Accounting - Principle of Auditing Chapter 3 Professional Ethics

In which of the following circumstances is it most likely that a CPA has violated the Code of Professional Conduct?

He serves as trustee of an audit client's profit-sharing trust

Current auditing standards do not allow which of the following types of loans from a financial institution audit client?

Home mortgage loans

Auditors are periodically punished for holding an investment in a client. This violates which ethical rule?

Independence

Issued by the AICPA to provide guidelines for the scope and application of the rules

Interpretations

Which of the following sections of the AICPA Code of Professional Conduct is applicable to All members?

Interpretations

Which of the following is most likely to violate the AICPA Code of Professional Conduct?

Issuing the current year audit report when fees for the past year audit remain uncollected.

Which of the following is most likely to be a violation of the AICPA rules of conduct by Bill Jones, a sole practitioner with no other employees?

Jones names his firm Jones and Smith, CPAs.

Which of the following individuals is least likely to be considered a covered member by the independence standard?

Manager who does not work on the audit.

The integrity and _______ rules applies to all members of the AICPA and to all services provided by the CPA.

Objectivity

Which of the following is (are) required when a CPA is performing only consulting services for a client? Independence Objectivity (1) Yes Yes (2) Yes No (3) No Yes (4) No No

Option 3 No, Yes

Which of the following nonattest services may be performed by the auditors of a public company?

Preparation of the company's tax return.

The Code of Professional Conduct _______ include responsibilities, public interest, integrity, objectivity and independence, due care, and scope and nature of services.

Principles

The members of the public accounting profession developed a code of _______ _______ to guide individuals in maintaining a professional attitude and provide assurance of high standards to the public.

Professional conduct

The AICPA Conceptual Framework for Independence requires that CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-independence exists?

Reasonably informed third party.

When an accountant is not independent, the accountant is precluded from issuing a:

Review report.

If a CPA violates the AICPA Code of Professional Conduct, the AICPA Trial Board may do all of the following, except:

Revoke the offending member's CPA certificate

requirements that are enforceable under the AICPA bylaws

Rules

Mary Trout, CPA, has been asked by an audit client to prepare income tax returns and serve as a tax advisor.

She would be free to resolve questionable issues in favor of the client in preparing the tax return.

The Compliance with Standards Rule requires CPAs to adhere to all of the following applicable standards, except:

Statements on Responsibilities for Assurance Services.

Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack of competence required for the engagement. What should Adams do?

Suggest that Kelly Company engage another CPA to perform the audit.

Which of the following statements is true with respect to the PCAOB and SEC;s concept of independence when an auditor both prepares financial statements and audits those financial statements for a client?

The auditor is not independent.

Which of the following is implied when a CPA signs the preparer's declaration on a federal income tax return?

The return is not misleading based on all information of which the CPA has knowledge.

John Jones, CPA has a 20 year old son in college who is still John's dependent. The son just purchased 10 shares of stock in a company John audits. Which of the following statements is correct?

This is a direct financial interest that impairs John's independence.

Pickens and Perkins, CPAs, decide to incorporate their practice of accountancy. According to the AICPA Code of Professional Conduct, shares in the corporation can be issued:

This is an acceptable form of organization.

In providing nonattest services to an attest client, a CPA is allowed to perform which of the following functions?

Training client employees.

Accounting Standards Updates issued by the FASB are enforceable under the AICPA Code of Professional Conduct.

True

Advertising fees for services is an acceptable form of advertising under the AICPA Code of Professional Conduct.

True

Engaging in discriminatory employment practices is considered to be an act discreditable to the profession.

True

In certain circumstances, a member of the AICPA may be held responsible for compliance with the ehtics rules by persons under his or her supervision.

True

In most states, violation of Rules of the AICPA Code of Professional Conduct may result in suspension or revocation of a CPA's license to practice.

True

In some cases threats to independence may be adequately mitigated through safeguards.

True

Not all parts of the AICPA Code of Professional Conduct are binding on all CPAs.

