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Flashcards in NINJA AUD 6 Deck (48):
1

Section 402 of SOX Title IV, “Enhanced Conflict of Interest Provisions,” dictates that:

A.
it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer.

B.
any person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security or is a director or an officer of the issuer must file statements required by SOX and the SEC.

C.
each annual report filed with the SEC must contain an internal control report.

D.
each issuer must disclose whether or not they have adopted a code of ethics for senior financial officers.

The correct answer is A.

Section 402 of Title IV of the Sarbanes-Oxley Act (SOX) dictates that it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer.

Section 403 requires disclosures from a person who is directly or indirectly a beneficial owner of more than 10% of any class of any security registered pursuant to Section 12 of the Securities Exchange Act of 1934.

Section 404 requires that an internal control report be filed with each annual report. Management must acknowledge responsibility for establishing and maintaining adequate internal control.

Section 406 requires disclosure of whether or not the issuer had adopted a code of ethics for senior financial officers (and if not, why not). Any change in or waiver of this code requires disclosure as well.

2

Which of the following are items of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures?

A.
Advancement

B.
Consultation

C.
Both advancement and consultation

D.
Neither advancement nor consultation

You are correct, the answer is C.

In accordance with Statement on Quality Control Standards (SQCS) 7, A Firm's System of Quality Control, the quality control policies and procedures applicable to a firm's accounting and auditing practice should encompass the following elements:

Leadership responsibilities for quality within the firm
Relevant ethical requirements
Acceptance and continuance of client relationships and specific engagements
Human resources
Engagement performance
Monitoring
Consideration of the advancement of the audit firm's personnel would be part of the human resources element of quality control. The consultation procedures are considered in the engagement performance element of quality control.

3

If a registered public accounting firm is in violation of any rule or regulation of the SEC or PCAOB:

A.
they are required to remedy all violations within 120 days.

B.
they may not prepare or issue any audit report with respect to that issuer.

C.
depending on the violation, they may continue the engagement.

D.
Violations of the SEC or PCAOB rules do not prevent firms from associating with clients (issuers)

The correct answer is B.

Section 208 of the Sarbanes-Oxley Act prevents public accounting firms in violation of SEC or Public Company Accounting Oversight Board (PCAOB) rules from preparing or issuing any audit report with respect to that issuer.

4

PCAOB Rule 3522 regarding tax transactions prevent which of the following nonaudit tax services?

A.
Original, or amended, federal returns

B.
Services related to state and local returns

C.
Services related to marketing, planning, or opining in favor of the tax treatment of a transaction

D.
All tax services are prevented by the PCAOB.

You are correct, the answer is C.

Rule 3522 of the Public Company Accounting Oversight Board prevents registered public accounting firms from marketing, planning, or opining in favor of tax treatment of a transaction. Should public accounting firms violate this rule, they will no longer be considered independent.

5

Section 11(A) of the Securities Act of 1933:

A.
shifts the burden of proof in a lawsuit from the investor to the CPA who audited the financial statements.

B.
requires that the CPA be proven to have committed fraud in a lawsuit brought by an investor.

C.
protects the CPA who audits the financial statements of a registrant if the CPA follows section 11(A) to the letter.

D.
removes the discussion of materiality from any lawsuits brought by an investor against a CPA.

The correct answer is A.

A CPA who audits the financial statements associated with a registration statement may be sued by anyone who acquires the securities. The CPA must show that the misstatement in the financial statements was immaterial, that the financial statements were not misleading, or that he exercised due diligence in the audit. The burden of proof is shifted to the CPA.

The investor does not have to prove fraud, deceit, or reliance in order to win the lawsuit.

6

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

A.
Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.

B.
The firm must address all independence impairment issues on the date of the audit opinion.

C.
Communications related to independence may occur in any form prior to issuance of the financial statements.

D.
Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

A.
Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.

B.
The firm must address all independence impairment issues on the date of the audit opinion.

Incorrect C.
Communications related to independence may occur in any form prior to issuance of the financial statements.

