Sarbanes-Oxley Act of 2002 and the PCAOB Flashcards
According to PCAOB auditing standards, which of the following is not ordinarily considered an indicator of a “material weakness” in internal control over financial reporting?
A. Identification of a material misstatement of the financial statements in the current period’s financial statements.
B. Ineffective oversight of the company’s financial reporting function by the audit committee.
C. Identification of fraud involving senior management, although the amount involved is not viewed as material to the financial statements.
D. The issuer has engaged in material transactions with related party entities.
D. The issuer has engaged in material transactions with related party entities.
AS #5 (paragraph 69) specifically identifies A - C as conditions that would indicate a material weakness. There is nothing inherently inappropriate about related party transactions.
Each of the following is identified by both the PCAOB risk assessment standards and the AICPA risk assessment standards as an assertion to be specifically addressed by the auditor, except for
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Presentation and Disclosure
D. Presentation and Disclosure
The PCAOB identified “presentation and disclosure” as an assertion, whereas the AICPA standards (SAS No. 106, “Audit Evidence”) identified “presentation and disclosure” as a separate category of assertions consisting of 4 separate, specific assertions: (1) occurrence and rights and obligations; (2) completeness; (3) classification and understandability; and (4) accuracy and valuation.
An auditor should ordinarily add an explanatory paragraph to the auditor’s report to identify a material matter related to
A. A change in reporting entity resulting from a specific transaction or event.
B. A change in accounting principle caused by the issuance of a new authoritative accounting standard that rendered the principle previously used no longer generally accepted.
C. A change in classification in previously issued financial statements.
D. All of the above.
B. A change in accounting principle caused by the issuance of a new authoritative accounting standard that rendered the principle previously used no longer generally accepted.
PCAOB Auditing Standard No. 6 identifies 2 specific matters that affect the auditor’s evaluation of consistency of financial statements: (1) a change in accounting principle; and (2) an adjustment to correct a misstatement in previously issued financial statements (i.e., a “restatement”). A change in accounting principle may be at management’s discretion or it may be mandated by a change in accounting standards that eliminates an accounting alternative that was previously accepted, but no longer is.
When there is a change in accounting principle, the auditor should evaluate whether all of the following criteria have been met, except for whether
A. The change has been authorized by those charged with governance.
B. The method of accounting for the effect of the change conforms to GAAP.
C. The disclosures related to the change are adequate.
D. Management has justified that the alternative accounting principle selected is preferable to the previously used accounting principle.
A. The change has been authorized by those charged with governance.
When there is a change in accounting principle, the auditor is required to evaluate 4 matters: (1) whether the newly adopted principle is GAAP; (2) whether the method of accounting for the effect of the change conforms to GAAP; (3) whether the disclosures related to the change are adequate; and (4) whether the company has justified that the alternative accounting principle is GAAP. Hence, it is not true to suggest that the change must be authorized by those charged with governance.
Under the Sarbanes-Oxley Act of 2002, which of the following is not a stated responsibility of the Public Company Accounting Oversight Board?
A. Conducting inspections of registered public accounting firms.
B. Overseeing the registration of public accounting firms.
C. Issuing accounting standards that must be followed by issuers in financial reporting.
D. Issuing auditing standards that must be followed by registered public accounting firms in auditing the financial statements of issuers.
C. Issuing accounting standards that must be followed by issuers in financial reporting.
The PCAOB is a “standard-setting body” for certain matters related to registered public accounting firms (including auditing and quality control, among other matters). However, the PCAOB is not an “accounting” standard-setting body and does not promulgate GAAP affecting the financial statements of issuers.
