Audit - SU 1 & 2
Audit engagement team members should remain alert for evidence of noncompliance with which of the following relevant ethical requirements? A) Performing professional responsibilities with the highest sense of integrity. B) Performing audit procedures efficiently and within expected time budgets. C) Maintaining confidentiality of client information by not including it in the audit documentation. D) Maintaining a suspicious attitude, presuming that the client is dishonest until evidence proves otherwise.
A "All members should perform all professional responsibilities with the highest sense of integrity to maintain public confidence. Integrity requires a member to be honest and candid within the limits of client confidentiality" (Integrity Principle, Code of Professional Conduct). Why Incorrect: B) An auditor should complete professional services according to professional standards and with reasonable care and diligence. However, the Code of Professional Conduct does not require adherence to expected time budgets. C) A member in public practice must not disclose confidential client information without the client's consent. Accordingly, an auditor should protect the confidentiality of client information included in the audit documentation by establishing reasonable safeguards, such as prevention of unauthorized access. Nevertheless, an audit cannot be adequately documented without inclusion of confidential client information. D) An auditor should maintain professional skepticism. But (s)he should not assume that management is either dishonest or unquestionable honest
According to the AICPA Code of Professional Conduct, under which of the following circumstances may a CPA receive a contingent fee for services? A) Representing a client in an IRS examination of the client's federal income tax return. B) Examining a client's prospective financial information. C) Preparing a client's federal income tax return. D) Reviewing a client's financial statements.
A A contingent fee is permitted for representing a client in an IRS examination by a revenue agent of the client's federal (or state) income tax return. A contingent fee also is permitted for representing a client who is (1) seeking a private letter ruling from the IRS or (2) lobbying with regard to the drafting of a statute or regulation. Why Incorrect: B) The Code prohibits accepting a contingent fee for examining a client's prospective financial information. C) The Code prohibits accepting a contingent fee for preparing a client's federal income tax return. D) The Code prohibits accepting a contingent fee for auditing or reviewing a client's financial statements.
Regarding employment or association with attest clients, the employment of a former partner by a client in a key position most likely impairs firm independence if A)The former partner consults with the accounting firm. B)Amounts are to be paid to the former partner based on a fixed formula. C)The former partner cannot influence the accounting firm's operations. D)Team members have interactions with the former partner.
A A former partner or professional employee of the firm who is employed by or associated with an attest client in a key position impairs the firm's independence unless, among other things, the former partner does not participate or appear to participate in, and is not associated with, the firm, regardless of compensation. For example, such activity may be by consulting, use of an office, or inclusion in membership lists. Why Incorrect: B) One of the conditions for not impairing the firm's independence is that amounts due to the former partner are not material to the firm, the payment formula is fixed during the payout period C)The former partner's inability to influence the firm's operations or financial policies is one of the conditions for not impairing the firm's independence D) The former partner may have a key position with the client without impairing firm independence if certain conditions are met, for example, that the engagement is reviewed to determine whether team members maintained professional skepticism in dealing with the former partner
At least how often should the PCAOB inspect a registered public accounting firm that regularly issues audit reports to 50 issuers? A) Every 3 years. B) Every 2 years. C) Annually. D) As requested by the firm.
A A registered public accounting firm is inspected at least once every 3 calendar years. This requirement must be met beginning with the 3-year period following the calendar year in which its application for registration with the PCAOB is approved. But the requirement does not apply unless the firm, during any of the 3 previous calendar years, (1) issued an audit report for at least 1, but no more than 100, issuers or (2) was substantially involved in preparing or providing an audit report for at least one issuer. Why Incorrect: B,C,D) The PCAOB inspects audit firms every 3 years and every year if the firm audits 100 or more issuers.
Quality control for a CPA firm, as referred to in Statements on Quality Control Standards (SQCS), applies to A) Auditing and accounting and review services B) Auditing services only C) Auditing and consulting services D) Auditing and tax services
A According to QC 10, quality control for a CPA firm applies to all audit, attest, accounting and review, and other services for which professional standards have been established by the ASB and the Accounting and Review Services Committee. The SQCS therefore do not apply to compliance with standards for consulting services and tax services, which are issued by different AICPA technical committees. Why Incorrect: B,C,D) The SQCSs apply to auditing and accounting and review services but not to consulting and tax services
According to the PCAOB, an accounting firm's independence in least likely to be impaired if the firm A) Has an audit client that employs a former firm professional B) Provides a service to the audit client for a contingent fee C) Receives a commission from the audit client D) Provides tax services to a person in a financial reporting oversight role at the audit client
A Firm independence is impaired by a client's employment of a former firm professional that could adversely affect the audit unless safeguards are established. Pre-change safeguards include removal from the audit of those negotiating with the client, and post-change safeguards include possibly modifying the audit plan. Why Incorrect: B,C) A firm is not independent of its client if the firm or any affiliate, during the audit and engagement period, provides any service or product to the client for a contingent fee or a commission, or receives from the client a contingent fee or commission. D) A registered public accounting firm is not independent of its audit client if the firm or any affiliate, during the professional engagement period, provides any tax service to a person in a financial reporting oversight role at the audit client.
