3
Q
Which regulations govern the preparation of compilation reports?
A
SSARS (Statements on Standards for Accounting and Review Services) regulates these reports.
Relevant for non-public companies.
4
Q
Why is professional skepticism essential for auditors?
A
Auditors apply professional skepticism to design the audit’s scope and define its objectives.
5
Q
What is necessary for an auditor to discuss a predecessor auditor’s work?
A
The auditor requires client consent to address issues related to the predecessor auditor’s work on past financial statements.
6
Q
What inquiries should an auditor make about assistants’ work?
A
- Were procedures executed properly? (Review work papers)
- Do outcomes align with the audit report?
7
Q
Identify the essential elements for preserving auditor impartiality.
A
- Must be unbiased in both fact and appearance
- Integrity
- No direct financial interests
- No significant indirect financial stakes
8
Q
What are the essential components of exercising due professional care in auditing?
A
- Possess skills equivalent to professional peers
- Adhere to GAAS guidelines
- Achieve reasonable assurance
- Maintain professional skepticism
- Oversee audit team
- Evaluate judgment consistently
9
Q
What steps must an auditor take before deciding to accept an audit engagement?
A
- Examine past financial reports
- Communicate with external parties
- Reach out to the previous auditor for insights (requires client consent)
Client approval is necessary to contact the predecessor auditor.
10
Q
List the inquiries an auditor should make before accepting an engagement.
A
- Reason for auditor change?
- Any significant discussions with the audit committee?
- Assessment of management’s integrity?
- Any disputes?
- Evaluation of internal controls?
Understand the industry or be open to learning.
Consider limitations on scope.
Limited evidence = no engagement
Client permission is required to contact the previous auditor.
11
Q
What elements should be included in a written audit engagement agreement?
A
- Objectives of the audit
- Engagement limitations
- Management’s responsibilities, including written assertions
- Auditor’s responsibilities, including limited error/fraud liability
- Expectations for record access
- Management’s duty for financial statements and disclosures
- Compliance with legal requirements
- Internal control considerations
The agreement must be documented in writing.
12
Q
What are the quality control procedures that CPA firms with audit practices must carry out?
A
- Leadership sets a quality-focused tone
- Policies and procedures are monitored and documented
- Adherence to ethical standards
- Continuous evaluation of client engagements for integrity, competence, and legality
- Employ competent and ethical staff
- Ensure engagements meet professional standards and regulations
13
Q
What regulations apply to the preparation of financial statements for non-public entities?
A
SSARS (Statements on Standards for Accounting and Review Services) oversee this process.
Specifically for non-public entity reporting.
14
Q
Is independence necessary for compilation services?
A
- Independence is not a requirement.
- Internal controls are not assessed.
- No assurance is provided.
15
Q
What level of assurance does a compilation engagement offer?
A
A compilation engagement provides no assurance.
16
Q
What assurance type is associated with review services?
A
Reviews give negative assurance.
17
Q
What independence criteria apply to review engagements?
A
- Independence is mandatory.
- No evaluation of internal controls.
- Conducts analytical procedures.
- Avoid significant indirect financial interests.
- No minor direct financial interests.
18
Q
What industry knowledge must a service provider possess for compilations and reviews?
A
Service providers need a comprehensive understanding of the client’s industry.
19
Q
Define attestation services.
A
CPAs deliver a conclusion on an assertion.
- Must comply with legal standards
- Not classified as consulting
- Independence is essential
20
Q
Are consulting services subject to independence requirements?
A
Independence is not required for consulting engagements.
21
Q
Which organization is responsible for creating the International Auditing Standards?
A
The International Auditing and Assurance Standards Board (IAASB), part of the International Federation of Accountants (IFAC), develops these standards.
22
Q
Who are the intended users of IAASB International Auditing Standards?
A
These standards are designed for countries without their own standards, guiding members like the AICPA.
IAASB does not supersede existing member standards.
23
Q
What audit methodology is emphasized by IAASB standards?
A
IAASB standards emphasize a risk-based audit methodology.
24
Q
How do IAASB audit standards differ from US audit standards?
A
- No audits of Internal Controls
- Prohibits referencing other audit firms
- Requires fraud assessment in writing
- Less detailed documentation requirements
- Specifies auditor’s home office location
IAASB standards are internationally recognized, while US standards are primarily for domestic use.
25
Q
Who establishes International Ethical Standards for accountants?
A
The International Ethics Standards Board for Accountants (IESBA) sets these standards, akin to the AICPA Code of Professional Conduct.
26
Q
Identify the groups targeted by the sections of International Ethical Standards.
A
- Section A: All accountants
- Section B: Public accountants
- Section C: Accountants in business environments
27
List the fundamental principles for accountants under the International Ethical Standards.
- Integrity
- Objectivity
- Competence
- Due Care
- Confidentiality
- Professionalism
28
What self-assessment questions should public accountants ask regarding ethics per the International Ethical Standards?
- What are the **threats and safeguards**?
- Could this new client **threaten ethics**?
