Ch. 6-11

3. A CPA wishes to accept a commission from one client for marketing the client's software product to other clients served by the CPA. The CPA: a. May do so as long as the CPA discloses this commission to these potential software purchasers and the potential purchasers are not audit clients b. Always may do so as long as the CPA discloses this commission to these potential purchasers c. May do so as long as the CPA discloses this commission to these potential software purchasers and the potential purchasers are not tax return preparation clients d. Never may do so

a

3. A CPA's conflicts of interest are determined by: a. The CPA herself b. The accountancy licensing board of the state in which she works as an accountant c. The AICPA Conflicts Enforcement Committee d. The AICPA committee that evaluates issues of independence, objectivity, and conflicts of interest

a

4. According to the AICPA's Code of Professional Conduct, if a CPA renders more than ten hours of nonaudit services to an audit client, the CPA : a. Automatically is a covered member on the audit b. Automatically prevents the CPA firm from satisfying the independence requirement under all circumstances c. Automatically prevents the CPA firm from satisfying the independence requirement if the CPA is a partner in the CPA firm performing the audit d. Automatically prevents the CPA firm from satisfying the independence requirement if the CPA has a friend who works in the compilation, processing, or presentation of the audit client's financial statements

a

5. If a CPA charges a contingent fee in connection with providing management consulting services to a non-audit client, the CPA's fee arrangement is: a. Permissible always b. Permitted only if the fee arrangement is expressed in a clear writing signed by the client c. Permitted only if the CPA is not a member of the AICPA d. Never permissible

a

5. In accordance with the Independence Rule, an ownership interest in an audit client is considered to be an indirect interest if: a. An auditor benefits from it, but cannot meaningfully influence or control it b. A partnership of which the auditor is a member owns the interest c. The benefits from the interest have accrued in the form of price appreciation but realization of this appreciation has not occurred d. An immediate family member owns the interest and shares the financial benefits of the interest with the auditor

a

5. The duty of confidentiality applies to: a. All communications between a CPA and a client b. All communications between a CPA working in industry and his employer or designated employer representative c. Only information exchanged between tax return preparers and their clients d. All CPAs and their clients until the time that a CPA retires from the active practice of accounting

a

7. An auditing firm has a standard fee policy that it maintains internally and uses in bidding on auditing projects. However, in preparing bids, it increases its audit fee by up to 20% for corporate audit clients that have December 31 fiscal year-ends and lowers its audit fees by up to 30% for government entities that have fiscal years that end during the summer months. The auditing firm justifies this pricing practice by noting that its personnel are overwhelmed with work during the end-of-year "busy season," but often are idle during the summer months. This auditor: a. Does not have a conflict of interest b. Has a dual-client conflict of interest c. Has an accountant-client conflict of interest, even if this pricing differential is cost-justified d. Is not acting with integrity, unless it discloses this pricing policy to all affected clients

a

7. Enron used special-purpose entities to: a. Keep large amounts of debt off of its balance sheet b. Create the appearance of activities that fooled inspectors c. Distort its reported Accounts Receivable d. Avoid the use of accelerated depreciation on assets for which this method was required to be applied

a

10. A CPA firm has multiple locations in Europe, Asia, and North America. The principal partner overseeing the audit is located in Dallas, Texas. Are all partners who commute to offices in Dallas, Texas considered to be covered members? a. Yes, if they are audit partners b. Yes, even if they are not audit partners c. No, as long as they are not in a position to influence the audit d. No, as long as they are not in a position to supervise, manage, or evaluate the performance of any of the audit partners or audit team members who participated in the audit engagement

b

10. Which of the following acts is clearly discreditable? a. Creating and posting a youtube video in which a CPA berates the IRS for incompetence b. Refusing to return client records, even if a CPA is owed unpaid fees, if these records are needed by the client to prepare its tax return c. Commenting on "how graceful" an administrative assistant is when she wears high-heeled shoes d. Mentioning on your CPA firm's website that you formerly worked for the IRS, if a reader might conclude from this statement that you are better able to negotiate favorable settlements with the IRS for clients

b

11. During the course of working as an external auditor, you discovered that your audit client is going to build a new luxury ski resort in rural Utah. As a result, you purchased a vacation home near that resort in the expectation that housing prices will benefit from the announcement of a luxury resort being built nearby. Your action: a. Was unethical only if it precluded your client from pursuing this opportunity to earn a profit on nearby real estate b. Was unethical even though it caused no harm to your client c. Was ethical because the insider trading laws only concern purchases of securities d. Was ethical because your action was expressly allowed by the IFAC code of conduct

b

12. When a person's net cash flow exceeds his or her reported taxable income, the IRS: a. Has an automated system that identifies a taxpayer as a possible tax cheater b. Presumes, upon examination, that the taxpayer is underreporting his or her income c. Conclusively recognizes that the taxpayer is underreporting his or her income d. Conclusively recognizes that the taxpayer has underreported both income and tax payments

b

13. A CPA is in partnership with three non-CPAs. The CPA wants to sign a report. Her signature will appear at the bottom of the report and the signature block will mention that she is a CPA and is affiliated with this partnership. This CPA: a. May do so as long as the non-CPAs comply with the standards set forth in the AICPA's Code of Professional Conduct b. May do so as long as the report would not lead a reasonable reader to believe that the entire partnership is comprised solely of CPAs c. May not do so because the use of the entire firm's name would imply to a reasonable reader that all partners in the firm participated in the submission and preparation of the report d. May not do so because a CPA who is in partnership with non-CPAs may not use the entire partnership's name in connection with reports submitted to clients or third parties

b

14. The "books and records" requirement of the Foreign Corrupt Practices Act require a firm involved in international commerce to maintain especially tight internal controls over transactions involving: a. Depreciation expense on real estate situated in foreign countries in which it does business b. Travel and Entertainment Expense c. Bonds Payable d. The amortization of Bond Discounts and Premiums

b

21. In the business world, sellers often sell goods on credit. In the auditing world, due to the independence requirement, CPAs: a. Are required to collect payment in full for an audit no later than the submission date of the CPA's audit report b. May not give their clients more than 60 days in which to pay the full outstanding invoice owing for audit services c. Remain independent as long as audit fees do not remain unpaid for more than one year d. Never may require clients to pay interest on unpaid fee balances

c

15. If a paid tax return preparer mistakenly discloses qualitative information, such as a client's address, but does not disclose any financial information appearing on the client's tax return, the tax return preparer: a. Nonetheless is potentially subject to monetary penalties and possible imprisonment b. Is potentially subject to monetary penalties but not criminal punishment c. Is subject to a statutory fine of $1,000 per violation unless the preparer can demonstrate good cause d. Not subject to monetary penalties or possible imprisonment because her misconduct was accidental

b

9. A CPA firm has an office in New York and an office in San Francisco. The CPA firm's New York office has been retained to audit the financial statements of a new bank client based in New York. The bank is a very large provider of consumer loans. As a result, numerous professionals who work at the CPA firm have outstanding loan and credit card balances owed to this bank. Which of the following loans potentially will impair the CPA firm's independence to audit this bank? a. A New York tax partner, who will not work on the audit, has a large mortgage loan owing to the bank b. A New York tax partner who will work on the audit has a standard automobile loan owing to the bank c. A San Francisco audit partner who only audits governmental entities has a large credit card balance owing to the bank d. A New York audit partner who will serve as the concurring partner on this bank audit engagement uses a credit card issued by this bank but routinely pays off the full outstanding balance monthly

a

9. The IFAC code of conduct recognizes the concept of "implied consent." Implied consent, in the context of conflicts of interest, means that: a. A professional accountant may assume that a client has consented to a conflict of interest based on the surrounding circumstances b. A professional accountant may insist, before commencing work on a project, that a client consent to a potential conflict of interest c. Actual consent to a present-day conflict of interest also will be considered to constitute consent to any future conflicts of interest that may arise d. The likelihood of a conflict arising in the near future can be reasonably inferred from surrounding circumstances

a

The undue influence threat exists when: a. A client threatens to terminate a CPA firm during the course of performing an audit of the client's books b. An auditor provides a 10% fee reduction to a client who complained about the auditor's staff being inadequately trained c. An auditor pays the entire restaurant bill for a client business lunch at which interpersonal conflicts between one audit staff member and a client employee were addressed d. An auditor sends an exceedingly generous gift to the CEO of a client to celebrate her fifth-year anniversary as the CEO

