SEC, PCAOB, GAO, DOL Flashcards
Financial reporting oversight role FROR
role in which a person is in position to or does exercise influence over contents of FS or anyone who prepares them. examples. director, ceo, president, cfo, coo, general counsel, cao, controller, director of internal audit, director of financial reporting, treasure
audit and professional engagement period
includes period covered b any FS being audited or reviewed and period of engagement. professional eng period begins at earlier of when cpa signs an initial eng ltr or begins audit and ends when audit client or cpa notifies SEC that client is no longer the cpa for audit client
close family member
person's spouse, spousal equivalent, parent, dependent, nondependent child sibling
covered persons
partners
principals
shareholders
employees of accounting firm
audit engagement team definition
all partners
principals
shareholders
professional employees participating in audit, review or attest eng
immediate family member
person’s spouse
spousal equivalent
dependent
to be qualified to audit public company a cpa must
- be registered and in good standing under the laws of his or her state
- must be and appear to be independent and capable of exercising objective and impartial judgment
direct investment
cpa firm,
any of its covered persons or
any of their immediate family members may not have direct investment in adult client such as: owning stocks bonds notes, options
direct investment includes one through an intermediary if
firm, covered person or IMF alone or together either supervise or participate in intermediary’s investment decision
-intermediary is a non-diversified mutual fund that has invested 20% or more its money in audit client
five percent investments
independence is impaired if any partner, principal shareholder or professional of firm (an any of their IFM and CFM) owns 5% ore more of client’s stocks
trustee of a trust
independence is impaired if cpa firm or any CP or IFM serve as voting trustee of trust or executors of estate containing an audit client’s securities, unless they have no authority to make investment decisions for the trust or estate
material indirect interest
as with aicpa code, cpa firms, cp and their IFM may not only not have direct financial interest in audit client (material or not) they may not have indirect interests that are material. it is permitted for these persons to own 5% or less of diversified investment company, even if company owns some shares of audit client
related entities - independence is destroyed if firm, cp or ifm:
have any direct or material indirect investment in entity that is not audit client where
a. audit client has investment in that entity that is material to audit client and has ability to exercise significant control over that entity
b. entity has investment in audit client that is material to entity that has ability to exercise significant influence over audit client
have any material inv in entiy over which audit client is able to exercise sig inf
have ability to exercise sig inf over entity that has ability to exercise sig infl over audit client
define other financial relationships where independence is impaired if firm or its covered persons or IFMs have a relationship with:
- loans/debtor creditor relationships
- savings and checking accounts
- broker dealer accounts
- credit cards
- insurance products
CP or IMF have a relationship with loans/debtor creditor relationships and independence
impaired. any loan to or from audit client, its officers or directors, or its 10% owners, except the following loans obtained from financial institution under normal lending procedures, terms and requirements
1. automobile loans and leases collateralized y the automobile
2. loans fully collateralized by cash surrender value of insurance polity
3. loans fully collateralized by cash deposits at the same financial institution
4. mortgage loan collateralized by borrower’s primary residence provided the loan was not obtained while cp was a cp
savings and checking accounts - covered person - independence issues
impaired..any savings, checking or similar account at a bank, savings and loan, or similar institution that is an audit client if the account has a balance that exceeds the amount insurable by FDIC, except that an accounting firm may have an uninsured balance provided that the likelihood of institution experiencing financial difficulties is remote
broker dealer relationship with CP and IMF - independence issues
independence impaired if brokerage or similar accounts maintained with broker dealer that is audit client:
any such account includes assets other than cash or securities
-the value of assets in accounts exceeds amount protected by securities investor protection corporation (SPIC) which is 500k for securities and 250k for cash
