AUDIT MIDTERM

A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA's dependent minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Is the independence of the CPA considered to be impaired with respect to the client? A.Yes, because the stock is considered a direct financial interest and, consequently, materiality is not a factor. B.No, because the CPA is not considered to have a material indirect financial interest in the client. C.Yes, because the stock is considered an indirect financial interest that is material to the CPA's child. D.No, because the CPA is not considered to have a direct financial interest in the client.

A

In which of the following situations would a covered member's independence be considered to be impaired? 1. The covered member maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution. 2. The covered member has a direct financial interest in an audit client, but the interest is maintained in a blind trust. 3. The covered member owns a commercial building and leases it to an audit client. The lease is properly classified as a capital lease, and the rental income is material to the CPA. A.II and III. B.I and II. C.I and III. D.I, II, and III.

A

Jaye B. Honest, CPA, was offered the engagement to audit Wicket Corporation for the year ended June 30, Year 3. She had served as a director of Wicket Corporation until June 30, Year 1, and her spouse currently owns 600 of the 10,000 outstanding shares of Wicket Corporation. Jaye disassociated from Wicket prior to being offered the engagement. Moreover, the engagement does not cover any period that includes Jaye's association or employment with Wicket. Under the AICPA Code of Professional Conduct, she should A.Refuse the engagement because of her spouse's stock ownership. B.Let a partner from the same office accept and conduct the engagement. C.Accept the engagement. D.Refuse the engagement because she had served as a director.

A

The profession's ethical standards most likely are violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the A.Actual fee would be substantially higher. B.Actual fee would be substantially lower than the fees charged by other CPAs for comparable services. C.CPA would not be independent. D.Fee was a competitive bid.

A

Which is most likely a violation of the AICPA Code of Professional Conduct? A.A member begins a public accounting firm with the trade name "Pay Less Tax Service." B.A member firm buys computer time at wholesale prices from another CPA firm and sells it at retail prices to clients. C.A member firm's name is imprinted on a tax booklet prepared by an outside author who is clearly identified. D.A member forms a partnership for the practice of public accounting with non-CPAs.

A

Ann Covington, CPA, has been asked to perform a consulting services engagement concerning the analysis of a potential merger. She has little experience with the industry involved. What is her most appropriate action? A.Decline the engagement because she lacks sufficient knowledge. B.Accept the engagement and perform additional research or consult with others to obtain sufficient competence. C.Accept the engagement and perform it in accordance with auditing standards. D.Accept the engagement and issue a report vouching for the achievability of the results of the merger.

B

Audit engagement team members should remain alert for evidence of noncompliance with which of the following relevant ethical requirements? A.Maintaining confidentiality of client information by not including it in the audit documentation. B.Performing professional responsibilities with the highest sense of integrity. C.Performing audit procedures efficiently and within expected time budgets. D.Maintaining a suspicious attitude, presuming that the client is dishonest until evidence proves otherwise.

B

The AICPA Code of Professional Conduct A.Prohibits encroachment on the practice of another CPA. B.Expects the CPA to honor the public trust. C.Encourages but does not require CPAs to refrain from advertising or engaging in other forms of solicitation. D.Prohibits offers of employment to employees of another CPA without notice.

B

The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectivity. Objectivity in the Code refers to a CPA's ability A.To independently choose between alternate accounting principles and auditing standards. B.To maintain an impartial attitude on all matters that come under the CPA's review. C.To be unyielding in all matters dealing with auditing procedures. D.To independently distinguish between accounting practices that are acceptable and those that are not.

B

Which action is not considered a discreditable act under the Code's Acts Discreditable Rule? A.A CPA-defendant has lost a final appeal of an adverse verdict in a racial discrimination suit in federal court B.A CPA has a bank collect notes received from a client in payment of fees. C.A CPA fails to follow standards and procedures established by governmental agencies in audits of grants by those agencies. D.A CPA-defendant has lost a final appeal of an adverse verdict in a sexual harassment suit in state court.

B

A CPA who has a direct financial interest in a nonclient having a material investment in the CPA's audit client A.Lacks independence only if the CPA can exercise significant influence over the nonclient. B.Does not lack independence. C.Lacks independence. D.Lacks independence only if the CPA's investment in the nonclient is material.

