B) Chpts 3 & 4

75) Which of the following is not correct relating to the Private Securities Litigation Reform Act of 1995? A. It provides certain small investors better recovery rights than it does large investors. B. It retains joint and several liability in certain circumstances. C. It makes recovery against CPAs more difficult under common law litigation. D. It eliminates securities fraud as an offense under civil RICO.

C. It makes recovery against CPAs more difficult under common law litigation.

57) Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. As a result the CPA has been required to pay the entire $500,000. The auditor's liability is most likely based upon which approach to assessing liability? A. Absolute liability. B. Contributory negligence. C. Joint and several liability. D. Proportional liability.

C. Joint and several liability.

72) Which of the following must be proven by the plaintiff in a case against a CPA under the Section 11 liability provisions of the Securities Act of 1933? A. The CPA knew of the misstatement. B. The CPA was negligent. C. Material misstatements were contained in the financial statements. D. The unqualified opinion contained in the registration statement was relied upon by the party suing the CPA.

C. Material misstatements were contained in the financial statements.

32) 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' reason for resignation should be disclosed through: I. CPA Direct Communication w/Shareholders II. Process of Filing 8-k A. I and II B. I ; Not II C. Not I ; II D. Not I ; Not II

C. Not I ; II

47) As compared to the AICPA Code of Professional Conduct, IFAC's International Code of Ethics for Professional Accountants: A. Applies to more types of services. B. Has more specific restrictions. C. Has less specific restrictions. D. Is less conceptual.

C. Has less specific restrictions.

52) Jones, CPA, is in court defending himself against a lawsuit filed under the 1933 Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general, Jones will have to prove that: A. He is not guilty of gross negligence. B. He performed the audit with good faith. C. He performed the audit with due diligence. D. The plaintiffs did not show him to be negligent.

C. He performed the audit with due diligence.

17) Under the AICPA Code of Professional Conduct, which of the following rules is not applicable to CPAs in business? A. Integrity and objectivity. B. General standards. C. Independence. D. Acts discreditable.

C. Independence

15) Which of the following attributes is more closely associated with attestation services performed by a CPA firm than with other lines of professional work? A. Integrity. B. Competence. C. Independence. D. Keeping informed on current professional developments.

C. Independence.

65) Under the Securities Act of 1933, the burden of proof that the plaintiff sustained a loss must be proven by the: A. Plaintiff. B. Defendant. C. SEC. D. Jury.

A. Plaintiff.

38) The AICPA Code of Professional Conduct will ordinarily be considered to have been violated when the 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. Fee was a competitive bid. D. CPA would not be independent.

A. Actual fee would be substantially higher.

6) A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA firm's revenues come from this client. Which statement is most likely to be true? A. Appearance of independence may be lacking. B. The small CPA firm does not have the proficiency to perform a larger audit. C. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit. D. The auditor should provide an "emphasis of a matter paragraph" to his/her audit report adequately disclosing this information and then it may issue an unqualified opinion.

A. Appearance of independence may be lacking.

73) A CPA issued a standard unqualified audit report on the financial statements of a client that the CPA knew was in the process of obtaining a loan. In a suit by the bank issuing the loan, the CPA's best defense would be that the: A. Audit complied with generally accepted auditing standards. B. Client was aware of the misstatements. C. Bank was not the CPA's client. D. Bank's identity was known to the CPA prior to completion of the audit.

A. Audit complied with generally accepted auditing standards.

90) The Public Company Accounting Oversight Board may conduct investigations and disciplinary proceedings of: I. Registered Public Accounting Firms II. Registered Public Accounting Firm Employees A. I and II B. I ; No II C. No I ; II D. No I and No II

A. I and II

83)In a common law action against an accountant, lack of privity is a viable defense if the plaintiff: A. Is the client's creditor who sues the accountant for negligence. B. Can prove the presence of gross negligence that amounts to a reckless disregard for the truth. C. Is the accountant's client. D. Bases the action upon fraud.