When a former partner of a registered public accounting firm who left the firm 2 years ago accepts a financial reporting oversight role at an issuer audit client, the independence of the registered public accounting firm is considered impaired unless which of the following is true? A) The former partner has no remaining capital balance in the registered public accounting firm. B) The former partner was employed by the registered public accounting firm for a period of 2 years or less. C) The former partner discloses the relationship to the issuer audit client's board of directors. D) The former partner exerts only limited influence over the registered public accounting firm's operations and financial policies.
A PCAOB Interim Independence Standards apply to audits of issuers. They include the AICPA's prior Conduct Rule 101, Independence, and related rulings and interpretations as of April 16, 2003, to the extent not superseded or amended. According to these PCAOB interim standards, a firm's independence may be impaired with respect to a client if a partner or professional employee leaves the firm and is subsequently employed by or associated with that client in a key position. However, independence is not impaired if, among other things, amounts due to the former partner or professional employee for (1) his or her previous interest in the firm and (2) unfunded, vested retirement benefits are not material to the firm. This assumes that the underlying formula used to calculate the payments remains fixed during the payout period. Retirement benefits also may be adjusted for inflation, and interest may be paid on amounts due. Moreover, the former partner or professional employee must not be in a position to influence the accounting firm's operations or financial policies. Under SEC independence standards, a registered public accounting firm is not independent if a former partner, principal, shareholder, or professional employee is in an accounting role or a financial reporting oversight role at an issuer audit client. But independence is not impaired if the individual (1) does not influence the accounting firm's operations or financial policies, (2) has no capital balances in the accounting firm, and (3) has no financial arrangement with the accounting firm other than one providing for regular payment of a fixed dollar amount (not dependent on the revenues, profits, or earnings of the accounting firm). PCAOB rules require compliance with the SEC rules if they are more restrictive. Why Incorrect: B) The length of employment is irrelevant. C) Mere disclosure is insufficient if the individual retains a financial interest. D) The individual should have no influence over the accounting firm's operations or financial policies.
According to the standards of the profession, which of the following activities most likely does not impair a CPA's independence? A)Providing extensive advisory services for a client. B)Contracting with a client to supervise the client's office personnel. C)Accepting a luxurious gift from an attest client. D)Signing a client's checks in emergency situations.
A Performance of advisory services does not, by itself, impair the independence required for attest services Why Incorrect: B) Supervising client employees in normal circumstances impairs independence C) Acceptance of a gift from an attest client impairs independence unless its value is clearly insignificant to the recipient. However, this rule applies only if the member recipient is (1) on the attest engagement team or (2) in a position to influence the engagement (D) Accepting responsibility for signing client checks, even in an emergency, impairs independence
Travis, the auditor for Boxcar Co., receives an email from Tom, Boxcar's CFO, about some ethically questionable accounting methods he wants to implement in the upcoming year. This situation is relevant to which quality control element? A) Acceptance and continuance of client relationships and specific engagements. B) Human resources. C) Relevant ethical requirements. D) Leadership responsibilities for quality within the firm.
A Policies and procedures should be established to provide reasonable assurance that the firm has considered the client's integrity and has no information leading to a conclusion that the client lacks integrity. The situation described falls under the scope of acceptance and continuance of client relationships and specific engagements. Why Incorrect: B) Human resources encompasses issues relating to personnel within the firm. C) An audit firm must consider whether the firm itself and its personnel comply with relevant ethical requirements. The situation described is an external matter. D) An audit firm should promote an internal culture recognizing that quality is essential in performing engagements. The situation described is an external matter.
According to the ethical standards of the profession, which of the following acts is generally prohibited for a member in public practice? A) Accepting a commission for recommending a product to an audit client. B) Purchasing a product from a third party and reselling it to a client. C) Accepting engagements obtained through the efforts of third parties. D) Writing a financial management newsletter promoted and sold by a publishing company.
