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AUDIT 2024 > ETHICAL AND INDEPENDENCE REQUIREMENTS > Flashcards

ETHICAL AND INDEPENDENCE REQUIREMENTS Flashcards

PART 1

1
Q

What is an issuer, and what group establishes standards for audit reports of issuers?

A

An issuer is an entity subject to the rules of the SEC (this would include primarily public companies)

The Public Company Accounting Oversight Board (PCAOB) establishes standards for audit reports of issuers

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2
Q

Under SOX Title II, what services may not be provided to an audit client

A

Prohibited services include:

*Bookkeeping
*Financial information systems design & implementation
*Appraisal & valuation services
*Actuarial services
*Management functions & human resources services
*Internal audit outsourcing services
*Services as a broker, dealer, investment advisor, or investment banker
*Legal services
*Expert services unrelated to the audit

Tax service are permissible if preapproved by the audit committee

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3
Q

What are the audit partner rotation rules under SOX Title II & SEC Regulation S-X?

A

*Both SOX & Regulation S-X require the lead & concurring partner to rotate off the audit every 5 years. Lead & concurring partners are subject to a 5 year “time-out” period.

*Regulation S-X further requires other partners to rotate off every 7 years. Other partners are subject to a 2-year “time out” period

*Under PCAOB rules, auditors of issuers must also disclose the name of the engagement partner.

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4
Q

Under SOX Title II & SEC Regulation S-X, what services must be preapproved by the audit committee?

A

All auditing services & permitted non-audit services (including tax services) must be preapproved by the audit committee of the issuer

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5
Q

What must be reported by the auditor to the audit committee under SOX Title II & SEC Regulation S-X?

A

*Critical accounting policies & procedures used

*Alternative accounting treatments discussed w/ management, the ramifications of alternatives, and the treatment preferred by the auditor

*Material written communications between the auditor & management

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6
Q

What is the required cooling-off period under SOX Title II & SEC Regulation S-X?

A

The audit firm cannot have employed an issuer’s CEO, CFO, controller, CAO, or any person serving in an equivalent position for a 1 yr period preceding the audit.

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7
Q

Title III of the Sarbanes-Oxley Act, Corporate Responsibility, includes 4 topics pertaining to financial reporting.
What are they?

A

*Public company audit committees

*Corporate responsibility for financial reports

*Improper influence on conduct of audits

*Forfeiture of certain bonuses & profits

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8
Q

The Sarbanes-Oxley Act defines the criteria for the independence of audit committee members for issuers as including the following characteristics:

A

*Each member of the audit committee shall be a member of the board of directors of the issuer but shall be otherwise independent

*Audit committee members may not accept any consulting, advisory, or other compensation or fees from the issuer other than pursuant to their roles on the board

*Audit committee members may not be an affiliated person ( a person who can influence financial decisions) of the issuer or any subsidiary of the issuer

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9
Q

The Sarbanes-Oxley Act requires that an issuer’s audit committee establish a complaint procedures that includes:

A

Receipts, retention, and treatment of complaints received by issuers regarding:

*Accounting
*Internal Controls
*Auditing

Confidential or anonymous by employees of issuers regarding questionable accounting or auditing matters

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10
Q

The Sarbanes-Oxley Act assigns the following corporate responsibilities for financial reports for issuers:

A

The CEO & CFO must certify the following for annual & quarterly reports:

*The officers have reviewed the report
*The report does not include untrue stmts or omit material info
*The FS are fairly stated
*The signing officers make assertions regarding their responsibilities for internal control
*The signing officers have disclosed internal control weakness & instances of fraud to the auditors and the audit committee
*The status of changes to internal subsequent to the date of their evaluation

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11
Q

The Sarbanes-Oxley Act assigns the following corporate responsibilities regarding internal controls that must accompany financial reports:

A

The CEO & CFO must certify the following for annual & quarterly reports:

*The officers are responsible for establishing & maintaining internal controls

*Internal control is designed to ensure that material information is provided to internal & external users.