credit cards relationship with CP IMF - independence issue
impaired if any aggregate outstanding credit card balance is >10,000 owed to a lender that is audit client
insurance policies relationship with CP IMF independence issue
impaired if any individual policy issued by an issuer that is an audit client, unless:
- policy was obtained when cp ws not a cop
- likelihood of insurer becoming insolvent is remote
independence exceptions for covered members who have relationships with
- inheritance and gifts
- new audit engagement
- employee compensation and benefit plan
inheritance and gifts given to CP or IMF
any person who acquires an unsolicited financial interest will not lose independence if he or she disposes of the interest as soon as practicable, but always less than 30 days after the person has knowledge of and the right to dispose of the interest
new audit engagement - relationship with CP or IMF
a person has financial interest that would normally impair independence but that person did not audit client’s FS previous year and disposes of interest before signing eng ltr or commenting any audit procedures
employee compensation and benefit plan - CP and IMF
if IFM has an impermissible financial interest in audit client that was unavoidable consequence of participation in employer’s EBP, provided that financial interest (other than un-exercised employee stock options) is disposed of as soon as practicable but no later than 30 days after person has the right to dispose financial interest. exception applies to IMF of OPIO and 10 hour person
audit clients financial relationships
cpas are not independent in these cases
- investments by audit client in accounting firm
2 cpa engages audit client to be underwriter, broker dealer, promoter for securities issued by cpa firm
employment relationships - cpa is not independent if he has employment relationship with audit client such as:
- employment at audit client of accountant
- employment at audit client of certain relatives of accountant
- employment of audit client of former employee of accounting firm
- employment at accounting firm of former employee of audit client
independence issues - employment at audit client of former employee of accounting firm
independence is impaired if a former partner, principal shareholder or professional employee at accounting firm is in accounting or in financial reporting oversight role, unless
does not influence acct firm’s operation or financial policies
has no capital balances in accounting firm
has no financial arrangement with accounting firm other than the one providing for regular payment of a fixed dollar amount (retirement plan)
former partner, principal, shareholder or professional employee of firm is FROR at audit client unless not a member of audit eng team during one year proceeding date of audit initiation
audit cycle runs may 15-may 14. sandy is on audit team. she resigns on june 15. when can she work for audit client
she must wait until end of current audit cycle, then allow one year before she can go work for audit client. if she quit on may 14th, she could have started may 15 of next year.
if individual worked for audit firm but didn’t participate in audit, is there a problem if he goes and works for audit client?
no
a person who provided 10 hours or fewer hours of attest services, is there a problem if he goes and works for audit client?
no issue
a former officer, director or employee of audit client becomes a partner, shareholder or professional employee of accounting firm, no independence unless
individual does not participate in, and is not in a position to influence audit FS covering any period he or she was employed by audit client
non audit services not permitted by sox provisions, implemented by SEC
- bookkeeping svc
- financial information system design and implementation
- appraisal or valuation svc
- actuarial svc
- internal audit outsourcing svc
- mgt functions
- human resources
- broker dealer
- legal svc
- expert services unrelated to audit
contingent fees per SEC
accountant is not independent if it provides any svc or product ot public company audit client for a contingent fee or commission
partner rotation - mandated by sox
- no requirements that public companies rotate audit firms
- lead and concurring audit partners must rotate every five years (5on, 5off)
- partners providing more than 10 hours must be rotated every seven years (7on, 2 off)
- there are exemptions for firms with fewer than 5 public client audits and 10 audit partners
pcaob performs inspections every how many years for firms auditing more than 100 firms
every 1 year
pcaob performs inspections every how many years for firms auditing fewer than 100 companies
every 3 years
who approves pcaob rules?
sec
whose rules override aicpa rules?
pcaob and sec, if different
does sec and pcob permit cpas to prepare taxes of audit clients?