D.
Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

7

The Securities Act of 1933:

A.
created the Securities and Exchange Commission.

B.
requires investors to take responsibility for registration accuracy.

C.
requires public accounting firms to register with the SEC.

D.
is concerned with preventing fraud in securities sales.

The correct answer is D.

The Securities Act of 1933 exists to provide information to investors about securities offered for sale. It requires all those firms who are not exempt to register before selling their securities, and for those associated with the registration statement to take responsibility for the accuracy of the registration. Full and fair disclosure is meant to prevent misrepresentation or fraud associated with the sale of securities.

The Securities Exchange Act of 1934 created the SEC.

8

Based on Rule 3521 of the PCAOB, in order for registered public accounting firms to maintain independence, they can only accept contingent fees or commission:
A.

if they are approved by the audit committee.
B.

if they are approved by the PCAOB.
C.

if they are disclosed as a nonaudit fee.
D.

Contingent fees and commissions are currently not allowed.

You are correct, the answer is D.

Based on Rule 3521 of the Public Company Accounting Oversight Board, contingent fees and commission will result in a lack of independence for the registered public accounting f

9

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures?
A.

Complying with laws and regulations
B.

Using statistical sampling techniques
C.

Assigning personnel to engagements
D.

Considering audit risk and materiality

The correct answer is C.

The elements of a CPA firm's quality control system are identified in Statement on Quality Control Standards (SQCS) 7 as:

leadership responsibilities for quality within the firm,
relevant ethical requirements,
acceptance and continuance of client relationships and specific engagements,
human resources,
engagement performance, and
monitoring.

Policies and procedures for assigning personnel to engagements ensure that only technically trained and proficient personnel perform the audit work. Audit risk, materiality, and statistical sampling techniques are considered in the planning and performance of an audit of financial statements. Compliance with laws and regulations is an audit objective.

10

The Public Company Accounting Oversight Board was established by which of the following?
A.

The Financial Accounting Standards Board
B.

The American Institute of Certified Public Accountants
C.

The Sarbanes-Oxley Act of 2002
D.

The International Accounting Standards Board

The correct answer is C.

The Public Company Accounting Oversight Board (PCAOB) was established by the Sarbanes-Oxley Act of 2002. Section 101(a) of the Sarbanes-Oxley Act states:


Quote



There is established the Public Company Accounting Oversight Board, to oversee the audit of public companies that are subject to the securities laws, and related matters, in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for companies the securities of which are sold to, and held by and for, public investors.

11

Registered public accounting firms and associated persons must be independent of their audit clients during:
A.

the fiscal year of which the financial statements are being audited.
B.

the fiscal year and engagement period of which the financial statements are being audited.
C.

the engagement period of which the financial statements are being audited.
D.

There are no independence requirements for registered public accounting firms, as they are under the direct supervision of the PCAOB.

The correct answer is C.

Rule 3520 of the Public Company Accounting Oversight Board requires that registered public accounting firms and their associated persons must be independent during the professional and audit engagement period. There are currently no requirements to be independent prior to the engagement period.

12

A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA's independence with respect to the client?
A.

The CPA records transactions in accordance with classifications determined by management.
B.

The CPA prepares financial statements from a trial balance provided by management.
C.

The CPA posts adjusting journal entries prepared by management to the trial balance.
D.

The CPA authorizes client transactions and reports them to management.

You are correct, the answer is D.

The AICPA Code of Professional Conduct states that the CPA should not perform management functions or make management decisions for the attest client. Authorizing client transactions would be a management function. In each of the other answer choices, management has made the decisions, evaluated the adequacy of the services performed, and accepted responsibility for the services. Those services would most likely be permitted under the Code without compromising independence.

13

A pervasive characteristic of a CPA’s role in a consulting services engagement is that of being:
A.

an objective advisor.
B.

an independent practitioner.
C.

a computer specialist.
D.

a confidential reviewer.