a

15. If financial statements contain a departure from GAAP, a CPA is: a. Not allowed to issue an audit report concerning the statements b. Required to disclose an estimate of the approximate financial impact that the departure from GAAP had on the financial statements c. Allowed to complete the current-year engagement only if the financial statements are utilized by company management for internal decision-making d. Required to withdraw from future-year engagements, but may complete the current-year assignment as long as the departure from GAAP is adequately disclosed

b

16. An employee at an information systems consulting firm recently asked a partner at the firm for a 20% pay raise. The partner said that this request was excessive. To resolve this issue amicably, the employee and the partner agreed that the firm's managing partner, who is well-respected, would mediate this issue and determine the fair amount of the pay raise. All parties agreed to this arrangement. The managing partner who is deciding this issue is a CPA. She: a. Does not have to disclose her conflict of interest to this employee because she is not a practicing CPA b. Does not have to make any disclosures because none are needed c. Does have to disclose her conflict of interest, but she does not need to get the employee's consent d. Does have to disclose her conflict of interest and does need to get the employee's explicit consent

b

16. If a CPA prepares a few sales invoices on behalf of an audit client without charge because the client does not want to have to pay overtime to the workers who normally perform this task, the CPA's independence is: a. Impaired due to the management participation threat b. Impaired due to the self-review threat c. Impaired due to the self-interest threat d. Not impaired because the threat, if any, is immaterial

b

19. A "side agreement": a. Allows a company to charge a lower selling price to attract a new customer, without existing customers discovering this reduction b. A secondary agreement that overrides a primary agreement, for the purposes of committing accounting fraud c. An comparatively minor agreement that forensic investigators set aside during the course of conducting a fraud examination of major improprieties d. A technique used by Certified Fraud Examiners and others to deter potentially fraudulent actions

b

19. If a CPA leaves a job in public accounting to commence work as a member of a company's internal accounting staff, this CPA: a. No longer has to be concerned about conflicts of interest b. Still has to be concerned about conflicts of interest involving former clients as well as conflicts of interest arising at her new workplace c. Only has to be concerned about conflicts of interest involving her former clients because industry accountants are not subject to the AICPA's conflict of interest rules d. Does not have to be concerned about conflicts of interest that may arise between loyalty to her new employer and loyalty to her former employer

b

19. The federal tax law grants CPAs acting as tax advisors: a. A comprehensive privilege against having to disclose the identities of clients who file late tax returns or do not file tax returns at all b. A limited privilege against having to disclose certain client information c. An absolute privilege against having to disclose client information and makes it a crime for a tax advisor to make such a disclosure d. A comprehensive privilege against having to disclose all tax-related client information

b

5. Your employer operates in an industry in which company pre-tax earnings are expected to increase by 5% next year. Your employer, however, has issued earnings guidance in which it declared that it expects its pre-tax earnings to increase by 11% next year. As a result, which of the following elements of the Fraud Triangle are present? a. Attitudes b. Pressure to understate expenses c. Opportunity to overstate revenues d. All three elements are present

b

19. A musician believed that his record company was not paying him the agreed-upon royalty on all songs downloaded by fans from a well-known music Internet site. This musician hired a CPA to perform a royalty audit of the record company's sales revenues. The musician and the CPA agreed that that the CPA will be entitled to receive 5% of all amounts recovered by the musician as a result of this royalty audit. They also agreed to keep the results private. This arrangement is: a. Ethical b. Unethical under all circumstances c. Unethical if the amounts recovered exceed fair compensation for the CPA's time and effort d. Unethical, unless a court or other administrative body, such as the American Federation of Musicians, approves of this fee arrangement

a

19. The "moral character" requirement, as expressed in the Uniform Accountancy Act's Model Rules: a. Is limited to acts of dishonesty or deceit that evidence unfitness to carry out the duties of the accounting profession b. Is limited to acts of misconduct that constitute misdemeanors c. Is limited to acts of misconduct that constitute felonies d. Includes all acts of dishonesty or deceit that evidence unfitness to practice accounting and any felony, whether or not it relates to the practice of accounting

a

2. According to the Fraud Triangle, which the following is one of the requisites for fraud to occur? a. The perception of an opportunity for ill-gotten financial gain b. The existence of sound justification for a person to receive greater financial rewards c. The existence of a clear-cut opportunity for ill-gotten financial gain d. Employment in a sensitive financial capacity in which peers reap greater financial rewards than the employee contemplating fraud receives

a

24. The determination of whether an American CPA has, or does not have, a conflict of interest is resolved by: a. A CPA on his or her own b. The Conflicts Advisory Board of the AICPA c. A board of the AICPA other than the Conflicts Advisory Board d. A mediation process between the CPA and its client

a

24. The term "safeguard," as it used in determining auditor independence, refers to: a. Actions or other preventative measures that reduce threats to auditor independence to an acceptable level b. Actions or other preventative measures that eliminate all known threats to auditor independence c. Actions or other preventative measures that eliminate all threats, known and unknown, to auditor independence d. Actions taken by a client to protect confidential information from subsequent disclosure by an audit team

a

27. A CPA firm audits Zaxstation, Inc. To avoid impairing the CPA firm's independence, members of this CPA firm may never: a. Authorize capital expenditures for the company, even if the projects are worthwhile b. Authorize junior staff members who have not yet passed the CPA exam to perform required audit procedures c. Evaluate whether the company's internal controls have weaknesses or deficiencies d. Suggest changes to the company's selection of accounting policies

a

28. Under ordinary circumstances, both the CFO and CEO of a particular company authorize and sign check disbursements exceeding $10,000. However, when the CEO of this audit client is unavailable for an extended period due to her travel schedule, the client's CPA co-signs checks that exceed $10,000 only after these checks first have been authorized and signed by the client's CFO. The CPA: a. Has created a management participation threat that impairs his independence b. Has created an undue influence threat that impairs his independence c. Has created an advocacy threat that impairs independence, unless appropriate safeguards are put into place d. Should be commended for assisting the client and has not affected his independence

a

10. Which of the following scandals involved expenses that were improperly were capitalized as assets? a. World Com b. Parmalat c. Bernie Madoff d. Enron

a

11. If a conflict of interest arises during the course of providing professional services, a professional accountant: a. Must consider withdrawing from the professional engagement b. Is required to withdraw from the professional engagement, but does not have to refund fees previously paid by its client c. Is required to withdraw from the professional engagement and is required to refund fees previously paid by the client d. Is not required to withdraw from the professional engagement if the conflict of interest did not exist at the inception of the relationship and it was not reasonably foreseeable at that time

a

13. A CPA's mother-in-law owns stock in one of the CPA's audit clients. The CPA just learned this fact. In all likelihood, the CPA's independence is: a. Not impaired b. Impaired if the mother-in-law's stock holdings are material to her net worth c. Impaired if the mother-in-law owns sufficient stock to be able to significantly influence the governance of the audit client d. Automatically impaired, unless the mother-in-law immediately disposes of her share holdings

a

13. An accountant recent met with the CFO of a major corporation. The accountant and this prospective client are contemplating entering into a professional relationship. The prospective corporate client has a history of violating the Foreign Corrupt Practices Act's provisions concerning bribery of foreign government officials. The accountant's job is to ensure that the company fully complies with this law. To accomplish this, the accountant will perform unannounced reviews of the company's accounting records and internal controls from time to time. The accountant's daughter told the CFO that her father is "an amazing accountant," which facilitated the professional introduction. The accountant's daughter recently was promoted to serve as this corporation's Director of International Sales-Asia Division. In all likelihood, the accountant: a. Should not agree to provide these services to this prospective client b. May provide services to this client, as long as the accountant's daughter does not also participate directly in the corporation's presentation of corporate financial transactions in the form of financial statements c. May provide all requested services because a conflict of interest does not currently exist and is not reasonably foreseeable d. May provide services to this client because safeguards against conflicts of interest readily are available