yes, however they cannot provide services related to marketing, planning or opining in favor of tax transactions that are confidential and aggressive
can public company accounting firm provide tax services to to person in financial reporting oversight role at the audit client or to an immediate family member (spouse, spousal equivalent, and dependents)
no, unless
- fror only because he is member of bod
- fror only because his relationship to affiliate of entity being audited where affiliates fs are not material o consolidated fs of audit client or are audited by different audit team
- was not in a fror before hiring promotion or similar change in employment
before accepting a public company as a new audit client, a registered firm must
- describe in writing to audit committee all relationships between firm and its affiliates on the one had and the client and its fror employees as of the date of communications\
- discuss with audit committee these relationship and their potential effect on independence
- document the discussion
to increase transparency pcaob requires firms to file a form for each issuer audit disclosing
- name of eng partner
- name, location, extent of participation of each other accounting firm participating in audit whose work constituted at least 5% of audit hours
- number and aggregate extent of participation of all other accounting firms participating in adult whose individual participation was less than 5% of audit hours
general accountability office GAO guidelines apply who conduct audits of
government entities (federal, state and local) entities who receive gov awards (colleges, trade schools, charities, local gov)
those who audit pursuant to gagas are expected to audit
independently
in accordance with key ethical principles
1. public interest
2. integrity
3. objectivity
4. proper use of gov information, resources and positions
5. professional behavior - compliance with all relevant legal, regulatory and professional obligations avoidance of conflict of interest, sensitivity to appearance of impropriety and putting forth an honest effort to meet technical and professional standards
independence comprises of
- independence of mind - performing audit without being affected by influences that compromise professional judgment (act with integrity, objectivity and professional skepticism)
- independence in appearance
what are four key independence considerations
- conceptual framework for making independence determinations
- requirements for and guidance on independence for audit organizations structurally located within entities they audit
- requirements for and guidance on independence for performing nonaudit services
- requirements for and guidance on necessary documentation of audit’s independence
GAO threats that should be indentified and evaluated
- self interest threat - interest will be inappropriately influence cpa’s judgment or behavior
- self review threat - AO will evaluate its own non attest services and not appropriately evaluate results of previous judgments or actions taken
- bias threat - cpa will, as a result of political, ideological, social or other convictions take a position that is not objective
- familiarity threat - close family member will undermine objectivity
- undue influence threat - external influences or pressures will impact cpa’s indep and objectivity
- mgt participation threat -
- structural threat - AO’s placement within gov entity, in combination with structure of entity being audited, will impact AO’s ability to perform work and report results objectively
a nonexclusive list of safeguards AO itself might apply to eliminate threats to independences or reduce to acceptable level include
- consulting independent third party
- involving another AO to perform or re-perform part of audit
- having a professional staff member who is not a member of audit team to review work
- removing an individual from audit team
nonexclusive list of safeguards that might arise from audited entity itself, include:
- requirement that persons other than mgt rafity or approve appointment of AO to perform audit
- internal entity procedures ensuring objective choices in commissioning NAS
- entity governance structure that provides appropriate oversight and communications regarding audit organizations services
structural threat
independence can be threatened when auditors in government entities report either to external auditor, to senior management within audited entity or to both
fore external AO, constitutional or statutory safeguards may include governmental organizations under which AO is:
- at a level of government other than the one of which the audited entity is part (federal auditors may be auditing state gov program or state auditors may be auditing county gov programs)
- placed within a different branch of gov from that of audited entity (legislative auditors audit an executive branch program)
structural threats may be mitigated if the head of AO meets any of the following criteria in accordance with consitutional or statutory requirements:
- directly elected by voters of jurisdiction being audited
- elected or appointed by a legislative body, subject to removal by a legislative body, and reports the results of audit to and is accountable to legislative body
- appointed by someone other than a legislative body, so long as appointment is confirmed by a legislative body and removal from the position is subject to oversight or approval by a legislative body, and reports the results of audits to and is accountable to legislative body
- appointed by, accountable to, reports to, and can only be removed by a statutorily created governing body, the majority of whose members are independently elected or appointed and are outside the org being audited
for AOs under a different structure, all of the following safeguards should be in place
- statutory protections to prevent audited entity from abolishing the AO
- statutory protection that if the head of AO is removed, the head of agency reports this to legislative body
- statutory protection preventing audited entity from interfering with initiation, scope, timing and completion of any audit
- statutory protection preventing audited entity from interfering with audit reporting, findings, conclusions, or manner, means or timing of AO’s reports.