The correct answer is A.

Regardless of service or capacity, members should protect the integrity of their work, maintain objectivity, and avoid any subordination of their judgment.

Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for objectivity as members in public practice.

14

Violations with any of the applicable auditing and related professional practice standards may result in:
A.

disciplinary proceedings by the PCAOB.
B.

criminal prosecution.
C.

the inability to practice public accounting with respect to public companies in the future.
D.

the inability to practice public accounting with respect to private companies in the future.

. The correct answer is A.

Registered public accounting firms that do not comply with applicable Public Company Accounting Oversight Board standards may be subject to PCAOB disciplinary proceedings as set forth by Section 105 of the Sarbanes-Oxley Act. Any violation of the PCAOB's rules is treated in the same manner as a violation of the Securities Exchange Act of 1934.

15

The auditor with final responsibility has a primary supervisory responsibility to explain to the staff assistants:
A.

that immaterial irregularities are not to be reported to the client's audit committee.
B.

how the results of various auditing procedures performed by the assistants should be evaluated.
C.

what benefits may be attained by the assistants' adherence to established time budgets.
D.

why certain documents are being transferred from the current file to the permanent file.

You are correct, the answer is B.

The primary supervisory responsibility of the auditor with final responsibility is to explain to the staff assistants how the results of various auditing procedures performed by the assistants should be evaluated. This is most in keeping with directing the efforts of the assistants regarding their responsibilities and the objectives of the audit procedures.

Additional items that may be discussed would be whether or not to communicate immaterial irregularities, how the time budgets relate to the auditing procedures, and which documents are to be stored in the current files versus the permanent file.

16

Each of the following broker-dealer relationships impairs auditor independence with respect to a broker-dealer issuer audit client, except:
A.

the auditor has a brokerage account that holds both U.S. securities and assets other than cash or securities.
B.

the auditor has a brokerage account that holds U.S. securities in excess of Securities Investor Protection Corporation coverage limits.
C.

the auditor has a brokerage account that includes assets other than cash or securities.
D.

the auditor has a cash balance in a brokerage account that is fully covered by the Securities Investor Protection Corporation.

You are correct, the answer is D.

A member’s independence is not considered impaired if they have checking or savings accounts, CDs, or money market accounts with a financial institution client, provided the accounts are insured by a state or federal deposit insurance agency (for example, the Securities Investor Protection Corporation), or any other insurer, and that the uninsured amounts are not considered to be material to the member’s net worth.

When insured amounts are considered material, independence is not impaired, provided the member reduces any uninsured balances to an immaterial amount no later than 30 days from the date the uninsured amount becomes material.

17

Any officer or director of an issuer is strictly prohibited from:
A.

investing in stock or in stock options of the issuer.
B.

owning more than 10% of the issuer's stock.
C.

taking any action to fraudulently influence the registered public accounting firm or any of its members.
D.

All of the answer choices are correct.

The correct answer is C.

Title III, Section 303, of the Sarbanes-Oxley Act (SOX) prohibits any officer or director from taking any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of the audit of the financial statements of the issuer.

18

The concept of materiality would be least important to an auditor when considering the:
A.

adequacy of disclosure of a client's illegal act.
B.

discovery of weaknesses in a client's internal control structure.
C.

effects of a direct financial interest in the client on the CPA's independence.
D.

decision whether to use positive or negative confirmations of accounts receivable.

The correct answer is C.

As noted by ET Section 101.02A.I., the auditor would not be independent if the auditor had any direct financial interest in the client. Therefore, materiality is not considered because any interest in the client's ownership violates independence.

Materiality is a consideration with respect to assessing adequacy of disclosure of a client's illegal act, to the discovery of weaknesses in a client's internal control structure, and to the decision whether to use positive or negative confirmations of accounts receivable.

