-leases

Answer 33

deposits: no self-interest threat if balance is insured by state/fed gov deposit insurance, any uninsured is immaterial
loans: no self-interest threat if unsecured loan is immaterial to net worth or is a home mortgage or is a secured loan; or a collateralized auto loan, collateralized CSV of life insurance policy, cash collateralized loan
leases: must be an operating lease, terms comparable with other leases of similar nature

Question 34

AICPA Code of Professional Conduct
Independence Rule
when nonattest, advisory, and IT systems are ok

Answer 34

nonattest: client assumes mgmt responsibilities, provides oversight, accepts responsibilities for results of services
advisory: can provide advice/research materials/recommendations, attend BOD meetings as nonvoting advisor, interpret FS/forecasts, provide mgmt with advice on potential plans/strategies
IT: can install financial info system they didn’t design/develop, design/develop/install non financial info system

Question 35

AICPA Code of Professional Conduct
Independence Rule
-Immediate family relationships with attest client
-Close relative

Answer 35

covered member neither participates on engagement nor is in a position to influence
immediate family member does not serve in a key position of client
immediate family member exercises or forfeits rights (SO, RS) once vested and price is advantageous for 10 consecutive days
amount payable (def comp) is funded through a separate vehicle (life insurance, annuity) and unfunded portion is immaterial to covered member

close relative neither has key position at attest client nor financial interest at attest client during period of professional engagement

Question 36

AICPA Code of Professional Conduct
Independence Rule
(simultaneous employment, honorary director/trustee, appraisal/valuation services, forensic accounting, witness, IA services, tax services)

Answer 36

simultaneous employment with client = independence impaired
honorary director or trustee = independence not impaired as long as position is clearly honorary (no voting)
appraisal, valuation, actuarial services = independence not impaired if service provided was solely for nonfinancial statement purposes, otherwise, independence is impaired
forensic accounting = litigation consultant (not impaired)
expert witness = impaired unless witness for a large group where client is small percentage of group and is not lead
internal audit services = impaired if client outsources IA function to covered member
tax services = not impaired as long as services are prep/submit/pay tax returns and covered member does not have control over client’s funds & client reviews/signs returns

Question 37

AICPA Code of Professional Conduct
General Standards Rule:
-professional competence
-due professional care
-planning and supervision
-sufficient relevant data

Answer 37

“A member shall comply with the following standards and with any interpretations thereof by bodies designated by Council.”
Professional competence. “Undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence.”
Due professional care. “Exercise due professional care in the performance of professional services.”
Planning and supervision. “Adequately plan and supervise the performance of professional services.”
Sufficient relevant data. “Obtain sufficient relevant data to afford a reasonable basis for conclusions or recommendations in relation to any professional services performed.”

Question 38

AICPA Code of Professional Conduct
Conpliance with Standards Rule

Answer 38

“A member who performs auditing, review, compilation, management consulting, tax, or other professional services shall comply with standards promulgated by bodies designated by Council.”

Question 39

AICPA Code of Professional Conduct
Accounting Principles Rule

Answer 39

“A member shall not (1) express an opinion…that the financial statements or other financial data of any entity are presented in conformity with generally accepted accounting principles…if such statements or data contain any departure from an accounting principle promulgated by bodies designated by Council to establish such principles that has a material effect on the statement or data taken as a whole.”

Question 40

AICPA Code of Professional Conduct
Acts Discreditable Rule
Confidential Client Info Rule
Contingent Fees Rule
Advertising and Other Form of Solicitation Rule
Commissions and Referral Fees Rules
Form of Organization and Name Rule (AICPA Council Resolution)

Answer 40

“A member shall not commit an act discreditable to the profession.”
“A member in public practice shall not disclose any confidential client information without the specific consent of the client.”
member shall not perform for a contingent fee an audit or review of FS, a compilation of FS that a 3rd party will use, an examination of prospective FS OR prepare an original or amended tax retrun or claim a refundfor a contingent fee
“A member in public practice shall not seek to obtain clients by advertising or other forms of solicitation in a manner that is false, misleading, or deceptive. Solicitation by the use of coercion, over‐reaching, or harassing conduct is prohibited.”
member in public practice shall not for a commission recommend or refer to a client any product or service, or for a commission recommend or refer any product or service to be supplied by a client, or receive a commission when the member or the member’s firm also performs for that client
“A member may practice public accounting only in a form of organization permitted by law or regulation whose characteristics conform to resolutions of Council.” Resolution: majority (over 50%) of the financial interests in a firm engaged in attest services (as defined therein) be owned by CPAs.

