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
A company grants SARs settled in cash. Under ASC 718, how must these awards be classified for accounting purposes?
Answer: Liability-classified, remeasured at fair value each reporting period
Cash-settled SARs are liability-classified awards requiring remeasurement at fair value each reporting period until settlement, with changes flowing through compensation expense.
Which audit procedure would most effectively detect unauthorized equity grants made outside the plan's approval process?
Answer: Agree all grants to board or compensation committee minutes and compare to the equity administration system
Tracing every grant to board or compensation committee authorization minutes and verifying consistency with the equity system detects grants made without proper approval.
An equity auditor identifies that the company used a peer group to estimate volatility for Black-Scholes. Under ASC 718, what condition justifies using peer group (implied or historical) volatility?
Answer: The company's shares have been publicly traded for fewer than the expected option term
When a company has insufficient trading history—less than the expected option term—it may use peer group volatility as a proxy under ASC 718.
Under Rule 10b-18, a company repurchasing its own shares to cover equity award dilution receives a safe harbor from market manipulation claims if it meets certain volume limits. What is the daily volume cap?
Answer: 25% of average daily trading volume
Rule 10b-18's safe harbor limits repurchase volume to 25% of the security's average daily trading volume (ADTV) over the prior four weeks.
When auditing RSU settlement procedures, which risk is associated with net share settlement (also called share withholding)?
Answer: The withheld shares may be counted as treasury share repurchases under ASC 505-10
Under ASC 505-10, net share settlements above minimum statutory tax rates are treated as share repurchases, which must be properly reflected on the statement of stockholders' equity.
A CEP candidate is auditing a plan that allows early exercise of unvested options. Which tax issue must the audit flag for each early exercising employee?
Answer: The requirement to file an 83(b) election within 30 days to fix the tax basis at exercise date
Employees who early exercise unvested options must file an 83(b) election within 30 days of exercise or they will owe ordinary income tax as shares vest rather than at the lower exercise price.
Which of the following best describes the purpose of a clawback policy audit as required under the SEC's Rule 10D-1 (Dodd-Frank clawback)?
Answer: To confirm that the company has a written policy to recover erroneously awarded incentive compensation following a financial restatement
Rule 10D-1 requires listed companies to have and enforce a written clawback policy that recovers incentive-based compensation awarded on the basis of financial data that was subsequently restated.