a

14. A CPA agreed to render professional services to all three of the shareholders in a corporation. All three shareholders asked the CPA to determine the amount of corporate earnings that should be distributed as dividends and the amount that should be maintained as Retained Earnings to spur the future growth of the corporation. All three told the CPA that they want to "allocate cash flow to maximize everyone's after-tax wealth." Two weeks after the CPA began this assignment, one of the shareholders told the CPA privately that she "desperately needed immediate cash flow from dividends because her mother recently had a stroke and needs to be able to afford to give her mother proper medical care. This shareholder asked that her mother's medical condition be kept confidential, to respect her mother's wishes. The CPA: a. Acted properly at the outset of this professional engagement b. Acted improperly at the outset of this professional engagement because representation of fellow shareholders automatically creates a dual-client conflict of interest c. Acted improperly at the outset of this professional engagement, but now has a duty to complete the engagement to minimize further harm to her clients d. Acted improperly at the outset of this professional engagement and has a duty to inform the accountancy licensing board about this misconduct

a

14. Due to its international expansion, a privately-held company ended its relationship with its local CPA firm and retained a larger, multi-office CPA firm. The newly-retained CPA firm has asked the former CPA firm to "forward all client records, financial statements, and workpapers still in its possession." The former CPA firm, however, has refused to do so.The former CPA firm: a. Definitely is not in violation of the AICPA's Code of Professional Conduct b. Is in violation of professional standards if all outstanding fees owed to it have been paid by its client c. Is in violation of professional standards if the newly-retained CPA firm has offered to pay all reasonable costs associated with the transmission of documents d. Is in violation of professional standards if the newly-retained CPA firm has, in good faith, communicated that receipt of these records is urgent due to a time-sensitive governmental filing that is overdue

a

15. The adverse interest threat exists when: a. A client sues its auditor for incompetence b. A CPA testifies in court, in response to a valid court subpoena, that it observed illegal activity taking place at the client's place of business c. A CPA voluntarily testifies in court that its client incorrectly recorded cash proceeds as nontaxable loan proceeds rather than as a taxable sale d. A CPA, in response to a formal SEC inquiry, states that it has serious concerns about the trustworthiness and candor of an audit client's CFO

a

15. Which of the following scandals can best be described as a Ponzi scheme? a. The Madoff scandal b. The Healthsouth scandal c. The Krispy Kreme scandal d. All of the above

a

16. "Big bath accounting" describes a company's actions when it: a. Manages its earnings in a downward direction in the year of a major acquisition or restructuring b. Optimizes the amount of Goodwill recognized upon paying a premium to acquire another company c. Manages its earnings by maintaining such a large number of discretionary items that it could "fill a bathtub," so to speak d. "Cleans its books," so to speak, of improperly recorded items in anticipation of a rigorous audit examination

a

16. If a paid tax return preparer intentionally discloses qualitative information, such as a client's address, but does not disclose any financial information appearing on the client's tax return, the tax return preparer: a. Is potentially subject to monetary penalties and possible imprisonment b. Is potentially subject to monetary penalties but not criminal punishment c. Is subject to a statutory fine of $1,000 per violation unless the preparer can demonstrate good cause d. Not subject to monetary penalties and possible imprisonment because her misconduct involved an accidental mistake

a

16. Mary, a CPA, accepted a fee from Rajiv, a CPA, for referring one of Mary's clients to him. Mary's client was not informed of this referral fee. Was Mary's acceptance of this fee permitted by applicable professional rules? e. No a. Yes, if Rajiv possesses specialized skills that Mary lacked b. Yes, if Rajiv possesses specialized skills that Mary lacks and Rajiv agreed to a non-contingent referral fee arrangement with Mary prior to provide services to the referred client c. Yes, as long Mary's fee arrangement is a lump-sum amount rather than a percentage of the amount that Rajiv bills this client for his services

a

18. Contingency fee arrangements are always allowed in tax matters if the amount of the fee an accountant is entitled to receive depends on: a. A determination by an IRS Administrative Board b. An "all or nothing" determination c. A percentage of the taxes saved d. The accountant's testimony in court being competent and persuasive to the judge or jury

a

18. The advocacy threat to independence exists when: a. A member of an auditing firm publicly speaks out on behalf of his client b. A member of an auditing firm makes a clear recommendation to the client c. A member of an auditing firm makes a recommendation to a client that is skewed in favor of a particular position or outcome d. A member of an auditing firm confronts an audit client and expresses an opinion that results in a significant disagreement with the client

a

1. A CPA has multiple office locations. In evaluating whether a CPA firm satisfies the independence rules with regard to an audit client, the concept of a "covered member" includes: a. An administrative assistant who assists the principal partner in charge of the audit b. A second audit partner who provides a concurring opinion on an audit and is located in a different office from the partner in charge of the audit c. An audit partner who works in a different office from the partner in charge of the audit and does not influence a particular audit d. An information systems partner who spent four hours on a consulting project for an audit client

b

1. The key difference between bribery of a public official and bribery of a corporate employee is that: a. Only bribery of a public official is ever unlawful under anti-bribery criminal laws b. Only bribery of a public official is unlawful under the Foreign Corrupt Practices Act c. Only bribery of a public official can ever result in a prison sentence in the United States d. Bribery of a corporate employee may exclusively be enforced through a civil action for damages by the corporation and never by government prosecution

b

1. Upon returning home after a long workday, a CPA told her husband that she "had a lunch meeting earlier that day with the Controller of her new client, Abnomacious, Inc., and that the Controller ate a really expensive seafood platter." Disclosure of this information to her husband: a. Likely violated the duty of confidentiality b. Likely did not violate the duty of confidentiality c. Could not have violated the duty of confidentiality because communications between spouses are protected by the marital exemption d. Could not have violated the duty of confidentiality because this duty applies only to individuals, not to corporations

b

2. During the course of working on a complex project, a client shared confidential information with its CPA. The CPA did a superb job, but the client, however, has never paid the CPA for her services. The CPA anticipates that, if she initiates a lawsuit to collect the amount due, the client will claim that the task was simple and the CPA's performance was below standard. If the CPA wants to introduce the nature of the work done as evidence in her court action to collect unpaid fees: a. She may not do so because she has a duty to not reveal confidential information b. She may do so because the complexity of the tasks performed by her is a critical fact in her lawsuit c. She may not reveal confidential information unless the court issues a protective order d. She may discuss confidential information only if her client reveals it first or if she obtains the consent of her client, the opposing party

b

20. An auditor is allowed to have: a. An indirect financial interest in a client as long as the interest constitutes an immaterial stake in the client b. An indirect financial interest in a client as long as the interest is immaterial to the auditor's net worth c. Any financial stake in a client as long as the interest is immaterial d. A direct interest in a client as long as safeguards on independence are satisfactory to the client

b

20. Which of the following is most likely to be considered "material," even if the amounts involved are small? a. Amounts that cause an upward earnings trend to become even larger b. Amounts that cause an earnings trend to swing from slightly positive to slightly negative c. Amounts that cause reported Gross Profit to be larger than Net Income d. Amounts that mask a retailer's inability to control its Cost of Goods Sold

b

22. The Assistant Controller of a publicly-traded company may buy company stock as long as: a. She agrees to hold company stock for a minimum of six months b. She does not possess non-public information c. Her trading activities are authorized by her employment contract d. All of the above

b

23. A CPA's duty to be free of conflicts of interest is most closely related to the AICPA Code of Professional Conduct's Principle of: a. Due care b. Objectivity c. Professional skepticism d. Nonsubordination of professional judgment

b

23. The federal accountant-client privilege: a. Applies only to the provisions of tax advice b. Applies only to the provision of tax advice relating to matters that do not involve fraud or other serious criminal activity c. Applies to all accountants who give advice regarding the preparation or presentation of financial statements, regardless of whether they are CPAs d. Does not exist

b

24. A CPA violates the duty of confidentiality if, without obtaining client consent, she discloses potentially embarrassing client information to: a. Her CPA firm partner b. A third party service provider who prepares depreciation schedules reflected and incorporated into the client's tax return c. A document delivery company d. A moving company that helps pack and relocate the CPA firm from its former office location to a new location

b

27. The AICPA Code of Professional Conduct has established for professional accountants: a. A duty of confidentiality only if this duty has been adopted or ratified by a particular state's accountancy licensing board b. A duty of confidentiality , but not an accountant-client privilege c. An accountant-client privilege, but not a duty of confidentiality d. Both a duty of confidentiality and an accountant-client privilege