19

An auditor is required to have the competence, skills, technical knowledge, and experience to perform an audit professionally and in accordance with:
A.

GAAS only.
B.

GAAP only.
C.

all standards.
D.

GAGAS only.

The correct answer is C.

An auditor is required to perform an audit professionally and in accordance with all standards. The auditor must understand all standards in order to perform an audit in the first place.

20

Which of the following laws requires that benefits be provided to employees after they leave a position?
A.

Health Insurance Portability and Accountability Act
B.

Family and Medical Leave Act
C.

Employee Retirement Income Security Act
D.

Comprehensive Budget Omnibus Reconciliation Act

The correct answer is D.

The Comprehensive Budget Omnibus Reconciliation Act (COBRA) requires employers to offer former employees continued benefits after they leave a position for a certain period of time. However, employees are normally responsible for the insurance premiums.

21

Which of the following elements should be encompassed by the quality control policies and procedures of an auditing firm?

a.Acceptance and continuance of client relationships and specific engagements
b.Relevant ethical requirements
c.Human resources
d.Engagement performance
e.Monitoring

A.

All of the elements listed
B.

All of the elements listed except e.
Incorrect C.

All of the elements listed except d.
D.

All of the elements listed except c.




Which of the following elements should be encompassed by the quality control policies and procedures of an auditing firm?

Acceptance and continuance of client relationships and specific engagements
Relevant ethical requirements
Human resources
Engagement performance
Monitoring

A.

All of the elements listed
B.

All of the elements listed except e.
Incorrect C.

All of the elements listed except d.
D.

All of the elements listed except c.
You answered C. The correct answer is A.

Statement on Quality Control Standards (SQCS) 7, A Firm's System of Quality Control, states that the quality control policies and procedures applicable to a firm's accounting and auditing practice should encompass the following elements:

Leadership responsibilities for quality within the firm
Relevant ethical requirements
Acceptance and continuance of client relationships and specific engagements
Human resources
Engagement performance
Monitoring

Terms
Quality Control
References
3613.14
Authorities
QC 10.14

Question #: 1330 Category: 6B1 A Firm's System of Quality Control Question 15 of 30

22

Auditors performing work under GAGAS, in addition to having competence, technical knowledge, skills, and experience to perform the audit, must:

A.
have completed a GAO-approved self-study course in governmental auditing.

B.
have an active CPA license.

C.
complete at least 24 hours of CPE relating to governmental auditing every two years.

D.
There are no additional requirements.

The correct answer is C.

In addition to having competence, technical knowledge, skills, and experience to perform the audit professionally, auditors must complete at least 24 hours of CPE relating to governmental auditing every two years. Individuals who work on GAGAS audits for 20% or more of their time must complete at least 80 hours of CPE relating to governmental auditing every two years.

23

Under the ethical standards of the profession, which of the following is a “permitted loan” regardless of the date it was obtained?

A.
Home mortgage loan

B.
Student loan

C.
Secured automobile loan

D.
Personal loan

You are correct, the answer is C.

According to the AICPA Code of Professional Conduct, an automobile loan or lease collateralized by the automobile does not impair the independence rule (ET 1.200.001).

Home mortgage loans, student loans, and personal loans from the client would each be considered an impairment of independence.

24

When monitoring a firm's accounting and auditing practice, which of the following effects should be considered?

I.The firm's management philosophy
II.The environment in which the firm practices
III.The environment in which its clients operate
A.
I and II only

B.
II and III only

C.
I and III only

D.
I, II, and III

The correct answer is D.

When monitoring a firm's accounting and auditing practice, the firm's management, the environment in which the firm practices, and the environment in which the client operates should all be considered.

25

Requirements of GAGAS for auditors and audit firms include all of the following except:

A.
80 hours of CPE in governmental auditing every two years for those auditors who spend at least 20% of their time on these audits.

B.
a system of quality control that includes independence, legal, and ethical requirements.

C.
an external peer review every other year.

D.
human resources policies and procedures.

The correct answer is C.