True

Statements on Auditing Standards are enforceable under the AICPA Code of Professional Conduct.

True

The Principles section of the Code consists of six principles that provide the overall ethical framework.

True

Training a client's employees in the operation of a computer system is a consulting service that would not necessarily impair the auditor's independence with respect to the client.

True

True or false: While CPAs may not perform management functions or make any management decisions for their clients, they are allowed to provide advice, research, and recommendations to assist their client decision-making

True

Which of the following provisions is not included in The Institute of Internal Auditors Code of Ethics?

Use of appropriate sampling methods to select areas for audit.

Gloria and Deloria, CPAs, have recently started their public accounting firm and intend to provide attestation and a variety of consulting services for their clients, which are all nonpublic. Both Ms. Gloria and Mr. Deloria have particular expertise in designing payroll and other disbursement systems. Ms. Gloria is concerned about whether any of the following services would impair their audit independence. a. For each of the services in the accompanying table, provide a judgment as to whether providing the service would impair attest independence. In all 12 situations, assume that management has designated a management-level individual to be responsible for overseeing the CPA's services and has established appropriate internal control. Also assume that the client is privately held and does not report to the SEC. b. Now assume that the 12 services are being contemplated for nonattest clients. Which of the services does the AICPA Code of Professional Conduct prohibit under this assumption? 1. Customize and implement a prepackaged payroll system 2. Manage a client's local area network system related to payroll 3. Using payroll time records approved by management, generate unsigned payroll checks on a continuing basis for the client, the client signs the checks. 4. Prepare the payroll tax return form and sign it on behalf of management. 5. Approve employee time cards 6. Accept responsibility to sign payroll checks, but only in emergency situations. 7. Monitor employee time cards and make changes when errors are detected. 8. Post client approved entries to clients trial balance. 9. Provide all of the initial training and instruction to client employees on a newly implemented payroll information and control system. 10. Screen candidates and recommend the most highly qualified candidate to serve as treasurer for the client. 11. Supervise client personnel in the daily operation of the payroll system. 12. Present payroll business risk considerations to the board of directors on behalf of management.

a b a. Indeterminate No b. yes No c. No No d. Yes No e. Yes No f. Yes No g. Indeterminate No h. No No i. No No j. indeterminate No k. yes No l. yes No

The firm of Schilling & Co., CPAs, has offices in Chicago and Green Bay, Wisconsin. Gillington Company, which has 1 million shares of outstanding stock, is audited by the Chicago office of Schilling; Welco, of the Chicago office, is the partner in charge of the audit. For each of the following circumstances, indicate whether the public accounting firm's independence is impaired with respect to Gillington Company. a. Johnson, a partner in the Chicago office, owns 100 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit. b. Gizmo, a partner in the Green Bay office, owns 600 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit. c. Masterson is a staff assistant in the Green Bay office and owns 10 percent of Gillington's outstanding common stock. Masterson provides no services to Gillington and is not able to influence the engagement. d. Schilling, the partner in charge of the entire firm, works in the Green Bay office. He owns 100 shares of Gillington stock (market value $2 per share) but provides no services on the engagement. e. Gorman is a staff assistant on the audit. Gorman's mother owns shares of Gillington that are material to her net worth and of which Gorman has knowledge.

a. Independence is impaired b. Independence is not impaired c. Independence is impaired d. Independence is impaired e. Independence is impaired

Donald Westerman is president of Westerman Corporation, a nonpublic manufacturer of kitchen cabinets. He has been approached by Darlene Zabish, a partner with Zabish and Co., CPAs, who suggests that her firm can design a payroll system for Westerman that will either save his corporation money or be free. More specifically, Ms. Zabish proposes to design a payroll system for Westerman on a contingent fee basis. She suggests that her firm's fee will be 25 percent of the savings in payroll for each of the next four years. After four years Westerman will be able to keep all future savings. Westerman Corporation's payroll system costs currently are approximately $200,000 annually, and the corporation has not previously been a client of Zabish. Westerman discussed this offer with his current CPA, Bill Zabrinski, whose firm annually audits Westerman Corporation's financial statements. Zabrinski states that this is a relatively simple task and that he would be willing to provide the service for $30,000. a. Would Zabish violate the AICPA Code of Professional Conduct by performing the engagement? b. Would Zabrinski violate the AICPA Code of Professional Conduct by performing the engagement? c. Now assume that Westerman has indicated to Zabrinski that he is leaning toward accepting Zabish's offer. Zabrinski then offers to provide the service for 15 percent of Westerman's savings for the next three years. Would performing the engagement in accordance with the terms of this offer violate the AICPA Code of Professional Conduct?

