SOX Act of 2002 & Professional Responsibilities Flashcards Preview

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Flashcards in SOX Act of 2002 & Professional Responsibilities Deck (75):
1

Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchanges Commission. How many annual audit period(s) must be completed before such employment can be accepted?

One.  

  • Act requires that both assigned audit partner having primary responsibility for a certain audit and audit partner who reviews audit can do the audit services for that issuer for only five consecutive years.
  • If public company has hired employee of an audit firm to be its CEO, CFO, or CAO within previous year, that audit firm may not audit that public company.

2

Under International Auditing Standards (ISA), the time horizon for a going concern consideration is?

  1. Not longer than twelve months from the date of the audit report.
  2. Not longer than twelve months from the date of the financial statements.
  3. At least twelve months from the date of the audit report.
  4. At least twelve months from the date of the financial statements.

At least twelve months from the date of the audit report.

  • Intl. standard is tougher than U.S. standard.
  • Intl. standards in the area of going concern include time horizon of at least, but not limited to, twelve months, while PCAOB standards limit the foreseeable future for a going concern consideration of up to twelve months.

3

International Auditing Standards are developed by?

International Auditing and Assurance Standards Board (IAASB of the International Federation of Accountants (IFAC), a worldwide organization of approximately 160 national accounting bodies (e.g., the AICPA).

Remember that IFAC is the worldwide parent organization of the IAASB and lots of other standard setting bodies such as the AICPA.  

4

International Standards on Auditing are issued by?

  1. The American Institute of Certified Public Accountants.
  2. The International Organization of Securities Commissions.
  3. The International Federation of Accountants.
  4. The International Auditing Society

The International Federation of Accountants.  International Auditing Standards are issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC).

5

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?

  1. The CPA records transactions in accordance with classifications determined by management.
  2. The CPA prepares financial statements from a trial balance provided by management.
  3. The CPA posts adjusting journal entries prepared by management to the trial balance.
  4. The CPA authorizes client transactions and reports them to management.

The CPA authorizes client transactions and reports them to management.

Any situation where the auditor is operating in a management function would impair independence under the AICPA rules (look at PCAOB and GAO as well to know the differences)

6

A CPA in public practice shall not disclose confidential client information without client consent except for?

Remember the IRS is not one of these exceptions and a CPA should not respond to the IRS without a client's permission.  

  1. Compliance with the Compliance with Standards Rule or the Accounting Principles Rule obligations
  2. Compliance with enforceable subpoena or summons
  3. AICPA review of professional practice
  4. Initiating complaint or responding to inquiry made by a recognized investigative or disciplinary body

7

Due Professional Care Definition

  • Remember to exercise DPC, an auditor should critically review the judgment exercised by those assisting in the audit.

A member should observe the profession's technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member's ability.

  1. Competence is derived from education and experience.
  2. Consultation or referral may be required when a professional engagement exceeds the personal competence of a member or a member's firm.

8

Pursuant to the AICPA rules of conduct, the auditor’s responsibility to the profession is defined by

  1. The AICPA Code of Professional Conduct.
  2. Federal laws governing licensed professionals who are involved in interstate commerce.
  3. Statements on Auditing Standards.
  4. The bylaws of the AICPA.

The AICPA Code of Professional Conduct outlines the profession’s rules of conduct and auditor’s responsibility to the profession.

9

The AICPA bylaws indicate that membership is suspended without a hearing if a member is convicted of any of the following?

  1. A felony and/or crime punishable by imprisonment for more than 1 year.
  2. Willful failure to file any income tax return required by law.
  3. Filing a fraudulent income tax return (one's own or a client's).
  4. Aiding in the preparation of a fraudulent income tax return.

10

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?

5 Years.  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.

11

According to PCAOB auditing standards, in reporting whether a previously reported material weakness continues to exist, the auditor may appropriately issue?

An unqualified opinion or a disclaimer of opinion.

12

PCAOB Auditing Standard No. 4 applies when an issuer's auditor is engaged to report on whether a previously reported material weakness in internal control over financial reporting continues to exist as of a date specified by management. Which of the following statements is correct according to Auditing Standard No. 4?

  1. Whenever an auditor's report on internal control over financial reporting identifies a material weakness, the auditor must also be engaged to issue a subsequent report within three months to indicate whether the previously reported material weakness continues to exist.
  2. Whenever an auditor's report on internal control over financial reporting identifies a material weakness, the auditor must also be engaged to issue a subsequent report within six months to indicate whether the previously reported material weakness continues to exist.
  3. Whenever an auditor's report on internal control over financial reporting identifies a material weakness, the auditor must also be engaged to issue a subsequent report within nine months to indicate whether the previously reported material weakness continues to exist.
  4. PCAOB auditing standards do not require an auditor to report whether a previously reported material weakness continues to exist, so such an engagement is voluntary.