C

A CPA's retention of client-provided records as a means of enforcing payment of an overdue audit fee is an action that is A.A violation of GAAS. B.Not addressed by the AICPA Code of Professional Conduct. C.Prohibited under the AICPA Code of Professional Conduct. D.Acceptable if sanctioned by state law.

C

A member of the AICPA may render which service under a contingent fee arrangement? A.A CPA compiles financial statements for a client seeking a loan, with the fee contingent upon the amount the client is able to borrow. The report does not disclose lack of independence. B.A CPA audits the financial statements of a company that intends to issue securities for sale to the public, with the fee contingent upon the proceeds from the sale of the securities. C.A CPA provides investment advisory services, with the fee based on a percentage of the client's investment portfolio. D.A CPA examines prospective financial statements for a client who intends to sell limited partnerships, with the CPA's fee contingent upon the proceeds.

C

Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest, and AICPA members in public practice shall not seek to obtain clients in such a manner. Such activities include all the following except those that A.Create unjustified expectations of favorable results. B.Imply the ability to influence a court. C.Indicate the CPA's educational and professional attainments. D.Claim to be able to save the taxpayer 20% of a determined tax liability.

C

Audit engagement team members should remain alert for evidence of noncompliance with which of the following relevant ethical requirements? A.Maintaining a suspicious attitude, presuming that the client is dishonest until evidence proves otherwise. B.Performing audit procedures efficiently and within expected time budgets. C.Performing professional responsibilities with the highest sense of integrity. D.Maintaining confidentiality of client information by not including it in the audit documentation.

C

Inclusion of which of the following statements in a CPA's advertisement is not acceptable pursuant to the AICPA Code of Professional Conduct? A.Paul FallCertified Public AccountantJ.D., Evans Law School 2012 B.Paul FallCertified Public AccountantFree Consultation C.Paul FallCertified Public AccountantEndorsed by AICPA D.Paul Fall Certified Public Accountant Fluency in Spanish and French

C

The profession's ethical standards most likely are violated when a CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the A.Fee was a competitive bid. B.CPA would not be independent. C.Actual fee would be substantially higher. D.Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

C

Which of the following is required for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountants" on its letterhead? A.At least one of the owners must be a member. B.The owners whose names appear in the firm name must be members. C.All CPA owners must be members. D.The firm must be a dues-paying member.

C

Which of the following most completely describes how independence has been defined by the accounting profession? A.Performing an audit from the viewpoint of the public. B.Avoiding the appearance of significant interests in the affairs of an audit client. C.Possessing the ability to act with integrity and objectivity. D.Accepting responsibility to act professionally and in accordance with a professional code of ethics.

C

Within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, an accountant deemed to be independent with regard to a specific entity must 1. Confirm in writing its independence from the audit client. 2. Have no relationships with the audit client. 3. Discuss its independence with the audit committee. A.I, II, and III. B.I and II only. C.I and III only. D.II and III only.

C

A violation of the profession's ethical standards most likely occurs when a CPA A.Has a public accounting practice and also is the owner of a business that offers data processing services to the public. B.Practices in a commercial corporation, a form of organization permitted by state law. C.Purchases another CPA's accounting practice and bases the price on a percentage of the fees accruing from clients over a 3-year period. D.Receives as a commission a percentage of the amounts invested by the CPA's audit clients in a tax shelter with the client's knowledge and approval.

D

According to the AICPA Code of Professional Conduct, which of the following records must a CPA return to the client when requested? A.Supporting records prepared by the CPA consisting of adjusting, closing, combining, or consolidating entries prior to the completion of the engagement. B.Client-provided records requested for a second time because the client misplaced the first set of records. C.The CPA's working papers consisting of analyses and schedules prepared by the client at the CPA's request. D.Client-provided records, even if fees are due to the CPA for the engagement and are unpaid.

D

An auditor strives to achieve independence in appearance to A.Comply with the generally accepted accounting principles. B.Become independent in fact. C.Maintain an unbiased mental attitude. D.Maintain public confidence in the profession.

