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Audit - Wiley > Sarbanes-Oxley Act of 2002 & PCAOB > Flashcards

Sarbanes-Oxley Act of 2002 & PCAOB Flashcards

1
Q

What document authorizes the Public Accounting Oversight Board (PCAOB)?

A

The Sarbanes-Oxley Act of 2002.

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2
Q

How many members are in the PCAOB and describe them.

A

Five members.

Two must be or have been CPAs
Three members cannot be or cannot have been CPAs
None of Board members may receive pay or profits from CPA firms

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3
Q

What is the PCAOB’s main function?

A

To regular CPA firms (registrants) that audit SEC registrants (issuers)

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4
Q

What are the two other main functions of the PCAOB?

A
  1. To register and conduct inspections of public accting firms (replaces peer review)
  2. Set or adopt standards on auditing, quality control, independence, or preparation of audit reports
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5
Q

How many years must working papers be saved for?

A

Most must be saved for seven years.

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6
Q

How many titles are in the Sarbanes-Oxley act?

A

4 titles

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7
Q

What does SB Title I stated?

A
  1. Authorizes the PCAOB
  2. PCAOB regulates CPA firms that audit SEC registrants
  3. Acct firms must have 2nd partner review and approve audit
  4. Acct firms must report on audit of internal control and audit of financial statements for issuers
  5. CPA working papers must be saved for 7 years
  6. Material additional services of auditors must receive preapproval from audit committee and fees must be disclosed to investors
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8
Q

What does SB Title II state?

A
  1. Lists what types of specific service categories that the public acct firm cannot legally perform
  2. Audit partner for job and audit partner who reviews can do audit services for only 5 consecutive years
  3. Audit firm should report critical acct policies, alternative treatments of transactions, and other material written communications between acct firm and management to audit committe
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9
Q

According to SB Title II, list 5 categories of activities that are illegal for public acct firms that they cannot legally perform.

A
  1. Bookkeeping or other services relating to financial statements or accounting records
  2. Financial information systems design and or implementation
  3. Financial information systems design and or implementation
  4. Appraisal services
  5. Internal Audit outsourcing activities
  6. Management functions
  7. Actuarial services
  8. Investment or broker-dealer services
  9. Certain tax services, such as tax planning for potentially abusive tax shelters

NOTE: The auditors can perform these services to nonaudit clients or private companies; tax services are allowed as well when approved by issuer’s audit committed

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10
Q

What does SB Title III state?

A

It is unlawful for any officer or director to take any action to fraudulently influence, coerce, manipulate, or mislead any public accountant engaged in the performance of the audit

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11
Q

What does SB Title IV state?

A

This title is important to the overall process of CPA reporting on internal control.

It is management’s responsibility to establish adequate internal control.
Management must access its internal control
CPA firm attests to management’s assessment of IC

  • Requires every issuer to report whether it has adopted a code of ethics for senior financial officers
  • CEOs and CFOs of most large companies now required to certify financial statements filed with SEC
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12
Q

When did the PCAOB adop the AICPA’s standards?

A

April 16, 2003

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13
Q

What AICPA standards did the PCAOB adopt?

A
  1. Auditing Standards Board Standards
  2. Attestation Standards
  3. Quality Control Standards
  4. Ethics Standards (Rule 101 and Rule 102)
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14
Q

What are the 3 general components of inspections performed by the PCAOB?

A
  1. An inspection and review of selected audit and review engagements
  2. Evaluate sufficiency of quality control system and manner of documentation and communication of system
  3. Performance of such other testing of audit, supervisory, and quality control procedures as are considered necessary
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15
Q

What are the results of an inspection performed by the PCAOB?

A
  • Written report that is transmitted to the SEC
  • Letter of comments by PCAOB inspectors and any responses by CPA firm
  • Criticisms of firm’s quality control are not made public unless firm does not address criticism within 12 months
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16
Q

What do PCAOB inspections focus on?

A

Selected quality control issues. The PCAOB focuses the high risk aspects of that engagement, such as revenue recognition and accounting estimates.

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17
Q

Prior to accepting an initial engagement (e.g audit), the CPA firm must:

A
  1. Describe in writing to the audit committee all relationships b/w CPA firm and potential audit client
  2. Discuss any possible effects on independence of above relationships
  3. Document the substance of the discussion

UPDATED ANNUALLY

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18
Q

What must the CPA firm do when obtaining preapproval of permissible tax services or permissible nonaudit services related to internal control over financial reporting.

