SEC, PCAOB, GAO, DOL

Question 1

Financial reporting oversight role FROR

Answer 1

role in which a person is in position to or does exercise influence over contents of FS or anyone who prepares them. examples. director, ceo, president, cfo, coo, general counsel, cao, controller, director of internal audit, director of financial reporting, treasure

Question 2

audit and professional engagement period

Answer 2

includes period covered b any FS being audited or reviewed and period of engagement. professional eng period begins at earlier of when cpa signs an initial eng ltr or begins audit and ends when audit client or cpa notifies SEC that client is no longer the cpa for audit client

Question 3

close family member

Answer 3

person's spouse, 
spousal equivalent, 
parent, 
dependent, 
nondependent child 
sibling

Question 4

covered persons

Answer 4

partners
principals
shareholders
employees of accounting firm

Question 5

audit engagement team definition

Answer 5

all partners
principals
shareholders
professional employees participating in audit, review or attest eng

Question 6

immediate family member

Answer 6

person’s spouse
spousal equivalent
dependent

Question 7

to be qualified to audit public company a cpa must

Answer 7

• be registered and in good standing under the laws of his or her state
• must be and appear to be independent and capable of exercising objective and impartial judgment

Question 8

direct investment

Answer 8

cpa firm,
any of its covered persons or
any of their immediate family members may not have direct investment in adult client such as: owning stocks bonds notes, options

Question 9

direct investment includes one through an intermediary if

Answer 9

firm, covered person or IMF alone or together either supervise or participate in intermediary’s investment decision
-intermediary is a non-diversified mutual fund that has invested 20% or more its money in audit client

Question 10

five percent investments

Answer 10

independence is impaired if any partner, principal shareholder or professional of firm (an any of their IFM and CFM) owns 5% ore more of client’s stocks

Question 11

trustee of a trust

Answer 11

independence is impaired if cpa firm or any CP or IFM serve as voting trustee of trust or executors of estate containing an audit client’s securities, unless they have no authority to make investment decisions for the trust or estate

Question 12

material indirect interest

Answer 12

as with aicpa code, cpa firms, cp and their IFM may not only not have direct financial interest in audit client (material or not) they may not have indirect interests that are material. it is permitted for these persons to own 5% or less of diversified investment company, even if company owns some shares of audit client

Question 13

related entities - independence is destroyed if firm, cp or ifm:

Answer 13

have any direct or material indirect investment in entity that is not audit client where
a. audit client has investment in that entity that is material to audit client and has ability to exercise significant control over that entity
b. entity has investment in audit client that is material to entity that has ability to exercise significant influence over audit client
have any material inv in entiy over which audit client is able to exercise sig inf
have ability to exercise sig inf over entity that has ability to exercise sig infl over audit client

Question 14

define other financial relationships where independence is impaired if firm or its covered persons or IFMs have a relationship with:

Answer 14

1. loans/debtor creditor relationships
2. savings and checking accounts
3. broker dealer accounts
4. credit cards
5. insurance products

Question 15

CP or IMF have a relationship with loans/debtor creditor relationships and independence

Answer 15

impaired. any loan to or from audit client, its officers or directors, or its 10% owners, except the following loans obtained from financial institution under normal lending procedures, terms and requirements
1. automobile loans and leases collateralized y the automobile
2. loans fully collateralized by cash surrender value of insurance polity
3. loans fully collateralized by cash deposits at the same financial institution
4. mortgage loan collateralized by borrower’s primary residence provided the loan was not obtained while cp was a cp

Question 16

savings and checking accounts - covered person - independence issues

Answer 16

impaired..any savings, checking or similar account at a bank, savings and loan, or similar institution that is an audit client if the account has a balance that exceeds the amount insurable by FDIC, except that an accounting firm may have an uninsured balance provided that the likelihood of institution experiencing financial difficulties is remote

Question 17

broker dealer relationship with CP and IMF - independence issues

Answer 17

independence impaired if brokerage or similar accounts maintained with broker dealer that is audit client:
any such account includes assets other than cash or securities
-the value of assets in accounts exceeds amount protected by securities investor protection corporation (SPIC) which is 500k for securities and 250k for cash

Question 18

credit cards relationship with CP IMF - independence issue

Answer 18

impaired if any aggregate outstanding credit card balance is >10,000 owed to a lender that is audit client

Question 19

insurance policies relationship with CP IMF independence issue

Answer 19

impaired if any individual policy issued by an issuer that is an audit client, unless:

• policy was obtained when cp ws not a cop
• likelihood of insurer becoming insolvent is remote