a. No b. No c. Yes d. No e. Yes

James Daleiden, CPA, is interested in expanding his practice through acquisition of new clients. For each of the following independent cases, indicate whether Daleiden would violate the AICPA Code of Professional Conduct by engaging in the suggested practice. a. Daleiden wishes to form a professional corporation and use the name "AAAAAAAA the CPAs" to obtain the first ad in the yellow pages of the telephone book. b. Daleiden wishes to prepare a one-page flyer that he will have his son stuff on the windshields of each car at the Pleasant Valley shopping mall. The flyer will outline the services provided by Daleiden's firm and will include a $50-off coupon for services provided on the first visit. c. Daleiden has a thorough knowledge of the tax law. He has a number of acquaintances who prepare their own tax returns. He proposes to offer to review these returns before they are filed with the Internal Revenue Service. For this review, he will charge no fee unless he is able to identify legal tax savings opportunities. He proposes to charge each individual one-third of the tax savings he is able to identify. d. Daleiden and his associates audit a number of municipalities. He proposes to contact other CPAs and inform them of his interest in obtaining more of these types of audits. He offers a $500 "finder's fee" to CPAs who forward business to him. e. Daleiden wishes to advertise that if he is hired to perform the audit, he will discount his fees on tax services (he does intend to grant a discount).

a. No Violation b. No Violation c. Violation d. No Violation e. No Violation

The firm of Wilson and Wiener (WW), CPAs, has had requests from a number of clients and prospective clients to perform various types of services. Please reply as to whether the appropriate independence rules (AICPA and/of PCAOB) allow the following engagements using the following key? (If both AICPA and PCAOB rules apply and one of them does not allow the services, answer Not Allowable.) a. Provide internal audit outsourcing, as well as perform the audit Public b. Prepare the corporate tax return, as well as perform the audit Public c. Prepare the corporate tax return, as well as perform the audit Nonpublic d. Provide bookkeeping services, as well as perform the audit, WW will not determine journal entries, authorize transactions, or prepare or modify source documents Nonpublic e. Provide financial information systems design and implementation assistance, WW provides no attest services for that company Public f. Serve on the board of directors of the company, WW provides no attest services for the company Public g. Implement an off-the-shelf accounting package, as well as perform the audit Nonpublic h. Provide actuarial services related to certain liabilities, as well as perform the audit, the subjectively determined liabilities related to a material portion of the financial statements Nonpublic i. Provide actuarial services related to certain liabilities, as well as perform the audit, the subjectively determined liabilities related to a material portion of the financial statements Public j. Provide tax planning services for corporate executives of an audit client (not for the company) Public

a. Not Allowable b. Allowable c. Allowable d. Allowable e. Allowable f. Allowable g. Allowable h. Not Allowable i. Not Allowable j. Not allowable

The firm of Bell & Greer, CPAs, has been asked to perform attest services for Trek Corporation (a nonpublic company) for the year ended December 31, Year 5. Bell & Greer has two offices: one in Los Angeles and the other in Newport Beach. Trek Corporation would be audited by the Los Angeles office. For each of the following cases, indicate whether Bell & Greer's independence is definitely impaired. a. A partner in the Los Angeles office of Bell & Greer has been a long-time personal friend of the chief executive officer of Trek Corporation. b. The former controller of Trek Corporation became a partner in the Newport Beach office of Bell & Greer on March 15, Year 5, resigning from Trek Corporation on that date. c. A manager in the Newport Beach office of Bell & Greer is the son of the treasurer of Trek Corporation. d. A partner in the Los Angeles office of Bell & Greer jointly owns a cattle ranch in Montana with one of the directors of Trek Corporation. The value of the investment is material to both parties. e. Trek Corporation has not yet paid Bell & Greer for professional services rendered in Year 4. This fee is substantial in amount and is now 15 months past due.

a. Not definitely impaired b. Not definitely impaired c. Not definitely impaired d. Definitely impaired e. Definitely impaired

The firm of Harwood & Toole, CPAs, has been the auditor and tax return preparer for Tucker, Inc., a nonpublic company, for several years. In the current year, the management of Tucker discharged Harwood & Toole from the audit and tax engagement because of a disagreement over a tax matter. Management of Tucker has not paid Harwood & Toole any of the current year's audit and tax fees. Another CPA firm has been hired and management of Tucker has requested that Harwood & Toole provide the following items: Indicate which of the following items must be provided to management of Tucker by Harwood & Toole. a. Accounting records of Tucker, Inc., in the possession of Harwood & Toole. b. Copies of adjusting entries prepared by the staff of Harwood & Toole. c. A copy of Tucker's partially completed tax return prepared by the staff of Harwood & Toole. d. Copies of Harwood & Toole's audit working papers from prior engagements. e. Several consolidating entries prepared by Tucker, Inc., and reviewed by Harwood & Toole.

a. Yes b. No c. No d. Yes e. Yes

For each of the following situations, indicate whether the individual CPA is "independent with respect to the client, by choosing "yes" or "no." a. The CPA's nondependent child owns an immaterial direct financial interest in the client b. The CPA's spouse owns an immaterial direct financial interest in the client. c. The CPA's brother is the controller of the client. d. The CPA's father is a salesman for the client. e. The CPA's nondependent mother owns an immaterial direct financial interest in the client. f. The CPA's five year old son who lives with her, was given a gift by a friend of 20 shares of stock worth, in total $100, in an audit client of the CPA. g. The CPAowns an immaterial amount of stock in a firm audit client, she does not work on that audit engagement. h. The CPA owns an immaterial amount of stock in a firm audit client, she works as a senior on that audit engagement. i. A CPA's father owns a material investment in a firm audit client, she works on the engagement as a partner but is not aware of the investment. j. A CPA's brother works part-time in the warehouse of an audit client.

a. yes b. no c. no d. yes e. yes f. no g. no h. no i. yes j. yes

When a threat exists, a CPA needs to determine whether a(n) _______ _______ of risk of noncompliance with the Code of Professional Conduct exists.

acceptable level

John Jones, CPA has an investment in a mutual fund whose investments includes stock in ABC Company. If ABC Company is attest client of the firm John works for John's investment is _______ financial interest.

an indirect

The AICPA Code of Professional Conduct

applies to all of the above categories.

NYSE, ASE, and NASDAQ all require listed companies to establish an _______ _______ that consists of at least three independent and financially literate individuals and that increases the auditors' ability to deal independently with management.

audit committee

Abundance of authoritative pronouncements governing financial reports

complex body of knowledge

The Code of Professional Conduct includes _______ that address threats to compliance when the Code itself has no specific related guidance.

conceptual frameworks

The AICPA Code of Professional Conduct refers to ethical dilemmas as ethical _______ .

conflicts

Without public confidence in the attestor, the attest function serves no purpose. Because the need for public confidence is so high, the CPA's product is:

credibility

The Code of Professional Conduct suggests CPAs facing ethical conflicts should document:

details of discussions with third parties the substance of the conflict the parties with whom the issue was discussed decisions made

The Code of Professional Conduct suggests during ethical conflicts, CPAs should consider:

established internal procedures ethical issues involved

The moral principles and values that govern the actions and decisions of an individual or group is known as _______ .

ethics

The study of moral principles and values that govern the actions and decisions of an individual or group is:

ethics

The Code of Professional Conduct requires independence for all:

financial statement audits.

