SU 03 Independence

Question 1

Covered member

Answer 1

Member of the audit team
or
Someone who can influence the audit

Question 2

Basis of the conceptual framework for independence

Answer 2

Threats
Safeguards
Acceptable level

reasonableness standard

Question 3

What is the reasonableness standard?

Answer 3

If another professional with the same level of education and training looked at what you’re talking about and agreed with you then it’s reasonable

Question 4

Types of threats to independence

Answer 4

• adverse interest
• advocacy
• familiarity
• management participation
• self-interest
• self-review
• undue influence

Question 5

Who creates/ implements safeguards?

Answer 5

• the profession or law
• the client
• the audit firm

Question 6

What are the elements of professional skepticism?

Answer 6

• questioning mind
• critical assessment and objective evaluation of audit evidence
• auditor should not be satisfied with anything less than persuasive evidence

Question 7

What is considered to impair independence?

Answer 7

Covered member has/is:
- financial interest (direct or material indirect)
- professional employee of the firm or partner in another office owns more than 5% of outstanding stock
- Director, officer, employee, or any management equivalent (honorary positions okay but only with no authority)
- close relative in a key position or has a material financial interest (where they can exercise significant influence AND auditor has knowledge of position)
- trustee of trust or executor of estate with direct/material indirect investment
- material, joint, closely-held investment with the client

PROHIBITED DURING THE PERIOD OF PROFESSIONAL ENGAGEMENT

Question 8

Appearance of non-independence that might lead to impairment might be caused by

Answer 8

• loans to or from clients/ related parties (unless collateralized or for credit cards < $10k)
• actual or threatened (probable) litigation with client
• Acceptance of more than a token gift

Question 9

What might cause impairment of an audit FIRM’S independence

Answer 9

• Former employee of a client (held key position) or vise versa
• unpaid fees for services provided more than one year before date of report

Question 10

With mitigates potential impairment of a key client employee now working at audit firm

Answer 10

• amounts due to former client employee not material to employee
• former client employee not in a position to influence CPA firm’s operations/ policies
• former client employee does not participate/ appear to participate in CPA firm

Question 11

What specific restrictions did SOX place on audit firms

Answer 11

• audit firm’s restricted from providing many non-audit services to audit clients (may still provide tax prep services)
• any allowed services must be approved by the client’s audit committee

Question 12

What are the potential consequences of independence violations

Answer 12

• damaged reputation
• threatened or actual litigations
• Sanctions against firm/ auditors by SEC/ PCAOB/ AICPA/ licensing boards
• sanctions by firm against auditors
• loss of clients

Question 13

What is the auditor independence letter

Answer 13

• letter sent annually from audit firm to audit committee of client confirming the audit firm’s independence

PCAOB Rule 3526

Question 14

What is an independence alert?

Answer 14

Sent to audit firm employees to alert them about new clients and request information regarding potential independence violations