Question 20

independence exceptions for covered members who have relationships with

Answer 20

1. inheritance and gifts
2. new audit engagement
3. employee compensation and benefit plan

Question 21

inheritance and gifts given to CP or IMF

Answer 21

any person who acquires an unsolicited financial interest will not lose independence if he or she disposes of the interest as soon as practicable, but always less than 30 days after the person has knowledge of and the right to dispose of the interest

Question 22

new audit engagement - relationship with CP or IMF

Answer 22

a person has financial interest that would normally impair independence but that person did not audit client’s FS previous year and disposes of interest before signing eng ltr or commenting any audit procedures

Question 23

employee compensation and benefit plan - CP and IMF

Answer 23

if IFM has an impermissible financial interest in audit client that was unavoidable consequence of participation in employer’s EBP, provided that financial interest (other than un-exercised employee stock options) is disposed of as soon as practicable but no later than 30 days after person has the right to dispose financial interest. exception applies to IMF of OPIO and 10 hour person

Question 24

audit clients financial relationships

cpas are not independent in these cases

Answer 24

1. investments by audit client in accounting firm

2 cpa engages audit client to be underwriter, broker dealer, promoter for securities issued by cpa firm

Question 25

employment relationships - cpa is not independent if he has employment relationship with audit client such as:

Answer 25

1. employment at audit client of accountant 2. employment at audit client of certain relatives of accountant 3. employment of audit client of former employee of accounting firm 4. employment at accounting firm of former employee of audit client

Question 26

independence issues - employment at audit client of former employee of accounting firm

Answer 26

independence is impaired if a former partner, principal shareholder or professional employee at accounting firm is in accounting or in financial reporting oversight role, unless does not influence acct firm's operation or financial policies has no capital balances in accounting firm has no financial arrangement with accounting firm other than the one providing for regular payment of a fixed dollar amount (retirement plan) former partner, principal, shareholder or professional employee of firm is FROR at audit client unless not a member of audit eng team during one year proceeding date of audit initiation

Question 27

audit cycle runs may 15-may 14. sandy is on audit team. she resigns on june 15. when can she work for audit client

Answer 27

she must wait until end of current audit cycle, then allow one year before she can go work for audit client. if she quit on may 14th, she could have started may 15 of next year.

Question 28

if individual worked for audit firm but didn't participate in audit, is there a problem if he goes and works for audit client?

Answer 28

no

Question 29

a person who provided 10 hours or fewer hours of attest services, is there a problem if he goes and works for audit client?

Answer 29

no issue

Question 30

a former officer, director or employee of audit client becomes a partner, shareholder or professional employee of accounting firm, no independence unless

Answer 30

individual does not participate in, and is not in a position to influence audit FS covering any period he or she was employed by audit client

Question 31

non audit services not permitted by sox provisions, implemented by SEC

Answer 31

- bookkeeping svc - financial information system design and implementation - appraisal or valuation svc - actuarial svc - internal audit outsourcing svc - mgt functions - human resources - broker dealer - legal svc - expert services unrelated to audit

Question 32

contingent fees per SEC

Answer 32

accountant is not independent if it provides any svc or product ot public company audit client for a contingent fee or commission

Question 33

partner rotation - mandated by sox

Answer 33

- no requirements that public companies rotate audit firms - lead and concurring audit partners must rotate every five years (5on, 5off) - partners providing more than 10 hours must be rotated every seven years (7on, 2 off) - there are exemptions for firms with fewer than 5 public client audits and 10 audit partners

Question 34

pcaob performs inspections every how many years for firms auditing more than 100 firms

Answer 34

every 1 year

Question 35

pcaob performs inspections every how many years for firms auditing fewer than 100 companies

Answer 35

every 3 years

Question 36

who approves pcaob rules?

Answer 36

sec

Question 37

whose rules override aicpa rules?

Answer 37

pcaob and sec, if different

Question 38

does sec and pcob permit cpas to prepare taxes of audit clients?