Question 41

Sarbanes-Oxley Act 2002 created PCAOB
PCAOB inspections ( >< 100 clients)

Answer 41

PCAOB inspects audit firms every year if they have >100 public clients or every 3 years if they have <100 public clients
PCAOB is funded by fees from audit firms of public companies
SEC has oversight over PCAOB

Question 42

SOX 101-109

Answer 42

SOX 101-109 - Duties of PCAOB
gives authority to PCAOB to set audit standards
allows them to inspect/investigate/discipline audit firms
enforce Sarbanes-Oxley Act/rules of the Board/professional standards
set budget and manage operations of Board
Public company audits are performed under PCAOB guidelines, not SaaS standards

Question 43

SOX 201 - Services Outside the Scope of Practice of Auditors (independence impaired)

Answer 43

Prohibited from providing nonaudit services to audit clients covered under SOX, including:
1. Bookkeeping or other services related to the accounting records or financial statements of
the audit client
2. Financial information systems design and implementation
3. Appraisal or valuation services
4. Actuarial services
5. Internal audit outsourcing services
6. Management functions or human resources
7. Broker or dealer, investment advisor, or investment banking services
8. Legal and expert services unrelated to the audit

Question 44

SOX 202 - preapproval requirements

Answer 44

auditing services and nonaudit services must be preapproved by the audit committee unless 1) total annual revenues for the nonaudit services are 5% or less of the total revenues paid to the auditor by the issuer
2) services were not recognized to be nonaudit services by the issuer at the time of the engagement
3) services are promptly brought to the attention of the audit committee of the issuer and approved prior to the completion of the audit

Question 45

SOX 203 - lead and review audit partner rotation, cooling off?

Answer 45

lead and review audit partner rotation - 5 years, cooling off is 5 years
all other audit partner rotation - 7 years, cooling off is 2 years

Question 46

SOX 204 - auditor reports to AC

Answer 46

amends Section 10A of the Securities Exchange Act of 1934 by requiring that each registered public accounting firm that performs an audit of issuer financial statements timely report to the issuer’s audit committee
all critical accounting policies/practices; all alternative treatments have been discussed w/mgmt; Summary/Schedule of unadjusted differences

Question 47

SOX 206 - conflicts of interest (“cool down period”)

Answer 47

Prevents firm from auditing an issuer if CEO, controller, CFO, CAO, or any equivalent was employed at the firm and participated in the audit of the entity during a 1-year period preceding the date of the initiation of the audit (i.e., a 1-year “cool-down” period)

Question 48

SOX 303 - improper influence on conduct of audits

Answer 48

prohibited for any issuer’s officer or director (or anyone acting under their direction) to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial
statements of that issuer for the purpose of rendering such financial statements materially misleading

Question 49

SOX 401 - disclosures in periodic reports

Answer 49

disclosures in periodic reports - must contain FS prepared according to GAAP, disclose all material off-BS transactions/arrangements/obligations, proforma must not contain untrue statements of material fact or omission of material fact & must reconcile to GAAP

Question 50

SOX 402 - Enhanced Conflict of Interest Provisions

Answer 50

no personal loans to BOD or exec officer (certain loans exempted - normal course of business, made available to public, no special terms)

Question 51

SOX 403 - Disclosures of Transactions Involving Management and Principal Stockholders (section 16)

Answer 51

( Section 16 Form 4 by end of 2nd business day) Any person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security (other than an exempted security) which is registered pursuant to Section 12 of the Securities Exchange Act of 1934, or who is a director of an officer of the issuer of such security, must file the statements required by SOX and the SEC

Question 52

SOX 404 - Management Assessment of Internal Controls

Answer 52

states the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. It also contains an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures

Question 53

SOX 406 - Code of Ethics for Senior Financial Officers

Answer 53

honest and ethical conduct; full/fair/accurate/timely/understandable disclosures; compliance with gov rules and regulations

Question 54

SOX 407 - Disclosure of Audit Committee Financial Expert

Answer 54

understanding of GAAP & FS, experience in prep/audit of FS, experience in internal accounting controls, understanding of AC functions

Question 55

SOX 408 - Enhanced Review of Periodic Disclosures by Issuers

Answer 55

SEC reviews disclosures every 3 years - risk based approach (higher-risk matters like restatements, stock price volatility, large market cap, emerging companies, companies that affect material sector of economy)

Question 56

SOX 409 - Real Time Issuer Disclosures (8-k)

Answer 56

Issuers must disclose to the public on a rapid and current basis any additional information concerning material changes in the financial condition or operations of the issuer. These disclosures must be in “plain English.”

Question 57

PCAOB Ethics and Independence Rules
Responsibility Not to Knowingly or Recklessly Contribute to Violations

Answer 57

Responsibility Not to Knowingly or Recklessly Contribute to Violations - A person associated with a registered public accounting firm shall not take or omit to take an action knowing, or recklessly not knowing, that the act or omission would directly and substantially contribute to a violation by that registered public accounting firm of the Sarbanes‐Oxley Act, the Rules of the PCAOB, the provisions of the securities laws

Question 58

PCAOB Ethics and Independence Rules
Auditor Independence

Answer 58

Auditor Independence - registered public accounting firm and its associated persons must be independent of the firm’s audit client throughout the audit and professional engagement period.

Question 59

PCAOB Ethics and Independence Rules
Contingent Fees

Answer 59

Contingent Fees - audit firm is NOT independent if it accepts a contingent fee or commission from audit client directly or indirectly

Question 60

PCAOB Ethics and Independence Rules
Tax Transactions

Answer 60

Tax Transactions - audit firm is NOT independent if it provides any nonaudit service to the client related to marketing, planning or opining in favor of tax treatment of a confidential transaction or a transaction that was initially recommended by audit firm to avoid taxes

Question 61

PCAOB Ethics and Independence Rules
Tax Services for Persons in Financial Reporting Oversight Roles

Answer 61

Tax Services for Persons in Financial Reporting Oversight Roles - audit firm is NOT independent if they provide tax service to a person (or immediate family member of) in financial reporting oversight role at audit client

exceptions - board members, person being audited’s FS are not material to FS of client, person was not in a FS oversight role before promotion/hire & engagement with client was already in progress & wil be completed w/in 180 days after hiring/promotion

Question 62

PCAOB Ethics and Independence Rules
Audit Committee Pre‐approval of Certain Tax Services

Answer 62

Audit Committee Pre‐approval of Certain Tax Services - firm needs to describe in writing the scope of service, fee structure; discuss potential effects of services on independence of firm; document the discussion

Question 63

PCAOB Ethics and Independence Rules
Audit Committee Pre‐approval of Non‐audit Services Related to Internal Control Over Financial Reporting

Answer 63

Audit Committee Pre‐approval of Non‐audit Services Related to Internal Control Over Financial Reporting - firm needs to describe in writing the scope of service; discuss potential effects of services on independence of firm; document the discussion

Question 64

PCAOB Ethics and Independence Rules
Communication with Audit Committees Concerning Independence (how often?)

Answer 64

prior to initial engagement and then annually thereafter, audit firm must describe in writing to AC all relationships thought to bear on independence and discuss with AC the potential effects of relationships on independence, document discussion

Question 65

PCAOB Ethics and Independence Rules
FORM AP - (Auditor Reporting of Certain Audit Participants)

Answer 65

filed with PCAOB for each new issuer audit and discloses: name of engagement partner, info of any other audit firm participating in audit whose work constituted at least 5% of total audit hours and aggregate info of any other firms whose participation was less than 5% of total audit hours

     filing required no more than 35 days after audit firm files the audit report with SEC; for IPOs filing is required within 10 days after auditor's report is first included in a document filed with SEC

