Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

When are appraisal and valuation services allowed for an SEC audit client?

1. When the audit committee approves them

2. Only if they are performed by an independent auditor

3. In all circumstances involving management requests

4. These services are always disallowed

The correct answer is: These services are always disallowed

The provision of appraisal and valuation services for an SEC audit client is generally disallowed due to the potential for conflicts of interest and the threat to auditor independence. The SEC has established stringent rules regarding prohibited non-audit services for audit clients to ensure that the transparency and objectivity of the financial reporting process remain intact. Appraisals and valuations can create self-review threats where an auditor may need to evaluate their own work if they were involved in providing such services. This could compromise the integrity of the audit process since the auditor is responsible for expressing an opinion on financial statements that may include or rely on the results of their own appraisal or valuation. In contrast to the choices involving approval from the audit committee, the need for independence, or the allowance under certain circumstances involving management requests, these do not align with the SEC's strict stance on maintaining auditor objectivity. Consequently, these services are categorized as disallowed to uphold the ethical standards expected in audit engagements.