D

An external auditor is not permitted to discuss confidential client information without the specific consent of the client. This ethical proscription A.Is often used by a client to blunt the auditor's efforts to modify the standard auditor's report. B.Will prevent the auditor from engaging another auditing firm to conduct a peer review. C.Is unenforceable. D.Will not preclude the auditor from complying with a validly issued court subpoena.

D

Ann Able, CPA, is considering forming a partnership with Ben Brown for the purpose of practicing public accounting. Which of the following is true? A.The AICPA's Code of Professional Conduct requires Brown to be a CPA. B.If Brown is not a CPA, he may not participate in the management of the partnership. C.If Brown is not a CPA, he need not conform to the AICPA Code of Professional Conduct. D.Brown need not be a CPA if the partnership does not represent itself as a partnership of CPAs.

D

CPAs are required to complete engagements competently. Competence includes all of the following except A.The capacity to exercise judgment. B.The technical qualifications of the CPA's staff. C.The ability to research subject matter and consult with others. D.An unbiased mental attitude.

D

Eagle Company's financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an opinion that is A.Qualified or adverse, depending on materiality, and describe the departure in an other-matter paragraph. B.Unmodified but not mention the departure in the auditor's report. C.Qualified and describe the departure in a separate paragraph. D.Unmodified and describe the departure in an other-matter paragraph.

D

In which of the following situations would a covered member's independence be considered to be impaired? 1. The covered member maintains a checking account that is fully insured by a government deposit insurance agency at an audit-client financial institution. 2. The covered member has a direct financial interest in an audit client, but the interest is maintained in a blind trust. 3.The covered member owns a commercial building and leases it to an audit client. The lease is properly classified as a capital lease, and the rental income is material to the CPA. A.I, II, and III. B.I and II. C.I and III. D.II and III.

D

Jaye B. Honest, CPA, was offered the engagement to audit Wicket Corporation for the year ended June 30, Year 3. She had served as a director of Wicket Corporation until June 30, Year 1, and her spouse currently owns 600 of the 10,000 outstanding shares of Wicket Corporation. Jaye disassociated from Wicket prior to being offered the engagement. Moreover, the engagement does not cover any period that includes Jaye's association or employment with Wicket. Under the AICPA Code of Professional Conduct, she should A.Let a partner from the same office accept and conduct the engagement. B.Accept the engagement. C.Refuse the engagement because she had served as a director. D.Refuse the engagement because of her spouse's stock ownership.

D

The Code prohibits loans to a covered member from a client financial institution except for certain permitted loans made under normal lending procedures, terms, and requirements. When making the comparison between the terms of the member's loan and those of other borrowers, which item(s) should be considered in the determination of normal lending procedures? A.Closing costs. B.Interest rate, including points. C.Repayment terms. D.All of the answers are correct.

D

The Code prohibits loans to a covered member from a client financial institution except for certain permitted loans made under normal lending procedures, terms, and requirements. When making the comparison between the terms of the member's loan and those of other borrowers, which item(s) should be considered in the determination of normal lending procedures? A.Repayment terms. B.Closing costs. C.Interest rate, including points. D.All of the answers are correct.

D

The concept of materiality is least important to an auditor when considering the A.Decision whether to use positive or negative confirmations of accounts receivable. B.Adequacy of disclosure of a client's illegal act. C.Discovery of weaknesses in a client's internal control. D.Effects of a direct financial interest in the client on the CPA's independence.

D

Under the AICPA Code of Professional Conduct, a covered member is most likely not permitted to A.Have an immaterial indirect financial interest in an affiliate of an attest financial statement client. B.Perform tax preparation services for an audit client. C.Perform bookkeeping services for an audit client. D.Have any joint closely held investment with a principal shareholder of an audit client during the period of the audit engagement.

D

Under the Code's Independence Rule, which of the following must be independent in the performance of an audit? A.Only individuals on the attest engagement team. B.Only the partners of the audit firm. C.All professional employees of the audit firm. D.All individuals on the attest engagement team, except those performing routine clerical functions.

D

Which AICPA Conduct Rule applies only to members in the practice of public accounting? A.Compliance with Standards. B.General Standards. C.Accounting Principles. D.Independence.

D