A. Is the client's creditor who sues the accountant for negligence.

80) Under common law, when performing an audit, a CPA: A. Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. B. Must strictly adhere to generally accepted accounting principles. C. Is strictly liable for failures to discover client fraud. D. Is not liable unless the CPA commits gross negligence or intentionally disregards generally accepted auditing standards.

A. Must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances.

33) 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: A. Only to persons qualified to practice public accounting. B. Only to employees and officers of the firm. C. Only to persons qualified to practice as CPAs and members of their immediate families. D. To the general public.

A. Only to persons qualified to practice public accounting.

28) Bill Pan, CPA, has posted the general ledger and has maintained the financial records of Zorko Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries. Which of the following best summarize the AICPA and SEC views as to the following question: Is audit independence impaired? A. AICPA and SEC B. AICPA; no SEC C. No AICPA; SEC D. No AICPA, No SEC

A. Option A

48) An accounting association established a code of ethics for all members. The most likely primary purpose for establishing the code of ethics was to: A. Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association. B. Establish standards to follow for effective accounting practice. C. Provide a framework within which accounting policies could be effectively developed and executed. D. Outline criteria that can be utilized in conducting interviews of potential new accountants.

A. Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association.

18) The AICPA allows an auditor to perform which of the following services for an audit client? A. Performance of bookkeeping services for the client. B. Authorization of transactions for the client. C. Preparation of client source documents. D. Preparation and posting of journal entries without the client's approval.

A. Performance of bookkeeping services for the client.

21) Which of the following acts by a CPA would not necessarily be considered an act discreditable to the profession under the AICPA Code of Professional Conduct? A. Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so. B. Engaging in discriminatory employment practices. C. Robbing a convenience store. D. Knowingly signing a false tax return.

A. Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so.

60) In which of the following court cases was a precedent set increasing liability to third parties arising from audits under common law? A. Rosenblum v. Adler. B. Hochfelder v. Ernst. C. 1136 Tenants Corporation v. Rothenberg. D. Continental Vending.

A. Rosenblum v. Adler.

34) Which of the following is not a safeguard that is ordinarily considered in evaluating threats to auditor independence? A. Safeguards created by the Audit Committee Reference Group. B. Safeguards created by the profession, legislation, or regulation. C. Safeguards implemented by the attest client. D. Safeguards implemented by the CPA firm.

A. Safeguards created by the Audit Committee Reference Group.

16) Which of the following types of employees must be independent of an audit client? A. Staff assistants assigned to the engagement. B. Senior auditors assigned to the office that performs the audit. C. Managers assigned to an office that does not participate in the engagement. D. All firm professionals, regardless of their position.

A. Staff assistants assigned to the engagement.

79) Dexter and Co., CPAs, issued an unqualified opinion on the 20X3 financial statements of Bart Corp. Late in 20X4, Bart determined that its treasurer had embezzled over $1,000,000. Dexter was unaware of the embezzlement. Bart has decided to sue Dexter to recover the $1,000,000. Bart's suit is based upon Dexter's failure to discover the missing money while performing the audit. Which of the following is Dexter's best defense? A. That the audit was performed in accordance with GAAS. B. Dexter had no knowledge of the embezzlement. C. The financial statements were presented in conformity with GAAP. D. The treasurer was Bart's agent and as such had designed the controls which facilitated the embezzlement.

A. That the audit was performed in accordance with GAAS.

2) 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? A. The auditor is not independent. B. The auditor is independent if he or she is able to maintain a level of professional detachment. C. The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements. D. The auditor cannot audit the financial statements since a lack of integrity exists.

A. The auditor is not independent.

31) Which of the following is considered a type of threat to compliance with the Rules of the Code of Professional Conduct? A. Undue influence. B. Illegitimate skepticism. C. Lack of management participation. D. Irrevocability.

