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CPA AUD Vol 6 Actual Solution!!
What are the six principles of the AICPA Code of Professional Conduct? - Answers The six principles of the Code of Conduct are:
- Responsibilities
- Public interest
- Integrity
- Objectivity and independence
- Due care
- Scope and nature of services Under the AICPA Code of Professional Conduct, independence is impaired. - Answers 1. If a member has a direct financial interest with attestation clients without regard to materiality.
- If a member has a material indirect financial interest in the client.
- If a member or a member's immediate family member has a loan to or from the client.
- If a member accepts more than a token gift.
- If a member is an employee of or makes management decisions on behalf of the client.
- If the client is overdue more than one year in the payment of professional fees to the member.
- If there is actual or threatened litigation between the member and the client. Under the AICPA Code of Professional Conduct, when is independence impaired by employment relationships? - Answers Independence is impaired when:
- An individual who was formerly employed by the client participates on the engagement team or is in a position to influence the engagement when the engagement covers any period of his or her former employment with the client.
- An immediate family member or close relative is employed in a key position by the client.
- A partner or professional employee leaves the firm and is employed by the client in a key position, unless the individual is no longer in a position to influence or participate in a firm's business decisions and the amounts due to the individual are immaterial to the firm. Generally, independence rules apply to a covered member and their spouse and dependents. According to SEC rules, what independence rules apply to close relatives? - Answers According to SEC rules, independence is impaired if the close family member:
- has an accounting role or financial reporting oversight role with the SEC audit client (e.g., the family member is a treasurer, CFO, accounting supervisor, or controller); or
- Solicitation or disclosure of CPA Examination questions and answers.
- Failure to timely file a personal or firm tax return or to timely remit payroll or other taxes collected on behalf of others.
- Marketing a member's abilities to provide professional services or making claims about the member's experience or qualifications in a manner that is false, misleading, or deceptive.
- Member whose employment relationship is terminated and takes or retains (a) originals or copies (in any format) from the firm's client files; or (b) propriety information without the firm's permission, unless the member has a contractual arrangement with the firm allowing such action.
- Disclosing confidential information obtained from a prospective client or non-client without consent. According to the AICPA Code of Professional Conduct, a departure from GAAP may be justified under what circumstances? - Answers A departure from GAAP may be justified only if compliance with GAAP would cause the financial statements to be misleading According to the AICPA Code of Professional Conduct, in what circumstances must a CPA disclose confidential client information without the consent of the client? - Answers A CPA must disclose confidential information without client consent under the following circumstances:
- It is necessary to comply with a valid subpoena or summons.
- As part of a quality review of the CPA's professional practices authorized by the AICPA.
- In response to any inquiry made by the ethics division or the trial board of the AICPA, or by a duly-constituted investigative body of a state CPA society. According to the AICPA Code of Professional Conduct, when are contingent fees prohibited? - Answers Contingent fees are prohibited for:
- Audits of financial statements
- Reviews of financial statements
- Examinations of prospective financial information
- Preparing an original or amended tax return or claim for a tax refund According to the AICPA Code of Professional Conduct, when are contingent fees permitted? - Answers Contingent fees are permitted:
- For compilations of financial statements expected to be used by third parties only if the member includes a statement that the member is not independent.
- Fees are not regarded as being contingent when they are fixed by courts or other public authorities or in tax matters, if they are based on the results of court proceedings or the findings of governmental agencies (e.g., a contingent fee is permitted when representing a client in an examination of a tax return by an IRS agent.)
For example, a member experiences an adverse interest threat if he or she is commencing litigation against their client/employing organization. Define and provide an example of advocacy threat. - Answers The threat that a member will promote the client's or employing organization's interest to the point that his or her objectivity or independence, as applicable, is compromised. For example, a member experiences advocacy threat when he or she endorses a client's services or products. Define and provide an example of familiarity threat. - Answers The threat that, due to a long or close relationship with the client or employing organization, a member will become too accepting of the product or service and/or too sympathetic to the client's or employing organization's interests. For example, a member experiences familiarity threat when a close friend is employed by the client. Define and provide an example of management participation threat. - Answers The threat that a member will take on the role of client management or otherwise assume management responsibilities. For example, a member experiences management participation threat if he or she serves as an officer or a director of an attest client.