- statutory protection requiring AO to report regularly to a legislative body or other independent governing body
- statutory protections giving the AO sole authority over selection, retention, advancement and dismissal of its staff
- statutory access to records and documents related to agency, program or function being audited and access to officials or others as needed to conduct the audit
internal auditors working under direction of audited entity’s management are considered independent for purposes of reporting internally if head of the audit organization meets all of the following:
-accountable to head of gov entity or to those charged with governance
-reports audit results both to head of gov entity and to those charged with governance
-located organizationally outside the staff or line management function of the areas being audited
-has access to those charged with governance
-is sufficiently removed from political pressure to conduct audits and report findings objectively without fear of political reprisal
if internal auditors audit external organizations, such as contractors, and no independence impairment exist, auditor is considered external party to the audited entities.
before providing nas to audited entity, AO should determine that audited entity has designated an
individual with suitable skills, knowledge or experience as well as sufficient understanding to oversee services by auditor
if AO were to assume management responsibilities for audited entity, which threat would be present?
management participation threat would be so great that no safeguards could reduce them to an acceptable level. management responsibilities include leading and directing entity, including making decisions regarding acquisition, deployment and control of human, financial, physical, and intangible resources
examples of specific management actions that would impair AO’s independence
setting policies and strategic direction for audited entity
directing and accepting responsibility for actions of audited entity’s employees in performance of their routine, recurring activities
having custody of audited entity’s asset
reporting to those charged with gov on behalf of mgt
deciding which of auditor’s or outside third party’s recommendations to implement
accepting responsibility for mgt of audited entity’s project
accepting responsibility for DIM IC
providing svc that are intended to be used as mgt primary basis for making decisions that are sig to subject matter
developing audited entity’s performance measurement system when that system is material or sig tot subject matter
serving as voting member of audited entity’s mgt committee or BOD
before performing nas for audited entites, auditors should obtain assurances that audited entity mgt will do all of the following
- assume all mgt responsibilities
- oversee nas by designing a member within senior mgt who possessed suitable skill, knowledge or experience
3 evaluate adequacy and results of nas performed
4 accept responsibility for results of nas
auditors preparing to perform nas should establish and document their understanding with audited entity’s mgt regarding
objectives of nas services to be performed audited entity's acceptance of its resp. auditor's resp. any limitations to nas
giving routine advice and responding to questions as a direct part of audit are not considered nas and do not impair independence. examples are:
- providing advice to audited entity regarding acct matter relevant to audit
- researching and responding to audited entity technical question relevant tax laws as an ancillary part of providing tax services
- providing advice on routine business matters
- educating audited entity on matters within technical expertise of auditors
- providing information to audited entity that is readily available to auditors such as best practices and benchmarking studies
certain nas that directly support audited entity’s operations will necessarily impair independence, among other these include:
- determining or changing JE, acct codes or classifications for transactions, or other accounting records for audited entity without obtaining mgt approval
- authorizing or approving entity’s transactions
- preparing or making changes to source documents (purchase orders, payroll time sheets, GL, customer orders, contracts) without mgt approval
if auditor has determined that nas requirements have been met and that any significant threats to independence have been eliminated or reduced to an acceptable level, then the following services, unless otherwise expressly prohibited, may be performed for an audited entity
- recording tx approved by mgt
- preparing FS based on info in TB
- posting entries approved by mgt ot TB
- preparing acct recon for mgt evaluation
- proposing standard, adjusting or correcting je or other changes affecting FS to audited entity’s mgt for its review and acceptance so long as the auditor is satisfied that mgt understands nature and impact of entries
internal audit assistance - the following will always impair independence when provided to audit client
- setting internal audit policies or strategic direction of internal audit activities
- performing procedures that form part of internal control, such as reviewing and approving changes to employee data access privileges
- determining scope of internal audit function and resulting wok
information technology system services - examples of IT nas that would impair independence when provide to audit client include:
designing or developing financial or other IT system that will play a sig role in the mgt of are of operations that is or will be subject matter of audit
providing services that entail making other than insignificant modifications to source code underlying such as system
operating or supervising operation of such a system
valuation services - providing valuation services that have a material effect on FS - will impair or not impair independence
