Audit Ch 3 Study Guide
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.
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.
The following is a list of circumstances that might be faced by a public accounting firm. Select the rule violated of the AICPA Code of Professional Conduct in the second column. If no rule is violated select 10-no violation (this may be used once, more than once, or not at all). Rules 1 through 9 may be used either once, or not at all. Circumstance Rule Violated A. The dependent-son of a partner in a CPA firm owns ten shares of stock in an audit client. 1. Accounting principles. B. In preparing a tax return, a CPA takes a deduction at the client's request that the CPA believes is not justified. 2. Acts discreditable. C. A CPA robs a bank. 3. Advertising and other forms of solicitation. D. A CPA owns 100 shares in a consulting client for which the firm provides no attest services.4. Commissions and referral fees. E. A CPA charges an audit fee that depends on the amount of credit the client obtains. 5. Compliance with standards. F. A CPA advertises in a local newspaper. 6. Confidential client information. G. A client knowingly issues financial statements that inappropriately and materially depart from a FASB standard. 7. Contingent fees. H. A CPA and the president of an audit client both have an immaterial joint investment in another company. The CPA firm provides no services for the other company. 8. Independence. I. A CPA discloses information about a client because the information was subpoenaed. 9. Integrity and objectivity. J. A CPA does not follow generally accepted auditing standards in the audit of a nonpublic US company. 10. No violation.
A. 8. Independence. B. 9. Integrity and objectivity. C. 2. Acts discreditable. D. 10. No violation. E. 7. Contingent fees. F. 10. No violation. G. 1. Accounting principles. H. 10. No violation. I. 10. No violation. J. 5. Compliance with standards.
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.
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.
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.
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? Item AICPA SEC A. Yes Yes B. Yes No C. No Yes D. No No A. Option A B. Option B C. Option C D. Option D
A. Option A
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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: Item CPA Direct Communication With Shareholders The Process of Filing a Form 8-K A. Yes Yes B. Yes No C. No Yes D. No No A. Option A B. Option B C. Option C D. Option D
C. Option C
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
A CPA may receive a commission for recommending a particular computer system to an audit client.
False
CPAs can advertise the fees only for their nonattest services.
False
CPAs may not advertise as to any special expertise other than in accounting, auditing, and tax
False
Financial interests of a CPA's nondependent children are attributed directly to the CPA.
False
The American Institute of Certified Public Accountants has been the primary source for ethical rules for internal auditors.
False
The Rules portion of the AICPA Code of Professional Conduct must be followed by only those members in private practice
False
The communications between CPAs and their clients are privileged under federal law.
False
An immaterial loan from the CPA to an officer of a client impairs the independence of the CPA
True
Statements on Accounting and Review Services are enforceable under the AICPA Code of Professional Conduct.
True
The AICPA Code of Professional Conduct derives its authority from the Bylaws of the AICPA.
True
CPAs are allowed to advertise under the Rules of the AICPA Code of Professional Conduct. a. List the general guidelines regarding the nature of acceptable advertising. b. Describe two specific forms of unacceptable advertising.
a. Advertising is acceptable if it is not false, misleading, or deceptive. b. Unacceptable forms of advertising include advertising that (only two required): • Creates unjustified expectations of favorable results. • Indicates an ability to influence a court or other official body. • Misstates professional qualifications
The AICPA's Code of Professional Conduct includes principles, rules and interpretations. a. Describe the purpose of each of the three parts. b. Describe the disciplinary action that may be taken against a member who violates the Code. c. Must the Rules be followed by members of the AICPA that are not in public practice? Explain your answer
a. Principles provide an overall ethical framework. Rules are enforceable applications of the principles. Interpretations provide guidelines for the scope and application of the Rules. b. For violations of the Code a member may be required to take remedial action, such as attending continuing education programs. For more serious violations, the member may be censured, suspended, or expelled. c. No, not all standards must be followed by those not in public practice. Members in business must follow the following rules—Integrity and Objectivity, General Standards (general standards, compliance with standards, accounting principles) and Acts Discreditable. Other CPAs not in public practice or business only must follow the Acts Discreditable rule.
The Sarbanes-Oxley Act of 2002 placed significant restrictions on the types of consulting that may be performed by auditors for their public company audit clients. a. List four types of services that are prohibited by the Act. b. List three types of general consulting activities that would impair the auditors' independence based on the AICPA Code of Professional Conduct.
a. Services prohibited by the Act include (4 required): • Bookkeeping or other services related to the accounting records or financial statements. • Financial information systems design and implementation. • Appraisal, valuation, and actuarial services. • Internal audit outsourcing services, management functions, or human resources. • Various investment services. • Legal services and expert services unrelated to auditing. b. Consulting functions that the AICPA Code of Professional Conduct indicate impair independence include (3 required): • Authorizing, executing, or consummating a transaction. • Preparing source documents. • Having custody of client assets. • Supervising client employees in their normal recurring activities. • Determining which recommendation should be implemented. • Reporting to the board of directors on behalf of management. • Serving as a client's stock transfer or escrow agent, registrar, or its general counsel.