PCAOB auditing standards do not require an auditor to report whether a previously reported material weakness continues to exist, so such an engagement is voluntary.

13

PCAOB Auditing Standard No. 6 identifies 2 specific matters that affect the auditor's evaluation of consistency of financial statements: 

  1. a change in accounting principle; and
  2. an adjustment to correct a misstatement in previously issued financial statements (i.e., a "restatement").

A change in accounting principle may be at management's discretion or it may be mandated by a change in accounting standards that eliminates an accounting alternative that was previously accepted, but no longer is.

14

Each of the following is identified by both the PCAOB risk assessment standards and the AICPA risk assessment standards as an assertion to be specifically addressed by the auditor, except for

  1. Existence or occurrence.
  2. Completeness.
  3. Rights and Obligations
  4. Presentation and Disclosure

Presentation and Disclosure.  

The PCAOB identified "presentation and disclosure" as an assertion,

Whereas the AICPA standards (SAS No. 106, "Audit Evidence") identified "presentation and disclosure" as a separate category of assertions consisting of 4 separate, specific assertions:

  1. occurrence and rights and obligations;
  2. completeness;
  3. classification and understandability; and
  4. accuracy and valuation.

15

Audit Evidence Standards - PCAOB

The PCAOB focuses on the five traditional financial statement assertions (as presented in an earlier SAS that has since been superseded in an attempt to align U.S. auditing standards more closely with international standards).

  1. Existence
  2. Completeness
  3. Rights and obligations
  4. Valuation or allocation
  5. Presentation and disclosure

16

Audit Evidence Standards - AICPA

The AICPA SAS presents the discussion of assertions in three categories:

  1. Account balances at the period end (four assertions);
  2. Transactions and events during the period (five assertions); and
  3. Presentation and disclosure (four assertions).

17

The definition of "supplemental information" under PCAOB Auditing Standard No. 17 includes all of the following, except for?

  1. A public company's sustainability report consisting of a variety of financial and nonfinancial measures of performance, which is made available to readers on the entity's web site.
  2. B.  Supporting schedules that brokers and dealers are required to file with the Securities and Exchange Commission.
  3. C.  Information outside of the financial statements that is derived from the entity's accounting records, which is covered by the auditor's report in relation to financial statements audited under PCAOB auditing standards.
  4. D.  Information that is required to be presented under the rules of a regulatory authority, which is covered by the auditor's report in relation to financial statements audited under PCAOB auditing standards.

A public company's sustainability report consisting of a variety of financial and nonfinancial measures of performance, which is made available to readers on the entity's web site.

Information that a company voluntarily presents on its web site is outside the PCAOB's definition of "supplemental information." As a practical matter, sustainability reports are not required, nor is third-party assurance on sustainability required.

18

The auditor's report on supplemental information should include a statement about each of the following, except for

  1. A statement that the supplemental information is management's responsibility.
  2. A statement that the methods of measurement and presentation have not changed from those used in the prior period.
  3. A statement that the supplemental information complies with the applicable regulatory requirements.
  4. An opinion (or disclaimer) as to whether the supplemental information is fairly stated in relations to the financial statements as a whole.

A statement that the methods of measurement and presentation have not changed from those used in the prior period.

The auditor should obtain management's representation that the methods of measurement or presentation have not changed from those used in the prior period. However, the auditor's report does not include such a statement.

19

For any related-party transaction that is required to be disclosed or that is determined to be a significant risk, PCAOB Auditing Standard No. 18 (Related Parties) requires the auditor to do each of the following, except

  1. Evaluating the financial capability of the related parties with respect to their significant responsibilities in connection with the transaction.
  2. Ascertaining that the transaction has been authorized and approved in accordance with the company's established policies.
  3. Reading applicable underlying documents for consistency with explanations about the business purpose obtained from inquiries and other procedures performed.
  4. Obtaining a written representation from the company's lawyer that the related-party transaction complies with all applicable laws and regulations.

Obtaining a written representation from the company's lawyer that the related-party transaction complies with all applicable laws and regulations.  AS No. 18 does not require the auditor to obtain any such representation from the company's lawyer.

20

Suppose that management of an issuer makes an assertion in a footnote to the company's financial statements that material transactions with related parties were conducted on terms equivalent to those prevailing in arm's-length transactions. If evidence cannot be obtained to support this assertion and management declines to alter that footnote, what type of audit opinion would be appropriate?

