Deck 13: Duties of Public-Company Auditors: the Sarbanesoxley Act

Question 1

The concurring auditor who serves as the quality control reviewer on an audit engagement:

A) Must be an audit partner in the CPA firm that is performing the audit
B) May be either an audit partner in the CPA firm that is performing the audit or an experienced CPA associated with another CPA firm
C) Must be an experienced and knowledgeable CPA who is associated with a CPA firm other than the CPA firm that conducted the audit
D) Must be appointed by the PCAOB from a list of qualified accounting professionals

Answer 1

B

Question 2

The best argument against mandatory audit firm rotation is that:

A) Audit fees will tend to increase when a highly qualified and experienced auditor is arbitrarily forced to stop serving an audit client
B) It will lead to undignified competition as unprincipled successor auditors reviewing a predecessor auditor's work will be publicly critical of the predecessor to bolster their own reputations
C) The "learning curve" efficiencies achieved by the first audit firm will be sacrificed when a new, inexperienced successor auditor is appointed
D) The ethical leadership provided by large CPA firms will be diluted by the market entrance of newer, more aggressive competitors

Answer 2

C

Question 3

The PCAOB is:

A) A government-run entity
B) A division of the AICPA
C) Not a division of the AICPA, but it is overseen by the AICPA
D) A nongovernmental entity that is overseen by the SEC

Answer 3

D

Question 4

Under the Sarbanes-Oxley Act,the establishment of Codes of Conduct by publicly traded companies became:

A) Largely irrelevant due to the mandates imposed by stock exchanges
B) Largely irrelevant because the law itself imposed strict rules of conduct on publicly traded companies
C) Standardized in form and substance, utilizing the uniform rules expressed in the law
D) Widespread

Question 5

Under the Sarbanes-Oxley Act,the use of a concurring audit partner on an audit engagement for a company regulated by this Act is:

A) Mandatory, under all circumstances
B) Mandatory, only if the audit client has been cited by the SEC for failing to present its financial statements in conformity with GAAP during the preceding five-year period
C) Recommended, but optional as long as the absence of a concurring partner is disclosed to the SEC
D) Recommended, but optional as long as the absence of a concurring partner is disclosed as an integral part of the audit client's financial statements

Question 6

Registration with the PCAOB requires CPA firms to:

A) Pay a substantial one-time only fee
B) Submit to periodic PCAOB quality control inspections of their federal tax compliance practices
C) Submit annual reports to the PCAOB that identify their audit clients and fee structures
D) Submit to periodic PCAOB quality control inspections that are disseminated to the firm's audit clients

Question 7

After a CPA has served as the lead partner on an audit client for five years,that audit partner may:

A) Resume providing audit services to that client after a gap in service of one year
B) Resume providing audit services to that client after a gap in service of five years
C) Become the concurring partner, and later return to become the lead audit partner after a gap in service as the lead audit partner of one year
D) Become the concurring partner, but never again serve as the lead audit partner

Question 8

The PCAOB:

A) Is entirely independent of the AICPA
B) Appoints the members of the AICPA's governing board, but otherwise is independent of the AICPA
C) Frequently is criticized for developing financial accounting standards that are more complex than those established by the FASB
D) Legally has the power to override the AICPA when their areas of jurisdiction conflict or overlap

Question 9

Some commentator advocate in favor of audit firm rotation:

A) To minimize the management participation threat
B) To give new CPA firms the opportunity to expand and create employment opportunities for inexperienced accountants to gain valuable professional skills
C) As a safeguard against the familiarity threat
D) As a safeguard against auditor fee gouging

Question 10

An audit partner has served as the lead audit partner on a client engagement for the past eight years.Which of the following is most likely to arise?

A) The management participation threat
B) The familiarity threat
C) The self-review
D) All of the above

Question 11

The PCAOB is:

A) A self-regulatory body
B) A regulatory body that solely is in charge of developing standards that govern audits of publicly traded companies
C) A regulatory body that, jointly with the AICPA, develops auditing standards that govern audits of publicly traded companies
D) A regulatory body that sets and, when necessary, enforces ethical standards for all CPAs

Question 12

Which the following is a "reportable event," as that term is defined in the Sarbanes-Oxley Act?

A) A CPA firm partner successfully is sued a lender for failing to pay principal and interest on her home mortgage
B) A CPA firm audit partner is successfully prosecuted by local authorities for domestic violence
C) A CPA firm partner is sued by a former client for committing audit malpractice
D) All of the above

Question 13

Which of the following categories of CPA firm professionals must discontinue providing auditing services to an audit client after serving that client for a five-year consecutive period?

A) Only the lead audit partner
B) Only the lead partner and the concurring audit partner
C) The lead audit partner, the concurring audit partner, and all other CPA firm partners who provided nonaudit services to the client
D) Any CPA firm professional associated with, or employed by, the CPA firm

Question 14

Which of the following is least likely to arise if the same audit partner repeatedly serves as the lead auditor on a client engagement for multiple years?