b

28. The AICPA's Code of Professional Conduct recognizes that the duty of confidentiality is: a. Absolute b. Subject to various exceptions, even without client consent c. Cannot be waived by a client d. Cannot be waived by a client if the public interest is best served by a particular client's information remaining confidential

b

3. Can a tax partner in a CPA firm with multiple offices be a "covered member" on an audit? a. Yes, but only if the partner renders more than 10 hours of tax services to an audit client b. Yes, if the tax partner works out of the same office as the audit partner in charge, even if she does not render any services to the audit client c. Yes, all partners in a CPA firm automatically are "covered members," even if they do not work out of the same office as the audit partner or render any services to the audit client d. No, tax partners are not subject to the independence rules

b

3. The name of a CPA firm may: a. Include the name of a founder who is retired, as long as he or she remains an active member of the AICPA b. Include the name of a founder who is deceased c. Not include the name of a CPA unless that CPA is a member in good standing of the AICPA d. May include the name of a non-CPA without needing to identify the non-CPA as being, in fact, a non-CPA

b

3. Which of the following is not an element of The Fraud Triangle? a. A person's attitude b. A person's willingness to violate the Due Care Principle c. The presence of pressures to achieve specified performance levels d. The perceived opportunity for financial gain

b

31. The concept of "discounting," in the context of accountant conflicts of interest, means that: a. An accountant, in evaluating the reliability of a client statement, applies greater professional skepticism b. A client, in evaluating the reliability of its accountant's statement, applies greater skepticism c. An accountant weighs immediate satisfaction more heavily than deferred satisfaction d. A prospective client, in listening to an accountant, weighs immediate satisfaction more heavily than deferred satisfaction

b

4. In deciding whether a conflict of interest exists, the relevant standard to be applied is whether: a. The CPA subjectively believes that a conflict of interest exists b. A reasonable observer, with reasonable knowledge of the relevant circumstances, would conclude that a conflict of interest exists c. In an accountant-client conflict of interest situation, at least one of the clients believes, reasonably or unreasonably, that a conflict of interest exists d. In a dual-client conflict of interest situation, both of the clients themselves believe, reasonably or unreasonably, that a conflict of interest exists

b

4. Your employer operates in an industry in which company sales are expected to increase by 5% next year. Your employer, however, has issued earnings guidance in which it declared that it expects its sales to increase by 13% next year. As a result, which of the following elements of the Fraud Triangle are present? a. Rationalization b. Pressure to engage in channel stuffing c. Opportunity to exceed expectations d. Opportunity to garner above-market stock performance gains

b

6. An accountant generally has an obligation to prepare statements for a publicly-traded corporation in "accordance with GAAP." What does this mean? a. An accountant must always follow the mandates of rules established by the FASB and not apply international accounting standards b. An accountant may follow either the rules of the FASB or the rules of IFRS, depending on the jurisdiction in which the intended readers of the financial statements are located c. An American accountant must follow both the rules of the FASB and the rules of the AICPA's Code of Professional Conduct d. Any well-recognized, systematic framework of accounting may be applied, as long as the framework is prominently disclosed

b

8. A CPA has been asked by an engaged couple to help them budget the amount that they can afford to spend on their upcoming wedding. Both the groom and the bride approached the CPA together and met with him together. The CPA has no prior relationship with either of these individuals. The groom and the bride each have agreed to pay one-half of the CPA's fees. The CPA: a. Currently does not have an accountant-client conflict of interest, but must be alert to the possibility that one will arise b. Currently does not have a dual-client conflict of interest, but must be alert to the possibility that one will arise c. Currently has a conflict of interest and should not accept this professional engagement d. Currently has a conflict of interest, and should agree to render professional services to this couple only if they give their specific consent to waive this conflict of interest

b

8. A CPA recently was presented with the opportunity to bid to become the auditor for a corporation. This CPA's husband owns stock in that company. Does this CPA satisfy the independence requirement to audit this company? a. No, if the stock is held in a joint brokerage account b. No, even if the stock is held in an individual brokerage account and was purchased solely with funds earned by her husband c. Yes, if her husband owns a small number of shares and the corporation is publicly-traded d. Yes, as long as she maintains objectivity and professional skepticism in performing the audit

b

8. A client wants to discuss with its CPA some of the valuation and accounting issues associated with maintaining a proprietary business process as a trade secret rather than obtaining a patent for it. Patents are granted by the United States Patent Office. As a result: a. The federal accountant-client privilege applies to protect these discussions from being revealed to the general public b. The duty of confidentiality, as articulated in the Code of Professional Conduct, applies to these discussions c. The federal accountant-client privilege does not fully apply because discussions of non-accounting issues, such as the preservation of a patent, are exempted from the scope of this privilege d. Both the duty of confidentiality and the federal accountant-client privilege govern this situation

b

8. Which of the following would most likely be classified as a facilitation payment? a. A payment that encourages a high-ranking government official to facilitate a new business deal with a foreign supplier b. A payment that encourages a lower-level government official to perform a routine service more rapidly than it otherwise would be performed c. A payment that encourages a private-sector company to accelerate the delivery of goods or services in an international shipping transaction d. A payment that provides a lawful commission to a foreign agent or representation to enable a plant or other operational facilities to bypass certain regulations established by the Foreign Corrupt Practices Act

b

9. When unaudited financial statements prepared on a basis that does not conform to GAAP are disseminated by a CPA, the CPA should: a. Directly contact intended recipients of these statements to inform them about the nonconformity with GAAP b. Mark the statements as "Unaudited" and state that they are "Not prepared in accordance with GAAP" c. Not be involved in the physical or digital transmission of these statements d. Not sign any reports or statements indicating her status as a CPA

b

A CPA, acting on behalf of a client company, makes a payment to a foreign government official to ensure that goods that are entitled to be exported into that country are processed more rapidly than other competing shipments into that country are processed. By doing so, the CPA has: a. Committed a direct violation of the Foreign Corrupt Practices Act's provision concerning "financial professionals and other client representatives" b. Not jeopardized her professional license c. Jeopardized her professional license if she also performed sales tax reporting services for that client during the same reporting period d. Definitely jeopardized her professional license

b

An auditor may not perform an audit unless threats to independence are: a. Agreed to by the audit client b. Reduced to an acceptable level c. Nonexistent d. Eliminated entirely by the client prior to commencement of the audit

b

1. When a CPA leaves her job working as an IRS Revenue Agent to accept a job in the Tax Department of a public accounting firm, she primarily: a. Has to be concerned about conflicts of interest between her new employer and its competitors b. Has to be concerned about conflicts of interest between her new employer and other employers whose job offers she rejected c. Has to be concerned about conflicts of interest arising between one of her clients and her former employer d. Does not have to be concerned about using information learned at the IRS in assisting new clients because a CPA has a duty to use all of her knowledge to best serve her clients

c

11. A CPA firm has multiple locations throughout the Midwest of the United States. This firm has an audit client that is headquartered in Milwaukee, Wisconsin and the partner in charge of this audit is also located in the Milwaukee office of the firm. The audit client is a beverage manufacturer and the partner in charge of this audit is the Chairman of the firm's Food and Beverage Industry Audit Committee. To preserve the CPA firm's independence, which of the following individuals definitely must not own any direct interests in this beverage manufacturer? a. The aunt of the partner in charge b. A partner in the Oklahoma City office of this CPA firm who does not participate in rendering services to this client c. A partner in the Chicago office who also serves on the firm's Food and Beverage Industry Audit Committee d. A junior staff member in the Milwaukee office who spent 6 hours preparing a tax research memorandum relating to beverage sales taxes imposed on this manufacturer 's products

c

11. A CPA prepared financial statements that reflect a company's expected financial position, operating results, and cash flows and were based on one or more hypothetical assumptions: This CPA has: a. Violated the ethical standards of the accounting profession, as reflected in the IFAC Code of Conduct b. Violated the ethical standards of the accounting profession, as reflected in both the AICPA's and IFAC's standards of conduct c. Prepared financial projections, which is not an ethical violation d. Prepared financial forecasts, which is not an ethical violation

