Chapter 4 - MAL

In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining the audit​ fee? 1. A fee based on whether the​ CPA's report on the​ client's financial statements results in the approval of a bank loan. 2. A fee based on the outcome of a bankruptcy proceeding. 3. A fee based on the nature of the service rendered and the​ CPA's expertise instead of the actual time spent on the engagement. 4. A fee based on the fee charged by the prior auditor.

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

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential client information obtained in the course of a professional engagement except with the consent of the client. In which one of the following situations would disclosure by a CPA be in violation of the Code​? 1. Disclosing confidential information to another accountant interested in purchasing the​ CPA's practice. 2. Disclosing confidential information in compliance with a subpoena issued by a court. 3. Disclosing confidential information in order to properly discharge the​ CPA's responsibilities in accordance with the​ profession's standards. 4. Disclosing confidential information during an​ AICPA-authorized peer review.

1. Disclosing confidential information to another accountant interested in purchasing the​ CPA's practice.

What is the meaning of the rule that requires the auditor be​ independent? 1. The auditor must be without bias with respect to the client under audit. 2. The auditor must adopt a critical attitude during the audit. 3. The​ auditor's sole obligation is to third parties. 4. The auditor may have a direct ownership interest in the​ client's business if it is not material.

1. The auditor must be without bias with respect to the client under audit.

Which of the following is not a provision of the SarbanesdashOxley Act of​ 2002? 1. The auditor of an issuer may not provide internal audit outsourcing services for the issuer. 2. Audit documentation must be maintained for five years. 3. The lead and reviewing partners must rotate off the audit after five years. 4. Tax services must be preapproved by the audit committee.

2. Audit documentation must be maintained for five years.

According to the​ profession's ethical​ standards, which of the following events may justify a departure from​ GAAP? I. New legislation. II. Conflicting industry practices. III. Evolution of a new form of business transaction. 1. I and II 2. II and III 3. I and III 4. ​I, II, and III

3. I and III

Which of the following services can be offered to public company audit clients under SEC requirements and the SarbanesdashOxley ​Act? 1. Tax services for executives involved in financial reporting 2. Internal audit outsourcing 3. Tax planning not involving tax shelters 4. Bookkeeping and other accounting services

3. Tax planning not involving tax shelters

The concept of materiality would be least important to an auditor when considering the 1. adequacy of disclosure of a​ client's illegal act. 2. discovery of weaknesses in a​ client's internal control structure. 3. effects of a direct financial interest in the client on the​ CPA's independence. 4. types of evidence to use in testing accounts receivable.

3. effects of a direct financial interest in the client on the​ CPA's independence.

An auditor strives to achieve independence in appearance to 1. comply with the auditing standards related to audit performance. 2. become independent in fact. 3. maintain public confidence in the profession. 4. maintain an unbiased mental attitude.

3. maintain public confidence in the profession.

A​ CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is 1. not addressed by the AICPA Code of Professional Conduct. 2. acceptable if sanctioned by the state laws. 3. prohibited under the AICPA rules of conduct. 4. a violation of generally accepted auditing standards.

3. prohibited under the AICPA rules of conduct.

Give an example of when stock ownership would be prohibited for each. Start first with a partner example and then continue with the professional staff example. A. An audit manager owns stock in a client whose audit is performed by the office where the audit manager works. The manager is promoted to partner​ mid-year. B. An audit manager owned stock in a client prior to joining the firm. The audit manager is currently the manager of this​ client's audit. The partner responsible for the audit is aware of the prior ownership. C. An audit manager located in Orlando has multiple nieces and nephews who own stock in an audit client of his firm. The audit and responsible partner are located in Chicago. D. An audit manager who gifts all his shares of stock to a​ non-family member so he or she can be assigned to the audit engagement.

A. An audit manager owns stock in a client whose audit is performed by the office where the audit manager works. The manager is promoted to partner​ mid-year.

State the allowable forms of organization of a CPA firm may assume. A. CPA firms may only be a general​ partnership, limited liability partnership based on state​ law, or a limited liability company based on state law. B. CPA firms may assume a general​ partnership, a​ proprietorship, a professional​ corporation, or based on state​ law, a general​ corporation, limited liability company or limited liability partnership. C. CPA firms may assume a​ proprietorship, or a general​ corporation, and based on state​ law, they may also assume a limited liability​ partnership, or a general partnership. D. A CPA firm may only be a​ partnership, a general partnership or a limited liability​ partnership, as permitted by state law.

