Quiz

Question 1

An individual on the attest engagement team (team member) is a Covered member

Answer 1

True

Question 2

An individual in a position to influence the attest engagement (PTI) is a Covered member

Answer 2

True

Question 3

A partner, partner equivalent (defined as “a person who is not a partner of the firm but either has the ultimate responsibility for the conduct of an attest engagement, or has the authority to bind the firm to conduct an attest engagement without partner approval”), or manager who provides 10 or more hours of nonattest services to the attest client within any fiscal year (10-hour person) is a Covered member

Answer 3

True

Question 4

A partner or partner equivalent in the office in which the lead attest engagement partner or partner equivalent practices in connection with the attest engagement (other partner in office) is a Covered member

Answer 4

True

Question 5

The firm, including the firm’s employee benefit plans is a Covered member

Answer 5

True

Question 6

An entity whose operating, financial, or accounting policies can be controlled by any of the individuals or entities described in items (1) through (5) or two or more such individuals or entities if they act together is a Covered member

Answer 6

True

Question 7

where Maria, a partner of the ABC audit firm also works for DEF Co., which is an audit client of GHI audit firm. GHI proposes to purchase ABC. If the acquisition occurs, Maria may suddenly be an employee of her new firm’s audit client. Independence should not be impaired so long as:

A . Maria terminates her relationship with DEF before the closing date of the acquisition;

B. Maria is not a team member or a PTI on the DEF audit if the engagement covers any period in which she worked for DEF;

C. Maria dissociates from DEF, including ceasing participation in its employee benefit plans if she is a covered member;

D. A responsible person within the new firm assesses Maria’s prior relationship with DEF to ensure that any threats to independence are at a reasonable level. If Maria has any interaction with the attest engagement team or if the team evaluates any work done by Maria while she worked for DEF, an appropriate person within the firm should review the engagement prior to issuing the report to ensure that the team maintained integrity, objectivity, and professional skepticism; and

E. All safeguards should be discussed with DEF’s management and the discussions should be documented.

Answer 7

True

Question 8

Covered members or their firms that were independent when they first issued an audit report may reissue that report or consent to its incorporation by reference, even if they are no longer independent, so long as they do not perform new procedures that would require updating the date (or dual dating) of the original report.

Answer 8

True

Question 9

Covered members or their firms that were independent when they first issued an audit report may reissue that report or consent to its incorporation by reference, even if they are no longer independent.

In this connection, it is acceptable if necessary to assess the effect of recent facts on the original report to:

1. Make inquiries of successor auditors
2. Read subsequent financial statements
3. Undertake similar procedures

Answer 9

True

Question 10

The Securities and Exchange Commission (SEC) and other regulators disapprove of engagement contracts that indemnify auditors for the effects of their own mistakes, it is NOT okay for an engagement letter to require an attest client to indemnify or hold harmless a member firm for liability and costs resulting from knowing misrepresentations by the client’s management.

Answer 10

False
Although the Securities and Exchange Commission (SEC) and other regulators disapprove of engagement contracts that indemnify auditors for the effects of their own mistakes, it is okay for an engagement letter to require an attest client to indemnify or hold harmless a member firm for liability and costs resulting from knowing misrepresentations by the client’s management.

Question 11

It would NOT impair independence for a covered member to agree to indemnify an attest client for losses resulting from the client’s own acts.

Answer 11

False

It would impair independence for a covered member to agree to indemnify an attest client for losses resulting from the client’s own acts.

Question 12

Engagement letters may NOT require use of alternative dispute resolution (ADR) to resolve disagreements with clients.

Answer 12

False

Engagement letters may require use of alternative dispute resolution (ADR) to resolve disagreements with clients.

Question 13

If alternative dispute resolution is initiated, binding arbitration is sufficiently similar to litigation that it could place the member in public practice and the client in positions of material adverse interests and thereby impair independence, so the Conceptual Framework should be applied.

Answer 13

True

Question 14

Financial interest—Includes ownership (or an obligation to obtain ownership) in equity, debt, or derivatives issued by an entity.

Answer 14

True

Question 15

Direct financial interest—An interest:
1. Owned directly (even if managed by others)
2. Under one’s control (even if managed by others)
3. Beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary either:
a. Controls the intermediary, or
b. Has the authority to supervise or participate in
the intermediary’s investment decisions.