  1. Unqualified with an explanatory paragraph.
  2. Qualified for a scope limitation.
  3. Qualified or adverse for a material misstatement.
  4. Disclaimer of opinion

Qualified or adverse for a material misstatement.  AS No. 18 states that the auditor should consider a qualified or adverse opinion under such circumstances.

21

International accounting standards (sometimes referred to as "International Financial Reporting Standards" or IFRS) are issued by the:

A.  International Financial Reporting Standards Board.
B.  International Accounting Standards Board.
C.  International Federation of Accountants.
D.  International Auditing and Assurance Standards Board.

International Accounting Standards Board (IASB).

The IASB is the designated international "accounting" standard-setting board.
 

22

The difference between U.S. auditing standards and International Standards on Auditing related to "going concern" issues is best characterized by the following statement:

  1. There is no identifiable difference between U.S. and international auditing standards on this topic.
  2. U.S. auditing standards require the auditor to predict an entity's likelihood for bankruptcy, whereas international auditing standards do not address this issue.
  3. U.S. auditing standards limit the auditor's responsibility to evaluate an entity's circumstances to a period no longer than the next 12 months, but international auditing standards do not limit the "foreseeable future" to the next 12 months.
  4. International auditing standards limit the auditor's responsibility to evaluate an entity's circumstances to a period no longer than the next 12 months, but U.S. auditing standards do not limit the "foreseeable future" to the next 12 months.

U.S. auditing standards limit the auditor's responsibility to evaluate an entity's circumstances to a period no longer than the next 12 months, but international auditing standards do not limit the "foreseeable future" to the next 12 months.

In defining the "foreseeable future" related to going concern issues, U.S. auditing standards restrict the auditor's focus to the next 12 months, whereas international auditing standards do not limit the auditor's focus to the next 12 months.
 

23

Which of the following topics represents a primary difference between U.S. auditing standards relative to International Standards on Auditing?

  1. Obtaining written representations from management.
  2. Reference to other auditors when there is a division of responsibility.
  3. Quality control considerations.
  4. Responsibilities for detecting illegal acts in a financial statement audit.

Reference to other auditors when there is a division of responsibility.

Reference to "other auditors" is a difference between U.S. and international auditing standards. U.S. auditing standards permit a division of responsibility, but international auditing standards do not.

24

Which of the following topics represents a primary difference between U.S. auditing standards relative to International Standards on Auditing?

  1. Reporting on internal control in an integrated audit for a public company.
  2. Subsequent events.
  3. Related party issues.
  4. Responsibilities for detecting fraud in a financial statement audit.

Reporting on internal control in an integrated audit for a public company.

U.S. auditing standards (associated with requirements under the Sarbanes-Oxley Act) address internal control reporting in connection with an "integrated audit," but International Standards on Auditing do not address the topic of an "integrated audit."

25

The International Federation of Accountants (IFAC) is a global standard-setting body in all of the following areas, except for

  1. Accounting standards.
  2. Auditing standards.
  3. Ethics standards.
  4. Educational standards.

Accounting standards. 

IFAC is not the global "accounting" standard-setter -- the IASB is.

26

The independent body that provides oversight of the audit and ethics standard-setting activities of the International Federation of Accountants (IFAC) is the:

A.  IFAC Monitoring Commission.
B.  International Organization of Securities Commissions.
C.  Public Company Accounting Oversight Board.
D.  Public Interest Oversight Board.

Public Interest Oversight Board (PIOB).

The Public Interest Oversight Board oversees IFAC's auditing and ethics-related standard-setting activities for the purpose of protecting the public interest.

27

International Standards on Auditing are issued by the:

  1. International Auditing Standards Board.
  2. Public Interest Oversight Board.
  3. International Auditing and Assurance Standards Board.
  4. Global Reporting Initiative.

International Auditing and Assurance Standards Board

IFAC's IAASB is the global "auditing" standard-setting board and is responsible for issuing International Standards on Auditing.

28

Julie would violate the Code of Professional Responsibility if, during an audit, she:

  • I. Expressed an opinion or stated affirmatively that the financial statements were presented in conformity with GAAP when they contained material departures from GAAP.
  • II. Expressed an opinion or stated affirmatively that the financial statements were presented in conformity with GAAP when they contained immaterial departures from GAAP.

I only...Material departures from GAAP, but not immaterial departures, violate the Code of Professional Conduct.

29

According to the profession's ethical standards, which of the following events may justify a departure from a Statement of Financial Accounting Standards?

  1. New legislation?
  2. Evolution of a new form of business transaction?

BOTH...

There is a strong presumption that established accounting principles must always be followed. However, the AICPA cannot always anticipate all circumstances in which such principles might be applied and recognizes that there may be occasional situations where literal application of pronouncements on accounting principles would render financial statements misleading. In those situations, departure from the accounting principles is justified under Rule 203 of the Code of Ethics.