Answer 38

yes, however they cannot provide services related to marketing, planning or opining in favor of tax transactions that are confidential and aggressive

Question 39

can public company accounting firm provide tax services to to person in financial reporting oversight role at the audit client or to an immediate family member (spouse, spousal equivalent, and dependents)

Answer 39

no, unless 1. fror only because he is member of bod 2. fror only because his relationship to affiliate of entity being audited where affiliates fs are not material o consolidated fs of audit client or are audited by different audit team 3. was not in a fror before hiring promotion or similar change in employment

Question 40

before accepting a public company as a new audit client, a registered firm must

Answer 40

- describe in writing to audit committee all relationships between firm and its affiliates on the one had and the client and its fror employees as of the date of communications\ - discuss with audit committee these relationship and their potential effect on independence - document the discussion

Question 41

to increase transparency pcaob requires firms to file a form for each issuer audit disclosing

Answer 41

1. name of eng partner 2. name, location, extent of participation of each other accounting firm participating in audit whose work constituted at least 5% of audit hours 3. number and aggregate extent of participation of all other accounting firms participating in adult whose individual participation was less than 5% of audit hours

Question 42

general accountability office GAO guidelines apply who conduct audits of

Answer 42

``` government entities (federal, state and local) entities who receive gov awards (colleges, trade schools, charities, local gov) ```

Question 43

those who audit pursuant to gagas are expected to audit

Answer 43

independently in accordance with key ethical principles 1. public interest 2. integrity 3. objectivity 4. proper use of gov information, resources and positions 5. professional behavior - compliance with all relevant legal, regulatory and professional obligations avoidance of conflict of interest, sensitivity to appearance of impropriety and putting forth an honest effort to meet technical and professional standards

Question 44

independence comprises of

Answer 44

1. independence of mind - performing audit without being affected by influences that compromise professional judgment (act with integrity, objectivity and professional skepticism) 2. independence in appearance

Question 45

what are four key independence considerations

Answer 45

1. conceptual framework for making independence determinations 2. requirements for and guidance on independence for audit organizations structurally located within entities they audit 3. requirements for and guidance on independence for performing nonaudit services 4. requirements for and guidance on necessary documentation of audit's independence

Question 46

GAO threats that should be indentified and evaluated

Answer 46

1. self interest threat - interest will be inappropriately influence cpa's judgment or behavior 2. self review threat - AO will evaluate its own non attest services and not appropriately evaluate results of previous judgments or actions taken 3. bias threat - cpa will, as a result of political, ideological, social or other convictions take a position that is not objective 4. familiarity threat - close family member will undermine objectivity 5. undue influence threat - external influences or pressures will impact cpa's indep and objectivity 6. mgt participation threat - 7. structural threat - AO's placement within gov entity, in combination with structure of entity being audited, will impact AO's ability to perform work and report results objectively

Question 47

a nonexclusive list of safeguards AO itself might apply to eliminate threats to independences or reduce to acceptable level include

Answer 47

1. consulting independent third party 2. involving another AO to perform or re-perform part of audit 3. having a professional staff member who is not a member of audit team to review work 4. removing an individual from audit team

Question 48

nonexclusive list of safeguards that might arise from audited entity itself, include:

Answer 48

1. requirement that persons other than mgt rafity or approve appointment of AO to perform audit 2. internal entity procedures ensuring objective choices in commissioning NAS 3. entity governance structure that provides appropriate oversight and communications regarding audit organizations services

Question 49

structural threat

Answer 49

independence can be threatened when auditors in government entities report either to external auditor, to senior management within audited entity or to both

Question 50

fore external AO, constitutional or statutory safeguards may include governmental organizations under which AO is:

Answer 50

- at a level of government other than the one of which the audited entity is part (federal auditors may be auditing state gov program or state auditors may be auditing county gov programs) - placed within a different branch of gov from that of audited entity (legislative auditors audit an executive branch program)

Question 51

structural threats may be mitigated if the head of AO meets any of the following criteria in accordance with consitutional or statutory requirements:

Answer 51

- directly elected by voters of jurisdiction being audited - elected or appointed by a legislative body, subject to removal by a legislative body, and reports the results of audit to and is accountable to legislative body - appointed by someone other than a legislative body, so long as appointment is confirmed by a legislative body and removal from the position is subject to oversight or approval by a legislative body, and reports the results of audits to and is accountable to legislative body - appointed by, accountable to, reports to, and can only be removed by a statutorily created governing body, the majority of whose members are independently elected or appointed and are outside the org being audited

Question 52

for AOs under a different structure, all of the following safeguards should be in place

Answer 52

- statutory protections to prevent audited entity from abolishing the AO - statutory protection that if the head of AO is removed, the head of agency reports this to legislative body - statutory protection preventing audited entity from interfering with initiation, scope, timing and completion of any audit - statutory protection preventing audited entity from interfering with audit reporting, findings, conclusions, or manner, means or timing of AO's reports. - statutory protection requiring AO to report regularly to a legislative body or other independent governing body - statutory protections giving the AO sole authority over selection, retention, advancement and dismissal of its staff - statutory access to records and documents related to agency, program or function being audited and access to officials or others as needed to conduct the audit

Question 53

internal auditors working under direction of audited entity's management are considered independent for purposes of reporting internally if head of the audit organization meets all of the following:

Answer 53

-accountable to head of gov entity or to those charged with governance -reports audit results both to head of gov entity and to those charged with governance -located organizationally outside the staff or line management function of the areas being audited -has access to those charged with governance -is sufficiently removed from political pressure to conduct audits and report findings objectively without fear of political reprisal if internal auditors audit external organizations, such as contractors, and no independence impairment exist, auditor is considered external party to the audited entities.

Question 54

before providing nas to audited entity, AO should determine that audited entity has designated an

Answer 54

individual with suitable skills, knowledge or experience as well as sufficient understanding to oversee services by auditor

Question 55

if AO were to assume management responsibilities for audited entity, which threat would be present?

Answer 55

management participation threat would be so great that no safeguards could reduce them to an acceptable level. management responsibilities include leading and directing entity, including making decisions regarding acquisition, deployment and control of human, financial, physical, and intangible resources

Question 56

examples of specific management actions that would impair AO's independence

Answer 56

setting policies and strategic direction for audited entity directing and accepting responsibility for actions of audited entity's employees in performance of their routine, recurring activities having custody of audited entity's asset reporting to those charged with gov on behalf of mgt deciding which of auditor's or outside third party's recommendations to implement accepting responsibility for mgt of audited entity's project accepting responsibility for DIM IC providing svc that are intended to be used as mgt primary basis for making decisions that are sig to subject matter developing audited entity's performance measurement system when that system is material or sig tot subject matter serving as voting member of audited entity's mgt committee or BOD

Question 57

before performing nas for audited entites, auditors should obtain assurances that audited entity mgt will do all of the following

Answer 57

1. assume all mgt responsibilities 2. oversee nas by designing a member within senior mgt who possessed suitable skill, knowledge or experience 3 evaluate adequacy and results of nas performed 4 accept responsibility for results of nas

Question 58

auditors preparing to perform nas should establish and document their understanding with audited entity's mgt regarding

Answer 58

