Chapter 6 Flashcards
(42 cards)
What are the six principles of the AICPA Code of Professional Conduct?
1) Responsibilities 2) Public Interest 3) Integrity 4) Objectivity and independence 5) Due care 6) Scope and nature of services
Under the AICPA Code of Professional Conduct, Rule 101, independence is impaired:
1) If a member has a direct financial interest with attestation clients without regard to materiality; 2) If a member has a material indirect financial interest in the client; 3) If a member or a member’s immediate family member has a loan to or from the client; 4) If a member accepts more than a token gift; 5) If a member is an employee of or makes management decisions on behalf of the client; 6) If the client is overdue more than one year in the payment of professional fees to the member; 7) If there is actual or threatened litigation between member and the client
According to the AICPA Code of Professional Conduct, Rule 203, a departure from GAAP may be justified under what circumstances?
Only if compliance with GAAP would cause the FS to be misleading.
Under Rule 301, in what circumstances must a CPA disclose confidential client info without the consent of the client?
1) It is necessary to comply with a valid subpoena or summons 2) As part of a quality review of the CPA’s professional practices authorized by the AICPA 3) In response to any inquiry made by the ethics division or the trial board of the AICPA, or by duly-constituted investigative body of a state CPA society.
What are contingent fees prohibited under Rule 302?
1) Audits of FS 2) Reviews of FS 3) Examinations of prospective financial info
What is an issuer? What group establishes standards for audit reports of issuers?
Issuer is an entity subject to the rules of the SEC (includes primary public companies). PCAOB establishes standards.
Title I of SOX requires that registered firms must adhere to what auditing standards?
1) Audit workpapers must be maintained for seven years. 2) A concurring or second partner review is required for each audit report. 3) The audit report must describe the scope of the testing of the issuer’s internal controls.
Under SOX Title II, what services must be preapproved by the audit committee and what services may not be provided to an audit client?
1) All auditing services and permitted non-audit services (including tax services) must be preapproved by the audit committee. 2) Prohibited services: a) bookkeeping b) financial info systems design and implementation c) appraisal and valuation services d) actuarial services e) management functions and HR functions f) internal audit outsourcing services g) investment related services h) legal services i) expert services unrelated to the audit (Note: SEC Regulation S-X contains these same rules.)
What are the audit partner rotation rules under SOX Title II and SEC Regulation S-X?
1) Both SOX and Reg S-X require the lead and concurring partner to rotate off the audit every five years. 2) Reg S-X further requires other partners to rotate every seven years. Lead and concurring partners are subject to a five year time out and other partners are subject to a two year time out.
What must be reported by the auditor to the audit committee under SOX Title II and SEC Reg S-X?
1) Critical accounting policies and procedures used. 2) Alternative accounting treatments discussed with management, the ramifications of alternatives, and the treatment preferred by the auditor. 3) Material written communications between the auditor and management.
What is the required cooling off period under SOX Title II and Reg S-X?
The audit firm cant have employed an issuer’s CEO, CFO, controller, CAO, or other employee in a financial reporting oversight role during the one year preceding the audit.
What is the required content of management’s internal control report under SOX Title IV?
1) Management’s responsibility for establishing an adequate internal control structure for financial reporting. 2) An assessment of the effectiveness of the current year’s control structure.
What are the PCAOB’s tax related independence rules?
1) Registered firms may not provide confidential or aggressive tax transactions to audit clients. 2) Registered firms may not provide tax services to corporate officers of audit clients or their immediate family members. 3) Audit committee must preapprove tax services and related fees.
Under the SEC’s principles of independence, a client relationship or a service provided to an audit client would create independence issues if it:
1) creates a mutual or conflicting interest between the auditor and client. 2) results in the auditor acting as management or an employee of the audit client. 3) places the auditor in a position of auditing his or her own work. 4) makes the auditor an advocate for the audit client.
Explain the conceptual framework approach under IFAC’s Code of Ethics and identify threats to compliance with its fundamental principles.