An unusual degree of materiality or the existence of conflicting industry practices are given as examples of circumstances where departure from accounting principles is NOT usually justified. But new legislation and evolution of a new form of business transaction are BOTH given as examples of circumstances where departure IS justified.

30

Under AICPA standards, competence to complete an engagement includes:

  1. The ability to supervise and evaluate work.
  2. Knowledge of the technical subject matter.
  3. The ability to research subject matter and consult with others where necessary.
  4. All three choices provided.

All three choices provided.

31

Sally has her own small accounting firm. Due to some personal connections with a top officer of Mediumsize Corporation, Sally landed an interview with Mediumsize as a potential tax client. Mediumsize has some complicated tax issues of a type that Sally has not handled before. Which of the following is true?

  • I. Because Sally has not handled these complicated issues before, she cannot take this engagement.
  • II. Sally can take this engagement if she believes in good faith that she can research these tax issues and handle them competently.
  • III. Sally can take this engagement if she believes in good faith that she can consult with experts in the area and thereby handle these tax issues competently.

II and III only.

32

Members may properly:

I. Advocate on behalf of audit clients.
II. Advocate on behalf of tax clients.

MIPP's in general may not advocate, only when performing tax or advisory work, may advocacy be permitted but should be exercised cautiously and judiciously.  

Members may advocate on behalf of tax and advisory service clients, although they should never stretch the bounds of performance standards, go beyond sound and reasonable professional practice, or compromise their credibility.

33

Which of the following is true?

  1. Clients have the right to veto any outsourcing by a CPA firm.
  2. Clients must be informed in writing before any professional services are outsourced.
  3. If the client objects to outsourcing of professional services, then the member should either not outsource the work or decline to provide the service altogether.
  4. All three choices provided.

If the client objects to outsourcing of professional services, then the member should either not outsource the work or decline to provide the service altogether.

Remember the notice does not have to be in writing...

34

Which of the following actions by a CPA most likely does not constitute an act discreditable to the profession?

  1. Sexually harassing an employee.
  2. Providing for a right of contribution from the client in an audit engagement letter.
  3. Providing for a right of indemnification from the client in an audit engagement letter.
  4. All of the above.

Providing for a right of contribution from the client in an audit engagement letter.

While the SEC and most government agencies oppose full indemnification of wrongdoers, contribution is typically allowed and, therefore, would not violate Rule 501.

The SEC does still oppose indemnification for it lets a wrongdoer completely off the hook.

35

Which of the following AICPA standards did the PCAOB not adopt as a part of its interim standards?

  1. Auditing Standards Board Standards.
  2. Attestation Standards.
  3. Accounting and Review Services Standards.
  4. Quality Control Standards.

Accounting and Review Services Standards.  The PCAOB did not adopt the AICPA’s Accounting and Review Services Standards because they only apply to nonpublic companies ("non-issuers").

36

A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities are not material to the CPA's wealth but are material to the child's personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA's independence with the client?

  1. No, because the CPA would not have a direct financial interest in the client.
  2. Yes, because the stock would be a direct financial interest and materiality is a factor.
  3. Yes, because the stock would be an indirect financial interest and materiality is not a factor.
  4. Yes, because the stock would be a direct financial interest and materiality is not a factor.

Yes, because the stock would be a direct financial interest and materiality is not a factor.

Rememeber the financial interest of dependents (here, the child) are treated the same as if the CPA held the interest, and any direct financial interest impairs CPA independence.

37

Jo is a member in public practice who is very wealthy and has no individual investments that are material to her. Which of the following investments would impair Jo's independence?

  1. Jo owns 3% of a diversified mutual fund and is on her firm's attest team for that fund.
  2. Jo owns 4% of a diversified mutual fund and is on her firm's attest team for ABC Co., whose shares are in the mutual fund's portfolio of stocks.
  3. Jo owns 2% of an undiversified mutual fund that has ABC Co. stock in its portfolio (and Jo is on her firm's attest team for ABC).
  4. All three of the choicies provided.

I only.  Read over the rules to find out why situations 2 and 3 are not independence issues.  

1 is right because there is a direct interest in the fund.  2 and 3 have indirect and immaterial interests in the underlying funds for 2 and the undiversified fund for 3.  