c

11. A CPA, acting on behalf of a client company, makes a payment to a foreign government official to ensure that goods that are not entitled to be exported into that country are indeed allowed to enter that country. By doing so, the CPA has: a. Given a lawful facilitation payment b. Committed a direct violation of the Foreign Corrupt Practices Act's provision concerning "financial professionals and other client representatives" c. Definitely jeopardized her professional license d. Jeopardized her professional license only if she also performed auditing services with respect to that client during the same reporting period

c

12. A car tire manufacturer guarantees that its tires will last for 50,000 miles and, if they do not, it will replace the tires at no cost. A CPA working for this manufacturer of car tires is in charge of determining the liability account entitled "Liability for Warranty Repairs." Historically, this warranty account has had a balance equal to 2% of sales. However, due to a drastically high level of defects at the company's offshore manufacturing facility, this liability account needs to be increased by millions of dollars to roughly equal 9% of sales. To avoid negative publicity, this CPA's employer does not want this revised amount to be disclosed in its financial statements. The employer: a. Can keep this fact confidential because the CPA knows, or reasonably should know, that it will cause harm to the employer b. Cannot keep this fact confidential because the duty of confidentiality does not apply to the relationship between an employer and an employee c. Cannot keep this fact confidential because the CPA has a primary duty to ensure that a company's financial statements are accurate d. Can keep this fact confidential because the duty of confidentiality does apply to the relationship between an employer and a CPA-employee

c

12. Financial statements prepared on the cash basis: a. Comply with GAAP but are complex to prepare b. Comply with GAAP and are relatively easy to prepare c. Do not comply with GAAP and are relatively easy to prepare d. Do not comply with GAAP and, therefore, are not subject to being audited

c

13. A CPA's client base includes both publicly traded corporations and smaller privately-owned clients. Some of these clients require audits, and others only require bookkeeping and tax compliance services. If the CPA wishes to sell her professional practice to another CPA firm, she may disclose to the prospective buyer information concerning: a. only the publicly traded clients b. only the clients for whom she issues an audit opinion c. all information requested, as long as she takes reasonable precautions to ensure that the prospective buyer does not disclose sensitive client information shown to it d. none of these clients, due to the duty of confidentiality

c

13. The LIBOR scandal was primarily caused by: a. Bad debt losses on bank loans that were biased downward to avoid inquiry by European banking regulators b. Excessive reliance by banks on loans the bear adjustable loan interest rates c. A lack of candor by certain banks d. A lack of integrity by large corporate borrowers

c

15. The "books and records" provisions of the Foreign Corrupt Practices Act: a. Potentially imposes criminal liability on internal auditors who fail to detect bribery or corruption in a firm's record-keeping system b. Potentially imposes criminal liability on external auditors who fail to detect bribery or corruption in a firm's record-keeping system c. Requires publicly-held companies to devise and maintain adequate internal controls over payments that constitute bribes d. Requires companies to document the amounts, purpose, and recipients of facilitation payments to ensure that their federal income tax reporting is accurate

c

16. The "Continental Vending Machine" court decision was a landmark ruling because: a. It authorized CPA firms to both prepare a client's financial statements and then audit these same financial statements b. It held that, for consistency, all financial statements must comply with GAAP, regardless of the industry in which a company operates c. Auditors can be held liable for misconduct, even if financial statements comply with GAAP d. Auditors may recoup from an audit client all of the litigation losses that the auditor sustains from certifying misleading financial statements if the audit client solely was responsible for the statement presentation being misleading

c

17. "Cookie jar accounting": a. Always sweetens, or increases, a company's reported profits, as its name suggests b. Sets aside questionable but desirable items in a jar, so to speak, and reports conservative results c. Allows a firm to manipulate the trend in its earnings, making earnings less volatile d. Allows a firm to boost its long-run, total reported earnings from a financial accounting perspective

c

17. The rules governing contingent fee arrangements do not permit a tax practitioner to charge a contingent fee for rendering: a. Tax planning services b. Payroll tax processing services c. The preparation of a request for a refund of previously overpaid taxes d. Taxpayer advocacy in an IRS administrative hearing

c

17. if a paid tax return preparer discloses a client's Social Security Number, the preparer is subject to monetary penalties: a. Only if the disclosure was intentional b. Only if the disclosure was intentional or reckless c. If the disclosure was intentional, reckless, or inadvertent d. Only if the client can demonstrate that he or she suffered monetary damages

c

18. "Round trip" transactions primarily are utilized by companies: a. To commit tax fraud b. To substantially change the overall composition of their assets c. To recognize accounting gains without meaningfully changing the nature of their operations d. To return capital that previously was contributed by shareholders, often through the use of treasury stock repurchases

c

18. A CPA wants to understand the difference between the duty of confidentiality and the accountant-client privilege. She lives in a state in which an accountant-client privilege has been enacted. A key difference between the duty of confidentiality and the accountant-client privilege is that: a. The accountant-client privilege ceases to exist once an accountant-client relationship is terminated by the client b. The accountant client privilege ceases to exist once an accountant-client relationship is terminated by either the client or the accountant c. The accountant-client privilege only protects communications from disclosure, but the duty of confidentiality applies more broadly to protect observations, documents, and communications d. The duty of confidentiality only protects communications from disclosure, but the accountant-client privilege is a legal enactment that applies more broadly to protect observations, documents, and communications

c

18. Two CPAs are good friends as well as partners together in a CPA firm. They recently invested their money together to buy an apartment building. One of the tenants in the apartment building is an employee of their CPA firm, and another tenant is the father of one of the two CPAs. The father's lease terminates soon and the father wishes to renew the lease at the same rental amount that he currently is paying. Under the AICPA's Code of Professional Conduct: a. Two conflicts of interest exist b. The father's status as a tenant creates a conflict of interest that cannot be corrected by safeguards c. The father's status as a tenant creates a conflict of interest that can be remedied by safeguards d. No conflicts of interest exist

c

2. Many companies adopt policies that preclude key employees from owning stock in company suppliers. Companies establish this type of policy to: a. Make it more difficult for key employees to leave their jobs to commence working for a supplier b. Make it more difficult for key employees to share confidential trade secrets with a supplier c. Prevent conflicts of interest that might be difficult to detect d. Prevent conflicts of interest, even though they usually are easy to detect

c

2. Under the Advertising and Other Forms of Solicitation Rule of the AICPA's Code of Professional Conduct, a CPA may not engage in advertising that is: a. Undignified b. Unprofessional c. Deceptive d. All of the above

c

2. Under the Foreign Corrupt Practices Act, a company can be held criminally liable: a. If it is more probable than not that it committed bribery b. In a lawsuit filed by a government other than the United States c. If it engaged in "willful blindness" to acts of bribery that furthered its economic interests d. Only if documentary evidence confirms the existence of bribery

c

20. From the perspective of accounting, the downfall of Lehman Brothers was primarily attributable to: a. The company's undue focus on short-term earnings b. The company's blatantly deceptive revenue recognition policy on complex financial products and services c. Debt repayment transactions that lacked enduring economic substance d. A subtle variation on cookie jar accounting

c

20. The FBI is trying to locate a suspected terrorist. Law enforcement authorities believe that this terrorist currently holds a job and, therefore, has had payroll taxes withheld from his paycheck. Also, this suspected terrorist would have received a W-2 payroll statement form from his employer that references his last-known address. The FBI has asked the IRS to cooperate by disclosing the name of the employer and the last known address of this suspected terrorist. Can the IRS disclose this information? a. No, due to the duty of confidentiality b. No, due to the federal taxpayer privilege c. Yes, because the law permits it d. Yes, because an employer does not have any privacy duties to its employees regarding qualitative tax information

c

21. A CPA provides services to two clients in the same industry. Both clients have been informed of this fact and have acknowledged their approval in writing. As a result: a. The CPA nonetheless is violating professional standards concerning conflicts of interest b. The duty of confidentiality has been waived and does not apply to the two accountant-client relationships mentioned c. Must be careful to not share specific information learned from one client with the other client d. Must be careful to not utilize general industry experience gained from serving one client to benefit the other client

