Auditing and Assurance Training Professional Standards and Ethics in Auditing 1 — Questions and Answers
Question 1: The AICPA Code of Professional Conduct requires a CPA to be independent in both fact and appearance primarily because:
- Independence reduces audit fees
- It enhances the credibility and usefulness of the auditor's report to financial statement users (Correct answer)
- It is required only for tax engagements
- Independence eliminates all risk of audit failure
Correct answer: It enhances the credibility and usefulness of the auditor's report to financial statement users
Independence — both mental (in fact) and in appearance — is essential for users to trust that the auditor's opinion reflects an unbiased assessment of the financial statements.
Question 2: Under PCAOB Rule 3526, audit firms must communicate to the audit committee regarding independence at:
- Only when an independence violation is discovered
- At least annually and before accepting the engagement (Correct answer)
- Every quarter during the audit
- Only upon request by the audit committee
Correct answer: At least annually and before accepting the engagement
PCAOB Rule 3526 requires firms to communicate all relationships that may reasonably bear on independence to the audit committee both prior to and on an annual basis during the engagement.
Question 3: The Sarbanes-Oxley Act of 2002 established the PCAOB with authority to oversee:
- All CPA firms, regardless of client type
- Auditors of public companies registered with the SEC (Correct answer)
- State CPA licensing boards
- International auditing standard setters
Correct answer: Auditors of public companies registered with the SEC
The PCAOB was created by SOX to register, inspect, and discipline auditors of SEC-registered public companies, addressing the oversight gaps exposed by Enron and other scandals.
Question 4: An auditor who owns even a small financial interest in an audit client has most likely violated which fundamental principle?
- Confidentiality
- Professional competence
- Independence (Correct answer)
- Objectivity in tax services
Correct answer: Independence
Owning any direct financial interest in an audit client impairs independence under both AICPA and SEC rules, regardless of the size of the investment.
Question 5: Which body sets auditing standards for audits of private (non-public) companies in the United States?
- PCAOB
- SEC
- AICPA Auditing Standards Board (ASB) (Correct answer)
- FASB
Correct answer: AICPA Auditing Standards Board (ASB)
The AICPA's Auditing Standards Board issues Statements on Auditing Standards (SAS) that govern audits of non-public entities; PCAOB standards apply to public company audits.
Question 6: Rotating the lead engagement partner every how many years is required under PCAOB independence rules for public company audits?
- 3 years
- 5 years (Correct answer)
- 7 years
- 10 years
Correct answer: 5 years
PCAOB Rule 3600T and SEC rules require lead engagement partners to rotate off a public company audit after five consecutive years of service.
Auditing and Assurance Training Professional Standards and Ethics in Auditing 1
The AICPA Code of Professional Conduct requires a CPA to be independent in both fact and appearance primarily because: