HW 1

according to the ethical standards of the profession, a CPA's independence would most likely be impaired if the CPA: a. accepted any gift from a client. b. became a member of a trade association that is a client. c. contracted with a client to supervise the client's office personnel. d. served, with a client bank, as a co-fiduciary of an estate or trust.

Answer (A) is incorrect because Gifts with clearly insignificant value from a client are not considered to impair independence. Answer (B) is incorrect because Membership in a client trade association will not impair independence provided the member is not an officer or a director, or in a position equivalent to management. Answer (C) is correct. Supervising client employees in normal circumstances impairs independence. Supervising client personnel is a type of management function. Performing management functions or making management decisions impairs independence, but providing advice, research, and recommendations does not. Answer (D) is incorrect because Mere designation as a trustee or executor does not impair independence in the foregoing circumstance but that actual service does.

Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchange Commission. How many annual audit period(s) must be completed before such employment can be accepted. a. one. b. two. c. three. d. five.

a. 1 To impose a disincentive to fraud, an audit team member may not accept employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchange Commission for one year.

Smith, CPA, is a partner of Johnson Accounting Firm. Johnson audited the books of Hometown Bank. Smith's independence would be impaired under which of the following circumstances? a. Smith is a director of Hometown Bank. b. Smith has a collateralized automobile loan with Hometown Bank. c. Smith had an account with Hometown Bank 2 years ago. d. Smith and a Hometown Bank board member belong to the same church.

a. Smith is a director of Hometown Bank. Independence is impaired if a firm or one of its partners is associated with the client as an officer, director, manager, employee, etc. Independence is impaired by business relationships with the client, including acting as a director of the client.

which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice? a. information processing b. engagement performance c. technology selection d. professional skepticism

b. engagement performance Performance of the engagement is one of the six interrelated elements of quality control.

an independent auditor must have which of the following? a. a pre-existing and well-informed point of view with respect to the audit. b. technical training that is adequate to meet the requirements of a professional. c. a background in many different disciplines. d. experience in taxation that is sufficient to comply with generally accepted auditing standards.

b. technical training that is adequate to meet the requirements of a professional. The General Standards Rule of the AICPA Code of Professional Conduct states that auditor must have adequate technical training as an auditor.

During an audit of the financial statements of a company, the CFO provides a spreadsheet to the audit team that contains a number of errors that are material to the financial statements. Under what circumstances would this situation be a violation of the rules of the Sarbanes-Oxley Act of 2002 on improper influence on the conduct of audits? a. the CFO discovers and corrects most the errors in the spreadsheet, which was prepared by a staff accountant. One immaterial error remains of which the CFO is aware, and this error remains undetected by the audit team, but the financial statements end up being fairly presented. b. the audit team discovers the errors through alternative procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit. c. the CFO had the spreadsheet prepared by a vendor of the company; the vendor intentionally misstates information in the spreadsheet, and the CFO does not discover the misstatements. The errors remain undetected by the audit team, and the financial statements are materially misleading. d. the CFO was unaware of the errors in the spreadsheet, which was prepared by a staff accountant and reviewed by the CFO. The errors remain undetected by the audit team, and the financial statements are materially misleading.

b. the audit team discovers the errors through alternative procedures when they discern that the spreadsheet was improperly manipulated by the CFO. This intentional conduct of the CFO does not succeed in affecting the audit. It is unlawful for (1) any officer or director of an issuer to do any act (2) to fraudulently influence, coerce, manipulate, or mislead any auditor performing an audit if (3) the purpose is to render the financial statements materially misleading. The CFO is not excused by failure to affect the audit. Improper influence occurs when an officer or director of an issuer fraudulently influences, coerces, manipulates, or misleads the independent auditor of the financial statements for the purpose of rending the financial statements meterially misleading. In this situation, the auditor identified material errors that were intentionally recorded by the CFO. However, this fraudulent manipulation did not effect the audit. Based on the circumstances, it appears that improper influence most likely occurred because the auditor knew of the manipulation but did not to allow it to affect the audit.

according to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA's independence? a. all direct and indirect financial interests. b. only direct financial interests. c. only direct and material indirect financial interests. d. only material financial interests.

c. Independence shall be considered to be impaired if, during the period of the professional engagement, the CPA had a direct or material indirect financial interest in the client.

under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest? a. an investment held in a retirement plan. b. an investment held in a blind trust. c. an investment held through a regulated mutual fund. d. an investment held through participation in an investment club.

c. an investment held through a regulated mutual fund. A CPA in public practice must be independent in fact and appearance. Independence will be impaired if the CPA has a DIRECT financial interest with an attestation client or a material INDIRECT financial interest in a client. An INDIRECT financial interest involves a removed relationship such as owning share in a mutual fund that owns stock in a corporate client. Choices a, b and d are incorrect. A DIRECT financial interest is an interest held DIRECTLY in a client. An interest in a client's retirement plan or in a blind trust holding stock in a client would be considered a direct interest.

Section 404 of the Sarbanes-Oxley Act of 2002 requires each annual report of an issuer to include which of the following? a. representations from the company's external auditors that the company has effective internal control over operations. b. management representations that the company's external auditors have examined its internal control over compliance with laws and regulations. c. reasonable assurances that fraud will be identified before the issuance of the company's annual report d. management's assessment of the effectiveness of internal control over financial reporting.

d. management's assessment of the effectiveness of internal control over financial reporting. Every public company (an issuer) must include in its annual report management's assessment of the design and effectiveness of internal control over financial reporting.

A CPA 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 are not material to the CPA's wealth but are material to the child's personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA's independence with the client? a. no, because the CPA would not have a direct financial interest in the client. b. yes, because the stock would be a direct financial interest and materiality is a factor. c. yes, because the stock would be an indirect financial interest and materiality is not a factor. d. yes, because the stock would be direct financial interest and materiality is not a factor.

d. yes, because the stock would be direct financial interest and materiality is not a factor. The Independence Rule requires that a CPA not have any direct financial interests in the client, regardless of materiality. This rule extends to the covered member's spouse and dependents. Direct is when you have interest in client, member's spouse or dependents. with an individual, human being.