*Internal controls have been evaluated within 90 days prior to the report

*The officers’ conclusions regarding internal control effectiveness as of the evaluation date

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12
Q

The Sarbanes-Oxley Act assigns the following corporate responsibilities regarding the required disclosures to the auditors and audit committee by officers:

A

The CEO & CFO must certify the following for annual & quarterly reports to the auditors and the audit committee:

*All significant deficiencies in the design or operation of internal controls
*Any fraud, whether or not material, that involves management

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13
Q

The Sarbanes-Oxley Act specifically prohibits improper influence on the conduct of audits defined as follows:

A

No officer or director may take any action to fraudulently influence, coerce, manipulate, or mislead an independent CPA engaged in an audit of the FS of an issuer for the purpose of rendering the FS materially misleading

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14
Q

The Sarbanes-Oxley Act imposes certain financial penalties on officers who are responsible for material misstatements resulting from their misconduct.

Penalties include:

A
  • Refund to the issuer of any bonus or other incentive-based or equity-based compensation during the 12-month period following the first public issuance of the financial document.
  • Refund any profits realized from the sale of securities of the issuer during the 12-month period following the first public issuance of the financial document.
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15
Q

Title IV of the Sarbanes-Oxley Act, Enhanced Financial Disclosures, includes the following topics:

A
  • Disclosures in periodic reports
  • Enhanced conflict-of-interest provisions
  • Disclosures of transactions involving management & principal stockholders
    *Management assessment of internal controls
  • Certain exemptions
  • Code of ethics for senior financial officers
  • Disclosure of audit committee financial expert
  • Enhanced review of periodic disclosures by issuers
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16
Q

The Sarbanes-Oxley Act requires certain disclosures in periodic reports. Those disclosures include:

A
  • All materials adjusting entries identified by the public accounting firm reporting on the FS

*The FS disclose all material off-balance sheet transactions including operating leases, contingent obligations, & relationships w/ unconsolidated subsidiaries

  • Pro forma FS shall be reconciled w/ GAAP basis FS and include all relevant info & shall not include misleading or untrue info

*Us of special purpose entities (SPEs)

17
Q

Title I of the Sarbanes-Oxley Act of 2002 (SOX) requires that registered firms must adhere to what auditing standards?

A
  • Audit workpapers must be maintained for 7 years

*A concurring or second partner review is required for each audit report

  • The audit report must describe the scope of the testing of the issuer’s internal controls
18
Q

The Sarbanes-Oxley Act defines the responsibilities of the audit committee of an issuer as including:

A

*Appointment of the auditor

*Compensation of the auditor

*Oversight of the auditor

  • Resolve disagreements between management and the auditor
  • The auditor reports directly to the audit committee
19
Q

The Sarbanes-Oxley Act includes certain enhanced conflict-of-interest provisions. Those provisions include:

A

Prohibitions on personal loan to executives, w/ some exceptions.

20
Q

The Sarbanes-Oxley Act includes provisions for disclosure of transactions involving management & principal stockholders.

Those provisions include:

A

Reporting by persons w/ ownership of 10% or more.
Stmts are filed at the time of registration, when a person achieves 10% ownership, and when there has been a change in ownership.

21
Q

The Sarbanes-Oxley Act includes provisions for management assessment of internal controls.

Those provisions include a report showing:

A

*Management’s assertion that it is responsible for adequate internal control structure.

*Management’s conclusions regarding its assessment of the effectiveness of the internal control structure & procedures for financial reporting.

*The auditor’s attestation regarding management’s assessment of internal control.

22
Q

The Sarbanes-Oxley Act includes provisions for audit committee disclosure.

Those disclosures include:

A

The issuer must disclose the existence of a financial expert on the committee or the reasons why the committee does not have a member who is a financial expert.

23
Q

For purposes of service on the audit committee, what qualifies an individual for classification as a financial expert?

A

A financial expert qualifies through education, past experience as a public accountant, or past experience as a finance officer for an issuer. Knowledge of the financial expert should include:

  • Understanding of GAAP
  • Experience in the preparation or auditing of FS for comparable issuers
    *Application of GAAP
    *Experience w/ internal controls
  • Understanding of audit committee functions
24
Q

Title VIII of the Sarbanes-Oxley Act considers what topics?

A
  • Criminal penalties for altering documents
  • Statute of limitations for securities fraud
  • Whistle-blower protection
  • Criminal penalties for securities fraud
25
Q

Title IX of the Sarbanes-Oxley Act considers what topics?