A
  1. Describe those services in writing to the audit committee
  2. Discuss any possible effects on independence with the audit committee
  3. Document the substance of the discussion
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19
Q

List 2 examples as to when a CPA firm is not independent.

A
  1. If provides a client nonaudit services related to marketing, planning, or opinion in favor of the tax treatment of confidential transactions or aggressive tax position transactions
  2. If provides any tax services to a person or a financial reporting oversight role to audit client, or an immediate family member of such person.
    - Exceptions: if services provided for only serves as a member of the BOD
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20
Q

What is the International Ethics Standards Board for Accountants?

A

The IESBA is a standard setting body within the International Federation of Accountants (IFAC) that issues ethical standards for accountants throughout the world. They issued the Code of Ethics for Professional Accountants.

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21
Q

What are the 3 parts of the International Ethics Standards Board for Accountants?

A

Part A - Framework applies to all professional accountants
Part B - Applies to professional accountants in public practice
Part C - Applies to professional accountants in business

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22
Q

If there is no definitive prohibition, the following approach is used:

A
  1. Identify threats to independence
  2. Evaluate the significance of the threats identified
  3. Apply safeguards, when necessary. to eliminate the threats or reduce them to an acceptable level
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23
Q

Who develops the international auditing standards on auditing/assurance?

A

International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC), a worldwide organization of approximately 160 national accounting bodies (e.g AICPA)

24
Q

Why was the IFAC established?

A 
The IFAC (International Federation of Accountants) was established to help foster a coordinated worldwide accounting profession with harmonized standards. 
Its boards also establish ethical and quality control standards for accounting professionals with accounting firms.
25
Q

How are the international auditing standards issued?

A

As a series of statements referred to as the International Standards on Auditing.

26
Q

Differences between international and US PCAOB auditing standards.

A
  1. International standards do not require an audit of internal control, while PCAOB standards do so require.
  2. International standards do now allow reference to another audit firm involved in a portion of the audit while PCAOB standards allow the principal auditor to so report
  3. International standards for documentation are less detailed than than PCAOB standards
  4. International standards in the area of going concern include time horizon of at least, but not limited to, twelve months, while PCAOB standards limit the foreseeable future for a going concern consideration of up to twelve months
27
Q

International v. US in regards to Compliance with GAAS

A

International: Auditors comply with requirements except in exceptional circumstances in which case alternate procedures are performed
US: 3 responsibility levels for compliance: (1) unconditional, (2) presumptively mandatory and (3) responsibility to consider
-Note: Auditing Standards Board (ASB) only include the first 2 categories

28
Q

International v. US in regards to Confirmation of AR

A

International: Not required.
US: Presumptively required unless AR are immaterial, the use of confirmations would be ineffective or the combined assessed level of inherent and control risk is low.

29
Q

International v. US in regards to Fraud definition

A

International: intentional act by one of more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage
US: An international act that results in a material misstatement in financial statements that are the subject of an audit

30
Q

International v. US in regards to Fraud

A

International: Auditors should obtain a written representation from management that it has disclosed to the auditor the results of its assessment of the risk of fraud
US: Not required.

31
Q

International v. US in regards to Illegal Acts

A

International: Auditor’s concern is with whether laws and regulations may materially affect the financial statements (no distinction is made between direct and indirect effect illegal acts)
US: Audit obtains reasonable assurance of detection of illegal acts that have a direct and material effect on financial statement amounts;

32
Q

International v. US in regards to Use of the work of internal auditors

A

International: Auditors evaluate internal auditor objectivity, competence, and work performance before using their work
US: In addition to AICPA SAS requirement, auditors must determine that the internal audit function applies a systematic and disciplined approach, including quality control.