B. CPA firms may assume a general​ partnership, a​ proprietorship, a professional​ corporation, or based on state​ law, a general​ corporation, limited liability company or limited liability partnership.

After accepting an​ engagement, a CPA discovers that the​ client's industry is more technical than he realized and that he is not competent in certain areas of the operation. What are the​ CPA's options? ​(Select all that​ apply.) A. As long as the CPA discloses his​ incompetence, he can complete the audit with no further action needed. B. Obtain the expertise through continuing education and​ self-studies. C. Work on a consulting basis with another CPA firm. D. Hire someone who has the expertise. E. Do​ nothing, being competent in part of the operation is sufficient. F. Withdraw from the engagement.

B. Obtain the expertise through continuing education and​ self-studies. C. Work on a consulting basis with another CPA firm. D. Hire someone who has the expertise. F. Withdraw from the engagement.

Give an example of when stock ownership would be prohibited for each. Start first with a partner example and then continue with the professional staff example. A. A partner in the Los Angeles office relocates to the San Diego office so he or she can continue to own stock in a corporation. A different partner in the Los Angeles office is responsible for the audit of the corporation. B. A partner in the New York City office is the partner responsible for an audit engagement for a worldwide corporation with offices in Texas. A different partner in the Austin office comes for a visit to the New York City office and currently owns shares of stock in the worldwide corporation. C. A partner in the San Francisco office owns one share of stock of a client whose audit is conducted by a different partner in the San Francisco office. D. All of the above.

C. A partner in the San Francisco office owns one share of stock of a client whose audit is conducted by a different partner in the San Francisco office.

Why is an​ auditor's independence so​ essential? A. An​ auditor's independence is essential for legal and expert services. Businesses rely on auditors to work closely with their legal advisors and an auditor must remain independent to ensure they are not biased in the business dealings. B. Independence for an auditor is essential for all services an auditor performs to prove to end users that ownership interests are not being influenced in any way. C. Independence in auditing means taking an unbiased viewpoint. Users of financial statements would be unlikely to rely on the statements if they believed auditors were biased in issuing audit opinions. D. All of the above.

C. Independence in auditing means taking an unbiased viewpoint. Users of financial statements would be unlikely to rely on the statements if they believed auditors were biased in issuing audit opinions.

Assume that a partner of a CPA firm owns two shares of stock of a large audit client on which he serves as the engagement partner. The ownership is an insignificant part of his total wealth.​ (1)Has he violated the AICPA Code of Professional Conduct​? ​(2) Explain whether the ownership is likely to affect the​ partner's independence of mind.​ (3) Explain the reason for the strict requirements about stock ownership in the rules of conduct. _______ the AICPA Code of Professional Conduct because ________. Such a small ownership is _____ to have any impact on a partner's objectivity in evaluating the financial statements. It is _____ to affect the partner's independence of mind.

Yes he has violated independence rules prohibit any direct ownership by a partner or shareholder unlikely unlikely

Most other professions​ (attorneys, doctors,​ dentists, etc.) represent their clients and perform services intended primarily to assist their clients. For this reason _______ is required. Judges, however, must maintain a(n) ____ position, ___ __ auditors

no assumption of independence nonadvocacy similar to

Violations of the AICPA Code of Professional Conduct may result in a remedial or corrective disciplinary​ action, such as _______. More serious violations may require appearance before the Joint Trial Board and may result in _______.

requiring additional continuing education suspension of membership or expulsion from membership in the AICPA

Explain how the rules concerning stock ownership apply to partners and professional staff. A. A partner can own stock in an audit​ client, as long as​ (a) he or she cannot influence the audit engagement and​ (b) he or she is not in the same office as the partner responsible for the audit engagement. A professional staff member cannot own stock in an audit client if he or she is assigned to the engagement or if he or she becomes a partner if the office of the partner responsible for the audit engagement. B. A partner in the office of the partner responsible for an audit engagement cannot own stock in that audit client. A professional staff member can own stock in a​ firm's audit client as long as he or she does not participate in the audit engagement. C. A partner can own stock in an audit client as long as the firm of the partner is not the firm performing the audit engagement. A professional staff member can own stock in a​ firm's audit client as long as he or she discloses the ownership to the PCAOB and only performs menial tasks on the audit engagement. D. Both A and B apply.

