CEP Auditing Principles & Procedures 2

Question 1

When auditing an equity plan, which document serves as the primary authoritative source for verifying share reserve limits?

Accepted Answer

The plan document approved by shareholders

Answer

The shareholder-approved plan document establishes the legally binding share reserve and its terms govern all grants made under the plan.

Question 2

An equity auditor discovers that option grants were backdated to a date with a lower stock price. Which regulatory body's rules are most directly violated?

Accepted Answer

SEC and IRS

Answer

Backdating violates SEC disclosure rules (material misstatement) and IRS rules regarding the strike price requirement for ISOs and Section 409A compliance.

Question 3

During an audit, you find that an employee received an RSU grant but no related 83(b) election was filed. What is the correct audit conclusion?

Accepted Answer

No error exists because 83(b) elections do not apply to RSUs

Answer

Section 83(b) elections apply to restricted stock with a substantial risk of forfeiture, not to RSUs, which are taxed upon settlement.

Question 4

A dual-trigger RSA accelerates vesting only upon both a change in control AND termination without cause. When auditing this feature, what document must be reviewed?

Accepted Answer

The individual award agreement and the plan document

Answer

Both the individual award agreement and the plan document must be reviewed to confirm the dual-trigger language is consistently defined and enforceable.

Question 5

Which audit procedure best detects errors in the calculation of shares available for future grants?

Accepted Answer

Recalculating the share reserve rollforward from inception or last audit date

Answer

A reserve rollforward recalculation traces all grants, cancellations, forfeitures, and exercises to independently verify the remaining share balance.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Auditing Principles & Procedures 2