SEC & PCAOB Flashcards
Public Company Accounting Oversight Board (PCAOB) is responsible for…
regulating CPA firms that audit public companies AND entities reporting to SEC
Auditing Standards Board establishes…
auditing for nonpublic entities
Financial Accounting Standards Board is responsible…
for establishing GAAP for all entities
Powers of PCAOB
- registers accounting firms that audit public companies
- sets standards for the audits
- inspects the registered firms
firms performing more than 100 audits get inspected
annually
firms performing less than 100 audits get inspected
every 3 years
PCAOB consists of what type of members?
2 CPA members and 3 non-CPA members
How did SOX expand independence requirements for auditors of public companies?
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
what service does the PCAOB prohibit to run concurrently with an audit?
the preparation of a FROR’s tax return
what is breach of fiduciary duty?
a director putting personal interest above the corporation’s interest
what is the board of directors fiduciary duties?
- duty of loyalty
- duty of care
- duty of diligence
what is duty of loyalty
act in the entity’s best interest, avoid conflict of interest
what is duty of care
act objectively, exercise independent, informed judgement; promote success
what is duty of diligence
use reasonable care when entering into agreements or transactions with another party
what are the 4 prohibited services under SOX that pose a self-review threat?
- actuarial services
- appraisal/valuation services
- information system design or implementation
- services related to accounting records (ie. bookkeeping, prep. of F/S or elements of F/S-like footnotes)
what are SOX’s 3 fundamental ideas for NAS?
- accounting firms should not audit their own work
- auditors should not advocate for their clients
- accounting firms should not serve as their clients managers
what are the 5 independence requirements of SOX for audits of issuers?
- auditor must cool off 1 year before taking a key role with client
- auditor cannot perform most non attest services for audit clients
- 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 - audit partner and reviewing partner must rotate off engagement every 5 years and can’t return for 5 years
true or false: audit clients can maintain the same company for audit services for an undetermined amount of time.
TRUE; there is no time length requirement for a company’s auditor under SOX independence requirements
what are 4 prohibited services under SOX?
- management or human resources functions
- internal audit outsourcing services
- broker/dealer investment advisory or banking services
- legal services/expert services unrelated to audit
what 2 responsibilities regarding internal control of issuers does SOX have for management?
- acknowledge responsibility for internal control over financial reporting
- assess effectiveness of internal control over financial reporting
what 3 responsibilities regarding internal control of issuers does SOX have for auditors?
- understand client’s control structure
- assess risk of material misstatement
- evaluate and express an opinion on design and operating effectiveness of controls
audit committee members may receive compensation such as director fee, retainers and meeting fees for serving on the board but may NOT:
- accept any other consulting, advisory or compensatory fee from the company
- be affiliated with the company
the audit committee is responsible for overseeing the:
- financial reporting process
- appointment and compensation of the entity’s auditors
- establishment of appropriate internal controls, including programs for fraud detection/prevention
- creation/publication of a code of ethics for senior financial officers
- establishment of a process for employees to anonymously report concerns about accounting maters or fraud
- engagement of independent counsel as deemed necessary
audit committee members are independent members of the board of directors ONLY IF:
- they are not employed by the entity
- they are not shareholders
- they have no financial relationship with the entity
- they are not attached to the entity
what tax services are prohibited for issuer audit clients?
- recommending an aggressive tax position
- providing any tax service for person in key position with client
- using contingent fee arrangements (even if unrelated to tax)
- advocating for client in a tax dispute
one member of the audit committee must be a financial expert and can gain the experience required:
- as a principal financial or accounting officer, controller, public accountant or auditor
- in actively supervising any of the above positions
- in overseeing or assessing companies or public accountants in the preparation, auditing or evaluation of F/S
they must understand GAAP and F/S
what gets reported in writing to the audit committee and management?
material weaknesses and significant deficiencies in internal control over financial reporting (ICFR)
what gets reported in writing to management?
other ICFR deficiencies should be reported to management only no later than the date of the auditors report on ICFR
PCAOB and the SEC deal with auditing requirements for entities with ____________________
publicly traded securities (issuers)
what are the 4 objectives of PCAOB Auditing Standard (AS) NO. 16 “Communications with Audit Committees”?
- communicate to auditor’s responsibilities and establish an understanding of the terms of the engagement
- obtain information from the audit committee relevant to the audit
- communicate information about the strategy and timing of the audit
- provide timely observations about significant audit matters