A The Commissions and Referral Fees Rule prohibits a member in public practice from recommending any product or service to a client when the firm performs (1) an audit or review of financial statements, (2) a compilation of a financial statement that is reasonably expected to be used by a third party if the report does not disclose the CPA's lack of independence, or (3) an examination of prospective financial information for that client. Why Incorrect: B) Resale of products to clients is permitted. The profit is not a commission C) The Advertising and Other Forms of Solicitation Rule permits acceptance of engagements obtained through the efforts of third parties if the third parties' promotional efforts were within the Rule. D) If the CPA reasonably concludes that the newsletter does not contain false, misleading, or deceptive information, the arrangement is not an ethics violation.
The primary objective of consulting services is to A) Provide better outcomes. B) Provide the client with better information to make better decisions. C) Evaluate management's representations. D) Verify the reliability of the client's information.
A The primary objective of consulting services is to provide the client with better outcomes through recommendations based on the objectives of the engagement. Why Incorrect: B) The primary objective of assurance and advisory services is to enhance decision making by providing the client with better information. C) Evaluating management's representations is necessary in traditional attestation services. D) Attestation services verify that information is reliable
According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company's board of directors? A) The CPA is asked by the company to test the internal controls of the company and is offered compensation for said services B) The CPA does not audit the company and has no other business connection with the company C) The CPA performs attestation services for a nonpublic company D) The CPA audits a bank to which the company has applied for financing, and board approval is required for said financing to occur
B A member in public practice must be independent when performing professional services. Independence is impaired if the CPA is a director of the client during the period covered by the financial statements or the period of the engagement. A CPA also is not independent if (s)he serves as an officer, employee, or in any capacity equivalent to that of a member of management. Accordingly, serving as a director is incompatible with performing the attest function, e.g., an audit. Certain other business connections also may impair independence. But a CPA may serve as a director and have any business connection with the entity if (s)he does not perform for it any service requiring independence. If the CPA does not audit the company and has no other business connection with it, the CPA can remain independent. Why Incorrect: A) The examination of internal control over financial reporting requires the practitioner to be independent. But being a director of a client impairs independence C) Independence is impaired if a firm is associated with the client as a director D) Service as a director creates a conflict of interest between the CPA's fiduciary responsibility as a director of the company and his or her ability to serve the client's interest objectively and in confidence
According to the AICPA Code of Professional Conduct, which of the following disclosures of client information by a member CPA to an outside party would normally require client consent? A) to the member's liability insurance carrier in response to a potential claim. B) to a third-party service provider when the member does not enter into a confidentiality agreement with the provider. C) to a potential client of the name of a client for whom the member or member's firm performed professional services. D) to a court or in documents in connection with a subpoena.
B A member in public practice must not disclose confidential client information without the client's consent. However, this rule does not affect a CPA's obligations to (1) comply with a valid subpoena or summons or with applicable laws and regulations, (2) discharge his or her professional obligations, (3) cooperate in an official review of his or her professional practice, and (4) initiate a complaint with or respond to any inquiry made by an appropriate investigative or disciplinary body. Moreover, a member in public practice may disclose confidential client information to a third-party service provider used by the member to provide professional services or for administrative support purposes. However, before using such a service provider, the member should enter into a contract with the service provider to maintain the confidentiality of the information and be reasonably assured that the service provider has appropriate procedures to prevent the unauthorized release of confidential information to others. If the member does not have a confidentiality agreement with a third-party service provider, specific client consent should be obtained. Why Incorrect: A) A member may release confidential client information to the member's liability insurance carrier solely to assist the defense when an actual or potential claim is or may be made against the member. C) The member may disclose the name of a client without the client's specific consent unless the disclosure constitutes the release of confidential information. For example, if a member's practice is limited to bankruptcy matters, the disclosure of a client's name suggests that the client may have financial difficulties. D) A CPA is obligated to comply with a valid subpoena or summons or with applicable laws and regulations.
According to SEC independence regulations, A) The issuer must disclose only those fees paid to the accountant for audit work. B) Preapproval of accountants' services may be in accord with detailed policies and procedures rather than explicit. C) No partner may sell nonaudit services to the client during the audit. C) All audit partners must rotate every 5 years.
B Audit committees ordinarily must preapprove the services performed by accountants (permissible nonaudit services and all audit, review, and attest engagements). Approval must be either explicit or in accordance with detailed policies and procedures. If approval is based on detailed policies and procedures, the audit committee must be informed, and no delegation of its authority to management is allowed. Why Incorrect: A) An issuer must disclose in its proxy statement or annual filing the fees paid to the accountant segregated into four categories: (1) audit, (2) audit-related, (3) tax, and (4) all other. C) An accountant is not independent if, during the audit and the period of the engagement, any audit partner (excluding specialty partners such as tax partners) earns or receives compensation for selling services (excluding audit, review, or attest services) to the client. D) The lead and concurring (reviewing) audit partners must rotate every 5 years, with a 5-year time-out period. Other audit partners must rotate every 7 years, with a 2-year time-out.