A

Title IX, White-Collar Crime Penalty Enhancements, include the following:

  • Attempt & conspiracy
  • Amended sentencing guidelines for white-collar offenses
  • Failure of corporate officers to certify financial reports
26
Q

An issuer periodic report containing FS filed w/ the SEC must include the following written certifications:

A

Each certified financial report must include a written statement:

*That the periodic report complies w/ the Securities Exchange Act of 1934

  • That information in the report fairly presents, in all material respects, the financial condition & operating results of the issuer

*Which must be signed by the CEO & CFO of the issuer, who bear responsibility for these stmts

27
Q

Title XI of the Sarbanes-Oxley Act considers what topics?

A

Title XI, Corporate Fraud Accountability, includes the following:

  • Tampering w/ a record or impeding an official proceeding
  • Temporary freeze of authority for the SEC
  • Authority of the SEC to prohibit persons from serving as officers or directors
  • Retaliation against informants
28
Q

Under Title XI, Corporate Fraud Accountability, what are the penalties for tampering w/ a document used in an official proceeding or retaliating against an informant providing information to the SEC?

A

Document tampering will result in fines and/or a prison term of not more than 20 years.

Retaliation against informants providing information to the SEC will result in fines and/or a prison term of not more than 10 years.

29
Q

Under the PCAOB and SEC’s principles of independence, a client relationship or a service provided to an audit client would create independence issues if it:

A
  • Creates a mutual or conflicting interest between the auditor & client
  • Results in the auditor acting as management or an employee of the audit client

*Places the auditor in a position of auditing his or her own work

  • Makes the auditor an advocate for the audit client
30
Q

Generally, independence rules apply to a covered member and their spouse and dependents.

According to SEC rules, what independence rules apply to close relatives?

A

According to SEC rules, independence is impaired if the close family member:

  • has an accounting role or financial reporting oversight role w/ the SEC audit client (ex., the family member is a treasurer, CFO, accounting supervisor, or controller)
  • has a beneficial ownership of more than 5% of a client’s equity securities or controls the client
  • has a direct investment in stocks, bonds, notes, options, or other securities of the audit client.
  • has a material indirect investment in the audit client

*serves as a voting trustee or a trust or executor of an estate containing securities of the audit client

31
Q

What are the PCAOB’s tax-related independence rules?

A
  • Registered firms may not provide tax services related to confidential or aggressive tax transactions to audit clients
  • Registered firms may not provide tax services to corporate officers of audit clients or their immediate family members
  • Audit committee must preapprove tax services and related fees
32
Q

A written code of conduct helps management set the tone for the organization; its existence promotes (among other things) honest/ethical conduct, teamwork, compliance, and appropriate disclosure.

A
33
Q

List the ethical principles under GAGAS.

Objectivity includes independence of mind & appearance when providing audits, maintaining an attitude of impartiality, having intellectual honesty, and being free of conflicts of interest.

A
  1. Serving the public interest
  2. Integrity
  3. Objectivity
  4. Proper use of governmental information, resources, & positions
  5. Professional behavior
34
Q

List the 2 general concepts of independence under GAGAS.

A
  1. Independence of mind
  2. Independence in appearance
35
Q

What are the steps to evaluate auditor independence under GAGAS?

A
  1. Identification of threats to independence
  2. Evaluation of the significance of threats identified both individually and in the aggregate
  3. Application of safeguards necessary to eliminate the threats or reduce them to an acceptable level

If no safeguards are available to eliminate an unacceptable threat or reduce it to an acceptable level, independence would be considered to be impaired

36
Q

List the 7 threats to auditor independence under GAGAS.

A
  1. Self-interest threat
  2. Self-review threat
  3. Bias threat
  4. Familiarity threat
  5. Undue influence threat
  6. Management participation threat
  7. Structural threat
37
Q

Under generally accepted government auditing standards, what is the critical consideration in determining whether a non-audit service is a threat to independence?

A

Consideration of management’s ability to effectively oversee the non-audit service to be performed.
The auditor should determine:

  1. that the audited entity has designated an individual who possesses suitable skill, knowledge, or experience;

AND

  1. that the individual understand the services to be performed sufficiently to oversee them.

The individual is not required to possess the expertise to perform or reperform the services.

The auditor should document consideration of management’s ability to effectively oversee non-audit services to be performed.

AUDIT 2024 (10 decks)

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