II. Financial Statement Audits - PCAOB Responsibilities

Question 1

The Sarbanes-Oxley Act of 2002 imposes a mandatory rotation applicable to both the audit engagement partner and the quality control (also called review) partner. How long in total is the partner allowed to serve as the engagement partner or review partner before someone else must serve in that capacity?

Answer 1

Title II of the Sarbanes-Oxley Act of 2002 establishes 5 years as the upper limit for how long someone can serve as the engagement partner or review partner before mandatory rotation is required.

Question 2

Under the Sarbanes-Oxley Act of 2002, what are the responsibilities of the Public Company Accounting Oversight Board?

Answer 2

• Conducting inspections of registered public accounting firms.
• Overseeing the registration of public accounting firms.
• Issuing auditing standards that must be followed by registered public accounting firms in auditing the financial statements of issuers.

Note: They do not establish accounting standards.

Question 3

At least how often should the PCAOB inspect a registered public accounting firm that regularly issues audit reports to 50 issuers?

Answer 3

Remember if it is fewer than 100 then it must be inspected every 3 years.

Question 4

Under Title II of the Sarbanes-Oxley Act, the auditor of an issuer cannot legally perform which type of service for that issuer?

Answer 4

The auditor may not provide internal audit outsourcing services to the issuer.

An auditor may:

• Tax services.
• Review of interim information.
• Audit of internal control over financial reporting.

Question 5

The Public Company Accounting Oversight Board (PCAOB) has authority to establish which of the following relating to public companies?

Answer 5

PCAOB may establish:

• attestation standards,
• independence standards,
• auditing standards
• quality control standards.

Question 6

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through

Answer 6

As a principal financial officer, principal accounting officer, controller, public accountant, or auditor.

Actively supervising a principal financial officer or principal accounting officer.

Assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements.

Question 7

A PCAOB engagement that focuses on the sufficiency of a CPA firm’s quality control system is most likely to be referred to as a(n)

Answer 7

Inspection.

Note:

Section 104 of the Sarbanes-Oxley requires that the PCAOBs evaluate the sufficiency of a CPA firm’s quality control system as a part of an inspection.

Question 8

What is issued by the Securities and Exchange Commission?

Answer 8

Financial Reporting Releases.

Question 9

The auditor must comply with requirements unless s/he demonstrates that alternative actions were sufficient to achieve the objectives of the standard.

Answer 9

The auditor must comply with requirements unless s/he demonstrates that alternative actions were sufficient to achieve the objectives of the standard.

Question 10

Which of the following is least likely to be directly examined in an inspection performed by the PCAOB?

Answer 10

Compilation engagements.

Are inspected are:

• Audit engagements.
• Review engagements.
• CPA firm quality control system.

Inspections may include consideration of aspects of practice management, such as how partner compensation is determined.

Note:

• The PCAOB is composed of five members.
• No members may be currently active in public accounting.
• Only two of its members may be CPAs.

Question 11

The audit partner in charge of an audit of a public company may only

Answer 11

Perform that role for five consecutive years.

Note: Another partner must perform the second partner review function. (NOT the auditor itself)

There are no restriction on how many audits they can do

Question 12

Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following?

Answer 12

Management’s assessment of the effectiveness of internal control over financial reporting.

Question 13

(PCAOB) is not responsible for standards related to

Answer 13

has no responsibility for promulgating or adopting accounting standards.

But do have:

• Attestation.
• Auditing.
• Quality control

Question 14

The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the:

Answer 14

Securities and Exchange Commission. (SEC)

Question 15

Which of the following is correct concerning PCAOB guidance that uses the term “must”?

Answer 15

The auditor must fulfill the responsibilities if relevant to the audit.

Question 16

How many audits of public companies per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB?

Answer 16

More than 100 audits.

CPA firms that audit more than 100 issuers must have an annual inspection by the PCAOB.

Question 17

A financial statement audit report issued for a public company states that the audit was performed in accordance with which of the following standards?

Answer 17

PCAOB standards requires that the audit report indicate that the audit was performed in accordance with standards of the Public Company Accounting Oversight Board (United States).

Note: GAAS are followed for audits of nonpublic companies.