c

21. The IRS will: a. Never release a person's tax return or information contained within it b. Only release a person's tax return in response to a proper request submitted in accordance with the Freedom of Information Act c. Generally not release a person's tax returns except for limited purposes, such as the determination of the employer of a person who has failed to pay child support d. Release a person's tax return, or information contained within it, to a federally chartered bank to whom a taxpayer has applied for a commercial loan

c

22. Before disclosing confidential information, a CPA generally must obtain client consent. This consent must be: a. Included in the original engagement agreement signed at the outset of an accountant-client relationship b. Included in the original engagement agreement or in a subsequent amendment to that document c. Specific to a particular fact or set of facts d. In writing, but the parties have substantial flexibility in deciding on the form and content of such a consent document

c

25. A CPA cannot be held liable for violating the duty of confidentiality if: a. He receives an urgent phone call from a client and responds to that message while standing in a crowded elevator b. He places a phone call to a client from his home office and a family member accidentally overhears the conversation c. The client did not have a reasonable expectation of confidentiality for the type of information being communicated d. Information was disclosed after an ongoing client relationship had terminated

c

26. The materiality of a conflict of interest should be evaluated from the perspective of: a. Whether a reasonable client would consider the conflict to be material b. Whether a client, acting unreasonably or reasonably, would consider the conflict to be material c. Whether an objective observer who is reasonably informed about the surrounding facts would conclude that a conflict of interest is material d. Whether the CPA subjectively, from his or her own vantage point, has concerns about two or more material interests clashing

c

26. To preserve their independence regarding audit clients, CPAs should not: a. Prepare suggested year-end adjusting entries b. Prepare suggested year-end closing entries c. Negotiate office leases on behalf of these clients d. Prepare financial projections that are based on management's assumptions

c

29. The "Fund of Funds" court decision stands for the proposition that: a. Auditors inherently have conflicts of interest with their clients b. Segregating one team of auditors at a CPA firm from another team does not necessarily prevent conflict of interest issues from affecting the firm's ethical obligations c. The duty of loyalty to one client sometimes has to override the duty of confidentiality owed to a different client d. The duty of loyalty to a client sometimes has to override the duty of confidentiality owed to that same client

c

32. A client called a CPA at her home one evening to discuss an urgent matter. The client called at a time when the CPA was eating dinner with her family. Due to the unexpected and potentially urgent nature of the call, the CPA answered the phone call while sitting at the dinner table. As a consequence, some of the CPA's family members overheard key aspects of the phone call. Did the CPA violate the duty of confidentiality? a. No, because the client reasonably should have known that the CPA was not conducting business from her office b. No, because the client had a reasonable expectation that a call to a CPA's house after business hours might be overheard c. Yes, because CPAs are specifically warned to guard against inadvertent disclosures in social settings d. Yes, even though a CPA's immediate family members are subject to the same duty of confidentiality that applies to the CPA herself

c

32. An accountant's conflict of interest: a. Always can be waived by a client b. Never can be waived by a client c. Sometimes cannot be waived by a client d. Cannot be waived by the doctrine of implied consent, according to the IFAC Code of Conduct

c

5. A CPA has to focus on whether a conflict of interest exists: a. Only at the outset of a professional relationship b. Only after a professional relationship has commenced c. Both at the outset of a professional relationship and throughout the conduct of a professional relationship d. In all professional relationships other than the provision of voluntary services to a charitable, civic, or religious organization

c

6. A CPA wishes to mention the names of her most prominent clients on her website. The mere existence of a professional relationship between a CPA and a small business client: a. Never may be disclosed due to the duty of confidentiality b. Never may be disclosed unless the client gives it specific consent c. Generally may be disclosed by a CPA as long as the substance of the communications between them is not disclosed d. Always may be disclosed, but it is advisable to first request the client's permission to avoid jeopardizing the client's goodwill

c

6. For many years, a partner in a CPA firm worked on the audit of Grossnomics, Inc. This partner now has retired from the CPA firm and serves as a consultant to Grossnomic's Audit Committee. This partner's former CPA firm: a. No longer maintains the independence to audit Grossnomics, unless the CPA firm demonstrates to the AICPA that it remains independent in fact and in attitude b. No longer maintains the independence to audit Grossnomics under any circumstance c. Maintains the independence to audit Grossnomics as long as this former partner no longer has any actual or apparent financial ties to his former CPA firm d. Maintains the independence to audit Grossnomics as long as the former partner does not participate in the preparation of Grossnomics' financial statements

c

7. The key difference between a kickback and a contingent fee is: a. The amount involved b. Whether the percentage of the gain shared is equal or not c. A kickback refers to an unlawful transaction and contingent fees relate to lawful transactions d. All of the above

c

8. To curb potential abuse, publicly traded companies: a. May not do business with related parties b. May not have related parties serve on their Boards of Directors c. May do business with related parties, as long as such relationships and transactions are clearly disclosed d. May do business with related parties as long as such transactions occur at fair market value, as determined by the company's independent auditors

c

8. Winkelberg, a CPA, has been retained to prepare unaudited financial statements for a company, on an income tax reporting basis, for a privately-held company owned by her best friend, Stinkelberg. WInkelberg has a professional obligation to: a. Withdraw from this engagement because of her friendship with Stinkelberg b. Withdraw from this engagement because of the basis on which these financial statements are presented c. Use due care in preparing these statements d. Inform her client that this basis of reporting violates SEC filing requirements, but she does not necessarily have a duty to withdraw from this engagement

c

9. A CPA specializes in helping businesses evaluate their future prospects and create successful budgets. As part of this process, the CPA invariably learns confidential information about a company's future. To avoid potential liability, the CPA's engagement letter states upfront that "all information learned after the commencement of services shall not be subject to the duty of confidentiality." This CPA: a. May utilize for its own benefit information learned from this budgeting engagement because of this express waiver provision b. May utilize for its own benefit information learned from this budgeting engagement because the duty of confidentiality does not apply to management consulting engagements c. May not utilize information learned from this client relationship because the client did not give its specific consent d. May not utilize information learned from this client relationship because the duty of confidentiality can never be waived

c

For a CPA who performs auditing services, the most significant conflict of interest that is likely to arise is between: a. Two clients who both sell the same product in different geographic markets b. Two clients who both are aggressively pursuing sales to the same prospective customer c. The client's interest and the public interest d. The CPA's interest and another CPA's interests

c

The undue influence threat is most likely to be present when: a. A client and a CPA disagree over whether a change in accounting principle has a material effect on the client's reported results b. A client and a CPA disagree over whether the valuation model selected by the client for expensing compensation costs associated with employee grants of stock options adequately reflects the economic costs associated with this expense c. A CPA firm generates 19% of its total revenues from services provided to a corporation and its seven subsidiaries d. A CPA gives its client a "one-time only" 20% discount on fees so the CPA firm can acquire a new audit client

c

29. A CPA firm is comprised of 100 audit partners. Three of these partners own stock in one of the CPA firm's audit clients, with each such partner owning 2% of the outstanding shares in this client. Does this CPA firm retain the independence to audit this client? a. Yes, as long as none participate in the audit as the primary or concurring partner b. Yes, as long as none render non-audit services to this client c. Yes, as long as none is a "covered member' with respect to this client d. No

d

1. A CPA observed another CPA engaging in an act that was undeniably discreditable to the profession. The Acts Discreditable Rule of the AICPA: a. Requires the observing CPA to report this violation to a designated officer of the AICPA b. Requires the observing CPA to report this violation to a designated officer of the applicable state's accountancy licensing board c. Expressly states that a CPA has no duty to report the observed misconduct d. Does not express an opinion on whether the observing CPA does, or does not, have a reporting duty

d

1. The Fraud Triangle refers to: a. The three acts of accounting deception that led to Enron's downfall b. The three alternative causes of fraud in large organizations c. The three alternative causes of financial fraud in business enterprises d. The three elements that collectively must be present for fraud to occur

d

10. A company makes a payment to a political campaign committee that supports the reelection of a foreign government official. The company's goal was to ensure that the government official authorizes goods that are not entitled to be exported into that country to indeed be allowed to enter that country. However, the company never had any direct communications with that government official. The company has given: a. A facilitation payment b. An unlawful referral fee c. A lawful bribe d. A bribe

