12.26.18 Flashcards
According to the Sarbanes-Oxley Act of 2002, what is the maximum number of years an audit partner can perform audit services for an issuer before the auditor rotation is required?
5 years.
The act requires rotation of the lead audit or coordinating partner and the reviewing partner on audits of issuers every 5 years. But the act does not require rotation of audit firms.
The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter’s resolution, the CPA firm’s procedures should enable the assistant to
Document the details of the disagreement with the conclusion reached.
According to AU-C 220 and QC 10, differences of opinion (1) within the engagement team, (2) with a consultant, or (3) between the engagement partner and the quality control reviewer should be resolved by following the firm’s related policies and procedures. A member of the engagement team should be able to document his or her disagreement with the conclusions reached after appropriate consultation. Moreover, (1) conclusions should be documented and implemented, and (2) the report should be released only after resolution of the matter. According to AS 1201, in applying due professional care, each engagement team member has a responsibility to bring to the attention of appropriate persons any disagreements or concerns about accounting and auditing issues that (s)he believes are significant to the statements or the report regardless of how they may have arisen. The PCAOB’s AS 1215 requires documentation of disagreements among members of the engagement team or with consultants about final conclusions on significant accounting or auditing matters.
The AICPA Code of Professional Conduct is violated if a CPA accepts a fee for services and the fee is
Payable after a specified finding is attained in a review of financial statements.
A contingent fee is dependent on a specified finding. The Code prohibits contingent fees (1) for the audit or review of a financial statement, (2) for a compilation if a third party is reasonably expected to use the financial statement and the report does not mention the member’s lack of independence, (3) for an examination of prospective financial information, and (4) for the preparation of original or amended tax returns or claims for tax refunds. However, contingent fees may be accepted for other services.
Within its system of quality control, the objectives of the firm’s policies and procedures related to the element of human resources include providing
Professional development activities that allow employees to fulfill assigned responsibilities.
Policies and procedures should be established to provide reasonable assurance that the firm has sufficient personnel with the capabilities, competence, and commitment to ethical principles necessary to perform engagements in accordance with professional standards and legal and regulatory requirements as well as to issue appropriate reports.
According to the Sarbanes-Oxley Act of 2002, the PCAOB has the legal authority to perform each of the following, except
Prosecute suspected criminal violations by registered public accounting firms.
The responsibilities and activities of the PCAOB include (1) registering public accounting firms; (2) overseeing the audit of public companies (issuers) that are subject to the securities laws; (3) establishing or adopting standards on auditing, quality control, ethics, and independence; (4) inspecting audit firms every 3 years (1 year if the firm is large) to (a) examine selected audit and review engagements, (b) evaluate the system of quality, and (c) test audit, supervisory, and quality control procedures; and (5) conducting investigations and disciplinary proceedings involving, and imposing appropriate sanctions upon, registered public accounting firms and associated persons.
Users of an issuer’s financial statements demand independent audits because
Management may not be objective in reporting.
Management and financial statement users may have an adversarial relationship because their interests in the firm are different. The independent auditor provides assurance that the financial statements are not biased for or against any interest.
With respect to records in a CPA’s possession, the Code of Professional Conduct provides that
Extensive analyses of inventory prepared by the client at the auditor’s request are working papers that belong to the auditor and need not be furnished to the client upon request.
A member’s working papers include, among other items, audit programs, analytical review schedules, statistical sampling results, analyses, and schedules prepared by the client at the request of the member. Working papers are the property of the member and need not be provided to the client unless required by (1) statute, (2) regulation, or (3) contract.
An auditor strives to achieve independence in appearance to
Maintain public confidence in the profession.
Third parties depend on the CPA’s report because (s)he is viewed as possessing the necessary impartiality. Public confidence is impaired if such objectivity even appeared to be lacking. The auditor must guard against the presumption of a loss of independence in addition to maintaining independence of mind.
To which of the following parties may a CPA partnership provide its audit documentation, without being lawfully subpoenaed or without the client’s consent?
Any surviving partner(s) on the death of a partner.
Audit documentation may be disclosed to another partner of the accounting firm without the client’s consent because such information has not been communicated to outsiders. A partner of the CPA has a fiduciary obligation to the client not to disclose confidential information without consent.
The in-charge auditor for an audit of an issuer most likely has a supervisory responsibility to explain to the staff assistants
How the results of various auditing procedures performed by the assistants should be evaluated.
Assistants should be informed of their responsibilities and the objectives of the work they are to perform. They should be informed about the matters that affect the nature, timing, and extent of procedures, including how the results of tests should be evaluated (AS 1201).
Which activity performed as nonattest services for a nonpublic attest client impairs a CPA’s independence?
Determining which recommendations for improving internal control should be implemented.
Performing nonattest services for a nonpublic attest client generally does not impair independence if the AICPA member does not assume management responsibilities. However, the client must agree to make all such decisions and perform all such functions. Moreover, the client must agree to (1) designate an individual with suitable skill, knowledge, or experience to oversee the services; (2) evaluate their adequacy and results; (3) accept responsibility for the results; and (4) establish and maintain internal control. Also, the member should have a documented agreement with the client about the objectives and limitations of the engagement, the services to be performed, and mutual responsibilities. Accordingly, determining which, if any, recommendations for improving internal control should be implemented impairs independence because it is a management decision.
A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by
Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.
A CPA firm must have a system of quality control to provide reasonable assurance that the firm and its personnel (1) comply with professional standards, (2) comply with applicable legal and regulatory requirements, and (3) issue appropriate reports. The nature and extent of the quality control system developed by an individual firm depends on factors such as the size and operating characteristics of the firm.
When is the independence of the CPA auditor of a client company’s financial statements most likely to be impaired because of involvement in litigation?
Shareholders of the client bring a class action against the client, its management, and the CPA. The CPA files a cross-claim against management alleging fraud.
Independence is not necessarily impaired when the CPA is a co-defendant with the client. However, cross-claims filed by the co-defendants against each other may impair independence. For example, the client may allege that the CPA was negligent, or the CPA may allege that the client’s management committed fraud. In these circumstances, the interests of the client and the CPA are opposed, and independence may be impaired.
According to the Integrity and Objectivity Rule, a member of the AICPA
Who has a difference of opinion with his or her supervisor about statement preparation has an obligation to act if a material misstatement would otherwise result.
If the member concludes that the position taken by others is not in compliance, but does not result in a material misrepresentation of fact or violation of laws or regulation, the threats to integrity and objectivity are not significant. However, the member should discuss the matter with the supervisor and, if not resolved, higher levels of management. If still not resolved, the member should consider (1) determining whether any additional reporting requirements exist, (2) consulting legal counsel, and (3) documenting his or her understanding of the issues and the nature of the discussions. If the member concludes that appropriate action was not taken and a material misrepresentation of fact or violation of laws or regulation exists, the member should consider ending his or her relationship with the member’s organization and take appropriate steps to eliminate his or her exposure to subordination of judgment.
Which of the following services provides the least assurance regarding the fairness of financial statements?
Compilation.
During a compilation, neither analytical procedures nor tests of balances and transactions are performed. Thus, no assurance can be expressed regarding the fairness of the financial statements.