A. Undue influence.

74) The Private Securities Litigation Reform Act of 1995 imposes proportionate liability on the CPA who: A. Unknowingly violates the 1934 Securities Exchange Act. B. Knowingly or unknowingly violates the 1934 Securities Exchange Act. C. Unknowingly violates the 1933 Securities Act. D. Knowingly or unknowingly violates the 1933 Securities Act.

A. Unknowingly violates the 1934 Securities Exchange Act.

85) Hark, CPA, negligently failed to follow generally accepted auditing standards in auditing Long Corporation's financial statements. Long's president told Hark that the audited financial statements would be submitted to several, at this point undetermined, banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will: A. Win because there was no privity of contract between Hark and Third. B. Lose because Hark knew that a bank would be relaying the financial statements. C. Win because Third was contributory negligent in granting the loan. D. Lose because Hark was negligent in performing the audit.

A. Win because there was no privity of contract between Hark and Third.

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

A. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor.

26) Independence is required of a CPA performing: A. Audits, but not any other professional services. B. Attestation services, but not other professional services. C. Attestation and tax services, but not other professional services. D. All professional services.

B. Attestation services, but not other professional services.

88) Bran, CPA, audited Frank Corporation. The shareholders sued both Frank and Bran for securities fraud under the Federal Securities Exchange Act of 1934. The court determined that there was securities fraud and that Frank was 80% at fault and Bran was 20% at fault due to her negligence in the audit. Both Frank and Bran are solvent and the damages were determined to be $1 million. What is the maximum liability of Bran? A. $0 B. $200,000 C. $500,000 D. $1,000,000

B. $200,000

67) Assume that a CPA firm was negligent but not grossly negligent in the performance of an engagement. Which of the following plaintiffs probably would not recover losses proximately caused by the auditors' negligence? A. A loss sustained by a client in a suit brought under common law. B. A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent. C. A loss sustained by initial purchasers of stock in a suit brought under the Securities Act of 1933. D. A loss sustained by a bank named as a third-party beneficiary in the engagement letter in a suit brought under common law.

B. A loss sustained by a lender not in privity of contract in a suit brought in a state court which adheres to the Ultramares v. Touche precedent.

1) ABC Company is audited by the Phoenix office of Willingham CPAs. Which of the following individuals would be least likely to be considered a "covered member" by the independence standard? A. Staff assistant on the audit. B. An audit partner in the Eloi office. C. A tax partner in Phoenix who performs no attest services for ABC Company or for any other clients. D. The partner in charge of Willingham CPAs (she does no work on the ABC Company Audit).

B. An audit partner in the Eloi office.

10) AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that: A. A questioning mind reveals doubt as to independence. B. An unacceptable risk of non-independence exists. C. The accountant is definitely not independent. D. There is substantial cause for a legal finding of non-independence.

B. An unacceptable risk of non-independence exists.

14) When a threat to independence arises, an auditor should consider: A. Alternative threats to a lack of independence B. Available safeguards to independence C. Global independence rules. D. Required lack of independence approaches.

B. Available safeguards to independence.

50) Which of the following is a correct statement related to CPA legal liability under common law? A. CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence. B. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed. C. CPAs may escape all personal liability through incorporation as a limited liability corporation. D. CPAs are guilty until they prove that they performed the audit with "good faith."

B. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.

64) A principle that may reduce or entirely eliminate auditor liability to a client is: A. Client constructive negligence. B. Client contributory negligence. C. Auditor ordinary negligence. D. Auditor gross negligence.

B. Client contributory negligence.

29) In determining the scope and nature of services to be performed in public practice, a CPA firm should: A. Require independence for all services performed. B. Determine that the performance of all services is consistent with the firm's members' role as professionals. C. Have in place internal control procedures. D. Only perform accounting related services.

B. Determine that the performance of all services is consistent with the firm's members' role as professionals.

63) The Second Restatement of the Law of Torts provides for auditor liability to a limited class of foreseen third parties for: A. Only criminal acts. B. Either ordinary or gross negligence. C. Only gross negligence. D. Only fraud.