Question 66

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Answer 66

Implemented sweeping and wide-ranging financial regulatory reform, such as the following:
 Increases investor protection
 Increases regulatory enforcement and remedies
 Improves the regulation of credit rating agencies
 Improves the asset-backed securitization process
 Enhances accountability, including executive compensation
 Strengthens corporate governance

Question 67

Government Accountability Office
Government Auditing Standards (GAGAS)
Independence of Mind
Independence in Appearance

Answer 67

Independence of mind: the state of mind that permits the performance of an audit without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism

Independence in appearance: the absence of circumstances that would cause a reasonable and informed third party, having knowledge of the relevant information, to reasonably conclude that the integrity, objectivity, or professional skepticism of an audit organization or member of the audit team has been compromised

Question 68

GAGAS -Threats to Independence
Steps

Answer 68

1) identify threats to independence
2) evaluate significance of threats, both individually and in aggregate
3) apply safeguards to eliminate or reduce threats

Question 69

GAGAS -Threats to Independence
Self‐interest threat:
Self‐review threat:
Bias threat:
Familiarity threat:
Undue influence threat:
Management participation threat:
Structural threat:

Answer 69

Self‐interest threat: the threat that a financial or other interest will inappropriately influence an auditor’s judgment or behavior
Self‐review threat: the threat that an auditor or audit organization that has provided nonaudit services will not appropriately evaluate the results of previous judgments made or services performed as part of the nonaudit services when forming a judgment significant to an audit
Bias threat: the threat that an auditor will, as a result of political, ideological, social, or other convictions, take a position that is not objective
Familiarity threat: the threat that aspects of a relationship with management or personnel of an audited entity, such as a close or long relationship, or that of an immediate or close family member, will lead an auditor to take a position that is not objective
Undue influence threat: the threat that external influences or pressures will impact an auditor’s ability to make independent and objective judgments
Management participation threat: the threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit
Structural threat: the threat that an audit organization’s placement within a government entity, in combination with the structure of the government entity being audited, will impact the audit organization’s ability to perform work and report results objectively

Question 70

Professional skepticism

Answer 70

Professional skepticism is required by due professional care standards for each individual auditor on the engagement team, and includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.

Question 71

Professional skepticism - PCAOB Staff Audit Practice Alert 10 (SAPA 10)

Answer 71

resolving inconsistencies in or doubts about reliability of confirmations, examining JEs for misstatement/fraud, reviewing accounting estimates for biases, evaluating business rationale for significant unusual transactions or for going concern

consideration of fraud - mgmt has unique ability to perpetuate fraud, personnel who intentionally misstate often conceal by attempting to deceive auditor

responsibility of the engagement partner for setting an appropriate tone that emphasizes the need to maintain a questioning mind throughout the audit and to
exercise professional skepticism in gathering and evaluating evidence such that engagement team members have the confidence to challenge management representations.

Question 72

Professional skepticism
Evaluating uncorrected misstatements:
Evaluating management bias:
Evaluating the presentation of the financial statements:

Answer 72

Evaluating uncorrected misstatements: The audit team must evaluate whether the uncorrected misstatements identified during the audit result in material misstatement of the financial statements, individually or in combination, considering both qualitative and quantitative factors

Evaluating management bias: This includes evaluating potential bias in accounting estimates, bias in the selection and application of accounting principles, the selective correction of misstatements identified during the audit, and identification by management of additional adjusting entries that offset misstatements accumulated by accounting the auditor. When evaluating bias, it is important for auditors to consider the incentives and pressures on management to manipulate the financial statements.

Evaluating the presentation of the financial statements: This includes determining whether the financial statements contain sufficient information essential for a fair presentation of the financial statements in conformity with the applicable financial reporting framework.

