U6 Flashcards
(32 cards)
Do the AICPA code of professional conduct rules for independence apply to all members?
Rules surrounding independence do not apply to AICPA members not in public practice. Independence rules apply to AICPA members in public practice that perform audit and other attestation services.
It applies to compilations and reviews of the financial statements of nonissuers.
Under the ethical standards of the profession, which of the following investments in a client is not considered to be a direct financial interest?
A.
An investment held by the trustee of a trust.
B.
An investment held in a blind trust.
C.
An investment held through a nonclient investment club.
D.
An investment held through a nonclient regulated mutual fund.
An investment held through a nonclient regulated mutual fund.
An accountant may compile a nonissuer’s financial statements that omit all of the disclosures required by GAAP only if the omission is:
I.
Clearly indicated in the accountant’s report.
II.
Not undertaken with the intention of misleading the financial statement users.
Both
When is ok to compile financial statements that omit substantially all disclosures required by generally accepted accounting principles?
When Omission is not undertaken to mislead the users of the financial statements and is properly disclosed in the accountant’s report.
Which of the following rules of the AICPA Code of Professional Conduct must be observed even by a member who is not in public practice?
Integrity and Objectivity.
The Independence Rule applies to a member in public practice.
What service may a CPA perform for a commission or contingent fee?
Representation of a nonattest client in an IRS examination.
Which of the following would be considered an analytical procedure?
A.
Projecting a deviation rate by comparing the results of a sample with the actual population characteristics.
B.
Evaluating management’s plans for dealing with the adverse effects of recurring operating losses.
C.
Developing the current year’s expected net sales based on the entity’s sales trend of prior years.
D.
Examining a sample of paid vendors’ invoices for proper approval by an authorized supervisor.
Developing the current year’s expected net sales based on the entity’s sales trend of prior years is an analytical procedure.
Which of the following would be considered an analytical procedure?
A.
Projecting a deviation rate by comparing the results of a sample with the actual population characteristics.
B.
Evaluating management’s plans for dealing with the adverse effects of recurring operating losses.
C.
Developing the current year’s expected net sales based on the entity’s sales trend of prior years.
D.
Examining a sample of paid vendors’ invoices for proper approval by an authorized supervisor.
Developing the current year’s expected net sales based on the entity’s sales trend of prior years is an analytical procedure.
An accountant has been engaged to compile the financial statements of a nonpublic entity. The financial statements contain many departures from GAAP because of inadequacies in the accounting records. The accountant believes that modification of the compilation report is not adequate to indicate the deficiencies. Under these circumstances, the accountant should:
Withdraw from the engagement and provide no further service concerning these financial statements
PBAOB responsibilities:
- Process registration of audit firms that audit issuers
- Inspect / review audit engagements
- Establish audit/ quality control of audits
But can’t prosecute violations. That’s the job of the department of justice
When financial statements that an accountant has compiled in accordance with Statements on Standards for Accounting and Review Services omit substantially all disclosures required by generally accepted accounting principles, the accountant’s report should include:
A.
Management’s justification for its decision to elect to omit substantially all the disclosures.
B.
No modification of the standard compilation report because compilations do not require disclosures that are required for audited financial statements.
C.
Information alerting readers about omission of the disclosures and notification that the omission may influence the user’s conclusions about the financial statements.
D.
A separate paragraph in the compilation report stating that the financial statements are misleading due to the lack of disclosures by management.
Information alerting readers about omission of the disclosures and notification that the omission may influence the user’s conclusions about the financial statements.
Which of the following statements is true regarding analytical procedures in a review engagement?
A.
Analytical procedures are not required to be used as a substantive test.
B.
Analytical procedures do not involve comparisons of recorded amounts to expected amounts.
C.
Analytical procedures are required to be used in the final review stage.
D.
Analytical procedures involve the use of both financial and nonfinancial data.
D. Analytical procedures involve the use of both financial and nonfinancial data.
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 blind trust.
B.
An investment held in a retirement plan.
C.
An investment held through a regulated mutual fund.
D.
An investment held through participation in an investment club.
A CPA in public practice must be independent in fact and appearance. Independence will be impaired if the CPA has a direct financial interest with an attestation client or a material indirect financial interest in a client. An indirect financial interest involves a removed relationship, such as owning shares in a mutual fund that owns stock in a corporate client.