Which of the following assertions is most closely related to the audit objective to verify that all sales have been recorded? A)Accuracy. B)Completeness. C)Cutoff. D)Occurrence.
B Completeness assertion is evaluated to determine that all transactions and events that should have been recorded in the financial statements were recorded. Why Incorrect: A) The accuracy assertion is evaluated to determine that amounts and other data were recorded appropriately C) The cutoff assertion is evaluated to determine that transactions and events were recorded in the proper period D) The occurrence assertion is evaluated to determine that recorded transactions and events actually occurred
A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements when engaged to A)Communicate with an audit committee regarding management's consultations with another CPA B)Provide assurance on investment performance statistics prepared by an investment company on established criteria C)Compile financial statements in conformity with a comprehensive basis of accounting other then GAAP D) Issue a letter for an underwriter, also known as a comfort letter, to a broker or dealer of securities
B SSAEs apply only to attest engagements for which no specific standards (e.g., SASs or SSARSs) apply. In an attest engagement, a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. Moreover, the practitioner must state a conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated in the report. Attest services traditionally have been limited to expressing an opinion on historical financial statements on the basis of an audit in accordance with U.S. GAAP. But CPAs increasingly provide assurance on representations other than historical statements and in forms other than an opinion. Why incorrect: A) SASs apply to an auditor's communications with those charged with governance C) SSARSs apply to compilations of financial statements in conformity with a comprehensive basis of accounting other than GAAP, also known as a special purpose framework D) SASs apply to letters for underwriters and certain other requesting parties
How many audits of public companies per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB? A) One audit. B) More than 100 audits. C) More than 10 audits. D) More than 50 audits.
B The PCAOB annually inspects registered CPA firms that regularly provide audit reports for more than 100 issuers. It inspects at least triennially firms that regularly provide audit reports for 100 or fewer issuers. Why Incorrect: A) A CPA firm that performs one audit will be inspected at least triennially by the PCAOB. C) A CPA firm that performs more than 10 audits but not more than 100 audits per year will be inspected at least triennially by the PCAOB. D) A CPA firm that performs more than 50 audits but not more than 100 audits per year will be inspected at least triennially by the PCAOB.
personal financial planning services include those that are limited to A) Preparing tax returns. B) Projecting future taxes C) Compiling personal financial statements D) Assisting the client to act on personal financial planning decisions
D "Personal financial planning engagements are only those that involve developing strategies and making recommendations to assist a client in defining and achieving personal financial goals." However, unless they are undertaken by specific agreement with the client, the CPA is not responsible for other services. These services include (1) assisting the client to act on planning decisions, (2) monitoring progress in achieving goals, and (3) updating recommendations and revising planning decisions (PFP 100). Why Incorrect: A) Preparing tax returns and tax advice are among the services specifically identified in PFP 100 as not, by themselves, constituting personal financial planning. B,C) Both are among the services specifically identified in PFP 100 as not, by themselves, constituting personal financial planning.
Fact Pattern:A CPA firm was purchased by a public company. The acquirer performs other professional services and has banking, insurance, and brokerage subsidiaries. The owners and employees became employees of a subsidiary. Also, the previous owners formed a new CPA firm that provides attest services. It leases employees, offices, and equipment from the parent, which also provides advertising, billing, and collection services. In the alternative practice structure (APS) of which the new firm is a part, covered members are closely aligned with other persons and entities. Who is subject to the same independence rules as covered members? A) Any indirect superior B) An employee leased by the firm from the parent C) The spouse of an indirect superior D) An indirect superior to whom a direct superior reports
B The independence rules ordinarily apply in their entirety only to the persons and entities included in the definition of a covered member: (1) the traditional firm (the new firm), (2) its owners, (3) individuals employed or leased by the new firm, and (4) entities controlled by such persons. The independence rules also apply in their entirety to (1) direct superiors of a partner or manager who is a covered member and (2) entities within the APS subject to significant influence by a direct superior. Why Incorrect: A,C,D) Less restrictive independence rules apply to indirect superiors (and their spouses, spousal equivalents, and dependents).
One difference between an examination and a review is that A) Documentation is required for an examination but not a review. B) An examination results in the issuance of an opinion. C) Independence is required only for a review. D) An examination offers only a limited level of assurance.
B The type of report for an examination under the SSAEs or an audit under GAAS is an opinion. The report on a review under the SSARSs or SSAEs is a determination of whether a material modification is needed. Why Incorrect: A) Examination and review engagements under the SSAEs, audits, and reviews under the SSARSs require documentation (working papers). C) Independence is required for all attestation engagements, audits, and reviews under the SSARSs. D) An examination offers a high level of assurance. A review offers only a limited level of assurance.