38

Covered Member - Definition

A covered member is:

  1. An individual on the attest engagement team;
  2. An individual in a position to influence the attest engagement;
  3. A partner or manager who provides nonattest services to the attest client beginning once he or she provides ten hours of nonattest services to the client within any fiscal year and ending on the later of the date
    1. The firm signs the report on the financial statements for the fiscal year during which those services were provided; or
    2. He or she no longer expects to provide ten or more hours of nonattest services to the attest client on a recurring basis;
  4. A partner in the office in which the lead attest engagement partner primarily practices in connection with the attest engagement;
  5. The firm, including the firm’s employee benefit plans; or
  6. An entity whose operating, financial, or accounting policies can be controlled (as defined by generally accepted accounting principles [GAAP] for consolidation purposes) by any of the individuals or entities described in (a) through (e) or by two or more such individuals or entities if they act together.

39

The independence requirements are more stringent for covered members as compared to partners and staff who are not covered members—if a covered member's independence is impaired, so is that of the CPA firm.

The following are relationships impair CPA firm independence (in addition to that of the covered member):

Financial relationships of a covered member which impair the independence of both the member and the firm include:

  1. All direct financial interests
  • Example: A covered member may not own any stock (or debt) of an attest client on which he or she is a covered member without impairing both that covered member's and the firm's independence.
  1. Material indirect financial interests
  • Example: A covered member may only own an immaterial amount of stock in a mutual fund that owns stock in an attest client.
  • Details on determining materiality are included in the Code, but generally beyond the scope of the CPA exam.
  1. A material joint closely held investment held with an attest client (or one of the client's officers or directors, or any owner with significant influence over the attest client).

40

The AICPA Conceptual Framework for Independence Standards suggests that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-independence exists?

  1. AICPA peer reviewer.
  2. Peer.
  3. SEC inspector.
  4. Reasonably informed third party.

Reasonably informed third party. 

The conceptual framework describes the risk-based approach to analyzing independence that is used by the AICPA Professional Ethics Executive Committee (PEEC). A member is not independent if there is an unacceptable risk to the member’s independence. Risk is unacceptable if the relationship would compromise (or would be perceived as compromising by a reasonably informed third party) the member’s professional judgment.

41

The audit report of which organization(s) includes section titles?

  • International Auditing and Assurance Standards Board
  • Public Company Accounting 
    Standards Board
  • American Institute of Certified Public Accountants

IAASB = YES TITLES

PCAOB = NO TITLES

AICPA = YES TITLES

42

A violation of the profession’s ethical standards least likely would have occurred when a CPA

  1. Purchased another CPA’s accounting practice and based the price on a percentage of the fees accruing from clients over a 3-year period.
  2. Received a percentage of the amounts invested by the CPA’s audit clients in a tax shelter with the client’s knowledge and approval.
  3. Had a public accounting practice and also was president and sole stockholder of a corporation that engaged in data processing services for the public.
  4. Formed an association, not a partnership, with two other sole practitioners and called the association "Adams, Betts and Associates."

Purchased another CPA’s accounting practice and based the price on a percentage of the fees accruing from clients over a 3-year period.

  • A member who is considering selling his/her practice, or merging with another CPA, may allow that CPA to review confidential client information without the specific consent of the client.
  • The member should take appropriate precautions (e.g., obtain a written confidentiality agreement) so that the prospective purchaser does not disclose such information.
  • This exception only relates to a review in conjunction with a purchase or merger. It does not apply to the review of working papers after a CPA has purchased another's practice. AU-C 510, discussed in detail later in this module, requires that the successor who wishes to review predecessor auditor working papers should request the client to authorize the predecessor to make such working papers available.
  • When selling a practice the price agreed upon may be fixed or contingent upon certain factors (e.g., fees of client's retained during the next three years).

43

Independence standards of the GAO for audits in accordance with generally accepted government auditing standards describe three types of impairments of independence. Which of the following is one of these types of impairments?

  1. External.
  2. Relatives.
  3. Financial.
  4. Unusual.

External.  GAO standards identify three types of impairments:

  1. personal,
  2. external, and
  3. organizational.

44

When the auditor of group financial statements (the “principal auditor”) is performing an audit in conformity with International Auditing Standards and a component (other) auditor is involved, which of the following is correct?

  1. The auditor of the group financial statements must refer to the component auditor and must name that auditor.
  2. The auditor of the group financial statements may, but is not required to, refer to the component auditor.
  3. The component auditor must issue its report on the portions of the financial statements it has audited and this report must be included with the report on the group financial statements.
  4. The auditor of the group financial statements may not refer to the component auditor.

The auditor of the group financial statements may not refer to the component auditor.  

International standards do not allow reference to another audit firm involved in a portion of the audit while PCAOB standards allow the principal auditor to so report (i.e., percentages or dollars audited by the other auditor are reported and the opinion is based in part upon the report of the other auditor).

45

When the dependent daughter of a partner in a CPA firm owns ten shares of stock in an audit client, which rule of the Code of Professional Conduct is most directly relevant?