d

10. CPAs who are full-time employees of a corporation and focus on the preparation of earnings forecasts and projections invariably learn confidential information about their employer's future prospects. Is such an employee subject to the duty of confidentiality? a. Yes, if the employment agreement between the employer and employee establish the duty of confidentiality b. Yes, but they would not be subject to this duty if they performed their services as part-time employees c. No, because employees in key financial oversight roles are not subject to the duty of confidentiality d. Yes, because all CPAs are subject to the duty of confidentiality

d

10. The concept of "moral licensing," in the context of conflicts of interest, relates to: a. A person receiving actual consent to proceed in a professional relationship, despite the potential for a conflict of interest to arise b. A person receiving implied consent to proceed in a professional relationship, despite the potential for a conflict of interest to arise c. A person who potentially will benefit from a conflict of interest agreeing to make periodic payments to reimburse any party who is adversely affected by the conflict of interest d. A person making exaggerated claims about goods or services after having disclosed influences that create the appearance of a conflict of interest

d

11. By serving on the Board of Directors of various charities, Bernie Madoff was able to: a. Utilize their tax-exempt status to his advantage b. Invest funds in a nontaxable manner c. Hide his profits through the use of nonprofit organizations that were highly unlikely to be audited by the IRS d. Gain their trust

d

12. A CPA firm billed for audit services performed for a client more than one year ago. The client has paid a portion of the fees outstanding, but it has not been able to pay the remaining balance due to cash flow problems. The CPA firm has verified that the cash flow problems are authentic and expects the client to be able to pay the remainder of the bill, but the CPA firm cannot reasonably estimate the timing of such payments. As a result, the CPA firm: a. Remains independent if the amounts that remain owing are immaterial to the CPA firm b. Remains independent if the client has paid over 50% of the total invoice outstanding c. Can preserve its independence if the client willingly signs a Note Payable for these services and the note bears a reasonable market rate of interest d. Lacks the independence to perform further attestation services

d

12. An accountant and a prospective client are contemplating entering into a professional relationship in which the accountant will provide monthly bookkeeping services and annual tax return preparation services for this client's hair salon. The accountant's teenage daughter told this prospective client that her father is "an amazing accountant," which facilitated the professional introduction. The accountant's daughter works for this prospective client as a receptionist. In all likelihood, the accountant: a. May not provide services to this prospective client b. May provide only tax preparation services to this prospective client because a conflict of interest presently exists c. May provide only bookkeeping services to this prospective client because a conflict of interest presently exists d. May provide all requested services because a conflict of interest does not currently exist and is not reasonably foreseeable

d

13. An auditor has discovered that its audit client made numerous facilitation payments to foreign officials over the past two years. This client's stock trades on the New York Stock Exchange. The auditor should: a. Inform the SEC b. Inform authorities at the stock exchange c. Inform the companies' Audit Committee d. Ignore this discovery

d

14. The Accounting Principles Rule states that financial statements: a. Always must comply with GAAP b. Never should contain a departure from GAAP c. May contain a departure from GAAP for administrative reasons, as long as the departure is clearly disclosed d. May contain a departure from GAAP if adherence to GAAP would result in the statements being misleading

d

14. When a person's net cash flow exceeds his reported taxable income, the presumption that this individual has misreported his income to taxing authorities can be rebutted by showing that: a. The cash flow was attributable to the receipt of a nontaxable inheritance b. The cash flow was attributable to loan proceeds c. The cash flow was attributable to the receipt of nontaxable gifts d. All of the above

d

17. A CPA firm knows that clients find it difficult to change auditors after a professional relationship has been in place for several years because the termination of an auditor often makes investors concerned about the trustworthiness of a company's financial statements. To take advantage of this fact, this CPA firm routinely bids on new audit engagements at a fee that is likely to be 25 percent lower than the fees bid by its competitors. The CPA firm plans to recoup this fee differential by steadily raising its fees to above-market rates in subsequent years. The CPA firm's policy creates: a. A current conflict of interest b. A foreseeable future conflict of interest c. An appearance of a conflict of interest, but not an actual one d. No conflict of interest

d

17. The judge's decision in the "Continental Vending" court case: a. Made GAAP mandatory for all financial statements b. Held that compliance with international accounting standards, rather than American accounting standards, was acceptable in the presentation of audited financial statements if the statements would predominantly be distributed to readers outside the United States c. Held that compliance with international accounting standards, rather than American accounting standards, was acceptable in the presentation of audited financial statements if the statements would exclusively be distributed to readers outside the United States d. Made deviation from GAAP-based presentations mandatory if the application of GAAP would be misleading

d

18. A CPA has been hired to audit a bank that is regulated by the federal banking authorities. This audit will be submitted by the bank to numerous readers, including federal regulators. The CPA's audit agreement with the bank provides that the bank will "reimburse and indemnify it for all losses it incurs if the bank's financial statements were prepared by the bank in a manner that was misleading or fraudulent." This provision: a. Definitely is a violation of the Acts Discreditable Rule b. Definitely is not a violation of the Acts Discreditable Rule because it provides for a limitation on the CPA's liability only in cases where the client solely is at fault c. Definitely is not a violation of the Acts Discreditable Rule because the CPA firm's agreement is reasonable and appropriate d. Potentially is a violation of the Acts Discreditable Rule

d

19. A paid tax return preparer is allowed to have: a. An indirect financial interest in a client, but not a direct financial interest b. A direct financial interest in a client, but not an indirect financial interest c. Both direct and indirect financial interests in a client, as long as the interests are not material d. Both direct and indirect financial interests in a client, even if these interests are material

d

2. In applying independence rules, the concept of a "covered member" on an audit applies to: a. Only the principal audit partner on an audit b. Only the principal audit partner and the concurring partner, if any, on an audit c. Only the principal audit partner, the concurring audit partner, and senior staff exercising managerial responsibilities on an audit d. All accounting professionals who provide audit services to an audit client

d

20. Under insider trading rules applicable to publicly traded companies, an accountant is considered to be an "insider": a. Only if she Is a full-time accounting staff member of a company b. Only if she is an internal auditor of a company c. Only if she serves in a financial reporting oversight role d. Even if she is only temporarily on the company's premises as an external auditor

d

21. Under the insider trading rules, a staff accountant who manages the collection and recording of a publicly-traded company's Accounts Receivable is: a. Never considered to be an insider b. Prohibited from ever trading in the company's stock c. Prohibited from trading in the company's stock, unless the purchases are made in a retirement fund in which numerous other employees also participate d. Prohibited from trading in the company's stock if she possesses material, non-public information

d

22. An Oklahoma CPA provides management advisory services to a large public utility that provides electrical power throughout Oklahoma and is the only supplier of electricity to residential users in Oklahoma. The CPA has been asked to prepare a request for a utility rate increase that will be submitted to state regulators for their approval. The CPA: a. Has a conflict of interest that should be disclosed to his client b. Does not have to be concerned about conflicts of interest because the CPA only provides management advisory services c. Does not have to be concerned about conflicts of interest because utility rates ultimately will be set by independent state regulators d. Does not have a material conflict of interest because the requested rate increase will apply to all Oklahoma citizens who use this utility's electricity services

d

23. Which of the following is not an "insider" for purposes of the insider trading rules? a. An internal auditor b. An independent member of the Board of Directors who does not own any company stock c. A shareholder who owns 7% of a company's stock and her husband owns 4% of the company's stock d. A investors who owns 20% of a company's general obligation bonds that are trading at a price roughly equal to their market value

d

24. In California, a CPA may: a. Always receive a referral fee in connection with the referral of a non-audit client b. Always pay a referral fee in connection with the referral of a non-audit client c. Never pay or receive a referral fee, in accordance with the AICPA's Code of Professional Conduct d. Never pay or receive a referral fee, even if the AICPA's Code of Professional Conduct otherwise might authorize it

d

25. According to the IFAC Code of Conduct, the determination of whether a professional accountant has, or does not have, a conflict of interest is resolved by: a. The IFAC Ethics Committee, if the conflict of interest is challenged by the accountant's client b. Balancing costs to the client and to society against the financial benefits to the CPA c. Applying the Public Interest Principle d. By the professional accountant, using professional judgment