Choices “B”, “A”, and “D” are incorrect. A direct financial interest is an interest held directly in a client. An interest in a client’s retirement plan or in a blind trust holding stock in a client would be considered a direct interest.
In reporting on internal controls, the Sarbanes-Oxley Act requires that the CEO and the CFO who sign the report assert that they have disclosed:
All significant internal control deficiencies to both the audit committee and the issuer’s auditors.
Compliance with the enhanced financial disclosures associated with issuer reports includes all the following details except:
A.
Management’s assessment of the effectiveness of internal control.
B.
Disclosure of the existence of an expert on the audit committee or why one does not exist.
C.
Verification of adoption of a code of ethics covering all employees.
D.
Disclosure of transactions with principal shareholders.
Issuers need not verify adoption of a code of ethics covering all employees. Issuers must disclose whether the issuer has adopted a code of conduct for senior officers. If no code of conduct has been adopted, the issuer must disclose the reasons.
According to the Sarbanes-Oxley Act (SOX), the assertions on financial reports that the CEO and the CFO must make regarding internal controls include all of the following, except:
Any identified internal control weaknesses will be rectified within 60 days after the report is issued.
B.
The controls have been evaluated for effectiveness within 90 days prior to the report issuance.
C.
The assurance that the controls were set up to ensure that material information is available.
D.
Conclusions as to the effectiveness of the controls per their evaluation
A. SOX does not require an assertion that any identified internal control weaknesses will be rectified within 60 days after the report is issued.
Corporate officers of issuers make a number of assertions regarding internal controls under the provisions of the Sarbanes-Oxley Act of 2002. Among those assertions is that internal controls are evaluated:
Under the Sarbanes-Oxley Act of 2002, internal controls must be evaluated within 90 days prior to the issuer’s report.
For an investor who has a 20% ownership stake in the sole class of equity for a company, all of the following statements regarding the filing statement disclosure (per SOX) are correct, except:
A.
A filing statement is needed when ownership changes.
B.
Disclosures are required for both direct and indirect equity ownership.
C.
A filing statement is required upon registration.
D.
The disclosure requirement is applicable once the investor reaches a 5% ownership level.
D. The requirement for a filing statement is applicable once the investor reaches a 10% ownership level.
Under Title IV of the Sarbanes-Oxley Act (SOX), disclosures found in an issuer’s annual financial statements will likely include all of the following, except:
A.
Relationships with subsidiary entities that are not consolidated in the parent’s financials.
B.
The usage of special purpose entities (SPEs).
C.
All correcting adjustments identified by external auditors.
D.
Reconciliation of pro forma financials with GAAP basis financial statements.
C. The requirement is that all material correcting adjustments identified by the auditor be reflected in the financial statements. Immaterial adjustments are not required.
In which of the following circumstances would a covered member’s independence be impaired with respect to a nonissuer client?
A.
The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.
B.
The member is designated to serve as guardian of a friend’s children if the need arises, and the friend’s estate, which would be held in trust for the children, holds significant stock ownership in a client entity.
C.
The member belongs to a client golf club that requires members to acquire a share of the club’s debt securities.
D.
The member’s spouse qualifies because of geographical residence to belong to a client’s credit union, and all transactions with the credit union are conducted under normal operating practices.
A. Although the bonds are not material in relation to the member’s total wealth, independence is still impaired because the ownership of the bonds represents a direct financial interest in the client and a violation of the Independence Rule.
Compilation report
SSARS does not require that the compilation report be printed on the accountant’s letterhead, nor does it require a manual signature. Although a signature is required, it need not be manual. Also, the report may be presented in the accountant’s letterhead, but is not required.
Financial statements of a nonissuer that have been compiled should be accompanied by a report explicitly stating that the accountant does not express an opinion and stating that the accountant has not audited or reviewed the financial statements.
The report should state that the accountant does not express an opinion on the financial statements.
You MAY say you are not independent IF you are not independent. Optional.
Compilation
Do you need to add a section on the report saying that all disclosures are included in the FS?
An accountant compiles the financial statements of a nonissuer and issues the standard compilation report. Although not specifically stated in this report, it is implied that:
A.
Substantially all disclosures required by GAAP are included in the financial statements.
Attest vs non attest engagements
Attest: review, compilation, audit
Non attest: preparation
Compilation / departures
An accountant performing a compilation or review of the financial statements of a nonissuer should:
A.
Be able to justify departures from SSARS.