Question 73

Professional skepticism

IMPEDIMENTS & MITIGATIONS

Answer 73

impediments - inherent pressures (maintaining client relationships, keep costs down, avoid conflicts w/mgmt), inappropriate levels of confidence or trust in mgmt, personal bias, lack of training and expertise

mitigate with setting tone at top that emphasizes need for professional skepticism, maintaining promotion and compensation processes that enhance it, assigning personnel with appropriate background

Question 74

Professional judgment

Answer 74

Professional judgment is the accumulated knowledge that an auditor gains through experience and training to make critical judgments in an objective, professionally skeptical manner. Overlaying this with professional and ethical standards results in ability to make informed decisions

Question 75

Professional judgment & Center for Audit Quality (CAQ)

Answer 75

CAQ suggests that exercise of professional judgment should be based upon relevant facts/circumstances known at the time; made after consideration of reasonable alternatives; sensitive to degree of uncertainty inherent in judgment; in compliance with professional standards

Question 76

Professional judgment & Center for Audit Quality (CAQ)
common potential judgment tendencies that can lead to auditor bias:
confirmation
overconfidence
anchoring
availability

Answer 76

Confirmation: The potential tendency for an auditor to put more weight on information that is consistent with his or her initial beliefs or preferences. As a result, the auditor may rely unconsciously on evidence that is biased toward his or her expected or preferred alternative, rather than objectively evaluating the facts as they exist
mitigation: Make the opposing case and consider alternative explanations; consider potentially disconfirming or conflicting information

Overconfidence: The potential tendency for an auditor to overestimate his or her own ability to perform tasks or to make accurate assessments of risks or other judgments and decisions
mitigation: Challenge opinions and experts; challenge underlying assumptions

Anchoring: The potential tendency to make assessments by starting from an initial numerical value and then adjusting insufficiently away from that initial value in forming a final judgment
mitigation: Solicit input from others; consider management bias, including the potential for fraud or material misstatements

Availability: The potential tendency for an auditor to consider information that is easily retrievable as being more likely or more relevant
mitigation: Consider why something comes to mind; obtain and consider objective data; consult with others and make the opposing case

Question 77

What does the engagement letter include?

Answer 77

1) objective and scope
2) responsibilities of auditor
3) responsibilities of management
4) limitations - statement that because of inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatement may not be detected, even though the audit is properly planned and performed in accordance with GAAS
5) identification of applicable financial reporting framework
6) reference to expected form and content of reports to be issued by auditor and statement that circumstances may airse in which report may differ from expected form and content
7) Recurring audit, auditor should assess whether terms of engagement should be revised and remind management of such in written documentation
8) New terms (changes in terms of engagement) should be documented in engagement letter

Question 78

What does the audit engagement letter ALSO include?

Answer 78

1) elaboration of scope and reference applicable legislation, regulation, GAAS, ethical and other pronouncements
2) form of any other communication of results of engagement
3) arrangements regarding planning and performing audit including composition of audit team
4) expectation that mgmt will provide written representations (rep letter)
5) agreement of mgmt to make available draft statements and accopanying info with enough time to complete the audit according to proposed timetable
6) agreement of mgmt to inform auditor of events or facts discovered subsequent to date of FS that may affect the FS
7) basis of fees and billing arrangements
8) request for mgmt to acknowledge receipt of engagement letter and agree to the terms as outlined, evidenced by their signature on the engagement letter
9) other matters: other auditors, specialists, internal auditors; arrangements with predecessor auditors; restrictions; obligations to provide audit documentation to other parties; additional services

Question 79

What does the non-audit engagement letter ALSO include?

Answer 79

1) mgmt agreement that each page of FS will have “no assurance provided” statement
2) whether FS will have departures from applicable framework or omit req’d disclosures

Question 80

What does the compilation engagement letter ALSO include?

Answer 80

1) whether FS will have departures from applicable framework or omit req’d disclosures
2) whether there will be reference to supplementary info

Question 81

What does the review engagement letter ALSO include?

Answer 81

1) responsibilities of responsible party if different than mgmt
2) engagement will be conducted in accordance with attestation standards established by AICPA
3) acknowledgement that engaging party agrees to provide rep letter at conclusion
4) statement that a review is substantially less in scope than an examination, the objective of which is to obtain reasonable assurance about whether the subject matter or assertions are free of material misstatement in order to express an opinion, and that, accordingly, the practitioner will not express such an opinion

Question 82

What does the attestation engagement letter ALSO include?

