Professional Responsibilities and the AUD Test of the CPA Exam
The auditing and attestation (AUD) test of the CPA exam covers several areas related to your professional responsibilities as a CPA. One important regulatory area that is heavily tested is the concept of independence. The test often provides scenarios and asks whether the CPA described in the scenario is independent of the client.
Another area of responsibility that is growing in importance relates to companies that issue securities to the public. The Public Company Accounting Oversight Board (PCAOB) has oversight over companies that issue these types of securities. This section discusses the auditor’s responsibilities related to the PCAOB.
AICPA Rule 101 discusses independence. The first line of Rule 101 explains that a member in public practice (in the practice of accounting) must be independent in the performance of professional services. Independence is required for attestation engagements.
Here are some instances in which independence is considered to be impaired:
A CPA has a direct interest or an indirect material interest in the client. Material means large enough to be relevant.
A CPA is trustee of a trust or administrator of an estate that has a direct or indirect material interest in the client. This statement includes any investment in the client by the trust or estate.
A CPA has loaned money to the client or has taken a loan from the client.
CPA firm partners, employees, and family members of either partners or employees jointly own more than 5 percent of the client.
During the period covered by the financial statements, a CPA firm partner or employee was a company officer, director, manager, promoter, underwriter, voting trustee, or trustee of a company pension or profit-sharing plan.
Promoters and underwriters are involved in creating and selling a company’s securities to the public. If any of the preceding guidelines apply to the CPA firm, the firm is not independent of the client. The CPA firm’s independence is impaired. If the firm isn’t independent, that firm should not perform attestation engagements for the client.
CPAs are allowed to provide bookkeeping services for an audit client. Bookkeeping services do not impair an auditor’s independence.
The PCAOB was created by Congress to oversee the audits of public companies to protect the interests of investors. A public company sells securities (stocks and bonds) to investors. One major goal of the organization is ensure that audit reports are “informative, accurate, and independent.” The AUD test may ask questions related to PCAOB.
The PCAOB has standards for conducting audits and relating to auditor independence. Those standards are very similar to the standards already explained in this chapter. The PCAOB also has quality control standards.
These standards are put in place to ensure that competent people perform the audit and that the audit staff is properly supervised. Specifically, the audit firm needs a system to train and evaluate employees. The CPA firm needs a process to review the work performed by the audit staff.