  1. Acts discreditable.
  2. Commissions and referral fees.
  3. Compliance with standards.
  4. Independence.

Independence.  

IFM's = Overall immediate family members are subject to the same requirements as the covered member. For example, if the covered member cannot own common stock of a client, neither than that covered member's spouse or dependent children. Exceptions (allowable situations):

  • An individual in a covered member's immediate family is employed by the client in a position other than a key position (a position in which the individual has primary responsibility for, or influence over, accounting or financial statement reporting decisions).
  • Certain circumstances when immediate family member holds a financial interest in an attest client through his/her employer's benefit plan.

46

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

  1. Performing an audit of a financial statement.
  2. Performing a review of a financial statement.
  3. Performing an examination of prospective financial information.
  4. Seeking a private letter ruling.

Seeking a private letter ruling.  contingent fees ordinarily may be received for seeking a private letter ruling when the CPA performs no attest services for that client; as an illustration, a private letter ruling may be obtained from the Internal Revenue Service relating to treatment of a potentially taxable event.

47

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

  1. A CPA in public practice providing tax and management advisory services.
  2. A CPA in public practice providing auditing and other attestation services.
  3. A CPA not in public practice.
  4. All CPAs.

A CPA in public practice providing auditing and other attestation services.

independence is required only for audits and other forms of attestation services.

48

The Sarbanes-Oxley Act of 2002 prohibits the performance of certain services for audit clients by auditors of public companies. Which of the following is not prohibited?

  1. Bookkeeping services.
  2. Appraisal services.
  3. Tax preparation services.
  4. Management functions.

Note - the act does not prohibit many of these servicesf or non-issuers or private companies.  

Tax preparation services.  several specific service categories that issuer’s public accounting firm cannot legally do, even if approved by audit committee:

  1. Bookkeeping or other services relating to financial statements or accounting records
  2. Financial information systems design and/or implementation
  3. Appraisal services
  4. Internal audit outsourcing services
  5. Management functions
  6. Note that Act does not restrict auditor from performing these services to nonaudit clients or to private companies
  7. Act intended to restrict specified categories performed for public audit clients
  8. Act permits auditor as a registered public accounting firm to perform nonaudit services not specifically prohibited (e.g., tax services) when approved by issuer’s audit committee

49

In relation to the AICPA Code of Professional Conduct, the rules of the International Code of Ethics for Professional Accountants:

  1. Have more definitive prohibitions.
  2. Have fewer definitive prohibitions.
  3. Are more country specific.
  4. Require the application of less judgment.

Have fewer definitive prohibitions, i.e. require more judgment than the AICPA's COPC.  

50

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

  1. Home mortgage loan.
  2. Student loan.
  3. Secured automobile loan.
  4. Personal loan.

Secured automobile loan. 

  1. secured automobile loans,
  2. loans collateralized by the cash surrender value of an insurance policy,
  3. fully collateralized loans on cash deposits, and
  4. outstanding loans on credit cards up to $10,000

are permitted loans from a financial institution attest client.

51

When a threat to independence arises that is not specifically considered in the Code of Professional Conduct an auditor should consider

  1. Alternative threats to a lack of independence.
  2. Available safeguards to independence.
  3. Global independence rules.
  4. Required lack of independence approaches.

Available safeguards to independence. After considering the threats to independence, the member should consider the safeguards that mitigate or eliminate threats to independence.  The three types of safeguards include:

  1. Safeguards created by the profession, legislation, or regulation (e.g., required continuing education on independence and ethics).
  2. Safeguards implemented by the client (e.g., an effective governance structure, including an active audit committee).
  3. Safeguards implemented by the firm (e.g., quality controls for attest engagements).

52

According to the profession’s ethical standards, a CPA who is a covered member would be considered independent in which of the following instances?

  1. A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA.
  2. The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust.
  3. The CPA owns an office building and the mortgage on the building is guaranteed by a client.
  4. The CPA belongs to a country club that is a client in which membership requires the acquisition of a pro rata share of equity.

The CPA belongs to a country club that is a client in which membership requires the acquisition of a pro rata share of equity. The acquisition of equity or debt securities as a condition for membership in a country club does not normally impair independence; serving on the club’s governing board or taking part in its management does impair independence.​

53

A client company has not paid its year 1 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the year 2 audit, the year 1 audit fees must be paid before the:

  1. Year 1 report is issued.
  2. Year 2 fieldwork is started.
  3. Year 2 report is issued.
  4. Year 3 fieldwork is started.

Year 2 report is issued. 

Independence is impaired when prior year fees for professional services, whether billed or unbilled, remain unpaid for more than one year prior to the date of the report.

