Independence Flashcards
T/F
Independence is required for audits
T
T/F
Independence is required for reviews
T
T/F
Independence is required for attestations
T
T/F
Independence is required for compilations
F
T/F
Independence is required for tax
F
T/F
Independence is required for consulting
F
T/F
If you are not independent for a compilation, you must disclose this
T
Who are covered members?
1) an individual on the attest engagement team
2) an individual in a position to influence the attest engagement
3) a partner or manager who provides more than 10 hours of nonattest services to the attest client
4) A partner in the office in which the lead attest engagement partner primarily practices
5) The firm, including the firm’s employee benefit plans
6) An entity whose operating, financial, or accounting policies can be controlled by any covered members
What individuals are in a position to influence the attest engagement?
Those who:
1) evaluate the performance or recommends the compensation of the attest engagement partner
2) directly supervises or manages the attest engagement partner, including all successively senior levels above that individual
3) consults with the attest engagement team regarding technical or industry-related issues specific to the attest engagement
4) participates in or oversees, at all successively senior levels, quality control activities (including internal monitoring) with respect to the specific attest engagement
T/F
Independence is impaired if a covered member has or is committed to acquire any direct financial interest in the client
T
T/F
Independence is impaired if a covered member has or is committed to acquire any indirect financial interest in the client
F
Independence is only impaired if the indirect financial interest is material. If immaterial, independence is not impaired.
How do you define a close relative?
Parent, sibling, nondependent child
How do you define immediate family?
Spouse, spousal equivalent, or dependent (whether or not related)
This is known as a threat to independence where you are reviewing evidence that results from your own work (for example, you prepared source documents for the client and are now reviewing those source documents)
Self-Review Threat
This is known as a threat to independence where you are performing actions that promote the client’s interests or position
Advocacy Threat
This is known as a threat to independence where actions or interest between the auditor and the client are in opposition (for example, litigation)
Adverse Interest Threat
This is known as a threat to independence where auditors have a close or longstanding relationship with the client
Familiarity Threat
This is known as a threat to independence where there have been attempts by the client’s management to coerce the auditor or exercise excessive influence over the auditor
Undue Influence Threat
This is known as a threat to independence where potential benefit to an auditor exists from a financial interest in, or financial relationship with, the client
Financial Self-Interest Threat
This is known as a threat to independence where the auditor is assuming the role of management or performing management functions for the client
Management Participation Threat
What are the three safeguards that mitigate/eliminate threats to independence?
1) Safeguards created by profession, legislation, or regulation (required CPE)
2) Safeguards implemented by the client (active audit committee)
3) Safeguards implemented by the firm (quality controls)
T/F
A CPA who is on the board of directors of a nonprofit organization where the board is large and a representative of community leadership does not have impaired independence if the position is purely honorary
T
T/F
Independence is not impaired by certain grandfathered loans. For example, if an auditor had a loan from a financial institution at a time when independence was not required and then later the financial institution became an attest client, this is not an issue
T
T/F
Under PCAOB the auditor is not independent from the client if any contingent fees or commissions were exchanged
T
T/F
Under PCAOB the auditor is not independent from the client if any nonaudit services have been provided to the client
T
T/F
Under PCAOB the auditor is not independent from the client if it provides any tax services to a person in a financial reporting oversight role at the client
T
Under SOX, the auditor cannot legally perform what services without losing independence? (8)
1) Bookkeeping
2) Financial Information Systems design/implementation
3) Appraisal Services
4) Internal audit outsourcing services
5) Management Functions
6) Actuarial Services
7) Investment or broker-dealer services
8) Certain tax services
Like the AICPA, the international ethics rules indicate threats. What are the four threats to Independence?
1) Financial interests in the client
2) Having certain business relationships with the client
3) Serving as a director, office, or employee of the client
4) Performing certain non-assurance services to the client
Like the AICPA, the international ethics rules indicate safeguards against the threats. What are the two safeguards?
1) Those created by profession, legislation, and regulation
2) Those implemented by the firm in the work environment
Required continuing education for all attest engagement team members is a _____ (threat/safeguard) that the _____ (client/firm) implements
Safeguard
Firm
An effective corporate governance structure is a _____ (threat/safeguard) that the _____ (client/firm) implements
Safeguard
Client
Required second partner review of an attest engagement is a _____ (threat/safeguard) that the _____ (client/firm) implements
Safeguard
Firm
Management selection of the CPA firm is a _____ (threat/safeguard) that the _____ (client/firm) implements
Threat
Client
T/F
To exercise due professional care an auditor should examine all available corroborating evidence supporting managements assertions
FALSE
It is impractical to examine ALL evidence
T/F
To exercise due professional care an auditor should design the audit to detect all instances of illegal acts
FALSE
It is impractical to examine the audit to detect ALL illegal acts
T/F
To exercise due professional care an auditor must attain the proper balance of professional experience and formal education
FALSE
While these assist in exercising due professional care, they are not a criterion for exercising due care (“MUST”)
T/F
To exercise due professional care an auditor should critically review the judgment exercised by those assisting in the audit
TRUE
Under Title II of the Sarbanes-Oxley Act, the auditor of an issuer cannot legally perform what type of services?
a) Tax Services
b) Review of interim information
c) Internal audit outsourcing services
d) Audit of internal control over financial reporting
C
B and D are required
A is allowed
Threats to independence arise from all of the following except:
A) Self Interest
B) Advocacy
C) The Audit Relationship
D) Intimidation
C
The requirement for independence by the auditor regarding audits of employee benefit plans apply to the plan as well as to the ___
The Plan Sponsor
T/F
When the auditor does not serve in management, s/he may join a trade association who is a client and not impair independence
TRUE
T/F
An auditor may perform a review of a forecast the company has prepared for the coming year
FALSE
T/F
An auditor may design a new payroll system and base billings on the company’s actual savings for the next three years. They must be independent, though, to do this.
FALSE
They CAN do this. They do not NEED to be independent
T/F
The CPA can prepare the Corporate Tax Return as well as perform the audit for a PUBLIC company
TRUE
T/F
The CPA can prepare the Corporate Tax Return as well as perform the audit for a NONPUBLIC company
TRUE
T/F
The CPA can provide bookkeeping services as well as perform the audit, as long as they will not determine JEs, Authorize Transactions, Prepare or Modify Source Documents
TRUE
T/F
The CPA can implement an off-the-shelf accounting package as well as perform the audit
TRUE
T/F
The CPA can provide Corporate Executives of an audit client with tax planning for themselves (not the company)
FALSE
This is not allowed
the threat that a financial or other interest will inappropriately influence judgment
Self-Interest Threat
the threat that an auditor will not properly evaluate the results
Self-Review Threat
the threat that an auditor will promote a position where objectivity is compromised
Bias Threat
the threat that a close relationship will impact objectivity
Familiarity Threat
A CPA purchases stock in a client corporation and places it in a trust as an educational fund for the CPA’s minor child. The trust securities are not material to the CPA’s wealth but are material to the child’s personal wealth. Does this impair independence
Yes, because the stock is a direct financial interest and materiality is not a factor
T/F
Registered public accounting firms and associated persons must be independent of their audit clients during the engagement period and the financial year under audit
FALSE
Registered public accounting firms and associated persons must be independent of their audit clients during the engagement period of which the financial statements are being audited. There are currently no requirements to be independent prior to the engagement period.