The Government Accountability Office (GAO) requires auditors who spend 20% or more of their time performing government audits to have 80 hours of CPE every two years directly related to government auditing (also called “Yellow Book” hours). Adding, on top of that requirement, state requirements for tax and ethics hours, government auditors have a heavy education requirement.

A firm that performs government audits must have a system of quality control in place to assure compliance with professional standards and legal and ethical requirements. The quality control system should address, among other areas, human resources policies and procedures.

An external peer review is required at least once every three years.

26

According to the profession's ethical standards, which of the following events may justify a departure from a FASB Accounting Standard (FASB ASC)?

A.
New legislation

B.
Evolution of a new form of business transaction

C.
Both new legislation and evolution of a new form of business transaction

D.
Neither new legislation nor evolution of a new form of business transaction

The correct answer is C.

According to the profession's ethical standards, in unusual situations a departure from a FASB Accounting Standard may be necessary to keep the financial statements from being misleading. The Code specifically recognizes that accounting principles cannot anticipate all of the circumstances to which the principles may be applied. Examples of such cases include both the passage of new legislation and the evolution of a new form of business transaction. Thus, both of these situations justify such a departure.

27

Which of the following actions would violate Title III, Section 303, of the Sarbanes-Oxley Act?

A.
The auditor of an issuer company provided assistance to the company a year ago with their new accounting software package.

B.
The head of internal audit at an issuer company worked for the public accounting firm that is now performing their audit. She left the firm 13 months ago.

C.
The audit committee approved a nonaudit service (tax return preparation) by the auditor, but this approval was not disclosed to investors.

D.
The payroll clerk of an issuer company did not answer questions about fraud truthfully during an interview with the auditor, at the instruction of the CFO.

The correct answer is D.

Title III, Section 303 of SOX deals with any action taken to fraudulently coerce, manipulate, or mislead the auditor. It prohibits any director or officer from acting in this manner, as well as anyone acting under their direction. Refusal to answer auditor questions honestly could be considered an attempt to mislead the auditor.

The other answer choices refer to independence issues. SOX Title II contains independence rules.

28

Which of the following areas of professional responsibility should be observed by a CPA not in public practice?

A.
Objectivity

B.
Independence

C.
Objectivity and independence

D.
None of the answer choices are correct.

The correct answer is A.

Although a CPA not in public practice does not have to maintain independence, the CPA does have to maintain objectivity. Objectivity is defined in the AICPA Code of Professional Conduct as “a state of mind, a quality that lends value to a member's services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest.” (ET 0.300.050.02)

29

Section 104 of SOX Title I, “Inspections of Registered Public Accounting Firms,” dictates that:

A.
public accounting firms performing audits on issuers must register with the PCAOB.

B.
the PCAOB has the authority to set, amend, update, and modify auditing, quality control, and ethics standards.

C.
the PCAOB has the mandate and authority to conduct compliance inspections of each registered public accounting firm.

D.
the PCAOB may investigate any act or practice, or omission to act, by a registered public accounting firm that may violate any provision of the Sarbanes-Oxley Act, PCAOB rules, securities laws, and professional standards.

The correct answer is C.

Section 104 of the Sarbanes-Oxley Act (SOX) dictates that the Public Company Accounting Oversight Board (PCAOB) has the mandate and authority to conduct compliance inspections of each registered public accounting firm. Firms that audit more than 100 issuers are inspected annually. Firms that audit 100 or fewer issuers are inspected every three years.

30

During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits?

A.
The CFO discovers and corrects most of the errors in the spreadsheet, which was prepared by a staff accountant. One immaterial error remains of which the CFO is aware, and this error remains undetected by the audit team, but the financial statements end up being fairly presented.

B.
The audit team discovers the errors through alternate procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit.

C.
The CFO had the spreadsheet prepared by a vendor of the company; the vendor intentionally misstates information in the spreadsheet, and the CFO does not discover the misstatements. The errors remain undetected by the audit team, and the financial statements are materially misleading.