33
Q

International v. US in regards to Sending letter of audit inquiry to lawyers

A

International: Only required when an auditor “assesses a risk of material misstatement”
US: Presumptively required

34
Q

International v. US in regards to Reviewing predecessor auditor’s working papers for evidence on beginning balances

A

International: May provide sufficient appropriate audit evidence on opening balances
US: Statement is not included in standards

35
Q

International v. US in regards to Terms of audit engagement change, and auditor is unable to agree on new terms

A

International: Auditor should withdraw and consider whether there is an obligation to contact other parties
US: There is no explicit obligation to consider contacting other parties

36
Q

International v. US in regards to Opinion on financial statements

A

International: Audit opinion may be on either (1) the fair presentation of the financial statements (2) that the financial statements give a true and fair view
US: Audit opinion may only be on fair presentation of financial statements

37
Q

International v. US in regards to audit report modification for consistency related to changes in accounting principles

A

International: Not required
US: Audit reports are modified for changes in accounting principles with a material effect on the financial statements

38
Q

International v. US in regards to Inclusion of an emphasis of a matter paragraph in an audit report

A

International: Preferably after the opinion paragraph
US: No such statement (may be before or after opinion paragraph)

39
Q

International v. US in regards to Providing location the auditor practices in an audit report

A

International: Required
US: Not required

40
Q

International v. US in regards to Dating the audit report for a subsequent event

A

International: When management amends financial statements for a subsequent even the auditor should perform necessary procedures and change the date of the audit report to no earlier than the date the financial statements were accepted as amended
US: Auditors may dual date report

41
Q

International v. US in regards to Communications to those charge with governance (internal control deficiencies and other matters related to the audit)

A

International: While report explicitly addressed to those charged with governance and/or management, the report does not include a restriction on use to these parties. Significant deficiencies identified, no category used to identify material weaknesses.
US: Report explicitly indicates that it is not intended to be, and should not be, used by anyone other than the specified parties. Internal control deficiencies divided into two categories: (1) significant deficiencies and (2) material weaknesses

42
Q

Who developed the International Financial Reporting Standards?

A

IFRS was developed by the International Accounting Standards Board (IASB). It is an alternative financial reporting framework to US GAAP.

IFRS is more principle based than US GAAP.

43
Q

What is the mission of the SEC (Securities and Exchange Commission)?

A

To protect investors, maintain fair, orderly, and efficient markets, and facilitate capital information.

44
Q

What the does SEC have authority to do?

A

Establish standards relating to financial accounting, auditing and CPA professional conduct when involved with public-company financial statements. (works with PCAOB)

45
Q

Does the PCAOB pronouncements require SEC approval?

A

Yes, it does.

46
Q

Give 2 examples that the SEC independence rules has been more restrictive than those in the AICPA.

A

AICPA requirements make clear that performing bookkeeping services impair audit independence; this is allowed under AICPA rules

SEC (and PCAOB) have required companies to disclose audit and nonaudit fees earned by CPA firms.

47
Q

What are Financial Reporting Releases?

A

FRRs are designed to communicate the SEC’s positions on accounting principles and auditing practices.

48
Q

What is the Government Accountability Office and its mission?

A

The GAO’s mission is to support Congress in meeting its constitutional responsibilities and to help improvement the performance and ensure the accountability of the federal government.

49
Q

Name 5 examples of work the GAO performs.

A
  1. Auditing agency operations to determine whether federal funds are being spent efficiently and effectively
  2. Investigating allegations of illegal and improper activities
  3. Reporting on how well government programs meet their objectives
  4. Performing policy analyses and outlining various options for Congress
  5. Issuing legal decision and opinions
50
Q

Where are the additional requirements for audits of orgs that receive federal financial assistance?

A

These are included in Government Auditing Standards, referred to as the “Yellow Book”

51
Q

What are the GAO independence requirements?

A
  1. Similar to ACIPA restrictions - Must be free of personal, external and organizational impairments to independence and must avoid the appearance of such impairments of independence
  2. CPA Firm cannot allow personnel working on nonattest engagements to also work on audit
  3. Government Auditing Standards (GAS) places restrictions on nature of nonattest services to be performed for audit client
52
Q

What is the Department of Labor’s mission?

A

Fostering and promoting the welfare of job seekers, wage earners, and retirees of the US

53
Q

What does the Department of Labor do?

A

Conducts financial and performance audits following (GAS) in audits of

  1. Compliance with applicable laws and regulations
  2. Evaluation of economy and efficiency of operations
  3. Evaluation of effectiveness in achieving program results
54
Q

What must employee benefit plans be audited in accordance with?

A

The Employee Retirement Security Act of 1974.

55
Q

What is one difference between DOL and AICPA independence rules?

A

Accountant or firm may be engaged on a professional basis by the plan sponsor and the accountant may serve as an actuary.

Audit - Wiley (14 decks)

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