Auditing Principles & Procedures Flashcards
7 cards from real CEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Auditing Principles & Procedures flashcards as text
An equity auditor is testing whether Section 16 officers filed Form 4s timely. What is the standard filing deadline after a reportable transaction?
Answer: Two business days
Under SEC rules, Section 16 insiders must file Form 4 within two business days of a reportable transaction such as a grant, exercise, or sale.
When auditing an ESPP, which condition must be satisfied for the plan to qualify as a Section 423 plan?
Answer: All employees of the company must be offered equal rights and privileges
A Section 423 ESPP requires that all employees be granted equal rights and privileges under the plan, though employers may exclude certain categories under IRC rules.
An auditor notes that a performance award payout exceeded the plan's per-person annual grant limit. What is the most significant risk?
Answer: The excess award may not be deductible under the plan's Section 162(m) provisions
Performance award payouts exceeding the stated per-person limit may jeopardize the deductibility of the excess compensation under Section 162(m).
Which sampling method is most appropriate when auditing a large volume of routine option exercises with expected low error rates?
Answer: Statistical random sampling
Statistical random sampling provides a defensible, unbiased selection for high-volume, low-complexity transactions and allows auditors to project error rates to the population.
A company uses a 10b5-1 plan to allow executives to sell shares. When auditing insider transactions, what key feature must the auditor verify?
Answer: That the plan was adopted during an open trading window when the insider lacked material non-public information
A valid 10b5-1 plan must be adopted at a time when the insider did not possess MNPI and during an open trading window to provide an affirmative defense against insider trading claims.
During a post-merger equity audit, the auditor must verify that assumed options were repriced to maintain economic equivalence. Which formula governs the adjustment?
Answer: Pre-merger exercise price divided by the exchange ratio; shares multiplied by the exchange ratio
Treasury regulations require that assumed options adjust the share number by the exchange ratio and divide the exercise price by the exchange ratio to preserve the intrinsic value.
When an auditor reconciles equity compensation expense under ASC 718, which component is NOT included in the fair value calculation for a standard stock option?
Answer: Current market price of the underlying stock relative to the exercise price after vesting
ASC 718 uses a grant-date fair value model (Black-Scholes or lattice), which does not include post-grant stock price movements; the key inputs are term, volatility, risk-free rate, and dividend yield.