This threat exists for members engaged in attest engagements. This threat does not apply to members in business. Define and provide an example of self-interest threat. - Answers The threat that a member could benefit financially or otherwise from an interest in, or relationship with, a client, or employing organization or persons associated with the client or employing organization. For example, a self-interest threat occurs when a member is eligible for a profit or other performance-related bonus at the employing organization and the value of that bonus is directly affected by the member's decisions. Define and provide an example of self-review threat. - Answers The threat that a member will not appropriately evaluate:
- the results of a previous judgment made; or
- a service performed or supervised by the member; or
- an individual in the member's firm or employing organization; and
- that the member will rely on that service in forming a judgment as part of another service. For example, a member in public practice would experience self-review threat when performing bookkeeping services for a client. Define and provide an example of undue influence threat. - Answers The threat that a member will subordinate his or her judgment to an individual associated with a client or employing organization or any relevant
de minimis exception to the preapproval requirements of non-audit services provided that those services:
- do not aggregate to more than five percent of total revenues from the audit client during the fiscal year when services are provided.
- were not recognized as non-audit services at the time of the engagement, and
- are promptly brought to the attention of the audit committee and approved prior to the completion of the audit. Under SOX Title II, what services may not be provided to an audit client? - Answers Prohibited services include:
- Bookkeeping
- Financial information systems design and implementation
- Appraisal and valuation services
- Actuarial services
- Management functions and HR functions
- Internal audit outsourcing services
- Investment-related services
- Legal services
- Expert services unrelated to the audit
(Note: SEC Regulation S-X contains these same rules.) What are the audit partner rotation rules under SOX Title II and SEC Regulation S-X? - Answers - Both SOX and Regulation S-X require the lead and concurring partner to rotate off the audit every five years. Lead and concurring partners are subject to a five year "time out" period.
- Regulation S-X further requires other partners to rotate off every seven years. Other partners are subject to a two year "time out" period. What must be reported by the auditor to the audit committee under SOX Title II and SEC Regulation S-X? - Answers - Critical accounting policies and procedures used.
- Alternative accounting treatments discussed with management, the ramifications of alternatives, and the treatment preferred by the auditor.
- Material written communications between the auditor and management. What is the required cooling-off period under SOX Title II and SEC Regulations S-X? - Answers The audit firm cannot have employed an issuer's CEO, CFO, controller, CAO, or other employee in a financial reporting oversight role during the one year preceding the audit.
- an ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves
- experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities
- an understanding of internal controls and procedures for financial reporting
- an understanding of audit committee functions What areth e PCAOB's tax-related independence rules? - Answers - Registered firms may not provide confidential or aggressive tax transactions to audit clients.
- Registered firms may not provide tax services to corporate officers of audit clients or their immediate family members.
- Audit committee must preapprove tax services and related fees. Under the SEC's principles of independence, a client relationship or a service provided to an audit client would create independence issues if it; - Answers - Creates a mutual or conflicting interest between the auditor and client.
- Results in the auditor acting as management or an employee of the audit client.
- Places the auditor in a position of auditing his or her own work.
- Makes the auditor an advocate for the audit client. Explain the conceptual framework approach under IFAC's Code of Ethics and identify threats to compliance with its fundamental principles. - Answers IFAC's Code is based on a conceptual framework (versus a set of rules) that requires entities to identify, evaluate, and address threats to compliance with its fundamental principles. These threats include:
- Self-interest threat
- Self-review threat
- Advocacy threat
- Familiarity threat
- Intimidation threat How long must audit documentation be retained for issuers and nonissuers? - Answers PCAOB rules require that auditors retain audit documentation of public companies (issuers) for seven years from the report release date. SAS rules require that auditors keep audit documentation for nonissuers for at least five years from the report release date. The report release date is the date on which the auditor gives the client permission to use the report (often the date the report is delivered to the client.)