D.
The CFO was unaware of the errors in the spreadsheet, which was prepared by a staff accountant and reviewed by the CFO. The errors remain undetected by the audit team, and the financial statements are materially misleading.

The correct answer is B.

It is prohibited for any issuer’s officer or director to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.

31

Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice?

A.
Information processing

B.
Engagement performance

C.
Technology selection

D.
Professional skepticism

The correct answer is B.

The CPA firm's system of quality control should include policies and procedures addressing the following elements:

Leadership responsibilities for quality within the firm (“tone at the top”)
Relevant ethical requirements
Acceptance and continuance of client relationships and specific engagements
Human resources
Engagement performance
Monitoring

32

According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?

A.
Performing an audit of a financial statement

B.
Performing a review of a financial statement

C.
Performing an examination of prospective financial information

D.
Seeking a private letter ruling

You are correct, the answer is D.

According to ET 1.510.001 ("Contingent Fees") of the AICPA Code of Professional Conduct, contingent fees are permitted when they involve a legal proceeding or ruling. When a CPA is receiving a contingent fee for a private letter ruling, it would be allowed and not be considered actually “contingent” because it would most likely be fixed by the legal jurisdiction.

Contingent fees are prohibited for a CPA performing an audit, a review of a financial statement, or an examination of prospective financial information.

33

The GAO standards list several threats to independence. A structural threat is defined as:

A.
external influences or pressures that will impact an auditor's ability to make independent and objective judgments.

B.
the threat that results from an auditor taking on the role of management.

C.
when an audit organization's placement within a government entity will impact their ability to perform work and report results objectively.

D.
when, due to a long or close relationship with management or other personnel, the auditor will be too sympathetic or accepting of work.

The correct answer is C.

The GAO has identified seven types of circumstances that could lead to threats of independence:

Self-interest
Self-review
Bias
Familiarity
Undue influence
Management participation
Structural threats
A structural threat is the threat that an audit organization's placement within a government entity, in combination with the structure of the government entity being audited, will impact the audit organization's ability to perform work and report results objectively.

34

The controller of a small utility company has interviewed audit firms proposing to perform the annual audit of their employee benefit plan. According to the guidelines of the Department of Labor (DOL), the selected auditor must be:

A.
the firm that proposes the lowest fee for the work required.

B.
independent for purposes of examining financial information required to be filed annually with the DOL.

C.
included on the list of firms approved by the DOL.

D.
independent of the utility company and not relying on its services.

The correct answer is B.

The Employee Retirement Income Security Act (ERISA) regulates employers who offer pension or welfare benefit plans. According to ERISA, auditors of employee benefit plans must be independent, in that they should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an objective, unbiased opinion about the financial condition of the plan.

35

A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position?

A.
One year

B.
Two years

C.
Three years

D.
Four years

The correct answer is A.

The Securities and Exchange Commission (SEC) requires a cooling-off period of one year for a former member of an audit client engagement team before he or she can be employed in a financial oversight role for that same client. This requirement is necessary to preserve auditor (firm) independence.

36

A registered public accounting firm must make representations to the audit committee:

A.
prior to accepting the initial engagement.

B.
at least annually.

C.
at least annually and prior to accepting the initial engagement.

D.
It is not required that a registered public accounting firm make explicit representations to the audit committee regarding independence.

The correct answer is C.

Public Company Accounting Oversight Board (PCAOB) Rule 3526 requires that registered public accounting firms make representations to the audit committee regarding independence both prior to accepting the initial engagement and annually thereafter.

37

The PCAOB has the authority to enforce SOX Title III, Section 303, in which type of proceedings?

A.
Criminal

B.
Civil

C.
Regulatory

D.
The PCAOB has no authority to enforce rules and regulations.


The correct answer is B.

