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The PCAOB has the power to
Inspect large firms annually.
The PCAOB will inspect large firms annually and report violations to the SEC and state authorities. All attestation engagements, notably those in litigation, may be reviewed. The inspection also involves a quality control assessment. Furthermore, the inspection report must include the firm’s response. The firm then has twelve months to correct the reported weaknesses.
A firm performed an attest engagement to apply agreed-upon procedures to help KIG Co. determine whether it should acquire FTBL Co. FTBL is responsible for the information to which procedures were applied. Who most likely is not required to be independent of the responsible party?
The firm, if it designed the responsible party’s information system.
The following covered members and their immediate families must be independent in relation to the responsible party: (1) an individual on the attest engagement team; (2) an individual who directly supervises or manages the attest engagement partner; and (3) individuals who consult with the attest engagement team about technical or industry-related matters specific to the engagement. Independence also is impaired if the firm had a material relationship with the responsible party prohibited under Rule 101. Moreover, a firm may provide nonattest services to the responsible party that normally are prohibited under Rule 101, e.g., designing the financial information system. However, if they do not relate directly to the subject matter of the attest engagement, independence is not impaired.
The Sarbanes-Oxley Act of 2002 has strengthened auditor independence by requiring that management of a public company
Select auditors through audit committees.
The audit committee must hire and pay the external auditors. Such affiliation inhibits management from changing auditors to gain acceptance of a questionable accounting method. Also, a successor auditor must inquire of the predecessor before accepting an engagement.
Fact Pattern: A CPA firm was purchased by a public company. The acquirer performs other professional services and has banking, insurance, and brokerage subsidiaries. The owners and employees became employees of a subsidiary. Also, the previous owners formed a new CPA firm that provides attest services. It leases employees, offices, and equipment from the parent, which also provides advertising, billing, and collection services.
Independence is not impaired when
A bank subsidiary in the consolidated group provides asset custody services in the ordinary course of business to an attest client of the new CPA firm.
.Other entities in the consolidated group and their employees may not be (1) promoters, (2) underwriters, (3) directors, (4) officers, or (5) voting trustees of an attest client. However, with these exceptions, indirect superiors and other consolidated entities may provide services to an attest client that a member could not without impairing independence. For example, a bank’s provision of trustee and asset custody services in the ordinary course of business does not impair independence if the bank is not subject to the independence rules in their entirety (e.g., because it is significantly influenced by a direct superior).
What most completely describes how independence has been defined by the accounting profession?
Possessing the ability to act with integrity and objectivity.
Integrity, objectivity, and independence are overlapping concepts. Integrity requires honesty and candor within the limits of confidentiality. It also requires, among other things, observation of the principle of objectivity and independence. Objectivity is impartiality, intellectual honesty, and freedom from conflicts of interest. Independence precludes relationships that “may appear to impair objectivity in rendering attestation services.” In rendering services, a member in public practice should therefore be independent in appearance as well as in fact.