Answer 15

True

Question 16

Indirect financial interest—An interest beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary neither:
1. Controls the intermediary, nor
2. Has the authority to supervise or participate in its
investment decisions.

Answer 16

True

Question 17

D. Beneficial ownership—Occurs when an individual or entity is not the record owner but has a right to some or all of the underlying benefits of ownership, such as to:

 1. Direct the voting
2. Dispose of the interest
3. Receive its economic benefits

Answer 17

True

Question 18

Financial Interests—These rules about financial interests normally apply only to covered members; however, even if a partner or professional employee of a firm is not a covered member, that person (and his or her immediate family, or any group of such persons acting together) cannot own more than 5% of a client’s ownership interests without impairing independence.

Answer 18

True

Question 19

Unsolicited Financial Interests
A. If covered members receive or learn they will receive an unsolicited financial interest in an attest client (perhaps through gift or inheritance) that is either a direct interest or a material indirect interest, independence will not be impaired.

If the covered member does not yet have the right to dispose of the interest (perhaps a relative who wrote a will is still alive), then independence will not be impaired if:

1. The member does not participate on the attest engagement team.
2. The interest is not material to the member.

Answer 19

True

Question 20

If the member owns 5% or less of the outstanding shares of a diversified mutual fund, the interest in the underlying investments of the fund is indirect. Immaterial and indirect interests do not impair independence.

Answer 20

True

Question 21

if the covered member owns more than 5% of a diversified fund’s shares or owns a financial interest in an undiversified fund, then the member must evaluate the fund’s underlying investments to determine whether he or she holds a material indirect financial interest in any of the underlying investments.

Answer 21

True

Question 22

A covered member who owns shares in a mutual fund has a direct financial interest in the fund itself.

Answer 22

True

Question 23

In case of Retirement, Savings, Compensation, or Similar Plans;

If covered members or their immediate family members (IFMs) self-direct their investments into such a plan or have the ability to supervise or participate in the plan’s investment decisions, then the financial interests held by the plan are direct financial interests that impair independence even if they are immaterial.

Answer 23

True

Question 24

Independence will not be impaired if:

A covered member is trustee of a retirement plan and supervises its investments, which include shares of an attest client.

Answer 24

False

Independence will be impaired if acovered member is trustee of a retirement plan and supervises its investments, which include shares of an attest client.

Question 25

Independence will not be impaired if:

A covered member participates in a retirement plan and has discretion to direct its investments, which include shares of an attest client.

Answer 25

False

Independence will be impaired if a covered member participates in a retirement plan and has discretion to direct its investments, which include shares of an attest client.

Question 26

In case of Retirement, Savings, Compensation, or Similar Plans;

If covered members (or their immediate family members) do not self-direct or supervise or participate in a plan’s investment decisions, the underlying investments are indirect and therefore do not create independence issues unless they are material.

Answer 26

True

Question 27

In case of Retirement, Savings, Compensation, or Similar Plans;

When a defined benefit plan is involved, interests held by the plan are interests held by the covered members unless the covered members (or their immediate family members) are trustees of the plan or otherwise have the ability to supervise or participate in the plan’s investment decisions.

Answer 27

False

When a defined benefit plan is involved, interests held by the plan are NOT interests held by the covered members unless the covered members (or their immediate family members) are trustees of the plan or otherwise have the ability to supervise or participate in the plan’s investment decisions.

Question 28

Allocated shares held in an employee stock option plan are NOT beneficially owned by the covered members. When the members have the right to dispose of them. At that point, they become direct financial interests.

Answer 28

False

Allocated shares held in an employee stock option plan are beneficially owned by the covered members but are indirect interests until the members have the right to dispose of them. At that point, they become direct financial interests.

Question 29

General Partnership—A general partner (GP) has authority to influence investments, so a general partner’s financial interests in both the partnership itself and its underlying investments are direct.

Answer 29

True

Question 30

A general partner has authority to influence investments, so a general partner’s financial interests in both the limited partnership itself and its underlying investments are direct.

Answer 30

True

Question 31

A limited partner’s interest in the limited partnership is direct, but usually he or she will not have influence over its investments so this partner’s financial interest in its underlying investments will be indirect.
a. If the limited partner has authority to supervise or
participate in investment decisions or the ability to
replace the general partner(s), then his or her
interest in the underlying investments will be
direct.