will impair independence if valuation involves a significant degree of subjectivity
Misc NAS that always impair independence when provided to audited entity - non tax disbursement examples
accepting responsibility to authorize payment of audited entity funds
accepting responsibility for signing or cosigning audited entity checks
maintaining audited entity’s bank account or otherwise having custody of its funds or making credit or banking decisions
approving vendor invoices for payment
Misc NAS that always impair independence when provided to audited entity - benefit plan administration examples
making policy decisions on behalf of mgt
when dealing with plan participants, interpreting plan documents on behalf of mgt without firms obtaining mgt concurrence
making disbursements on behalf of plan
having custody of plan assets
serving a plan as fiduciary as defined by erisa
Misc NAS that always impair independence when provided to audited entity - investment - advirsory or management examples
making investment decisions on behalf of mgt
executing tx to buy or sell
having custody of assets, even taking emp. possession of securities purchased
Misc NAS that always impair independence when provided to audited entity - corporate finance
committing to terms of tx or consummating a tx in its behalf
acting as promoter, underwriter, broker dealer or guarantor of audited entity securities or distributor of private placement memoranda or offering documents
maintaining custody of audited entity’s securities
Misc NAS that always impair independence when provided to audited entity - executive or employee personnel matters
committing audited entity’s employee to compensation or benefit arrangements
hiring or terminating audited entity employees
Misc NAS that always impair independence when provided to audited entity - business risk consulting examples
making or approving business risk decisions
presenting business risk considerations to those charged with gov on behalf of mgt
to establish independence, cpa must document
threat to independence that requires application of safeguards, along with safeguards applied
safeguards required if an audit organization is structurally located within a gov enity and is considered independent based on those safeguards
consideration of audited entity mgt ability to effectively oversee nas to be provided by auditor
cpa’s understanding with audited entity for which auditor will perform nas
this includes exercising reasonable care and professional skepticism. it represents the application of knowledge, skill and experience. professional judgment is used in
- applying conceptual framework to determine independence in specific situation
- assign competent staff to adult
- define scope of audit
- determine risk of audit
- determine sufficient and appropriate audit evidence to support findings
- to report results
- to maintain appropriate quality control over audit process
the audit staff must possess professional competence adequate to address audit objectives and perform work in accordance with gagas
competence derives from education and experience
audit firms should have a process for recruiting, hiring, continuously developing, assigning and evaluating staff in order to maintain a competent workforce
competence provides basis for sound professional judgments
the staff assigned to perform gagas audit should collectively possess
necessary technical knowledge, skill and experience
cpa’s performing gagas audits should undertake how many hours of cpe?
24 hours of gov auditing cpe every two years. auditors performing more senior auditor resp or more than 20% of their time charged to gagas audits must also have 56 hours of cpe every 2 years
audit firms performing gagas must have the following quality control and assurance
establish and maintain a system of quality control designed to provide organization with reasonable assurances that both org and its staff comply with professional standards and applicable legal and regulatory requirements.
undergo independent peer review every 3 years
adopt polices and procedures that address
- leadership responsibilities for quality within the AO
- independence, legal and ethical requirements
- initiation, acceptance and continuation of audits
- human resources
- audit performance, documentation and report
- monitoring of quality
EBP are broadly regulated by
DOL’s employee benefit security administration EBSA pursuant to employee retirement income security act ERISA
statutory law provides that an accountant retained by plan to examine plan financial information and render opinion on fs and schedules required to be contained in plan’s annual report must be independent or not indep?
izdpenendece is required
rules provide that acct will not be considered independent with respect to a plan due to following:
- financial ties
- employment ties
- employees of plan or plan sponsor who left to joing acct firm may be independent if (have disassociated from plan, and do not participate in auditing fs of plan)
describe independence issues due to financial ties
during audit, accountant or his firm had or was committed to acquire any direct financial interest or any material indirect interest
- this provision covers any member of accountant’s firm - coverage is much broader of AICPA
- term member means all partners, shareholder employees in firm and all professional employees participating in audit or located in office of firm participating in sig portion of audit
describe independence issues due to employment ties
during audit, entities may not be connected to plan or plan sponsor as promoter underwriter investment advisor voting trustee director officer employee of plan or plan sponsor
can cpa provide professional services, including actuarial services to plan sponsor
yes as long as cpa does not violate rules of financial ties and employment ties