- Improved morale and productivity for audit team. Disadvantages:
- Audit documentation may not contain readily observable details of calculations. Describe "auditing around the computer" and identify when it is appropriate and not appropriate. - Answers When auditing around the computer, the auditor does not directly test the application program, but instead tests the input data, processes the data independently, and then compares independent results to the program results. This method is appropriate for simple batch systems that have a good audit trail. Auditing around the computer is not appropriate when there is insufficient paper-based evidence. List and briefly define the types of computer assisted audit techniques (CAATs) that may be used. - Answers Transaction tagging - electronically marks specific transactions. Embedded audit modules - sections of program code collect data for the auditor. Test data - use of the client's system to process the auditor's data off-line. Integrated test facility - use of the client's system to process the auditor's data, online. Parallel simulation - use of the auditor's system to re-process client data.
In conducting an audit of an organization receiving federal financial assistance, what additional audit procedures must be performed in addition to the general requirements of GAAS and GAGAS? - Answers These procedures performed under GAAS and GAGAS plus:
- The auditor should obtain and document an understanding of internal control established to ensure compliance with the laws and regulations applicable to the federal financial assistance.
- In some instances, tests of controls are mandated to evaluated the effectiveness of such controls. Audits of governmental entities may draw on up to three sets of standards or supplementary requirements. What are they and what are the circumstances that surround their application? - Answers Generally Accepted Auditing Standards (all audits) Generally Accepted Government Auditing Standards (Yellow Book audits): auditee is a government, or receives financial assistance from the government 2 CFR 200.500 (Single Audits of Federal Financial Assistance): an entity expending more than $750,000 in federal financial assistance annually Identify the additional auditor responsibilities associated with government audits under GAGAS. - Answers - Obtaining an understanding of how laws, rules, and regulations relate to financial statement amounts.
In conducting an audit of an organization under Generally Accepted Government Auditing Standards, what audit documentation, in addition to that required by Generally Accepted Auditing Standards, must also be included? - Answers Internal control documentation must include:
- Consideration of procedures that ensure the auditee's compliance with laws, rules, and regulations.
- Written representations from management with regard to management's identification of material laws, rules, and regulations; management's responsibility for ensuring compliance with laws, rules, and regulations; and management's knowledge of any violations that should be disclosed or recorded. When reporting on a client's internal control deficiencies and weaknesses under GAGAS, the auditor is required to perform which procedures? - Answers When reporting on a client's internal controls, the auditor must:
- obtain an understanding of the design of relevant controls and determine whether they have been implemented
- communicate all significant deficiencies noted during the audit, even those that do not result in material weaknesses
- prepare a written report on the auditor's understanding of the client's internal control and assessment of control risk
- report significant deficiencies to specific legislative and regulatory bodies. Note: The third and fourth bullet points are required for GAGAS, but not GAAS.
How does materiality under the Single Audit Act differ from materiality under GAAS and GAGAS? - Answers Under the Single Audit Act, materiality is considered in relation to each major program, not simply in relation to the financial statements. What are the two types of requirements surrounding federal financial assistance programs? - Answers - General requirements involve national policy and apply to most federal financial assistance programs.
- Specific requirements apply to a particular federal program and generally arise from statutory requirements. Material instances of noncompliance include: - Answers - Failure to follow requirements.
- Violations of rules contained in statues, regulations, contracts, or grants. Discovery of illegal acts requires specific written communication under different circumstances. Which parties may be notified? - Answers Any of the following may be notified of illegal acts.
- Top officials of entity
- Appropriate oversight/governance bodies
- Officials of the entity's audit organization