``` objectives of nas services to be performed audited entity's acceptance of its resp. auditor's resp. any limitations to nas ```

Question 59

giving routine advice and responding to questions as a direct part of audit are not considered nas and do not impair independence. examples are:

Answer 59

1. providing advice to audited entity regarding acct matter relevant to audit 2. researching and responding to audited entity technical question relevant tax laws as an ancillary part of providing tax services 3. providing advice on routine business matters 4. educating audited entity on matters within technical expertise of auditors 5. providing information to audited entity that is readily available to auditors such as best practices and benchmarking studies

Question 60

certain nas that directly support audited entity's operations will necessarily impair independence, among other these include:

Answer 60

1. determining or changing JE, acct codes or classifications for transactions, or other accounting records for audited entity without obtaining mgt approval 2. authorizing or approving entity's transactions 3. preparing or making changes to source documents (purchase orders, payroll time sheets, GL, customer orders, contracts) without mgt approval

Question 61

if auditor has determined that nas requirements have been met and that any significant threats to independence have been eliminated or reduced to an acceptable level, then the following services, unless otherwise expressly prohibited, may be performed for an audited entity

Answer 61

1. recording tx approved by mgt 2. preparing FS based on info in TB 3. posting entries approved by mgt ot TB 4. preparing acct recon for mgt evaluation 5. proposing standard, adjusting or correcting je or other changes affecting FS to audited entity's mgt for its review and acceptance so long as the auditor is satisfied that mgt understands nature and impact of entries

Question 62

internal audit assistance - the following will always impair independence when provided to audit client

Answer 62

1. setting internal audit policies or strategic direction of internal audit activities 2. performing procedures that form part of internal control, such as reviewing and approving changes to employee data access privileges 3. determining scope of internal audit function and resulting wok

Question 63

information technology system services - examples of IT nas that would impair independence when provide to audit client include:

Answer 63

designing or developing financial or other IT system that will play a sig role in the mgt of are of operations that is or will be subject matter of audit providing services that entail making other than insignificant modifications to source code underlying such as system operating or supervising operation of such a system

Question 64

valuation services - providing valuation services that have a material effect on FS - will impair or not impair independence

Answer 64

will impair independence if valuation involves a significant degree of subjectivity

Question 65

Misc NAS that always impair independence when provided to audited entity - non tax disbursement examples