Answer 82

1) responsibilities of responsible party if different than mgmt
2) Identification of the underlying subject matter or the assertion(s) thereon, which will be the subject of the report
3) Identification of the applicable criteria to be used for measurement, evaluation, or disclosure of the underlying subject matter
4) acknowledgement that engaging party agrees to provide rep letter at conclusion
5) identification of specified parties if restricted-use report or agreed-upon procedures engagement
6) Reference to the attestation standards of the AICPA under which the engagement will be performed
7) any other risk factors related to engagement
8) any disclaimers
9) mgmt’s responsibilities for engagement assistance
10) other matters: other auditors, specialists, internal auditors; arrangements with predecessor auditors; restrictions; obligations to provide audit documentation to other parties; additional services
11) acknowledgement that engaging party agrees to provide rep letter at conclusion

Question 83

Audit documentation

Answer 83

provides evidence of the auditor’s basis for a conclusion about the achievement of the overall objectives of the audit, and evidence that the audit was planned and performed in accordance with relevant audit standards and applicable legal and regulatory requirements. It provides a sufficient and appropriate record of the basis for the auditor’s report.

should be prepared timely, should be sufficient to allow an experienced auditor with no prior knowledge of audit to understand the nature, timing, extent of audit procedures performed/results and evidence obtained/significant findings/professional judgments in reaching those conclusions

nature, timing, extent of documentation should identify characteristics of specific items tested, who performed audit work and when it was completed, who reviewed work and extent of the review

Question 84

Audit documentation -

property of?

Answer 84

property of the auditor. The auditor may make the audit documentation available to the entity at the auditor’s discretion, provided such disclosure does not undermine the independence or the validity of the audit process.

auditor has ethical, legal obligation to maintain confidentiality of client info

documentation should: clearly identify who created/charged/reviewed it; integrity of such should be protected at all stages of audit (ie. when shared within audit team or transmitted electronically); have unauthorized changes prevented; have access allowed to audit team and other authorized parties as necessary to properly discharge their responsibilities

Question 85

Audit documentation - release date, admin tasks, retention for issuers and non-issuers

Answer 85

non-issuer - report release date should be documented - 60 days following report all admin tasks should be completed
non-issuer- retention for documentation is 5 years following the report release date
issuer - report release date should be documented - 45 days following report all admin tasks should be completed
issuer- retention for documentation is 7 years following the report release date or w/o report after substantial fieldwork completed, unless longer retention required by law

Question 86

Audit documentation - preparation engagement

Answer 86

Preparation engagements - documentation in connection with each preparation engagement should be sufficient detail to provide a clear understanding of the work performed

documentation should: include engagement letter/written, copy of FS prepared by accountant, SSARS requires documentation to justify departure from presumptively mandatory requirement and how alternative procedures were performed were sufficient to achieve intent of requirement

Question 87

Audit documentation - compilation engagement

Answer 87

Compilation engagements - documentation in connection with each compilation engagement should be sufficient detail to provide a clear understanding of the work performed

documentation should: include engagement letter/written, copy of FS, copy of accountant’s report, SSARS requires documentation to justify departure from presumptively mandatory requirement and how alternative procedures were performed were sufficient to achieve intent of requirement

proforma documentation should include: detail sufficient to gain a clear understanding of work performed and include engagement letter/written, results of procedures performed, copy of proforma, copy of accountant’s report

Question 88

Audit documentation - review engagement

Answer 88

Review engagements - documentation should be sufficient to enable an experienced auditor w/o knowledge of engagement to understand nature/timing/extent of review procedures, that materiality should be assessed when planning/performing/evaluating the review engagement, results of

review procedures, significant findings/conclusions, significant judgments made in reaching conclusions

Review documentation should also include: engagement letter, communications to mgmt regarding fraud or noncompliance w/law/reg, communications to mgmt regarding accountant’s expectations of emphasis-of-matter or other-matter paragraphs in review report, written

rep letter, copy of reviewed FS and accountant’s review report, documentation of analytical procedures (expectations formed and factors considered in development of those expectations, results of comparisons of expectations to recorded amounts/ratios, mgmt’s responses