B. Either ordinary or gross negligence.

51) Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security purchasers for: A. Lack of due diligence. B. Existence of scienter. C. Ordinary negligence. D. Auditors have no liability to security purchasers under this act.

B. Existence of scienter.

84) If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on: A. Ordinary negligence. B. Gross negligence. C. Strict liability. D. Criminal deceit.

B. Gross negligence.

89) If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on A. Negligence. B. Gross negligence. C. Strict liability. D. Criminal deceit.

B. Gross negligence.

3) Auditors are periodically punished for holding an investment in a client. This violates which ethical rule? A. Integrity. B. Independence. C. Non compliance with GAAP. D. Confidentiality.

B. Independence

71) Which of the following is the best defense that a CPA can assert against common law litigation by a stockholder claiming fraud based on an unqualified opinion on materially misstated financial statements? A. Lack of due diligence. B. Lack of gross negligence. C. Contributory negligence on the part of the client. D. A disclaimer contained in the engagement letter.

B. Lack of gross negligence.

19) Which of the following forms of organization is most likely to protect the personal assets of any partner or shareholder who has not been involved on an engagement resulting in litigation? A. Professional corporation. B. Limited liability partnership. C. Partnership. D. Subchapter M Incorporation.

B. Limited liability partnership.

55) Which of the following forms of organization is most likely to protect the personal assets of any partner, or shareholder who has not been involved on an engagement resulting in litigation? A. Professional corporation. B. Limited liability partnership. C. Partnership. D. Subchapter M Incorporation.

B. Limited liability partnership.

86) Under the Ultramares rule, to which of the following parties will an accountant be liable for ordinary negligence? A. Parties in privity; Foreseen parties B. Parties in privity; No Foreseen parties C. No Parties in privity; Foreseen parties D. No Parties in privity; No Foreseen parites

B. Parties in privity; No Foreseen parties

40) When an accountant is not independent, the accountant is precluded from issuing a: A. Compilation report. B. Review report. C. Management advisory report. D. Tax planning report.

B. Review report.

12) Which of the following is not a broad category of safeguards that mitigate or eliminate threats to independence? A. Safeguards created by the profession, legislation, or regulation. B. Safeguards created to assure proper training within both the client and attest environment. C. Safeguards implemented by the attest client. D. Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements.

B. Safeguards created to assure proper training within both the client and attest environment.

5) Which of the following is not a broad category of threat to auditor independence? A. Familiarity. B. Safeguards implemented by the client. C. Financial self interest. D. Undue Influence.

B. Safeguards implemented by the client.

46) Which of the following organizations issue international ethics standards for auditors? A. The AICPA. B. The IFAC. C. The SEC. D. The FASB.

B. The IFAC.

25) In which of the following circumstances would a covered member be considered independent when performing the audit of the financial statements of a new client for the year ended December 31, 20X3? A. The covered member resigned on January 17, 20X3 from the board of directors of the client, prior to accepting the new audit engagement. B. The covered member continues to hold an immaterial indirect financial interest in the client. C. The covered member continues to serve as a trustee for the client's pension plan and has the authority to make investment decisions. D. The covered member's spouse owns an immaterial amount of shares of common stock in the client.

B. The covered member continues to hold an immaterial indirect financial interest in the client.

87) Quincy bought Teal Corp. common stock in an offering registered under the Securities Act of 1933. Worth & Co., CPAs, gave an unqualified opinion on Teal's financial statements that were included in the registration statement filed with the SEC. Quincy sued Worth under the provisions of the 1933 Act that deal with omission of facts required to be in the registration statement. Quincy must prove that: A. There was fraudulent activity by Worth. B. There was a material misstatement in the financial statements. C. Quincy relied on Worth's opinion. D. Quincy was in privity with Worth.