Answer 65

accepting responsibility to authorize payment of audited entity funds accepting responsibility for signing or cosigning audited entity checks maintaining audited entity's bank account or otherwise having custody of its funds or making credit or banking decisions approving vendor invoices for payment

Question 66

Misc NAS that always impair independence when provided to audited entity - benefit plan administration examples

Answer 66

making policy decisions on behalf of mgt when dealing with plan participants, interpreting plan documents on behalf of mgt without firms obtaining mgt concurrence making disbursements on behalf of plan having custody of plan assets serving a plan as fiduciary as defined by erisa

Question 67

Misc NAS that always impair independence when provided to audited entity - investment - advirsory or management examples

Answer 67

making investment decisions on behalf of mgt executing tx to buy or sell having custody of assets, even taking emp. possession of securities purchased

Question 68

Misc NAS that always impair independence when provided to audited entity - corporate finance

Answer 68

committing to terms of tx or consummating a tx in its behalf acting as promoter, underwriter, broker dealer or guarantor of audited entity securities or distributor of private placement memoranda or offering documents maintaining custody of audited entity's securities

Question 69

Misc NAS that always impair independence when provided to audited entity - executive or employee personnel matters

Answer 69

committing audited entity's employee to compensation or benefit arrangements hiring or terminating audited entity employees

Question 70

Misc NAS that always impair independence when provided to audited entity - business risk consulting examples

Answer 70

making or approving business risk decisions | presenting business risk considerations to those charged with gov on behalf of mgt

Question 71

to establish independence, cpa must document

Answer 71

threat to independence that requires application of safeguards, along with safeguards applied safeguards required if an audit organization is structurally located within a gov enity and is considered independent based on those safeguards consideration of audited entity mgt ability to effectively oversee nas to be provided by auditor cpa's understanding with audited entity for which auditor will perform nas

Question 72

this includes exercising reasonable care and professional skepticism. it represents the application of knowledge, skill and experience. professional judgment is used in

Answer 72

1. applying conceptual framework to determine independence in specific situation 2. assign competent staff to adult 3. define scope of audit 4. determine risk of audit 5. determine sufficient and appropriate audit evidence to support findings 6. to report results 7. to maintain appropriate quality control over audit process

Question 73

the audit staff must possess professional competence adequate to address audit objectives and perform work in accordance with gagas

Answer 73

competence derives from education and experience audit firms should have a process for recruiting, hiring, continuously developing, assigning and evaluating staff in order to maintain a competent workforce competence provides basis for sound professional judgments

Question 74

the staff assigned to perform gagas audit should collectively possess

Answer 74

necessary technical knowledge, skill and experience

Question 75

cpa's performing gagas audits should undertake how many hours of cpe?

Answer 75

24 hours of gov auditing cpe every two years. auditors performing more senior auditor resp or more than 20% of their time charged to gagas audits must also have 56 hours of cpe every 2 years

Question 76

audit firms performing gagas must have the following quality control and assurance

Answer 76

establish and maintain a system of quality control designed to provide organization with reasonable assurances that both org and its staff comply with professional standards and applicable legal and regulatory requirements. undergo independent peer review every 3 years adopt polices and procedures that address - leadership responsibilities for quality within the AO - independence, legal and ethical requirements - initiation, acceptance and continuation of audits - human resources - audit performance, documentation and report - monitoring of quality

Question 77

EBP are broadly regulated by

Answer 77

DOL's employee benefit security administration EBSA pursuant to employee retirement income security act ERISA

Question 78

statutory law provides that an accountant retained by plan to examine plan financial information and render opinion on fs and schedules required to be contained in plan's annual report must be independent or not indep?

Answer 78

izdpenendece is required

Question 79

rules provide that acct will not be considered independent with respect to a plan due to following:

Answer 79

1. financial ties 2. employment ties 3. employees of plan or plan sponsor who left to joing acct firm may be independent if (have disassociated from plan, and do not participate in auditing fs of plan)

Question 80

describe independence issues due to financial ties

Answer 80

during audit, accountant or his firm had or was committed to acquire any direct financial interest or any material indirect interest - this provision covers any member of accountant's firm - coverage is much broader of AICPA - term member means all partners, shareholder employees in firm and all professional employees participating in audit or located in office of firm participating in sig portion of audit

Question 81

describe independence issues due to employment ties

Answer 81

``` during audit, entities may not be connected to plan or plan sponsor as promoter underwriter investment advisor voting trustee director officer employee of plan or plan sponsor ```

Question 82

can cpa provide professional services, including actuarial services to plan sponsor

Answer 82

yes as long as cpa does not violate rules of financial ties and employment ties