A) The undue influence threat to independence
B) Subordination of judgment
C) The adverse interest threat to independence
D) A loss of objectivity

Question 15

An Audit Committee must:

A) Be comprised solely of independent individuals who do not have direct financial interests in the company they serve
B) Be comprised solely of independent individuals who are not members of the corporation's Board of Directors
C) Be comprised solely of individuals who also serve as company directors
D) Approve the core accounting methods selected and applied by the company's auditors in presenting company financial statements

Question 16

Registration with the PCAOB is required of:

A) All CPA firms that wish to audit publicly traded companies
B) All CPA firms that wish to provide any type of professional services to publicly traded companies, including management consulting services
C) All CPA firms that wish to design information processing systems that assist publicly traded companies in compiling their financial statements
D) All CPA firms that perform audits

Question 17

Under the Sarbanes-Oxley Act,the decision whether to have a concurring audit partner on an audit engagement,in addition to the lead audit partner,is:

A) A decision that solely is made by the audited company's Audit Committee
B) A decision that is made solely by the lead audit partner
C) A decision that is made jointly by the audited company's Audit Committee, in consultation with the lead audit partner
D) A compulsory provision in the law

Question 18

The Sarbanes-Oxley Act requires that publicly traded companies:

A) Adopt formal policies that prohibit them from granting employees exemptions from company "conflict of interest" rules
B) Decide "conflict of interest" issues based on an employee's individual facts and circumstances, rather than based on arbitrary guidelines
C) Disclose decisions concerning employee "conflict of interest" waiver requests on the company's website or in some other widely accessible format
D) Disclose to the SEC the rationale for any decisions that waive the application of their "conflict of interest" in a particular situation

Question 19

Most audit partners at CPA firms are compensated based on the gross billings or net CPA firm profits generated by the audit clients that they serve.As a result,when an audit partner serves a particular client for an extended period of time,which of the following threats is most likely to arise?

A) The self-interest threat
B) The advocacy threat
C) The adverse interest threat
D) The self-review threat

Question 20

In accordance with Sarbanes-Oxley Act,employee Codes of Conduct should:

A) Promote employees' responsibilities to preserve the confidentiality of company financial information
B) Be disclosed on a company website or in SEC filings
C) Be signed annually, or more frequently, by company officers engaged in financial reporting oversight roles
D) Be acknowledged annually in writing by all managerial and professional employees

Question 21

What types of organizations are subject to the mandates of the Sarbanes-Oxley Act?

Question 22

Under the Sarbanes-Oxley Act,loans to top corporate officers:

A) Cannot be made by a publicly traded company under any circumstances
B) Must bear a fair market interest rate if their employer is a publicly traded company
C) May not be made directly by their employer if the employer is a publicly traded company, but the employer may serve as a co-signer or guarantor on a loan granted to them by a bank
D) May be made by significant company shareholders in publicly traded companies as long as these loans satisfy the law's "commercially reasonable terms" requirement

Question 23

Under Sarbanes-Oxley,the CEO and CFO of publicly traded companies have to certify:

A) Company compliance with the Uniform Code of Conduct
B) That company financial statements accurately disclose all pending litigation claims and the estimated dollar amount of expected losses, if material
C) The effectiveness of the company's internal controls
D) That they have no known or foreseeable conflicts of interest with corporate goals and policies

Question 24

If a publicly traded corporation misstated its accounting filings to the SEC,which of the following is given the right under the "clawback" provision of the Sarbanes-Oxley Act to reclaim profits earned by the company's CEO?

A) Only the company itself
B) Only the shareholders who can prove that they suffered financial harm
C) Only the corporate financial officers who can prove that they suffered reputational harm
D) All of the above

Question 25

Should stockholders of a company be permitted to serve on a company's Board Directors? Should stockholders of a company be permitted to serve on a company's Audit Committee?

Question 26

Under the Sarbanes-Oxley Act,which of the following services is a CPA prohibited from providing to his or her CPA firms' audit clients?

A) Tax return preparation services to the audit client, under all circumstances
B) Tax return preparation services to the audit client, even if the client's Audit Committee preauthorizes these services
C) Tax return preparation services of personal tax returns for key officers of the audit client
D) Tax planning services that assist management in developing tax-minimization strategies

Question 27

What is a "reportable event"? Who receives submissions of reportable events?