Question 89

Audit documentation - review of interim for an issuer

Answer 89

Review of interim financial information of an Issuer- accountant should prepare documentation in connection with a review of interim financial information of an issuer, the form and content of which should be designed to meet the circumstances of the particular engagement. Documentation is the principal record of the review procedures performed and the conclusions reached by the accountant in performing the review.

documentation should: include significant findings or issues (FS materially misstated) and basis for those conclusions, allow audit team supervisors/reviewers to understand nature/timing/extent/results of review procedures performed, identify team members
who performed and reviewed the work, identify evidence obtained in support of conclusions that reconciled/agreed to accounting records.

retention - SSARS does not specify but says, “The firm should establish policies and procedures for the retention of engagement documentation for a period sufficient to meet the needs of the firm, professional standards, laws, and regulations.”

accountant should consider: nature of engagement, firm’s circumstances, whether law/reg prescribe retention, whether there are generally accepted retention periods

accountant should maintain “confidentiality, safe custody, integrity, accessibility, and retrievability of engagement documentation.”

accountant should NOT disclose confidential client info unless client has given permission or the accountant is under legal obligation to do so

Engagement documentation must not be lost, damaged, or compromised by being added to, altered, or deleted without the firm’s knowledge.

Question 90

Audit documentation - attestation engagement

Answer 90

Attestation documentation - retain attest documentation that is appropriate to the situation and the accountant’s needs. The quantity, type, and content of documentation will vary with the situation.

documentation should: allow members of team to understand nature/timing/extent/results of attest procedures, identify characteristics of specific items tested, indicate who performed/reviewed the work, significant findings/issues, results of procedures performed & evidence obtained, resolution of inconsistencies, identify who reviewed work performed and date and extent of review

must include req’d rep letter from those charged with governance

Question 91

“Communication to those charged with governance”
4 required communications

Answer 91

1) auditor is responsible for forming and expressing an opinion about whether the financial statements that have been prepared by management with the oversight of those charged with governance are presented fairly, in all material respects, in conformity with the applicable financial reporting framework.
2) audit of FS does not relieve mgmt or those charged with governance of their responsibilities
3) auditor is responsible for performing the audit in accordance with generally accepted auditing standards and that the audit is designed to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement
4) auditor should communicate the auditor’s responsibility with respect to other information prepared by management that accompanies the audited financial statements.

Question 92

“Communication to those charged with governance”
Internal controls and control deficiencies

Answer 92

Control deficiencies identified during the audit that upon evaluation are considered significant deficiencies or material weaknesses should be communicated in writing to management and those charged with governance as a part of each audit

written communication is best made by the report release date, which is the date the auditor grants the entity permission to use the auditor’s report in connection with the financial statements, but should be made no later than 60 days following the report release date.

Question 93

“Communication to those charged with governance”
Internal controls and control deficiencies - written communications should:

Answer 93

1) state that purpose of audit was to express an opinion on FS ,but NOT on effectiveness of ICs over financial reporting
2) state auditor is not expressing opinion on effectiveness of ICs
3) state auditor’s consideration of ICs was not designed to identify all deficiencies in IC that might be SD or MW
4) include definition of MW and SD, if applicable
5) identify all matters considered to be SD and, if applicable, MW
6) state that the communication is intended solely for the information and use of management, those charged with governance, and others within the organization and is not intended to be and should not be used by anyone other than these specified parties.
7) can also communicate any other deficiencies in IC identified that don’t’ rise to the level of SD or MW but are of sufficient importance to merit mgmt attention
8) explanation of potential effects of the SD and MW identified