Which of the following violates the AICPA's Code of Professional Conduct? A) A partner in a CPA firm is elected to public office. After her withdrawal from the firm, the remaining partners continue to use a firm name that includes her name. B) A member shares offices with another member. Their joint letterhead implies that a partnership exists when each member is in fact practicing individually. C) A member contracts with a service entity to maintain a client's computer hardware and charges the client a higher servicing fee than that charged to the member by the service provider. D) A member not in public practice is a bank controller who is designated as a CPA on bank stationery and in bank advertisements listing officers of the bank.
B Two CPAs who are in fact not in partnership should not use a letterhead showing both names. Such a representation is misleading. Furthermore, some courts have held that such an arrangement may be a de facto partnership, and the individual CPAs may be liable for the obligations of the de facto partnership and of the de facto partners. Why Incorrect: A) The name of a past owner may be included in the firm name of a successor organization C) The profit on the resale is not a commission. Resale of products to clients is permitted D) The bank controller's use of the CPA title is permitted
Which of the following acts by a CPA who is in business most likely is a violation of the ethical standards of the profession? A) Compiling the CPA's employer's financial statements and referring to the CPA's lack of independence. B) The member sells a newsletter bearing his or her name. C) Failing to disclose material facts when the employer's external accountant has requested written representations. D) The member accepts a commission for selling a product.
C A member in business must be candid and not knowingly misrepresent facts or fail to disclose material facts. For example, this interpretation applies when the member responds to specific inquiries from the external accountant that requests written representations. Why Incorrect: A) An accountant may compile a nonissuer's financial statements if (s)he issues the appropriate report. The lack of independence should be disclosed. B) A member may sell a newsletter bearing his or her name if it does not violate the prohibition against false, misleading, or deceptive advertising, or other forms of solicitation. D) Members in business may accept commissions
Which of the following statements is true concerning an auditor's responsibilities regarding financial statements? A) The adoption of sound accounting policies is an implicit part of an auditor's responsibilities. B) Making suggestions that are adopted about an entity's internal control environment impairs an auditor's independence. C) An auditor's responsibilities for audited financial statements are confined to the expression of the auditor's opinion. D) An auditor may not draft an entity's financial statements based on information from management's accounting system.
C GAAS require the audit report to state whether the financial statements are presented fairly, in all material respects, in accordance with the applicable reporting framework. Why Incorrect: A) The adoption of sound accounting policies is part of management's responsibilities B) Management is encouraged to adopt suggestions made by an auditor D) The auditor may make suggestions about the form or content of the financial statements or draft them based on management's information
Kar, CPA, is a staff auditor participating in the audit engagement of FOrt, Inc. Which of the following circumstances most likely impairs Kar's independence? A) Kar owns stock in a corporation that Fort's 401(k) plan also invest in. These interests are immaterial B) During the period of the professional engagement, Fort gives Kar tickets to a football game worth $25 C) Kar's sibiling is the director of internal auditing for Fort D) Kar's friend, an employee of another local accounting firm, prepares Fort's tax returns
C Independence is impaired if an individual participating in the audit engagement has a close relative who has a key position with the client. A close relative is a parent, sibling, or independent child. A key position is one in which an individual has (1) primary responsibility for significant accounting functions that support material components of the financial statements, (2) primary responsibility for the preparation of the financial statements, or (3) the ability to exercise influence over the contents of the financial statements. Thus, because Kar's sibling is the director of internal auditing for Fort, Inc., auditor independence is impaired. Why Incorrect: A,B) not material D)The position of a friend, in this case, someone who is not in a key position and is not a close relative or member of the immediate family, has no effect on the CPA's independence.
