Chapter 19

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) The CPA is issued a summons enforceable by a court order that orders the CPA to present confidential information. B) A major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the requested information. C) Confidential client information is requested as part of a quality review of the CPA's practice by a review team authorized by the AICPA. D) An inquiry by a disciplinary body of a state CPA society requests confidential client information.

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

According to the ethical standards of the profession, which of the following acts is generally prohibited? A) Purchasing a product from a third party and reselling it to a client. B) Writing a financial management newsletter promoted and sold by a publishing company. C) Accepting a commission for recommending a product to an audit client. D) Accepting engagements obtained through the efforts of third parties.

Accepting a commission for recommending a product to an audit client.

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

All CPA owners must be members of the institute.

Which of the following is an element of a CPA firm's quality control system that should be considered in establishing its quality control policies and procedures? A) Using the audit risk model. B) Using statistical sampling techniques. C) Assigning personnel to engagements. D) Considering audit risk and materiality.

Assigning personnel to engagements.

A violation of the profession's ethical standards would least likely have occurred when a CPA in public practice: A) used a records-retention agency to store the CPA's working papers and client records. B) served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff. C) referred life insurance assignments to the CPA's spouse, who is a life insurance agent. D) failed to file his personal tax return.

used a records-retention agency to store the CPA's working papers and client records.

Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who also is an attorney, serves as auditor and provides legal services to the same private client? A) When the CPA, as legal agent, consummates a business acquisition for the client. B) When the CPA's audit fees and legal fees are not billed separately. C) When the CPA uses legal expertise to research a question of income tax law. D) When the legal services consist of an analysis of the terms of an existing lease agreement.

When the CPA, as legal agent, consummates a business acquisition for the client.

The quality control standards are concerned with: A) actions of individual auditors. B) a firm's monitoring of its practice. C) disciplinary actions against individual auditors. D) preventing legal action.

a firm's monitoring of its practice.

A CPA's failure to file a tax return is: A) considered acceptable by the AICPA Code of Professional Conduct. B) ill-advised because it would impair the CPA's independence with respect to attest clients. C) considered discreditable to the profession. D) a violation of generally accepted auditing standards.

considered discreditable to the profession.

A CPA's membership in the AICPA will ordinarily be suspended or revoked automatically for: A) controlling the bookkeeping for a compilation client. B) conviction of willful failure to file personal income tax return. C) refusing to respond to an inquiry by the AICPA practice review committee. D) accepting compensation while honoring a subpoena to appear as an expert witness.

conviction of willful failure to file personal income tax return.

In order to achieve effective quality control, a firm of independent auditors should establish policies and procedures for: A) determining the minimum procedures necessary for unaudited financial statements. B) setting the scope of audit work. C) deciding whether to accept or continue a client. D) setting the scope of internal control study and evaluation.

deciding whether to accept or continue a client.

Following the issuance of a PCAOB draft report, how many days does the CPA firm have to respond to accusations? A) 10 days. B) 30 days. C) 50 days. D) 90 days.

30 days.

According to the profession's ethical standards, a CPA would be considered independent in which of the following instances? A) A client leases part of an office building from the CPA, resulting in a material indirect financial interest to the CPA. B) The CPA has a material direct financial interest in a client, but transfers the interest into a blind trust. C) The CPA owns an office building and the mortgage on the building is guaranteed by a client. D) A client has not paid CPA fees from a 3rd Quarter review just prior to the annual audit.

A client has not paid CPA fees from a 3rd Quarter review just prior to the annual audit.

In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining a fee? A) A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan. B) A fee based on an estimate of the number of hours needed to complete the engagement by auditors of various levels of experience. C) A fee based on the nature of the service rendered and the CPA's particular expertise instead of the actual time spent on the engagement. D) A fee based on the fee charged by the prior auditor.

A fee based on whether the CPA's report on the client's financial statements results in the approval of a bank loan.

Which of the following bodies ordinarily would have the authority to suspend or revoke a CPA's license to practice public accounting? A) The SEC. B) The AICPA. C) A state CPA society. D) A state board of accountancy.

A state board of accountancy.

Which of the following is allowable for a CPA? A) A used car loan from a banking client where the client has a lien on the car. B) An uncollateralized signature loan from a client. C) Owning more than five percent of the outstanding shares of client stock in a retirement account. D) The audit engagement partner (or partner equivalent) serves on the client's audit committee.

A used car loan from a banking client where the client has a lien on the car.

Which of the following statements best describes why the profession of certified public accountants has deemed it essential to promulgate a code of conduct and to establish a mechanism for enforcing observance of the code? A) Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate. B) A prerequisite to success is the establishment of an ethical code that stresses primarily the professional's responsibility to clients and colleagues. C) A requirement of most state laws calls for the profession to establish a code of conduct. D) An essential means of self-protection for the profession is the establishment of flexible ethical standards by the profession.