Answer 31

True

Question 32

If a limited liability company is member-managed, then it is sufficiently like a general partnership that members’ interests in both the firm and its underlying investments are direct.

Answer 32

True

Question 33

If a limited liability company is agent-managed, then members are more like limited partners and their interests in the underlying investments are viewed as indirect unless the members have the authority to control the limited liability company or to supervise or participate in its investments.

Answer 33

True

Question 34

Prepaid Tuition Plans—Owners of a 529 account used to prepay tuition have a direct interest in the plan but only an indirect interest in its underlying investments. Owners of such plans are essentially buying tuition credits. The state has an obligation to provide the education regardless of the investments’ performance.

Answer 34

True

Question 35

Savings Plans—Owners of these accounts have a direct financial interest in both the plan and its investments because they may decide in which sponsor’s 529 savings plan to invest and can determine before investing which firms the plan will invest in.

Answer 35

True

Question 36

The fact that a covered member is asked to serve as trustee of a trust or executor of an estate does not by itself create an independence problem if an attest client’s shares are owned by the trust or estate.

Answer 36

True

Question 37

In case pf trust and estate.

There is a problem if:
1. The covered member has the ability to make investment decisions for the trust or estate.

2. The trust or estate owns or is committed to acquiring more than 10% of the attest client’s ownership interests, or
3. The value of the trust’s or estate’s ownership interest in the client exceeds 10% of its total assets.

Answer 37

True

Question 38

B. Grantor—If a covered member acts as a grantor to set up a trust, its investments are direct financial interests if any of the following are true:

1. The covered member has the ability to amend or revoke the trust.
2. The covered member has authority to control the trust.
3. The covered member has the ability to supervise or participate in the trust’s investment decisions.
4. The underlying trust investments ultimately will revert to the covered member as the grantor.

Answer 38

True

Question 39

Beneficiary—If a covered member is a beneficiary of a trust, then the covered member’s interest in it is direct and his or her interest in the trust’s underlying investments is indirect, unless the covered member controls the trust or supervises or participates in its investment decisions, in which case the interest becomes direct.

Answer 39

True

Question 40

Blind Trust—Because the investments ultimately will revert to the grantor who typically retains the right to amend or revoke, both a blind trust and its underlying investments are considered to be direct financial interests of the grantor.

Answer 40

True

Question 41

Brokerage Accounts with an attest client would impair independence in all case

Answer 41

Fasle
Brokerage Accounts with an attest client would NOT impair independence if:

1. Under normal term, procedures and requirements AND
2. Any covered member’s assets subject to the risk of loss are immaterial to the covered member’s net worth.

In determining risk of loss, the question is not whether the assets’ market value might decline but whether the client might become insolvent or commit fraud. Protection by regulators and insurance are relevant factors in determining risk of loss.

Question 42

An insurance policy is not a financial interest unless it offers an investment option.

Answer 42

True

Question 43

with respect to Insurance Policy, If there is an investment option, there would always be an independence problem.

Answer 43

False

If there is an investment option, there would still not be an independence problem if the covered member bought the policy under normal terms and conditions, unless the covered member had either:

1. The ability to select the policy’s underlying investments

OR

2. The authority to supervise or participate in the investment decision and the covered member invested in an attest client.

Question 44

Generally, close relatives of covered members must follow the same independence rules as the covered members themselves, but the restrictions are looser than for immediate family members and they are looser for close relatives of covered members who are not on the engagement team.

Answer 44

True

Question 45

Generally, close relatives of covered members must follow the same independence rules as the covered members themselves, but the restrictions are looser than for immediate family members and they are looser for close relatives of covered members who are not on the engagement team.

Answer 45

True

Question 46

Independence is impaired if the close relative of an audit team member has a financial interest in the attest client that the team member knows or has reason to know was material to the close relative

Answer 46

True

Question 47

Independence is impaired if the close relative of an audit team member has a financial interest in the attest client that enabled the close relative to exercise significant influence over the attest client.

Answer 47

True

Question 48

Independence is impaired if the close relative of a person in a position to influence (PTI) or other partner in the office (OPIO) has a key position with an attest client

Answer 48

True

Question 49

Independence is impaired if the close relative of a person in a position to influence (PTI) or other partner in the office (OPIO) has a financial interest that:

1. The person in a position to influence or other partner in office has reason to believe was material to the close relative, AND
2. Enabled the close relative to exercise significant influence over the attest client.