d

26. A key difference between the attorney-client privilege and the accountant- client privilege is that: a. The accountant-client privilege has been enacted in every state b. The attorney-client privilege is more extensive because it encompasses all documents, observations, and thought processes c. The attorney-client privilege precludes the attorney from releasing information, even in court, but a CPA asserting the accountant-client privilege must release information if requested by a court d. The attorney-client privilege precludes an attorney from releasing information in an administrative hearing or to an administrative authority, but the accountant-client privilege does not

d

28. A CPA performs tax advisory services, but it does not provide tax return preparation services. For this CPA, the most significant conflict of interest that is likely to arise is between: a. The AICPA's Code of Professional Conduct and IRS Regulations regarding professional conduct b. The Internal Revenue Code and state tax codes c. The client and the IRS d. The duty of loyalty to the client and a duty to the public interest

d

29. If a CPA provides professional services to a large corporation, it should discuss confidential client information: a. Only with the corporation's Audit Committee and General Counsel b. Only with the corporation's Audit Committee and Board of Directors c. Only with the corporation's General Counsel to preserve the attorney-client privilege concerning such communications d. With any corporate employee who, in the CPA's professional judgment, is an appropriate recipient of such information

d

3. The duty of confidentiality arises when: a. A professional accountant and client agree to it in their contract for services b. A professional accountant expressly agrees to abide by the AICPA's Code of Professional Conduct c. Automatically for a professional accountant under the IFAC Code of Conduct, but not under the AICPA's Code of Professional Conduct d. Automatically for a professional accountant, under both the IFAC and AICPA Codes of Conduct

d

30. A CPA' duty of confidentiality ends when: a. A professional relationship with a client ends b. A client dies c. A client's is acquired by another company in a merger or purchase d. Never

d

30. In the "Fund of Funds" case, the plaintiff contended that: a. The defendant CPA firm owed it due care in performing professional services and failed to do so b. The defendant CPA firm violated the Integrity and Objectivity Rule c. The defendant CPA firm pursued its own self-interest over the public interest d. The defendant CPA firm had a duty to utilize all available information in performing professional services for the plaintiff

d

31. A CPA may utilize information obtained during the course of a professional accountant-client relationship for personal gain: a. Only if the CPA does not disclose this information to others b. Only if the source of this information cannot reasonably be discovered by others c. Only if the use of this information does not preclude the client from pursuing any opportunities that it otherwise would have desired to pursue d. Never

d

4. A facilitation payment: a. Is never lawful under the Foreign Corrupt Practices Act b. Is lawful under the Foreign Corrupt Practices Act as long as it does not involve the exportation of merchandise from the United States c. Is lawful under the Foreign Corrupt Practices Act as long as it does not involve the importation of merchandise into the United States d. Is always lawful under the Foreign Corrupt Practices Act

d

4. The Acts Discreditable Rule states that the following acts are discreditable: a. An accountant's failure to file her own tax return by April 15, even if the accountant obtains a permitted extension of time from the taxing authority b. The late filing of a tax return for a partnership client that results in at least one of the client's partners incurring late filing penalties c. A CPA's nonpayment of taxes due and owed to a taxing authority d. A CPA firm's failure to file its partnership tax return, even if all of its partners individually have filed their tax returns on time

d

4. The duty of confidentiality applies to: a. Spoken communications only b. Written documents only, whether or not they are in digital or physical form c. Only written documents that are marked with the word "Confidential" or an equivalent phrase d. All documents, communications, and observed facts

d

5. In some jurisdictions, laborers, including accountants, are given a lien over client records. (A lien is a priority legal and economic right that is created when a client fails to pay agreed-upon fees.) This lien customarily entitles an accountant to retain possession of client records until outstanding fees are paid in full. When such a lien right arises, the AICPA Code of Professional Conduct states that: a. State law is given priority over the CPA profession's rules of ethical conduct b. The CPA profession's rules of ethical conduct are given priority over state law c. The CPA is allowed to select the set of rules that are most favorable to the CPA d. The CPA is obligated to abide by the set of rules that is most favorable to the client

d

6. A CPA usually charges $3,000 to prepare a corporate income tax return, including all supplemental schedules. This CPA has agreed to charge the CFO of a mid-size corporation only $10 to prepare the CPA's personal tax return and $5,000 to prepare the corporation's tax return. This CPA: a. Is engaged in moral licensing b. Has an accountant-client conflict of interest c. Has a dual-client conflict of interest d. Is not acting with integrity

d

6. Enron's use of Special Purpose Entities led to: a. Widespread, and wholly unexpected, embezzlements of funds b. Widespread embezzlements of funds that could had, and should have, been readily anticipated c. The accounting profession developing the concept of consolidated financial statements d. Rule changes in GAAP

d

6. If a CPA charges a contingent fee in connection with providing professional services to a review client, the CPA's fee arrangement is: a. Permissible always b. Permitted only if the fee arrangement is expressed in a clear writing signed by the client c. Permitted only if the fee is reasonable in amount d. Never permissible

d

7. During the cold winter months, a Nebraska corn farmer discussed hiring a CPA to maintain his books and records. During the course of their discussions, the farmer told the CPA about various proprietary techniques that he uses to maximize the yield from growing corn and maximize the revenue his business generates. Thereafter, the farmer got busy operating his business and never contacted the CPA again. For what period of time, if any, does this CPA owe a duty of confidentiality to this farmer? a. No duty at all because the duty of confidentiality only continued until the time at which it became reasonably certain that the farmer would not become the CPA's client b. Expired after the end of the farmer's busy growing and harvesting season, if not sooner c. One year d. Forever

d

7. Preparing financial statements for an unincorporated business on a basis that does not comply with GAAP usually will result in: a. A CPA being suspended from membership in the AICPA b. A professional accountant suffering adverse professional consequences if the accountant practices in a country that has adopted IFRS c. A CPA being permanently disqualified from continuing membership in the AICPA d. No professional discipline as long as the noncompliance with GAAP is adequately disclosed

d

7. Status as a "covered member" is important in determining independence because CPAs who are classified as a "covered member" lack the independence to conduct an audit if: a. They have an indirect ownership interest in even a single share of stock outstanding in an audit client b. They refuse to subordinate their best judgment to the wishes of their client c. Their college-age, dependent child works in the client's warehouse during the summer as a shipping clerk d. Their sister is an attorney who works as the company's General Counsel

d

9. If a company makes a payment to a foreign government official to ensure that goods that are not entitled to be exported into that country are indeed allowed to enter that country, the company has given: a. A facilitation payment b. An unlawful referral fee c. A lawful referral fee d. A bribe

d

9. Some commentators have suggested that Enron would not have collapsed if it: a. Had enacted a Code of Conduct b. Had enacted a standard Code of Conduct rather than the weak one that it in fact had c. Had carefully complied with all of the provisions of the Sarbanes-Oxley Act d. Had not unduly focused on short-term stock performance

d

A "covered member" of a CPA firm owns 4% of the bonds outstanding in an audit client. In accordance with the Independence Rule, does this CPA firm have the independence to audit this client? a. Yes, as long as the CPA's immediately family does not have any additional financial interests in this client b. Yes, as long as the bonds are not convertible into common stock c. No, unless the CPA agrees to not directly participate in the audit d. No, because of the self-interest threat

d

A hearing of the State Commission on Workplace Administration was convened to determine if the CFO of a corporation had engaged in "quid pro quo" sexual harassment. A part of that hearing, an external auditor who observed various incidents while auditing this corporation testified voluntary about his observations. This testimony created: a. A self-review threat to independence b. A management participation threat to independence c. An adverse interest threat to independence d. No threat to independence

d

Cyndi's husband Larry works as a cashier at Starstrucks, a chain of coffee shops. Cyndi, a CPA, may: a. Not serve as the main partner in charge of the audit of Starstrucks b. Not serve as a senior staff member on the audit of Starstrucks c. Not serve in any capacity as a member of the audit team engaged to audit Starstrucks d. Definitely may serve in any capacity as a member of the audit team engaged to audit Starstrucks

d

Due to the conflict of interest rules, a CPA may: a. Not provide professional services to two companies in the same industry b. Not provide professional services to two companies who do business with one another c. Not provide professional services to two companies who do business with one another if the sales or services are material in amount to one of the parties d. Generally provide professional services to two companies who do business with one another, even if the sales or services are material in amount to one or both parties

d