The Public Company Accounting Oversight Board (PCAOB) has the authority to enforce Section 303 of the Sarbanes-Oxley Act (SOX) in civil proceedings.

Although Section 303 gives the Securities and Exchange Commission (SEC) exclusive authority to enforce the section, in practice the PCAOB enforces compliance and levies civil monetary penalties while the SEC oversees the PCAOB's operations.

38

A member of a group engagement team will not be subject to discipline if a foreign component auditor departed from the ethics requirement as long as:

A.
the member of a state CPA society is in compliance with the IESBA's Code of Ethics for Professional Accountants.

B.
the foreign component accountant is in accord with the ethics and independence requirements set forth in the AICPA's Code of Professional Conduct.

C.
the member is in compliance with the AICPA's Code of Professional Conduct.

D.
the foreign component auditor is in accord with the ethics and independence requirements set forth in the IESBA's Code of Ethics for Professional Accountants.

The correct answer is D.

A member of a group engagement team will not be subject to discipline if a foreign component auditor or accountant departed from the ethics requirement as long as the auditor or accountant, at a minimum, is in accord with the ethics and independence requirements set forth in the International Ethics Standards Board for Accountants' (IESBA) Code of Ethics for Professional Accountants.

39

According to the SEC, members of an issuer's audit committee may not:

A.
establish procedures for employees to anonymously report fraud.

B.
be responsible for the compensation of any registered public accounting firm employed by the registrant to provide an audit report.

C.
accept any consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board.

D.
engage independent counsel as deemed necessary to carry out their duties.

The correct answer is C.

Section 10A(m) of the Securities Exchange Act of 1934 prohibits the receipt of “any” consulting, advisory, or compensatory fees from the registrant for services other than as a member of the board.

Members of an issuer's audit committee:

may establish procedures for employees to anonymously report fraud.
are typically responsible for the compensation of the public accounting firm employed by the registrant to provide an audit report.
may engage independent counsel as deemed necessary to carry out their duties.

40

According to the ethical standards of the profession, a CPA's independence would most likely be impaired if the CPA:

A.
accepted any gift from a client.

B.
became a member of a trade association that is a client.

C.
contracted with a client to supervise the client's office personnel.

D.
served, with a client bank, as a co-fiduciary of an estate or trust.

The correct answer is C.

Under the Code of Professional Conduct, Rule 101 prohibits a CPA from acting in essence as a member of management. Supervising the client's office personnel would violate this rule.

41

When an auditor performs nonaudit services for a client subject to GAO standards, the auditor should obtain assurance that management performs the following functions:

A.
Assume all responsibility

B.
Evaluate the adequacy and results of the services performed

C.
Accept responsibility for the results of the services

D.
All of the answer choices are correct.

The correct answer is D.

For all nonaudit services, the auditor should obtain assurance that management assumes responsibility for both the service and results thereof. Additionally, management should oversee and evaluate the results of the services.

42

Which of the following services may a CPA perform in carrying out a consulting service engagement for a client?

I. Review of the client-prepared business plan
II. Preparation of information for obtaining financing
A.
I only

B.
II only

C.
Both I and II

D.
Neither I nor II

The correct answer is C.

A member may provide extensive consulting services to an audit client without losing independence as long as the member does not make management decisions and the member’s role is advisory in nature.

A member is allowed to review a client-prepared business plan, and can assist the client with obtaining financing, so long as the member is not considered to be making management decisions. Once a member is considered to be making decisions on behalf of a client, then independence has become impaired. It is important for a member in public practice to provide services in a strictly advisory role when independence is required.

43

Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?

A.
An investment held in a retirement plan

B.
An investment held in a blind trust

C.
An investment held through a regulated mutual fund

D.
An investment held through participation in an investment club

The correct answer is C.

Under the ethical standards of the profession, an investment held through a regulated mutual fund is an indirect financial interest. Indirect financial interests are the underlying investments of a mutual fund.