When faced with an ethical dilemma, the firs step for an accountant is to:

identify the problem

A public accounting firm's _______ is impaired if a group of partners and staff that are not covered members together own more than 5% of an attest client's outstanding equity securities.

independence

Due to a CPA's responsibility to serve the public, _______ is perhaps the most important concept in the AICPA Code of Professional Conduct.

independence

The Code of Professional Conduct requires CPAs to be _______ from a client when providing audit or attestation services.

independent

Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties and the current year's audit is scheduled to commence in one week. With respect to the past due audit fees, Mavis should

inform South Bay's management that the past-due audit fees are considered an impairment of auditor independence; therefore, it must be paid prior to the issuance of the auditors' report.

In order to sign the preparer's declaration page on a tax return a CPA must:

investigate unreasonable or contradictory information

A covered member's husband is employed by an attest client. The covered member and the CPA firm can still be independent and perform the audit if the husband _______ the attest client.

is not in a key position at

Advertising by CPAs:

is permissible as long as it is not false, misleading, or deceptive.

The Conceptual Frameworks section of the AICPA Code of Professional Conduct is applicable to:

members in public practice members in business

In comparing Government Auditing standards regarding independence to those issued by the AICPA, the Governmental Auditing standards are _______ restrictive.

more

CPA;s product is credibility

need for public confidence

In many ethical dilemmas faced by professional accountants, there are

no accounting standards that specifically apply to the situation gray areas with no obvious answers conflicts between an individual's self-interest and with his or her ethical beliefs

John Jones, CPA is a partner in a local firm. His wife works as an administrative assistant for one of the firm's audit clients and holds an immaterial investment in the company's stock through an employee benefit plan. The firm's independence is:

not impaired as long as John does not work on the audit

A professional corporation form of organization:

offers certain tax advantages as compared to partnerships.

A public accounting firm's independence is considered impaired if fees for professional services rendered more than _______ prior to the audit report date for the current year's audit has not be collected before the issuance of the current year CPA report.

one year

Auditors of public companies must wait _______ before accepting a CFO position with an SEC registrant.

one year

A CPA ethically could:

perform an audit of Tombstone, Arizona for less than 1/2 of normal audit billing rates.

Statements that provide overall framework of profession's responsibilities

principles

The profession's recognition of its responsibilities to the public, to clients and to colleagues are addressed in the Code of Professional Conduct:

principles

Independence in appearance

requires the avoidance of circumstances that might cause a reasonable and informed third party, aware of all relevant information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of an audit firm or member of the attest engagement team has been compromised.

CPA is representative of the public

responsibility to serve the public

Controls that mitigate or eliminate threats to independence are called _______ .

safeguards

The Compliance with _______ rule requires CPAs to adhere to professional standards promulgated by various technical bodies.

standards

CPA license requires education, experience and passing the CPA exam

standards of admission to the profession

All of the following may lack independence with respect to a client or a potential client except:

the AICPA

Independence is impaired in regards to a client if a close relative has:

the ability to exercise significant influence over the client a material financial interest the auditor has knowledge of

Covered members include:

the public accounting firm an individual in a position to influence the attest engagement an individual on the attest engagement team

Listed below are selected Rules of Conduct and ethical problems. Match the rule with the problem to which it applies: 1. An audit client owes the CPA past-due audit fees 2. The auditors fail to qualify their opinion on financial statements that do not properly apply FASB standards. 3. A CPA who is the controller for a company knowingly issues misleading financial statements. 4. A CPA performs tax services that the CPA is not competent to perform 5. A sole practitioner practices in a partnership name 6. A member violates rules issued by the Accounting and Review Service Committee 7. A CPA robs a service station 8. A CPA accepts a percentage of the client's loan as an audit fee.