Ethical standards are established so that users of accounting services know what to expect, the professionals know what behaviors are acceptable, and overseers can take disciplinary action when appropriate.

Which of the following is not an element of quality control as defined by Statement of Quality Control Standards No. 8? A) Monitoring. B) Independence. C) Human resources. D) Relevant ethical requirements.

Independence.

In performing an audit, Jackson, CPA, discovers that the professional competence necessary for the engagement is lacking. Jackson informs management of the situation and recommends another local CPA firm and management engages this other firm. Under these circumstances, A) Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement. B) Jackson may accept a referral fee from the other CPA firm. C) Jackson has violated the AICPA Code of Professional Conduct because of non-fulfillment of the duty of performance. D) Jackson's lack of competence should be construed to be a violation of generally accepted auditing standards.

Jackson may request compensation from the other CPA firm for any professional services rendered to it in connection with the engagement.

What is a purpose of the acceptance and continuance of client relationships and specific engagements element of quality control? A) Guarantee that firms do not associate with clients whose management lacks integrity. B) Provide reasonable assurance that firms do not associate with clients whose management lacks integrity. C) Guarantee that firms will not be sued as a result of association with a client. D) Provide reasonable assurance that firms will not be sued as a result of association with a client.

Provide reasonable assurance that firms do not associate with clients whose management lacks integrity.

A CPA firm evaluates its personnel advancement experience to ascertain whether individuals assigned to increased degrees of responsibility meet predetermined criteria. This policy is evidence of the firm's adherence to which of the following prescribed standards? A) Professional ethics. B) Supervision and review. C) Accounting and review services. D) Quality control.

Quality control.

Which of the following is not a Principle of Professional Conduct as defined by the Code of Professional Conduct? A) Integrity. B) Due care. C) Reporting. D) Scope and nature of services.

Reporting.

According to the ethical standards of the profession, which of the following acts is generally prohibited? A) Issuing a modified report explaining a failure to follow a governmental regulatory agency's standards when conducting an attest service for a client. B) Revealing confidential client information during a quality review of a professional practice by a team from the state CPA society. C) Accepting a contingent fee for representing a client in an examination of the client's federal tax return by an IRS agent. D) Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.

Retaining client records after an engagement is terminated prior to completion and the client has demanded its return.

In which of the following circumstances would a CPA who audits XM Corporation lack independence? A) The CPA and XM's president are both on the board of directors of COD Corporation. B) The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company. C) The CPA has an automobile loan from XM, which is a savings and loan organization and the loan is collateralized by the automobile. D) The CPA reduced XM's usual audit fee by 40 percent because XM's financial condition was unfavorable.

The CPA and XM's president each owns 25 percent of FOB Corporation, a closely-held company.

When auditing a public company, which of the following impairs an auditor's independence? A) Offering audit services as well as preparing the tax return for the same client. B) The auditor's spouse works in the assembly line of an audit client. C) Lack of fee disclosure in the client's annual report. D) The auditor has been a partner on the engagement for ten years.

The auditor has been a partner on the engagement for ten years.

According to the Code of Professional Conduct, which of the following individuals is not in a position to influence an attest engagement (i.e., not a covered member)? A) The office's managing partner (or partner equivalent) who determines the compensation of the attest engagement partner. B) The office's IT expert partner, who consulted with the engagement partner (or partner equivalent) regarding the client's IT system and spent 15 hours on the engagement. C) The partner (or partner equivalent) in another office in a nearby city who regularly plays golf with the engagement partner (or partner equivalent) and does not work on the engagement or have any interaction with the client. D) The office's partner (or partner equivalent) who monitors quality control over the attest engagement.

The partner (or partner equivalent) in another office in a nearby city who regularly plays golf with the engagement partner (or partner equivalent) and does not work on the engagement or have any interaction with the client.

A basic objective of a CPA firm is to provide professional services that conform to professional, legal, and regulatory requirements. Reasonable assurance of achieving this basic objective is provided through: A) compliance with generally accepted reporting standards. B) a system of quality control. C) a system of peer review. D) continuing professional education.

a system of quality control.

The profession's ethical standards would most likely 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) CPA would not be independent. B) fee was a competitive bid. C) actual fee would be substantially higher. D) actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

actual fee would be substantially higher.

In determining estimates of fees, an auditor may take into account each of the following, except the: A) value of the service to the client. B) degree of responsibility assumed by undertaking the engagement. C) skills required to perform the service. D) attainment of specific findings.

attainment of specific findings.

An auditor is about to commence a recurring annual audit engagement. The continuing auditor's independence would ordinarily be considered to be impaired if the prior year's audit fee: A) was unusually large. B) has not been paid and will not be paid for at least twelve months. C) has not been paid and the client has filed a voluntary petition for bankruptcy. D) was renegotiated during the prior year audit based on the need for expanded testing.

has not been paid and will not be paid for at least twelve months.