Question 94

“Communication to those charged with governance”
significant findings

Answer 94

1) auditor’s views about qualitative aspects of entity’s significant accounting practices (acctg policies, estimates, disclosures)
2) significant difficulties
3) uncorrected misstatements (untrivial)
4) disagreements w/mgmt
5) other findings and issues that are in the auditor’s professional judgment to be significant
6) material, corrected misstatements that were brought to the attention of management as a result of audit procedures.
7) representations the auditor is requesting from management
8) management’s consultations with other accountants
9) significant issues discussed w/mgmt during audit (business conditions or plans/strategies, application of accounting principles, matters that will be included in auditor’s report, whether matter has been resolved, whether mgtm has previously communicated the matter)
10) significant difficulties in performing audit (delays, short timeline provided for audit, significant efforts to obtain audit evidence, unavailability of evidence, restrictions imposed on auditors by mgmt, mgmt’s unwillingness to provide info about dealing with adverse conditions or events that may cause doubt about going concern)
11) other untrivial misstatements ( known, likely - arising from differences between mgmt’s and auditor’s judgments concerning accounting estimates or auditor considers likely to exist based on extrapolation from audit evidence)
11) request mgmt correct all known misstatements, including prior periods
12) discuss implications of failure to correct known and likely misstatements AND THE EFFECT ON FS, DISCLOSURES AND AUDITOR REPORT

Question 95

“Communication to those charged with governance”
FRAUD

Answer 95

Evidence of fraud - auditor should bring any evidence of fraud to attention of mgmt regardless of whether or not it is inconsequential
fraud involving senior mgmt and fraud that involved material misstatement of financials should be reported to those charged with governance
noncompliance with law or regulation should be reported to those charged with governance; should be reported directly to those charged with governance if senior mgmt is involved in noncompliance

Question 96

Planning the timing and scope of engagement
who to communicate to? and how?

Answer 96

timing and nature of auditor should be communicated to those charged with governance w/o compromising the effectiveness of the audit by making the audit procedures predictable

Matters related to scope/timing include: how to address significant risks of material misstatement whether or not due to fraud or error, approach to internal control relevant, concept of materiality in planning and executing the audit, extent to which the inclusion of IA will be used

Question 97

Statement on Quality Control Standards (SQCS) 8 - A Firm’s System of Quality Control “HELPME”

Answer 97

1) HR
2) Engagement & acceptance
3) Leadership
4) Performance
5) Monitoring
6) Ethics

Question 98

Statement on Quality Control Standards (SQCS) 8 - A Firm’s System of Quality Control

heLpme: leadership responsibilities for quality within the firm

Answer 98

-tone at top
recognizes importance of quality-oriented firm culture
-requires establishment of policies mandating that mgmt responsibilities be assigned so that commercial considerations don’t override those related to quality of work performed
-partners: take respon. for overall quality of audits, be alert for evidence of noncompliance with ethical requirements, identify threats to independence, and take action to reduce threats or withdraw

Question 99

Statement on Quality Control Standards (SQCS) 8 - A Firm’s System of Quality Control

helpmE: ethical requirements

Answer 99

-policies and procedures provide reasonable assurance that firm complies with relevant ethical requirements
-document issues considered and conclusions reached

Question 100

Statement on Quality Control Standards (SQCS) 8 - A Firm’s System of Quality Control

hElpme: acceptance and continuance of client relationships and specific engagements

Answer 100

-documentation of resolution of significant issues
-policies and procedures provide for obtaining understanding of services to be performed (SSARS/SAS/SSAE/PCAOB require this in writing)

Question 101

Statement on Quality Control Standards (SQCS) 8 - A Firm’s System of Quality Control

Helpme: human resources

Answer 101

Policies must address:
recruiting and hiring practices
determining capabilities and competencies (esp. for partner)
assigning personnel to engagements
professional development
performance evaluation, compensation, advancement

Question 102

Statement on Quality Control Standards (SQCS) 8 - A Firm’s System of Quality Control

helPme: performance

Answer 102

Includes guidance on engagement supervision, review, and documentation, as well as on consultation policies and procedures

Question 103

Statement on Quality Control Standards (SQCS) 8 - A Firm’s System of Quality Control

helpMe: monitoring

Answer 103

requires monitoring procedures that are comprehensive to enable firm to assess compliance with all professional standards, regulatory requirements, and firms policies and procedures

Question 104

QC - competencies required

Answer 104

1) understanding the role of a system of quality control and Code of Professional Conduct
2) understanding of service to be performed
3) technical proficiency
4) familiarity w/industry
5) professional judgment
6) understanding organization’s IT system