B. There was a material misstatement in the financial statements.

43) A client company has not paid its 20X3 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the 20X4 audit, the 20X3 audit fees must be paid before the: A. 20X3 report is issued. B. 20X4 fieldwork is started. C. 20X4 report is issued. D. 20X5 fieldwork is started.

C. 20X4 report is issued.

77) Which of the following is accurate with respect to litigation involving CPAs? A. A CPA will not be found liable for an audit unless the CPA has audited all affiliates of that company. B. A CPA may not successfully assert as a defense that the CPA had no motive to be part of a fraud. C. A CPA may be exposed to criminal as well as civil liability. D. A CPA is primarily responsible, while the client is secondarily responsible for the notes in an annual report filed with the SEC.

C. A CPA may be exposed to criminal as well as civil liability.

42) 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 should be understood to preclude a CPA from responding to an inquiry made by: A. The trial board of the AICPA. B. An investigative body of a state CPA society. C. A CPA-shareholder of the client corporation. D. An AICPA voluntary quality review body.

C. A CPA-shareholder of the client corporation.

61) The burden of proof that must be proven to recover losses from the auditors under the Securities Exchange Act of 1934 is generally considered to be: A. Less than the Securities Act of 1933. B. The same as the Securities Act of 1933. C. Greater than the Securities Act of 1933. D. Indeterminate in relation to the Securities Act of 1933.

C. Greater than the Securities Act of 1933.

8) Which of the following is least likely to impair a CPA firm's independence with respect to a nonpublic audit client in the Oklahoma City office of a national CPA firm? A. A partner in the Oklahoma City office owns an immaterial amount of stock in the client. B. A partner in the Jersey City office owns 7% of the client's stock. C. A partner in the Oklahoma City office, who does not work on the audit, previously served as controller for the audit client. D. A partner in the Chicago office is also the vice president of finance for the audit client.

C. A partner in the Oklahoma City office, who does not work on the audit, previously served as controller for the audit client.

22) Which of the following forms of advertising would most likely be considered a violation of the AICPA Code of Professional Conduct? A. Advertising including the types of services offered and the standard fees for the services. B. Advertising including the experience of the firm's professional staff. C. Advertising including an indication that the firm has a close relationship with several tax court judges. D. Advertising including the percentage of the firm's staff that have CPA certificates.

C. Advertising including an indication that the firm has a close relationship with several tax court judges.

11) If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence, the auditor should: A. Conclude that the threat is not significant unless proven so. B. Conclude that the threat results in a lack of independence unless it can be shown that no impairment of independence occurs. C. Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all the relevant information. D. Consult the Statements on Auditing Standards for guidance.

C. Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all the relevant information.

35) A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is: A. Considered acceptable by the AICPA Code of Professional Conduct. B. Ill advised since it would impair the CPA's independence with respect to the client. C. Considered discreditable to the profession. D. A violation of generally accepted auditing standards.

C. Considered discreditable to the profession.

59) Assume that a client has encountered a $500,000 fraud and that the CPA's percentage of responsibility established at 10%, while the company itself was responsible for the other 90%. Under which approach to liability is the CPA most likely to avoid liability entirely? A. Absolute negligence. B. Comparative negligence. C. Contributory negligence. D. Joint Negligence.

C. Contributory negligence.

45) A primary purpose for establishing a code of conduct within a professional organization is to: A. Reduce the likelihood that members of the profession will be sued for substandard work. B. Ensure that all members of the profession perform at approximately the same level of competence. C. Demonstrate acceptance of responsibility to the interests of those served by the profession. D. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.

C. Demonstrate acceptance of responsibility to the interests of those served by the profession.

62) CPAs should not be liable to any party if they perform their services with: A. Ordinary negligence. B. Regulatory providence. C. Due professional care. D. Good faith.

C. Due professional care.

76) A limited liability partnership form of organization: A. Decreases liability of all partners of a CPA firm. B. Has similar liability requirements to that of a professional corporation. C. Eliminates personal liability for some, but not all, partners. D. Eliminates personal liability for all partners.