- What are the **conflicts of interest**?
- What safeguards exist for **second opinions**?
- How do **commissions or fees** affect ethics?
- Is our **marketing truthful**?
- What are the impacts of **receiving gifts**?
- Are there threats to **objectivity**?
29
Which professional activities fall under the AICPA Code of Professional Conduct?
The code applies to **all professional engagements** and sets a minimum conduct standard.
## Footnote
Members should adhere to specific standards for particular engagements.
30
What ethical attributes must an accountant possess according to the AICPA Code?
- **Integrity**
- **Objectivity**
- Avoid **conflicts of interest**
- No **misrepresentation** of facts
- No **outsourcing** of judgment
31
How should independence be evaluated concerning threats and safeguards?
Independence is maintained when **safeguards outweigh threats**; otherwise, independence is compromised.
32
What are potential threats to an auditor's independence?
- **Self-review**: Auditing own work
- **Advocacy**: Supporting a client
- **Adverse interest**: Legal disputes with a client
- **Familiarity**: Excessive closeness to a client
- **Undue influence**: Board membership, excluding honorary roles
33
What measures ensure auditor independence?
Mitigation of threats.
- Established by Legislation (e.g., SOX)
- Client actions (Audit Committee involvement)
- Firm policies and procedures
34
Identify the traits of a Covered Member in an audit.
- Part of the audit team
- Holds significant influence over the audit, like:
- Reviewing Partner
- Managing Partner at the CPA firm
- Personnel doing over 10 hours of non-attest work (e.g., tax services)
- Partner sharing office with another Partner on the engagement
- Holds financial interest in the client (e.g., auditor involved in audit)
35
What are the prohibitions for a Covered Member?
Restrictions for a Covered Member:
- No direct financial stake
- No significant indirect financial stake
- Firm staff not being Covered Members can't own over 5% of client stock
- Immediate family of Covered Member can't own over 5% of stock or hold key positions
- Awareness of these breaches by the Covered Member impairs independence
- Management decisions are off-limits
## Footnote
These rules apply during the engagement period and while the client relationship exists.
36
What should a Covered Member do if disagreeing with a superior?
If the supervisor's stance complies with GAAP/GAAS, defer to them.
If it doesn’t, escalate the issue to higher management.
If management ignores the issue, consider resigning from the firm.
37
In which engagements is independence a necessity?
Independence is mandatory for:
- Audit
- Review
- Attestation Engagement
38
What are the criteria for nonattest engagements?
Criteria for nonattest engagements:
- Everything must be documented
- Client must handle all management tasks
- Client must appoint a competent individual to oversee the engagement, and the CPA must confirm this
- Engagement must have clear objectives
- Any limitations must be communicated
- An understanding must be reached and documented before beginning
- If multiple nonattest functions are performed, they must be reviewed collectively for independence impairment
39
Which standards govern consulting engagements?
Consulting engagements follow the *Statements on Standards for Consulting Services* (**SSCS**).
Requirements:
- Skill
- Due diligence
- Planning
- Oversight
- Gather adequate data
- Act in client’s best interest
- Agreement must be written or oral, with client communication
40
List common types of consulting engagements.
- Advisory Services
- Transaction Services
- Management Consulting
- Implementation Services
41
What is the rule on contingent fees for a Covered Member?
Contingent fees are prohibited if the member also provides services where independence is required.
Commission or referral fees for Covered Members are not permitted.
## Footnote
Example: An audit firm receiving a commission for recommending a new Accounts Payable System to a client is not allowed.
42
Under what circumstances are contingent fees permissible?
Contingent fees are permissible when linked to judicial proceedings.
## Footnote
Example: IRS audit or amending a tax return due to a tax case with another taxpayer.
43
How should a CPA's recommendations to a client be managed?
The client must execute them and cannot delegate management tasks to the CPA. A competent individual should oversee the engagement, and the CPA must confirm this oversight.
44
List the essential criteria for Personal Financial Planning Engagements.
- Clear objectives
- Planned specific procedures
- Basis for recommendations
- Communication of recommendations
- Steps for implementation
45
When is it permissible to deviate from GAAP?
If adhering to GAAP results in misleading financial statements, a deviation is allowed and must be disclosed.
46
In what situations can a CPA disclose confidential client information?
- When the client is not complying with GAAP
- Upon receiving a subpoena
## Footnote
Note: CPA-client privilege does not exist, unlike attorney-client privilege.
47
What happens if a CPA does not return all client-provided documents?
It is considered an act discreditable. All client documents must be returned, regardless of payment status. Work papers created by the CPA are not required to be returned if the client has not paid.
48
What are the guidelines regarding CPA firm names?
Names must not be misleading. If a partner dies, the name must change within two years if the partnership dissolves. If multiple partners remain, no change is needed. All partners must be AICPA members; 2/3 ownership must be CPAs. Non-CPA owners must adhere to AICPA conduct codes.
49
What is the result of revealing CPA exam content?
It is classified as an act discreditable.