54

Which of the following statements is true with respect to the PCAOB and SEC’s concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?

  1. The auditor is not independent.
  2. The auditor is independent if he or she is able to maintain a level of professional detachment.
  3. The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements.
  4. The auditor cannot audit the financial statements since a lack of integrity exists.

The auditor is not independent.

55

The Department of Labor (DOL) most frequently conducts financial and performance audits following

  1. Government Auditing Standards.
  2. Sarbanes-Oxley Requirements.
  3. Generally Accepted Auditing Standards.
  4. Financial Accounting Standards Board pronouncements.

Government Auditing Standards. The DOL conducts most of its financial and performance audits following Government Auditing Standards, including audits of compliance with laws, evaluation of economy and efficiency of operations, and evaluation of effectiveness in achieving program results.

56

According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company’s board of directors?

  1. The CPA audits a bank to which the company has applied for financing, and board approval is required for said financing to occur.
  2. The CPA is asked by the company to test the internal controls of the company and offers compensation to the CPA for said services.
  3. The CPA does not audit the company and has no other business connection with the company.
  4. The CPA performs attestation services for a nonpublic company.

The CPA does not audit the company and has no other business connection with the company.

57

A CPA firm must do which of the following before it can participate in the preparation of an audit report of a company registered with the Securities and Exchange Commission (SEC)?

  1. Join the SEC Practice Section of the AICPA.
  2. Register with the Public Company Accounting Oversight Board.
  3. Register with the Financial Accounting Standards Board (FASB).
  4. Register with the SEC pursuant to the Securities Exchange Act of 1934.

Register with the Public Company Accounting Oversight Board.

58

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, except

  1. As a principal financial officer, principal accounting officer, controller, public accountant, or auditor.
  2. Serving on at least one other issuer's audit committee or disclosure committee of the board of directors.
  3. Actively supervising a principal financial officer or principal accounting officer.
  4. Assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements.

Serving on at least one other issuer's audit committee or disclosure committee of the board of directors.  service on at least one other issuer's audit committee or disclosure committee would not be an experience that would necessarily qualify the individual as a financial expert.

59

Which of the following is not a source of guidance to CPAs with respect to their professional responsibilities?

  1. Principles of the Code of Professional Conduct
  2. Interpretations of the Code of Professional Conduct
  3. Rules of the Code of Professional Conduct
  4. All of the above are sources of guidance

All of the above are sources of guidance

60

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

  1. Audit engagements.
  2. Review engagements.
  3. Compilation engagements.
  4. CPA firm quality control system.

Compilation engagements.  Compilation standards for financial statements relate to nonpublic companies not under the jurisdiction of either the SEC or the PCAOB.

61

Which of the following is not a "covered member" under the Independence Rule of the Code of Professional Conduct?

  1. A partner in the same office as the lead attest partner.
  2. A manager that provides five hours of tax services to the client.
  3. A professional employee that is assigned to the engagement.
  4. A partner that manages the attest practice for the firm.

A manager that provides five hours of tax services to the client.   Partners or managers must provide ten or more hours of nonattest services before they are considered to be covered members.

62

A violation of the Code of Professional Conduct would least likely have occurred when a CPA in public practice

  1. Used a records-retention agency to store the CPA’s working papers and client records.
  2. Served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff.
  3. Referred life insurance assignments to the CPA’s spouse, who is a life insurance agent.
  4. Served simultaneously as state director of revenues and practiced public accounting in the same state.

Used a records-retention agency to store the CPA’s working papers and client records.  Remember this is ok if client confidentiality is maintained.

63

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

  1. Attestation standards?
  2. Independence standards?

BOTH. the PCAOB may establish: 

  1. attestation standards,
  2. independence standards,
  3. auditing standards, and
  4. quality control standards.

64

An audit performed by the Department of Labor is least likely to address

  1. Evaluation of Sarbanes-Oxley required COSO compliance.
  2. Compliance with applicable laws and regulations.
  3. Evaluation of economy and efficiency of operations.
  4. Evaluation of the effectiveness in achieving program results.

Evaluation of Sarbanes-Oxley required COSO compliance.

Few Department of Labor audits address Sarbanes-Oxley requirements and because the Sarbanes-Oxley Act does not require use of the COSO internal control (or ERP) framework.

65

When performing risk assessment procedures under the International Auditing Standards, the auditor shall consider

  1. Management’s plans avoid the need to perform audit procedures addressing the entity’s ability to continue as a going concern.
  2. Whether management’s risk avoidance techniques relating to the entity’s ability to continue as a going concern appear adequate.
  3. Sufficient appropriate audit evidence exists to assure the entity’s ability to continue as a going concern.
  4. Whether there are events or conditions that may cast significant doubt about the entity’s ability to continue as a going concern.