Among other things, the Integrity and Objectivity Rule prohibits knowing, material misrepresentation in the preparation and presentation of financial statements and records. A member of the AICPA violates this element of the rule when (s)he A) Suggests that a client invest in a business in which the member has an interest B) Signs a document containing false and misleading information regardless of its materiality C) Knowingly makes false and misleading journal entries in the records if some are material D) Fails to correct an entity's records that are inaccurate even if (s)he has no authority to do so
C Knowing, material misrepresentation in the preparation and presentation of financial statements and records includes (1) making materially false and misleading entries in financial statements or records, (2) failing to make corrections in materially false or misleading statements or records when the member has such authority, or (3) signing a document with materially false and misleading information. Why Incorrect: A) When the member suggests that a client invest in a business in which the member has an interest, (s)he has a conflict of interest B) The misrepresentation must be material D) The CPA must have authority to correct the records
Which of the following best characterizes an auditor's exercise of professional skepticism? A) Taking into account past relationships and experiences with management B) Conducting all fraud-related inquiries in a non-confrontational manner C) Having an attitude that includes a questioning mind D) Obtaining adequate conclusive evidence in support of the fairness of the financial statements
C Professional skepticism is an attitude that includes (1) a questioning mind, (2) alertness to conditions that may indicate material misstatement, and (3) critical assessment of audit evidence Why Incorrect: A) An auditor cannot be expected to disregard past experience of the honesty and integrity of management. But the auditor is still responsible for (1) maintaining profession skepticism and (2) not accepting less than persuasive audit evidence B) Conducting all fraud-related inquiries in a non-confrontational manner is an effective interviewing method, not an approach to detecting material misstatements or assessing audit evidence D) The auditor is required to obtain sufficient appropriate audit evidence as a basis for providing reasonable assurance
According to the ethical standards of the profession, which of the following acts generally is prohibited? A)Revealing client tax returns to a prospective purchaser of the CPA's practice B)Accepting a contingent fee for representing a client in connection with obtaining a private letter from the Internal Revenue Service C)Retaining client- provided records after the client has demanded their return D)Issuing a modified report explaining the CPA's failure to follow a governmental regulatory agency's standards when conducting an attest service for a client
C Retention of client-provided records after the client has demanded their return is an act discreditable to the profession. Even if the state in which a member practices grants a lien on certain records. the ethical standard still applies Why Incorrect: A) The disclosure of confidential information in the review of a member's professional practice is not prohibited under a purchase, sale, or merger of the practice. However, appropriate precautions (eg a written confidentiality agreement) should be taken so that the prospective buyer does not disclose any confidential client information B) A contingent fee for representing a client in connection with obtaining a private letter ruling from the IRS is permitted D) Failure to substantially follow a governmental regulatory agency's standards is an act discreditable to the profession. But the member may disclose in his or her report that such requirements were not followed and the reasons. Not following such requirements could require the member to modify the report
The AICPA's guidance for consulting services is provided by A) Statements on Standards for Management Advisory Services B) Statements on Auditing Standards C) The Statement on Standards for Consulting Services D) Statements on Standards for Accounting and Review Services
C The Statement on Standards for Consulting Services (SSCS) was issued by the AICPA Management Consulting Services Executive Committee, the senior technical committee designated to issue pronouncements for consulting services Why Incorrect: A) Statements on Standards for Management Advisory Services were superseded by the Statement on Standards for Consulting Services B) SASs govern the audits of nonissuers D) SSARSs apply to unaudited financial statements or other unaudited financial information of nonissuers
Richard, CPA, performs compilation services for Norton Corporation, a nonpublic entity. The compilation reports issued by Richard disclose lack of independence and are not used by third parties. Richard has accepted a commission from a software company for recommending its products to Norton. The commission agreement was disclosed to Norton. Richard also refers Norton to Cruz, CPA, who is more competent with respect to engagements involving the industry in which Norton operates. Cruz performs an audit of Norton's financial statements and subsequently remits to Richard a portion of the fee collected. The referral fee agreement was likewise disclosed to Norton. Richard accepts the fee. Who, if anyone, has violated the Code of Professional Conduct? A) Only Cruz. B) Both Richard and Cruz. C) Only Richard. D) Neither Richard nor Cruz.
D A commission is "compensation, except a referral fee, for recommending or referring any product or service to be supplied by another person" (FTC Order dated August 3, 1990). Receipt of a disclosed commission is prohibited only if the CPA performs for the client an audit, a review, a compilation when the report will be used by third parties and the report does not disclose the CPA's independence, or an examination of prospective financial information. A referral fee is "compensation for recommending or referring any service of a CPA to any person" (FTC Order cited above). Referral fees are allowed if they are disclosed to the client. Consequently, Richard has not violated the Code by accepting either the disclosed commission or the disclosed referral fee. Cruz has not violated the Code by paying the disclosed referral fee. Why Incorrect: A) Cruz has not violated the Code B) Neither Richard nor Cruz has violated the Code C) Richard has not violated the Code
A CPA in charge of the external audit of a nonissuer received an unexpected inheritance that includes 100 shares of the audit client's common stock. Which of the following actions should the CPA take to avoid violating independence rules? A) Petition the AICPA for an independence exception from unforeseen circumstances. B) Resign from the audit firm. C) Decline to accept the inheritance. D) Sell or donate the stock within 30 days after receipt of ownership rights.