IF IFAC’s Code is based on a conceptual framework (vs a set of rules) that requires entities to identify, evaluate, and address threats to compliance with its fundamental principles. These threats include: 1) Self-interest threat 2) Self-review threat 3) Advocacy threat 4) Familiarity threat 5) Intimidation threat
How long must audit documentation be retained for issuers and nonissuers?
1) PCAOB rules require that auditors retain audit documentation of public companies (issuers) for seven years from the report release date. 2) SAS rules require that auditors keep audit documentation for nonissuers for at least five years from the report release date. 3) The report release date is the date on which the auditor gives the client permission to use the report (often the date the report is delivered to the client).
What are advantages and disadvantages of auditing with a computer?
Advantages: 1) less math erros due to automatic performance of math on all documents. 2) Automatic cross referencing of amounts by linking each lead schedule to the working trial balance and FS. 3) Automatic preparation of FS, tax return schedules, and consolidating schedules. 4) Reduction in required supervisory review time. 5) Auto performance of certain analytical review procedures. 6) Enhanced client service 7) Improved morale and productivity for audit team. Disadvantages: 1) Audit documentation may not contain readily observable details of calculations.
Describe “auditing around the computer” and identify when it is appropriae and not appropriate.
a) When auditing around the computer, the auditor does not directly test the application program, but instead tests the input data, processes the data independently, and then compares the independent results to the program results. B) This method is appropriate for simple batch systems that have a good audit trail. Auditing around the computer is not appropriate when there is insufficient paper based evidence.
List and briefly define the types of computer assisted audit techniques (CAATs) that may be used.
1) Transaction tagging - electronically marks specific transactions. 2) Embedded audit modules - sections of program code collect data for the auditor. 3) Test data - use of the clients system to process the auditors data, off line. 4) Integrated test facility - use of the clients system to process the auditors data, online. 5) Parallel simulation - use of the auditor’s system to reprocess client data.
In conducitng an audit of an organization receiving federal financial assistance, what additional audit procedures must be performed in addition to the general reqs of GAAS and GAGAS?
1) auditor should obtain and document an understanding of internal control established to ensure compliance with the laws and regs applicable to the federal financial assistance. 2) In some instances, tests of controls are mandated to evaluate the effectiveness of such controls.
Audits of governmental entities may draw on up to three sets of standards or supplementary reqs. What are they and what are the circumstances that surround their application?
1) Generally Accepted Auditing Standards (all audits) 2) Generally Accepted Government Auditing Standards (Yellow Book audits); auditee is a government, or receives financial assistance form the government. 3) OMB Circular A-133 (Single Audits of Federal Financial Assistance): an entity expending more than $500,000 in federal assistance annually.
Identify the additional auditor responsibilities associated with government audits under GAGAS.
1) obtaining an understanding of “how laws, rules, and regulations relate to FS amounts.” 2) Assessing the degree to which “management has identified laws, rules, and regs that have a material impact on FS amounts.” 3) Obtaining reasonable assurance that FS are free from material misstatements resulting from “violations of laws, rules, and regs associated with the determination of FS amounts.” 4) Communication to management, as appropriate, that “GAAS procedures alone will not fulfill additional audit requirements” related to an audit of a govt or of govtl assistance.
Identify the three types of govtl audits/engagements normally undertaken by CPAs.
1) Financial Audits - Engagements primarily designed to determine the fair presentation of FS in conformity with GAAP or an OCBOA. Financial audits also include audits of specified elements of the FS, etc. 2) Attestation Engagements - Examinations, reviews, and agreed upon procedures, etc. 3) Performance Audits - Effectiveness, economy and efficiency audits, internal control and compliance audits.
In conducting an audit of an organization under Generally Accepted Government Auditing Standards, what audit documentation, in addition to that required by Generally Accepted Auditing Standards, must also be included?
Internal control documentation must include: 1) Consideration of procedures that ensure the auditee’s compliance with laws, rules, and regs. 2) Written representations from management with regard to management’s identification of material laws, rules, and regs; managements repsonsibility for ensuring compliance with laws, rules, and regs; and managements knowledge of any violations that should be disclosed or recorded.