50
What are the repercussions for a CPA committing an act discreditable?
- State revocation of certificate results in an AICPA ban
- Felony conviction leads to an AICPA ban
- Submitting a fraudulent tax return incurs an AICPA ban
- Intentionally failing to file a tax return results in an AICPA ban
## Footnote
The SEC may also impose disciplinary actions.
51
What roles does the PCAOB fulfill?
The PCAOB oversees CPA firms auditing SEC clients and sets standards for these firms, which are generally more stringent than AICPA standards.
52
When is a CPA's independence compromised under PCAOB guidelines?
- If the client pays a contingent fee
- During marketing or planning engagements
- With aggressive tax strategies
- If the firm provides tax services to an employee involved in audit oversight or their family
53
Who must approve non-audit services performed by a CPA firm for a client?
The client's audit committee must approve, and the firm must disclose any potential independence issues to the committee.
54
Which body is responsible for assessing the misuse of federal funds?
The Government Accountability Office (GAO)
55
What standards must auditors adhere to for governmental audits?
- Follow both GAAS and GAS (Yellow Book)
- Lower materiality thresholds
- More detailed working papers
- Stricter CPE requirements, with 24 hours of government audit-related education every two years
- Audit report must include compliance with regulations
56
Can a non-issuer request an audit under PCAOB standards?
Yes, and the audit must also comply with GAAS, which must be stated in the report.
57
What is the PCAOB's primary role?
To oversee the audits of public companies to protect investors.
## Footnote
The Public Company Accounting Oversight Board (PCAOB) was established by the Sarbanes-Oxley Act of 2002 and is responsible for setting auditing standards and conducting inspections of registered public accounting firms.
58
# True or False:
PCAOB can impose penalties on auditors for non-compliance.
TRUE
## Footnote
The PCAOB has the authority to impose disciplinary actions, including fines and suspension, on auditors and audit firms that violate established auditing standards or fail to comply with PCAOB rules.
59
List three potential penalties the PCAOB can impose on auditors.
* Monetary fines
* Suspension of auditing privileges
* Revocation of registration
## Footnote
Penalties aim to enforce compliance and maintain high ethical and professional standards in auditing.
60
# Define:
ethical dilemma
| (in the context of non-audit services)
A situation where a conflict arises between ethical principles and business interests.
## Footnote
In accounting, ethical dilemmas often occur when services like tax advocacy might impair an auditor's objectivity or independence.
61
What is the primary concern with providing non-audit services like tax advocacy?
Impairment of auditor independence.
## Footnote
Providing non-audit services can create conflicts of interest, potentially compromising the objectivity and impartiality required in auditing.
62
# Fill in the blanks:
The IESBA Code of Ethics primarily guides accountants in maintaining \_\_\_\_\_\_ and \_\_\_\_\_\_.
integrity and objectivity
## Footnote
The International Ethics Standards Board for Accountants (IESBA) Code is designed to ensure that accountants adhere to ethical principles, including integrity, objectivity, professional competence, confidentiality, and professional behavior.
63
What does IESBA stand for?
International Ethics Standards Board for Accountants
## Footnote
IESBA develops international standards for ethics and independence for professional accountants, ensuring uniform ethical practices across the globe.
64
Name one key principle from the IESBA Code of Ethics.
Integrity
## Footnote
Integrity is a foundational principle, requiring accountants to be straightforward and honest in all professional and business relationships.
65
# True or False:
Tax advocacy is considered a non-audit service under PCAOB rules.
TRUE
## Footnote
Non-audit services, like tax advocacy, may pose risks to auditor independence, requiring careful consideration and compliance with relevant ethical guidelines.
66
What is one potential ethical issue when an auditor provides tax advocacy services?
Conflict of interest
## Footnote
This occurs when the auditor's ability to remain objective is compromised due to competing interests between audit responsibilities and advocacy roles.
67
List two actions the PCAOB might take during an enforcement proceeding.
* Conduct investigations
* Hold hearings
## Footnote
These actions help ensure compliance with auditing standards and address any violations by registered audit firms or individuals.
68
How does the IESBA Code guide accountants in handling conflicts of interest?
By requiring disclosure and management of conflicts to maintain objectivity.
## Footnote
Accountants must identify, evaluate, and address conflicts of interest to ensure their professional judgment is not compromised.
69
What is one way ethical compliance is ensured in non-audit services?
Implementing strict independence policies.
## Footnote
Policies and procedures are established to prevent conflicts of interest and maintain the impartiality of audit services.
70
# Fill in the blank:
The primary objective of PCAOB enforcement actions is to protect \_\_\_\_\_\_.
investors
## Footnote
By ensuring that audit reports are reliable and accurate, PCAOB enforcement actions help maintain investor confidence in financial markets.
71
# True or False:
The IESBA Code is mandatory for all accountants worldwide.
FALSE
## Footnote
While widely adopted, the IESBA Code serves as a benchmark for ethical standards, and its adoption may vary based on local regulations and professional bodies.