44

The authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities is the:

A.
Financial Accounting Standards Board.

B.
Government Accountability Office.

C.
Accounting and Review Services Committee.

D.
Auditing Standards Board.

The correct answer is C.

The preface to the Accounting and Review Services Statements (AR) notes that the Accounting and Review Services Committee is the committee designated by the AICPA Council to promulgate standards in connection with unaudited financial statements of nonpublic entities. A nonpublic entity is any entity other than one whose securities trade on a stock exchange or over-the-counter market or that makes a filing with a regulatory agency in preparation for sale of securities (i.e., a nonpublic entity is not required to file financial statements with an agency regulating the issuance of the entity's securities).

45

Section 409 of SOX Title IV, “Real Time Issuer Disclosures,” dictates that:

A.
each issuer disclose whether or not the audit committee is comprised of at least one member who is a financial expert.

B.
the SEC will review disclosures made by issuers.

C.
issuers disclose to the public on a rapid and current basis any additional information concerning material changes in the financial condition or operations.

D.
each issuer disclose whether or not they have adopted a code of ethics for senior financial officers.

The correct answer is C.

Section 409 of the Sarbanes-Oxley Act (SOX) dictates that issuers disclose to the public on a rapid and current basis any additional information concerning material changes in the financial condition or operations.

46

The objective of an ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, the financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. The auditor's responsibilities regarding such an engagement include:

A.
performing the audit in accordance with generally accepted accounting principles.

B.
expressing an opinion in every case.

C.
adopting sound accounting policies and procedures.

D.
identifying circumstances in which generally accepted accounting principles have not been consistently observed.

The correct answer is D.

The auditor's responsibilities regarding an ordinary audit engagement include identifying circumstances in which generally accepted accounting principles have not been consistently observed.

The auditor must perform the audit in accordance with generally accepted auditing standards (not accounting principles—read every answer choice carefully). The auditor does not always express an opinion—there are circumstances under which he will disclaim, or not express, an opinion. Adopting sound accounting policies and procedures and establishing and maintaining an internal control structure are specifically and explicitly stated as the responsibility of management. (The auditor must adopt sound auditing policies and procedures.)

47

In order for a firm to designate itself as “Members of the AICPA”:

A.
all CPA owners must be members of the AICPA.

B.
all owners, not just CPA owners, must be members of the AICPA.

C.
the majority of CPA owners must be members of the AICPA.

D.
the majority of all owners, not just CPA owners, must be members of the AICPA.

The correct answer is A.

Based on the AICPA's Code of Professional Conduct, a firm may only designate itself as “Members of the AICPA” when all CPA owners are members.

48

Section 105 of SOX Title I, “Investigations and Disciplinary Proceedings,” dictates that:

A.
public accounting firms performing audits on issuers must register with the PCAOB.

B.
the PCAOB has the authority to set, amend, update, and modify auditing, quality control, and ethics standards.

C.
the PCAOB has the mandate and authority to conduct compliance inspections of each registered public accounting firm.

D.
the PCAOB may investigate any act or practice, or omission to act, by a registered public accounting firm that may violate any provision of the Sarbanes-Oxley Act, PCAOB rules, securities laws, and professional standards.

The correct answer is D.

Section 105 of the Sarbanes-Oxley Act (SOX) dictates that the Public Company Accounting Oversight Board (PCAOB) may investigate any act or practice, or omission to act, by a registered public accounting firm that may violate any provision of the Sarbanes-Oxley Act, PCAOB rules, securities laws, and professional standards.

Possible disciplinary actions include temporary suspension or permanent revocation of registration; temporary or permanent suspension of persons; temporary or permanent limitation on activities, functions, or operations of the firm; civil monetary penalties; censure; additional professional education or training; and any other sanction provided for in the PCAOB rules. Additionally, the PCAOB will strictly sanction intentional or knowing conduct, including reckless conduct, that results in violations and repeat violations.