CPA Regulatory Compliance & Standards 3 — Questions and Answers
Question 1: Under the AICPA independence rules, which of the following would most likely impair a CPA firm's independence when auditing a client?
- A covered member owns a mutual fund that holds 0.1% of the client's shares
- A covered member owns 5% of the client's voting stock directly (Correct answer)
- A staff accountant not on the engagement team has a checking account at a bank client
- A retired partner receives fixed retirement benefits unrelated to firm profits
Correct answer: A covered member owns 5% of the client's voting stock directly
Direct ownership of 5% of voting stock by a covered member constitutes a material financial interest that impairs independence.
Question 2: PCAOB Rule 3526 requires audit committee pre-approval of which of the following?
- All non-audit services provided to an audit client (Correct answer)
- Only tax services exceeding $50,000
- Only services provided by the engagement partner
- Services only when they exceed 10% of total audit fees
Correct answer: All non-audit services provided to an audit client
PCAOB Rule 3526 requires that auditors obtain pre-approval from the audit committee before providing any non-audit services to a public company audit client.
Question 3: When a CPA performs a compilation engagement, the report must include a statement that the accountant:
- Expresses limited assurance on the financial statements
- Has not audited or reviewed the financial statements (Correct answer)
- Confirms the statements are free of material misstatement
- Has tested internal controls over financial reporting
Correct answer: Has not audited or reviewed the financial statements
A compilation report states that the accountant has not audited or reviewed the statements and expresses no assurance.
Question 4: Under FASB ASC 840/842, which of the following distinguishes an operating lease from a finance lease under ASC 842?
- Operating leases never appear on the balance sheet under ASC 842
- Finance leases result in front-loaded total expense recognition; operating leases recognize straight-line expense (Correct answer)
- Finance leases are only used for real estate; operating leases for equipment
- Operating leases require the lessee to recognize interest expense separately
Correct answer: Finance leases result in front-loaded total expense recognition; operating leases recognize straight-line expense
Under ASC 842 finance leases produce front-loaded expense (interest + amortization), while operating leases recognize straight-line total lease cost.
Question 5: Which federal law prohibits CPAs from aiding in the preparation of a tax return they know will understate tax liability?
- IRC Section 6694 (Correct answer)
- IRC Section 6662
- IRC Section 7201
- IRC Section 6702
Correct answer: IRC Section 6694
IRC Section 6694 imposes penalties on tax return preparers who understate a taxpayer's liability due to unreasonable positions or willful conduct.
Question 6: Under the GAO Yellow Book (GAGAS), which type of independence standard applies to CPAs who provide both audit and non-audit services to a government entity?
- Independence in appearance only
- Independence in fact and appearance
- Conceptual framework independence standards (Correct answer)
- Modified independence standards for government entities
Correct answer: Conceptual framework independence standards
GAGAS uses a conceptual framework approach requiring CPAs to identify, evaluate, and apply safeguards to threats to independence.
Question 7: The SEC's Regulation S-X primarily governs which aspect of public company reporting?
- The form and content of financial statements filed with the SEC (Correct answer)
- Insider trading disclosures
- Proxy statement requirements
- Annual report narrative disclosures
Correct answer: The form and content of financial statements filed with the SEC
Regulation S-X prescribes the form, content, and requirements for financial statements included in SEC filings.
CPA Regulatory Compliance & Standards 3
Under the AICPA independence rules, which of the following would most likely impair a CPA firm's independence when auditing a client?