D A member in public practice must be independent when performing professional services as required by standards issued by bodies designated by the AICPA Council. Independence is impaired if a covered member has any direct financial interest in an attest client during the period of the engagement. An unsolicited financial interest in a client, such as through a gift or inheritance, does not impair independence if disposed of within 30 days. Why Incorrect: A) Petitioning the AICPA to permit the ownership of the common stock to not cause an independence issue is not the best course of action to take. B) Resigning from the audit firm is not required and there are less drastic courses of action that can be taken to eliminate the independence issue. C) Not accepting the inheritance is not required and there are less drastic courses of action that can be taken to eliminate the independence issue.
The Code of Professional Conduct contains Principles that guide all members of the AICPA. A commitment to act for the benefit of clients, creditors, investors, and others is most directly embodied in which Principle? A)Integrity. B)Due Care. C)Objectivity and Independence. D)The public interest.
D All members of the AICPA should act to benefit the public interest, honor the public trust, and demonstrate commitment to professionalism. The AICPA adopted ethical standards because a distinguishing mark of a profession is an acceptance of responsibility to the public. The public includes clients, credit grantors, investors, and others who rely on the integrity and objectivity of members to maintain the orderly functioning of commerce. Why Incorrect: A) The Integrity Principle states that all members should perform all professional responsibilities with the highest integrity to maintain public confidence. However, this Principle does not address a commitment to act specifically for the public's benefit. B) The Due Care Principle states that all members should (1) follow professional standards (2) strive for improved competence and quality services, and (3) discharge responsibilities to the best of their ability. Although the public interest is benefited when members exercise due care, this Principle does not directly address a commitment to act on behalf of the public interest C) The member in public practice should be independent in fact and appearance when performing attestation services. But the Principle does not apply to all members. It also does not directly address a commitment to act for the benefit of the public.
Under the ethical standards of the profession, which of the following business relationships would generally not impair an auditor's independence? A) Member of a client's board of directors B) Client's general counsel C) Promoter of a client's securities D) Advisor to a client's board of trustees
D Independence is not impaired if the auditor's role is advisory Why Incorrect: A) Independence is impaired if any partner or professional employee serves as a director. B) General activities that impair independence include serving as a client's general counsel. C) Acting as a promoter, underwriter, broker-dealer, or guarantor of client securities impairs independence.
Which of the following most completely describes how independence has been defined by the accounting profession? A)Avoiding the appearance of significant interests in the affairs of an audit client. B)Accepting responsibility to act professionally and in accordance with a professional code of ethics. C)Performing an audit from the viewpoint of the public. D)Possessing the ability to act with integrity and objectivity.
D Integrity, objectivity, and independence are overlapping concepts. Integrity requires honesty and candor within the limits of confidentiality. It also requires, among other things, observation of the Principle of objectivity and independence. Objectivity is impartiality, intellectual honesty, and freedom from conflicts of interest. Independence precludes relationships that "may appear to impair objectivity in rendering attestation services." Thus, in rendering services, a member in public practice should be independent in appearance as well as in fact. Why Incorrect: A) The auditor must be independent in fact as well as in appearance. B) A person who accepts responsibility for acting in accordance with a set of professional standards need not necessarily be independent unless the standards require independence. C) Although his or her performance of the attest function serves the public interest, an auditor's adoption of any viewpoint other than strict impartiality is inconsistent with professional standards.
To help ensure auditor independence from management, issuers follow the practice of A) Appointing a partner of the CPA firm conducting the audit to the issuer's audit committee. B) Requesting that a representative of the independent auditor be on hand at the annual shareholders' meeting. C) Establishing a policy of discouraging social contact between employees of the issuer and the staff of the independent auditor. D) Having the independent auditor report to an audit committee of outside members of the board of directors.
D Issuers follow the practice of having the independent auditor report to an audit committee composed of outside members of the board of directors. Because these members are not officers of the company, the independence of the auditor from management is enhanced. The audit committee's functions typically include appointment of the auditor, reviewing the auditor's findings, mediating disputes between the auditor and management, and working with the internal audit staff. Why Incorrect: A) The CPA reports to, but does not serve on, the audit committee of the client firm. B) The presence of the auditor with management at the shareholders' meeting has the opposite effect from emphasizing independence. C) Social contact of employees (corporate or CPA firm) is normally beyond the scope of employer influence.
Which of the following actions by a CPA most likely violates the profession's ethical standards? A)Compiling the financial statements of a nonpublic client that employed the CPA's spouse as a bookkeeper. B)Arranging with a financial institution to collect notes issued by a client in payment of fees due. C)Purchasing a segment of an insurance company's business that performs actuarial services for a nonpublic client's employee benefit plans. D)Retaining client-provided records after the client has demanded their return.