C. Eliminates personal liability for some, but not all, partners.

78) Starr Corp. approved a plan of merger with Silo Corp. One of the determining factors in approving the merger was the strong financial statements of Silo which were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo's financial statements. While performing the audit, Cox failed to discover certain instances of fraud which have subsequently caused Starr to suffer substantial losses. In order for Cox to be liable under common law, Starr, at a minimum, must prove that Cox: A. Acted recklessly or with lack of reasonable grounds for belief. B. Knew of the instances of fraud. C. Failed to exercise due care. D. Was grossly negligent.

C. Failed to exercise due care.

7) Contingency fee based pricing of accounting services is: A. Always strictly prohibited in public accounting practice. B. Never restricted in public accounting practice. C. Prohibited for clients for whom attestation services are provided. D. Considered an act discreditable to the profession.

C. Prohibited for clients for whom attestation services are provided.

13) Which of the following statements is correct? A. Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received. B. CPA working papers are the joint property of the CPA and the client. C. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid. D. CPA working papers that include copies of client's records are not available to third parties under any circumstances.

C. Supporting records not reflected in the client's records (e.g., proposed adjusting entries) may be withheld by the CPA if fees for the engagement remain unpaid.

82) Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements? A. The CPA is liable only to third parties in privity of contract with the CPA. B. The CPA is liable only to known users of the financial statements. C. The CPA probably is liable to any person who suffered a loss as a result of the fraud. D. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on the opinion.

C. The CPA probably is liable to any person who suffered a loss as a result of the fraud.

9) Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"? A. A close relative has a material investment in that client of which the CPA is not aware. B. A cousin has an immaterial investment in the client of which the CPA is aware. C. The CPA's father is president of the audit client. D. The CPA's spouse participates in a savings plan sponsored by the client.

C. The CPA's father is president of the audit client.

37) An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue? A. Information obtained as a result of a consulting services engagement is confidential to that specific engagement and should not influence performance of the attest function. B. The decision as to loss of independence must be made by the client based on the facts of the particular case. C. The auditor should not make management decisions for an audit client. D. The auditor who is asked to review management decisions, is also competent to make these decisions and can do so without loss of independence.

C. The auditor should not make management decisions for an audit client.

41) Competence as a certified public accountant includes all of the following except: A. Having the technical qualifications to perform an engagement. B. Possessing the ability to supervise and to evaluate the quality of staff work. C. Warranting the infallibility of the work performed. D. Consulting others if additional technical information is needed.

C. Warranting the infallibility of the work performed.

66) A case by a client against its CPA firm alleging negligence would be brought under: A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The state blue sky laws. D. Common law.

D. Common law.

68) Which of the following court cases highlighted the need for obtaining engagement letters for professional services? A. Ultramares v. Touche. B. Rosenblum v. Adler. C. Hochfelder v. Ernst. D. 1136 Tenants Corporation v. Rothenberg.

D. 1136 Tenants Corporation v. Rothenberg.

24) Which of the following acts by a CPA would most likely be considered a violation of the AICPA Code of Professional Conduct? A. Assisting a client in preparing a financial forecast. B. Forming a professional corporation to practice as a CPA. C. Accepting a fee in a tax matter relating to an administrative proceeding. D. A "covered member" owns an immaterial amount of stock in an audit client.

D. A "covered member" owns an immaterial amount of stock in an audit client.

20) Jones & Company CPAs has one office. Which of the following is least likely to impair independence with respect to an audit client? A. The client owes the firm for two prior years' audit fees. B. A partner in the CPA firm is the son of the president of the client. C. The wife of a partner in the firm has a small direct financial interest in the client. D. A partner in the firm has an investment in a mutual fund that has a direct interest in the client.