A CPA firm would be reasonably assured of meeting its overall responsibility to provide services that conform with professional standards by: A) adhering to generally accepted accounting principles. B) implementing an appropriate system of quality control. C) joining professional societies that enforce ethical conduct. D) maintaining an attitude of independence in its engagements.

implementing an appropriate system of quality control.

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: A) perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are alleviated. B) perform the scheduled audit only after arranging a definite payment schedule and securing notes signed by South Bay. C) inform South Bay's management that the past due audit fees are considered an impairment of auditor independence. D) inform South Bay's management that the past due audit fees may be considered a loan on which interest must be imputed for financial statement purposes.

inform South Bay's management that the past due audit fees are considered an impairment of auditor independence.

With respect to ethics, the justice-based approach: A) suggests that auditors should always verify ownership of a client's material tangible assets. B) is primarily concerned with equity and impartiality. C) suggests that an individual's actions should not violate the rights of any individual. D) recognizes that decisions involve trade-offs between costs and benefits.

is primarily concerned with equity and impartiality.

A violation of the profession's ethical standards would most likely have occurred when a CPA: A) purchased a bookkeeping firm's practice of monthly write-ups for a percentage of fees received over a three-year period. B) made arrangements with a bank to collect notes issued by a client in payment of fees due. C) named Smith formed a partnership with two other CPAs and used "Smith & Co." as the firm name. D) issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.

issued an unqualified opinion on the 2011 financial statements when fees for the 2010 audit were unpaid.

A CPA, while performing an audit, strives to achieve independence in appearance in order to: A) reduce risk and liability. B) meet the minimum requirements of the code of professional conduct. C) become independent in fact. D) maintain public confidence in and reliance on the profession.

maintain public confidence in and reliance on the profession.

A major purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to: A) enable the CPA firm to attest to the reliability of the client. B) satisfy the CPA firm's duty to the public concerning the acceptance of new clients. C) minimize the likelihood of association with clients whose management lacks integrity. D) anticipate before performing any fieldwork whether an unqualified opinion can be expressed.

minimize the likelihood of association with clients whose management lacks integrity.

For private companies, accounting firms are prohibited from providing: A) outsourced internal audit services. B) audit services. C) review services. D) none of these.

outsourced internal audit services, audit services, review services (none of these)

A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether the individuals who were assigned increased degrees of responsibility met predetermined criteria. This is evidence of the CPA firm's adherence to prescribed standards of: A) quality control. B) objectivity and independence. C) supervision and review. D) scope and nature of services.

quality control.

With respect to ethics, the utilitarian theory: A) suggests that auditors should always verify ownership of a client's material tangible assets. B) is primarily concerned with equity and impartiality. C) suggests that an individual's actions should not violate the rights of any individual. D) recognizes that decisions involve trade-offs between costs and benefits.

recognizes that decisions involve trade-offs between costs and benefits.

A violation of the profession's ethical standards would most likely occur when a CPA who: A) is also admitted to the Bar represents on letterhead to be both an attorney and a CPA. B) writes a newsletter on financial management also permits a publishing company to solicit subscriptions by direct mail. C) is controller of a bank permits the bank to use the controller's CPA title in the listing of officers in its publications. D) refused to hire a new employee does so because the CPA deemed the candidate to be "too old."

refused to hire a new employee does so because the CPA deemed the candidate to be "too old."

In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a: A) charitable organization in which an employee of the CPA serves as treasurer. B) municipality in which the CPA owns $25,000 of the $2,500,000 indebtedness of the municipality. C) restaurant where the CPA dines frequently. D) company in which the CPA's private investment club owns a one-tenth interest.

restaurant where the CPA dines frequently.

In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is protected by the: A) auditor's acquiescence in use of this defense. B) common law. C) AICPA Code of Professional Conduct. D) state law.

state law.

With respect to ethics, the rights-based approach: A) suggests that auditors should always verify ownership of a client's material tangible assets. B) is primarily concerned with equity and impartiality. C) suggests that an individual's actions should not violate the rights of any individual. D) recognizes that decisions involve trade-offs between costs and benefits.

suggests that an individual's actions should not violate the rights of any individual.

In auditing a publicly held company, an auditor must follow the professional standards established by all of the following except: A) the AICPA's Auditing Standards Board. B) the SEC Independence Rules. C) the PCAOB Code of Professional Conduct. D) the PCAOB Auditing Standards.

the AICPA's Auditing Standards Board.

In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a brokerage firm: A) which owes the CPA audit fees for more than one year. B) in which the CPA has a large active account. C) in which the CPA's brother is the controller. D) which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.

which owes the CPA audit fees for current year services and has just filed a petition for bankruptcy.

The SEC has issued independence rules that differ from the AICPA's in all of the following areas except: A) working paper documentation. B) provision of other professional services. C) human resource and compensation-related issues. D) required communication.

working paper documentation.