1. A Independence 2. E Accounting principles 3. G Acts discreditable 4. C General standards 5. J Form or practice and name 6. D Compliance with standards 7. G Acts discreditable 8. F Contingent fees

The Code of Professional Conduct includes the following conceptual frameworks for situations not explicitly addressed by the Code of Professional Conduct. Check all that apply 1. Overall for other CPAs (e.g., retired, unemployed) 2. Independence for CPAs in public practice 3. Overall for CPAs in business 4. Overall for CPAs in public practice

2. Independence for CPAs in public practice 3. Overall for CPAs in business 4. Overall for CPAs in public practice

Firm independence is impaired if a partner or any professional employee of the CPA firm or immediate family own more than _____ of an attest client's equity securities.

5%

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule may preclude a CPA from responding to an inquiry made by:

A CPA-shareholder of the client corporation.

In which of the following situations would a public accounting firm have violated the AICPA Code of Professional Conduct in determining its fee?

A fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing.

Which of the following fee arrangements for an audit would constitute a violation of the AICPA Code of Professional Conduct?

A fee that is computed as a percentage of audited net income.

In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement?

A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information.

Which of the following is not a covered member for an attest engagement under the Independence Rule of the AICPA Code of Professional Conduct?

A partner in the national office of the firm that performs marketing services.

Which of the following types of employees must be independent of an audit client?

A partner in the office that performs the engagement.

For a CPA firm with one office, which of the following individuals is most likely to impair the firm's independence with respect to an audit client?

A partner owns 50 shares of stock in the client (the total value is immaterial to both the partner and the audit client).

A public accounting firm would least likely be considered in violation of the AICPA Independence Rule in which of the following instances?

A partner's checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services.

Which of the following is not prohibited by the AICPA Code of Professional Conduct?

Advertising in newspapers

A CPA should maintain objectivity and be free of conflicts of interest when performing:

All professional services

Gary Watson, a graduating business student at a small college, is currently interviewing for a job. Gary was invited by both Tilly Manufacturing Co. and Watson Supply Company to travel to a nearby city for an interview. Both companies have offered to pay Gary's expenses. His total expenses for the trip were $96 for mileage on his car and $45 for meals. As he prepares the letters requesting reimbursement, he is considering asking for the total amount of the expenses from both employers. His rationale is that if he had taken separate trips, each employer would have had to pay that amount. a. Who are the parties that are directly affected by this ethical dilemma? b. Are the other students at the college potentially affected by Gary's decision? c. Are the professors at the college potentially affected by Gary's decision?

Both Yes Yes

While performing an audit of a public company the auditors discovered material illegal acts and resigned due to the client's refusal to disclose them. The auditors' reasoning for resignation should be disclosed through:

CPA Direct Communication With The Process of Shareholders Filing No Yes

Independence of mind

CPA is capable of performing an attest service without being affected by influences that might compromise professional judgement

A CPA who holds an investment in a mutual fund is not independent of any of the companies that the mutual fund invests in.

False

A CPA who previously was employed by a client may never be involved in an audit of the financial statements of that client.

False

A covered member may have only an immaterial direct financial interest in an audit client.

False

Auditors may not allow their working papers to be reviewed in conjunction with a peer review unless their clients agree to the review.

False

CPAs are prohibited from practicing in the form of a limited liability corporation.

False

High moral conduct in support of one's country is a basic ethical rule explicitly set forth in the AICPA Code of Professional Conduct.

False

The AICPA Code of Professional Conduct prohibits direct solicitation of clients by CPAs.

False

The Code of Ethics of the Institute of Internal Auditors, Inc., requires that members report to the audit committee of the board of directors.

False

The Code of Professional Conduct prohibits CPAs from establishing fixed fees for an engagement.

False

Utilizing outside computer services to process tax returns would be a violation of the ethics rule concerning confidential information.

False

True or false: If a partner in a CPA firm lacks independence with respect to a client engagement, the firm loses its independence with respect to that engagement.

False: Accounting firm independence is considered separately from independence of individuals.

True or false: All rules of the AICPA Code of Professional Conduct apply to CPAs in business.

False: Some rules do not apply to CPAs in business.

CPAs are required to perform all CPA services with competence and professional care under the _______ standards rule.

General