Question 28

If a junior staff member on an audit team wishes to accept employment in a junior staff accounting role at the audit client,she:

A) Does not have to wait at all
B) Has to wait at least one year if the audit client is a publicly traded company
C) Has to wait at least one year if the audit client is either a publicly traded company or a privately held company
D) Has to wait at least one year if her new position likely will require her to interact with colleagues with whom she worked at her former employer

Question 29

If a publicly traded corporation misstated its accounting filings to the SEC,the "clawback" provision in the Sarbanes-Oxley Act gives the corporation the right to recover certain gains and profits earned by:

A) The CPA or CPA firm that performed the company's audit
B) The lead audit partner and concurring quality review partner who certified the company's financial statements
C) The particular employee or employees who directly made the accounting error
D) The CEO and CFO of the corporation

Question 30

A publicly traded company files a Form 8K with the SEC:

A) Monthly, after it has been audited
B) Quarterly, after a CPA has performed a review
C) Annually, after a CPA has performed an audit
D) Occasionally, but not according to a fixed schedule

Question 31

Which of the following provisions of the Sarbanes-Oxley Act applies to nonprofit organizations?

A) The document destruction rules
B) The whistleblower reward and incentive provisions
C) The Audit Committee rules
D) The Form 8K filing rules

Question 32

Under the Sarbanes-Oxley Act,a CFO may:

A) Delegate the task of certifying company financial statements to the company's designated Chief Compliance Officer
B) Delegate the task of certifying company financial statements to the company's top accounting executive, commonly called the Controller of the Chief Accounting Officer
C) Delegate the task of certifying company financial statements to one or more heads of company subsidiaries or divisions through the use of subcertifications
D) Not delegate the responsibility for certifying company financial statements

Question 33

Under the Sarbanes-Oxley Act,tax professionals who are partners or employees of CPA firms may:

A) Never provide tax return preparation services to publicly-traded clients
B) Provide tax return preparation services to publicly-traded clients, even if their CPA firms also provide auditing services to these clients
C) Never represent clients in IRS audits if they also were involved in the preparation of the tax return that is under IRS examination
D) Never advocate on behalf of clients in an IRS administrative hearing

Question 34

Provisions of the Sarbanes-Oxley Act apply to:

A) Only the officers of publicly-traded companies only
B) Only the CEO and CFO of publicly-traded companies
C) Publicly-traded companies and certain individuals associated with them
D) All companies and certain individuals associated with them

Question 35

Who may serve on an Audit Committee?

Question 36

In accordance with the Sarbanes-Oxley Act's clawback provisions,amounts recovered are collected by:

A) The SEC, on a net-of-tax basis
B) The SEC, without adjustment for tax considerations
C) The company itself
D) The executive who suffered the clawback's financial injury

Question 37

Under the Sarbanes-Oxley Act,who may pursue an anti-retaliation claim against a company officer who allegedly has retaliated against a whistleblower?

Question 38

If a publicly traded corporation misstated its accounting filings to the SEC,the "clawback" provision in the Sarbanes-Oxley Act gives the corporation the right to recover:

A) Dividends earned by the company's CEO and CFO
B) Interest earned by the company's CEO and CFO
C) Capital gains earned by the company's CEO and CFO on stock bought within 12 months after the date of the misstated financial statements
D) Capital gains earned by the company's CEO and CFO on stock realized by sale within 12 months after the date of the misstated financial statements

Question 39

If a publicly traded corporation misstated its accounting filings to the SEC,the "clawback" provision in the Sarbanes-Oxley Act gives the corporation certain rights to recover:

A) Profits earned from the exercise of stock options by the company's CEO and CFO only
B) Profits earned from the exercise of stock options by all of the company's officers who serve in financial reporting oversight roles
C) Profits earned from the exercise of stock options by all of the company's officers and directors who serve in financial reporting oversight roles
D) Profits earned from the exercise of stock options by all company personnel who were involved in the preparation of, or content determination of, the company's financial statements

Question 40

Under the Sarbanes-Oxley Act,tax professionals who are employees or partners of auditing firms may not provide:

A) Tax return preparation services if the results of those services will be utilized in determining Tax Expense on the client's audited financial statements
B) Tax return preparation services unless the provision of these services is first preapproved by the client's Audit Committee
C) Tax return preparation services unless the provision of these services is first preapproved by the client's CFO
D) Tax return preparation services unless the provision of these services is first preapproved by the client's Board of Directors

Question 41

What is the "one-year waiting period" rule established by Sarbanes-Oxley? Do you believe that the scope of this rule is adequate?

Question 42

Do you agree or disagree with the concept of mandatory audit firm rotation? Why or why not?

Question 43

What provisions of the Sarbanes-Oxley Act pertain to nonprofit charitable organizations? Do you believe that other provisions should also apply?

Question 44

Do any provisions of the Sarbanes-Oxley Act pertain to tax accounting professionals?

Question 45

Under the Sarbanes-Oxley Act,what tax services may a CPA firm provide to a publicly-traded audit client? Does the performance of both tax services and auditing services to a client pose a threat to the auditor's objectivity?