SEC & PCAOB

Question 1

Public Company Accounting Oversight Board (PCAOB) is responsible for…

Answer 1

regulating CPA firms that audit public companies AND entities reporting to SEC

Question 2

Auditing Standards Board establishes…

Answer 2

auditing for nonpublic entities

Question 3

Financial Accounting Standards Board is responsible…

Answer 3

for establishing GAAP for all entities

Question 4

Powers of PCAOB

Answer 4

1. registers accounting firms that audit public companies
2. sets standards for the audits
3. inspects the registered firms

Question 5

firms performing more than 100 audits get inspected

Answer 5

annually

Question 6

firms performing less than 100 audits get inspected

Answer 6

every 3 years

Question 7

PCAOB consists of what type of members?

Answer 7

2 CPA members and 3 non-CPA members

Question 8

How did SOX expand independence requirements for auditors of public companies?

Answer 8

it prevents firms from performing audits if the client to be audited has anyone in a financial reporting oversight role (FROR) that worked for the firm on the client’s audit within one year preceding the current engagement

Question 9

what service does the PCAOB prohibit to run concurrently with an audit?

Answer 9

the preparation of a FROR’s tax return

Question 10

what is breach of fiduciary duty?

Answer 10

a director putting personal interest above the corporation’s interest

Question 11

what is the board of directors fiduciary duties?

Answer 11

1. duty of loyalty
2. duty of care
3. duty of diligence

Question 12

what is duty of loyalty

Answer 12

act in the entity’s best interest, avoid conflict of interest

Question 13

what is duty of care

Answer 13

act objectively, exercise independent, informed judgement; promote success

Question 14

what is duty of diligence

Answer 14

use reasonable care when entering into agreements or transactions with another party

Question 15

what are the 4 prohibited services under SOX that pose a self-review threat?

Answer 15

1. actuarial services
2. appraisal/valuation services
3. information system design or implementation
4. services related to accounting records (ie. bookkeeping, prep. of F/S or elements of F/S-like footnotes)

Question 16

what are SOX’s 3 fundamental ideas for NAS?

Answer 16

1. accounting firms should not audit their own work
2. auditors should not advocate for their clients
3. accounting firms should not serve as their clients managers

Question 17

what are the 5 independence requirements of SOX for audits of issuers?

Answer 17

1. auditor must cool off 1 year before taking a key role with client
2. auditor cannot perform most non attest services for audit clients
3. auditor must report to audit committee:
   a. critical accounting policies and practices
   b. alternative accounting discussed with management
   c. material written communications between auditor and management
4. audit partner and reviewing partner must rotate off engagement every 5 years and can’t return for 5 years

Question 18

true or false: audit clients can maintain the same company for audit services for an undetermined amount of time.

Answer 18

TRUE; there is no time length requirement for a company’s auditor under SOX independence requirements

Question 19

what are 4 prohibited services under SOX?

Answer 19

1. management or human resources functions
2. internal audit outsourcing services
3. broker/dealer investment advisory or banking services
4. legal services/expert services unrelated to audit

Question 20

what 2 responsibilities regarding internal control of issuers does SOX have for management?

Answer 20

1. acknowledge responsibility for internal control over financial reporting
2. assess effectiveness of internal control over financial reporting

Question 21

what 3 responsibilities regarding internal control of issuers does SOX have for auditors?

Answer 21

1. understand client’s control structure
2. assess risk of material misstatement
3. evaluate and express an opinion on design and operating effectiveness of controls

Question 22

audit committee members may receive compensation such as director fee, retainers and meeting fees for serving on the board but may NOT:

Answer 22

1. accept any other consulting, advisory or compensatory fee from the company
2. be affiliated with the company

Question 23

the audit committee is responsible for overseeing the:

Answer 23

1. financial reporting process
2. appointment and compensation of the entity’s auditors
3. establishment of appropriate internal controls, including programs for fraud detection/prevention
4. creation/publication of a code of ethics for senior financial officers
5. establishment of a process for employees to anonymously report concerns about accounting maters or fraud
6. engagement of independent counsel as deemed necessary

Question 24

audit committee members are independent members of the board of directors ONLY IF:

Answer 24

1. they are not employed by the entity
2. they are not shareholders
3. they have no financial relationship with the entity
4. they are not attached to the entity

Question 25

what tax services are prohibited for issuer audit clients?

Answer 25

1. recommending an aggressive tax position
2. providing any tax service for person in key position with client
3. using contingent fee arrangements (even if unrelated to tax)
4. advocating for client in a tax dispute

Question 26

one member of the audit committee must be a financial expert and can gain the experience required:

Answer 26

1. as a principal financial or accounting officer, controller, public accountant or auditor
2. in actively supervising any of the above positions
3. in overseeing or assessing companies or public accountants in the preparation, auditing or evaluation of F/S
   they must understand GAAP and F/S

Question 27

what gets reported in writing to the audit committee and management?

Answer 27

material weaknesses and significant deficiencies in internal control over financial reporting (ICFR)

Question 28

what gets reported in writing to management?

Answer 28

other ICFR deficiencies should be reported to management only no later than the date of the auditors report on ICFR

Question 29

PCAOB and the SEC deal with auditing requirements for entities with ____________________

Answer 29

publicly traded securities (issuers)

Question 30

what are the 4 objectives of PCAOB Auditing Standard (AS) NO. 16 “Communications with Audit Committees”?

Answer 30

1. communicate to auditor’s responsibilities and establish an understanding of the terms of the engagement
2. obtain information from the audit committee relevant to the audit
3. communicate information about the strategy and timing of the audit
4. provide timely observations about significant audit matters