Answer 49

True

Question 50

There are no specific restrictions on close relatives of 10-hour people

Answer 50

True

Question 51

if Joe is an elected head of a governmental unit or is a candidate running for that position,

An audit firm would not be independent in auditing that governmental unit if Joe’s campaign manager is a partner or professional employee (POPE) of the firm.

However, the firm would not necessarily lack independence to audit Joe’s political party. The firm should apply the threats and safeguards framework to determine whether threats to independence could be lowered to an acceptable level.

Answer 51

True

Question 52

If a firm’s partner or professional employee serves as director or officer of a federated fund-raising organization such as United Way, which not only gives funds to a particular local charity but also exercises control over that charity, then the firm may not audit that local charity.

Even if United Way does not exercise control, there are sufficient independence concerns that the Conceptual Framework should be invoked.

Answer 52

True

Question 53

When a partner or professional employee is a director of an organization that receives funding from a foundation that exists solely to raise funds for that organization, the firm may not audit the foundation, unless the directorship is clearly honorary.

Answer 53

True

Question 54

Independence concerns arise when people who are employed by attest clients or who were associated with them as officers, directors, promoters, underwriters, voting trustees, or trustees for a pension fund or profit-sharing fund of the clients, join the firm as covered members.

Answer 54

True

Question 55

Independence is impaired if one of these people participates as a team member or someone in a position to influence when the attest engagement covers any period of time when the person was employed by or associated with the audit client.

Answer 55

True

Question 56

C. However, if the people become merely other partners in the office or 10-hour people, then independence is not impaired so long as they dissociate themselves from the client prior to becoming a covered member. Dissociation includes all of the following five steps:

1. Ceasing to participate in all the client’s health and welfare benefit plans, unless the client is legally required to allow the covered member to participate in the plan (e.g., COBRA), and the covered member pays 100% of his or her portion of the cost
2. Ceasing to participate in all other employee benefit plans by liquidating or transferring all vested benefits in the client’s defined benefit plans, defined contribution plans, and similar arrangements at the earliest permissible
3. Disposing of any direct or material indirect financial interest in the client
4. Collecting or repaying any loans to or from the client other than those specifically permitted or grandfathered by the code
5. Assessing other relationships with the client to determine if they create threats to independence that would require the application of safeguards to reduce threats to an acceptable level

Answer 56

True

Question 57

When an attest team member or person in a position to influence is considering employment with the attest client, independence is impaired unless the team member:

1. Promptly reports such consideration or offer to an appropriate person in the firm, and
2. Removes him- or herself from the engagement until the offer is rejected or the position is no longer sought.

Answer 57

True

Question 58

When a covered member learns that a team member or a person in a position to influence is considering employment with a client and has not taken the steps listed above, that member should alert the firm.

1. The firm must consider what additional procedures may be necessary to provide reasonable assurance that the person acted properly.
2. The policy does not explicitly cover other partners in office or 10-hour people.

Answer 58

True

Question 59

If a covered member buys an interest in a condominium, cooperative, or other common interest realty association, his or her firm may nonetheless audit the common interest realty association, but only if all of the following safeguards are met:

A. The common interest realty association performs functions similar to local governments, such as public safety, road maintenance, and utilities;

B. The covered member’s annual assessment is not material to either the common interest realty association or the member;

C. Liquidation of the common interest realty association or sale of common assets would not result in a distribution to the covered member; and
D. The common interest realty association’s creditors would not be permitted to recover out of the member’s assets if the common interest realty association became insolvent.

Answer 59

True

Question 60

When a covered member is a member of a credit union and became eligible to join only because of the professional services he or she provided to the credit union, independence is impaired. However, if the member individually qualifies to join the credit union irrespective of professional services provided, then independence is not impaired.

Answer 60

True

Question 61

Member of a Social Club—If a covered member belongs to a social club, such as a country club, that is an attest client, there should be no independence problem if the membership is primarily a social matter.

Answer 61

True

Question 62

Member of a Trade Association—Independence is impaired if a covered member belongs to a trade association that is an attest client. If a partner or professional employee is employed by or associated with a trade association in an important role (director, trustee, etc.), independence is again impaired.

Answer 62

True

Question 63

Covered members should monitor the total amount of their nonaudit services to ensure that their total involvement with the client does not become so extensive that it would constitute performing a separate service.

Answer 63

True