D. A partner in the firm has an investment in a mutual fund that has a direct interest in the client.

27) A CPA should maintain objectivity and be free of conflicts of interest when performing: A. Audits, but not any other professional services. B. All attestation services, but not other professional services. C. All attestation and tax services, but not other professional services. D. All professional services.

D. All professional services.

69) In which type of court case is proving "due diligence" essential to the auditors' defense? A. Court cases brought under the Securities Exchange Act of 1934. B. Court cases brought by clients under common law. C. Court cases brought by third parties under common law. D. Court cases brought under the Securities Act of 1933.

D. Court cases brought under the Securities Act of 1933.

39) The concept of materiality would be 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 upon the CPA's independence.

D. Effects of a direct financial interest in the client upon the CPA's independence.

53) An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the Restatement of Torts approach to liability, the auditor is generally liable to the bank which subsequently grants the loan for: A. Lack of due diligence. B. Lack of good faith. C. Gross negligence, but not ordinary negligence. D. Either ordinary or gross negligence.

D. Either ordinary or gross negligence.

54) An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would eventually give the loan. Under the foreseeable third party approach, the auditor is generally liable to the bank which subsequently grants the loan for: A. Lack of due diligence. B. Lack of good faith. C. Gross negligence, but not ordinary negligence. D. Either ordinary or gross negligence.

D. Either ordinary or gross negligence.

81) A CPA's duty of due care to a client most likely will be breached when a CPA: A. Gives a client an oral report instead of a written report. B. Gives a client incorrect advice based on an honest error of judgment. C. Fails to give tax advice that saves the client money. D. Fails to follow generally accepted auditing standards.

D. Fails to follow generally accepted auditing standards.

36) The AICPA Code of Professional Conduct would be violated if a CPA accepted a fee for services and the fee was: A. Fixed by a public authority. B. Based on a price quotation submitted in competitive bidding. C. Based on performing work relating to judicial proceedings. D. Payable if the audit of the financial statements led to a loan.

D. Payable if the audit of the financial statements led to a loan.

58) Assume that $500,000 in damages are awarded to a plaintiff, and the CPA's percentage of responsibility established at 10%, while others are responsible for the other 90%. Assume the others have no financial resources. The CPA has been required to pay $50,000. The auditor's liability is most likely based upon which approach to assessing liability? A. Absolute liability. B. Contributory negligence. C. Joint and several liability. D. Proportional liability.

D. Proportional liability.

4) 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? A. AICPA ethics examiner. B. Peer. C. PCAOB inspector. D. Reasonably informed third party.

D. Reasonably informed third party.

23) If a CPA violates the AICPA Code of Professional Conduct, the AICPA Trial Board may do all of the following, except: A. Admonish the offending member. B. Suspend the offending member. C. Expel the offending member. D. Revoke the offending member's CPA certificate.

D. Revoke the offending member's CPA certificate.

56) Under which common law approach are auditors most likely to be held liable for ordinary negligence to a "reasonably foreseeable" third party? A. Due Diligence Approach. B. Ultramares Approach. C. Restatement of Torts Approach. D. Rosenblum Approach.

D. Rosenblum Approach.

70) Which common law approach leads to increased CPA liability to "foreseeable" third parties for ordinary negligence? A. Ultramares v. Touche. B. Restatement of Torts. C. Rule 10b-5. D. Rosenblum v. Adler.

D. Rosenblum v. Adler.

30) Independence of a CPA with respect to a client is not impaired if: A. The CPA has a loan to an officer of the client. B. The CPA has an immaterial direct interest in the client. C. The CPA is trustee for the client's pension plan. D. The CPA has an immaterial joint, closely held business investment with the client.

D. The CPA has an immaterial joint, closely held business investment with the client.

49) A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? A. The investor has not proven CPA negligence. B. The investor did not rely upon the financial statement. C. The CPA detected the misstatement after the audit report date. D. The misstatement is immaterial in the overall context of the financial statements.

D. The misstatement is immaterial in the overall context of the financial statements.