Whether there are events or conditions that may cast significant doubt about the entity’s ability to continue as a going concern. 

Remember that going concern issues are very similar for U.S. SAS and IAS!!!

66

Which of the following is true about requirements to send a letter of audit inquiry to the client’s lawyer under International Standards on Auditing?

  1. A lawyer’s letter must be obtained in all audits.
  2. A lawyer’s letter must be obtained if the client uses an outside attorney.
  3. A lawyer’s letter must be obtained if the auditor assesses a related risk of material misstatement.
  4. A lawyer’s letter need never be obtained.

A lawyer’s letter must be obtained if the auditor assesses a related risk of material misstatement. The lawyer letter is presumptively required for AICPA and PCAOB standards but only necessary for Intl. standards for the reason stated above.  

67

Which of the following is not true about the Public Company Accounting Oversight Board created by the Sarbanes-Oxley Act of 2002?

  1. The board consists of 5 members.
  2. The board oversees the SEC.
  3. The board has the responsibility to discipline CPA firms that audit public companies.
  4. The board has responsibility to develop independence standards for CPA firms that audit public companies.

The board oversees the SEC. the opposite is true, the SEC oversees the PCAOB!

68

Which of the following most accurately summarizes the intended use of International Standards on Auditing?

  1. Foreign publicly traded companies.
  2. Publicly traded companies.
  3. Publicly traded companies and private businesses.
  4. Publicly traded companies, private businesses, and governmental entities.

Publicly traded companies, private businesses, and governmental entities. ALL 3.  

69

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?

  1. Information processing.
  2. Engagement performance.
  3. Technology selection.
  4. Professional skepticism.

Engagement performance is an element of quality control, the others are

  1. leadership responsibilities for quality within the firm;
  2. relevant ethical requirements;
  3. acceptance and continuance of client relationships and specific engagements;
  4. human resources; and
  5. monitoring.

70

Assuming appropriate disclosure is made, which of the following fee arrangements generally would be permitted under the ethical standards of the profession?

  1. A fee paid to the client’s audit firm for recommending investment advisory services to the client.
  2. A fee paid to the client’s tax accountant for recommending a computer system to the client.
  3. A contingent fee paid to the CPA for preparing the client’s amended income tax return.
  4. A contingent fee paid to the CPA for performing a review of the client’s financial statements.

A fee paid to the client’s tax accountant for recommending a computer system to the client. a commission may be received providing it is not from a client for which the CPA provides any of the following services: (1) audit or review of financial statements, (2) compilation of financial statements expected to be relied upon by a third party or (3) examination of prospective financial information. In addition, a contingent fee cannot be accepted for preparing an initial or amended tax return.

71

Which of the following is correct concerning General Accountability Office (GAO) audits?

  1. They are based on the GAO’s mission to support the President in meeting his or her constitutional responsibilities.
  2. They do not include requirements beyond those of generally accepted auditing standards.
  3. Audit team members may not also work on nonattest engagements.
  4. They are generally based on the "Blue Book."

Audit team members may not also work on nonattest engagements.

72

Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client?

  1. A marketing position related to the client’s primary products.
  2. A policy-making position in the client’s finance division.
  3. A staff position in the client’s research and development division.
  4. A senior position in the client’s human resources division.

A policy-making position in the client’s finance division.  individuals in positions of significant influence include individuals in a policy-making position in the finance department. These individuals can significantly affect the financial statements of the company.

73

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

  1. An investment held in a retirement plan.
  2. An investment held in a blind trust.
  3. An investment held through a regulated mutual fund.
  4. An investment held through participation in an investment club.

An investment held through a regulated mutual fund. an investment in a regulated mutual fund is an indirect investment in the stock of the companies in the fund as defined under the Code of Professional Conduct.

74

Within the context of quality control, a primary purpose of the engagement performance element is to help ensure that

  1. CPA firm personnel have adequate technical training.
  2. Engagements are adequately supervised.
  3. The CPA firm undertakes only those engagements it is competent to perform.
  4. CPA firm personnel comply with relevant ethical requirements.

Engagements are adequately supervised. 

Firm’s engagements are consistently performed in accordance with professional standards and regulatory and legal requirements, with policies and procedures addressing:

  1. Engagement performance
  2. Supervision responsibilities
  3. Review responsibilities
     

75

Which of the following are issued by the Securities and Exchange Commission?

  1. Journal of Accountancy.
  2. Accounting Trends and Techniques.
  3. Industry Audit Guides.
  4. Financial Reporting Releases.

Financial Reporting Releases.

FRRs are designed to communicate the SEC’s positions on accounting principles and auditing practices.