D Retention of client-provided records after demand is made for them by the client is an act discreditable to the profession and a violation of the Code. Even if the state in which a member practices grants a lien on certain records, this ethical standard is applicable. Why Incorrect: A) The independence of a member is impaired by a spouse's job as a bookkeeper if the spouse approves transactions, prepares source documents, determines journal entries, etc. However, a compilation does not require independence. Thus, preparing financial statements based on the trial balance does not impair independence. B) A CPA may make arrangements with a bank to collect notes issued by a client in payment of fees. C) An appraisal, valuation, or actuarial service impairs independence if the results are material to the financial statements and significant subjectivity is involved. For example, a valuation for a business combination, but not an actuarial valuation for a pension or other post employment liability, usually involves significant subjectivity. Furthermore, appraisal, valuation, and actuarial services not performed for financial statement purposes do not impair independence if the other requirements of the Independence Rule are satisfied.
Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client? A) A marketing position related to the client's primary products B) A staff position in the client's R&D division C) A senior position in the client's HR division D) A policy-making position in the client's finance division
D Significant influence is defined in the FASM's Accounting Standards Codification. It means the ability to exercise significant influence over the financial, operating, or accounting policies of the entity. For example by (1) being connected with the entity as a promoter, underwriter, voting trustee, general partner or director or (2) being in a policy-making position such as chief executive officer, chief operating officer, chief financial officer, or chief accounting officer. Thus, a policy-maker in the finance division has significant influence. Why Incorrect: A,B,C) does not have authority over financial, operating, or accounting policies
Which of the following is a false statement about the relationship of financial statement assertions and audit procedures? A)Audit procedures should be developed in light of financial statement assertions about the financial statement components B)Selection of tests of financial statement assertions should depend upon the understanding of internal control C)The auditor should resolve any substantial doubt about any of management's relevant financial statement assertions D)The relationship between financial statement assertions and audit procedures should be one-to-one
D Some auditing procedures may relate to more than one assertion. But a combination of auditing procedures may be needed to test a single relevant assertion because audit evidence from different sources or of a different nature may be relevant to the same assertion. For example, when relating controls to assertions, the auditor may determine that multiple controls are needed to address a risk and the related assertion. Why Incorrect: A) Financial statement assertions should be considered when the auditor develops audit procedures B) The Understanding of internal control and the assessed RMMs affect the nature, timing, and extent of the auditor's substantive procedures C) A relevant assertion has a reasonable possibility of containing misstatements that could materially misstate the financial statements. All substantial doubts about relevant financial statement assertions should be resolved before an opinion is formed. Otherwise, the auditor should modify the opinion or disclaim an opinion.
The PCAOB has the power to A) Issue quality control, ethics, and accounting standards. B) Review only audit engagements of registered firms. C) Impose the largest penalty on an accounting firm for one instance of highly unreasonable conduct. D) Inspect large firms annually.
D The PCAOB will inspect large firms annually and report violations to the SEC and state authorities. All attestation engagements, notably those in litigation, may be reviewed. The inspection also involves a quality control assessment. Furthermore, the inspection report must include the firm's response. The firm then has 12 months to correct the reported weaknesses. Why Incorrect: A) The PCAOB has rule-making authority regarding audit standards. The FASB establishes GAAP. B) All attestation engagements, notably those in litigation, may be reviewed. C) The extreme cases in which the harshest penalties may be imposed include repeated instances of negligent misconduct. By contrast, the SEC may impose the severest punishments when the firm has engaged in just one instance of highly unreasonable conduct.
Must a CPA in public practice be independent in fact and appearance when providing the following services? Yes or No 1)Compilation of Personal Financial Statements 2)Preparation of a Tax Return 3)Compilation of a Financial Forecast
No No No CPAs in public practice must be independent in fact and appearance when providing attestation services. Attestation services provide assurances about assertions and include audits, examinations, reviews, and applying agreed-upon procedures. Why Incorrect No Yes No) A CPA need not be independent to prepare a tax return. No No Yes) A CPA need not be independent to compile a financial forecast. A compilation is not an attestation service. Yes No No) A CPA need not be independent to compile a personal financial statement.
According to the standards of the profession, which of the following activities may be required in exercising due professional care? Yes or No Consulting with Experts/Obtaining Specialty Accreditation
Yes and No A CPA should undertake only those services that (s)he reasonably expects to complete with professional competence and should exercise due professional care in performing those services. Additional research or consultation with others may be necessary to gain sufficient competence to complete a service in accordance with professional standards. However, professional standards do not require specialty accreditation, although many CPAs choose to specialize in specific services. Why Incorrect: Anything else) Due professional care may require additional research or consultation with others but not specialty accreditation.