D. Both A and B apply.

Identify and explain factors that should keep the quality of audits high even though advertising and competitive bidding are allowed. A. The quality of audits should remain high even though advertising and competitive bidding are allowed because the Code of Ethics for Professional Accountants requires a high quality of performance or the audit firm is required to discontinue all advertising and competitive bidding. B. The quality of audits should remain high regardless of the advertising and competitive bidding because professional advertisements compete greatly against each​ other, allowing the audit firm to brag about their accomplishments. C. The quality of audits should remain high even though advertising and competitive bidding are allowed because a reputation of doing high quality work usually pays off in more clients and a more profitable practice. D. The quality of audits should remain high regardless of the advertising and competitive bidding because this ensures that audit firms can inflate their fees on any work they perform.

C. The quality of audits should remain high even though advertising and competitive bidding are allowed because a reputation of doing high quality work usually pays off in more clients and a more profitable practice.

Why is independence so essential for​ auditors? Independence is essential for auditors because A. users of financial statements expect an unbiased viewpoint in the​ CPA's attestation to the accuracy of the financial statements. If users believe that auditors are not​ independent, the value of the audit function is eliminated. B. auditors are unable to perform any accounting services unless all rules of conduct in the AICPA Code of Professional Conduct are​ followed, including independence. Auditors in violation of the Code immediately lose their license to practice. C. users of financial statements expect an unbiased viewpoint in the​ CPA's attestation to the fairness of the financial statements. If users believe that auditors are not​ independent, the value of the audit function is eliminated. D. auditors are unable to perform any accounting services unless all rules of conduct in the AICPA Code of Professional Conduct are​ followed, including independence. Auditors in violation of the Code may be subject to fines and sanctions.

C. users of financial statements expect an unbiased viewpoint in the​ CPA's attestation to the fairness of the financial statements. If users believe that auditors are not​ independent, the value of the audit function is eliminated.

Explain the difference between independence in appearance and of mind. A. Independence in appearance refers to whether the auditor has maintained an attitude of independence throughout the engagement. Independence of mind is how independent the auditor appears to outsiders such as users of financial statements. B. Independence in appearance refers to whether the auditor has followed all of the rules of conduct in the AICPA Code of Professional Conduct. Independence of mind refers to the​ auditor's use of an audit committee to remain independent of management. C. Independence in appearance refers to the​ auditor's use of an audit committee to remain independent of management. Independence of mind refers to whether the auditor has followed all of the rules of conduct in the AICPA Code of Professional Conduct. D. Independence in appearance is how independent the auditor appears to outsiders such as users of financial statements. Independence of mind refers to whether the auditor has maintained an attitude of independence throughout the engagement.

D. Independence in appearance is how independent the auditor appears to outsiders such as users of financial statements. Independence of mind refers to whether the auditor has maintained an attitude of independence throughout the engagement.

What are the three categories of members under the AICPA Code of Professional Conduct​? A. ​1) Members in public​ practice; 2) members in private​ practice; and​ 3) members in business. B. ​1) Members in​ business; 2) Members in private​ practice; and​ 3) other members. C. ​1) Members in private​ practice; 2) members in public​ practice; and​ 3) other members. D. ​1) Members in public​ practice; 2) members in​ business; and​ 3) other members.

D. ​1) Members in public​ practice; 2) members in​ business; and​ 3) other members.

The following situations involve the provision of nonaudit services. Indicate whether providing the service is a violation of AICPA rules or SEC rules including​ Sarbanes-Oxley requirements on independence. Violation? a. Providing bookkeeping services to a public company. The services were preapproved by the audit committee of the company. b. Providing internal audit services to a public company audit client with the preapproval of the audit committee. c. Providing advice to a private company client on accounting for a merger with another private company. d. Providing bookkeeping services to a private company. The source documents were prepared and authorized by the client. e. Providing internal audit services to a public company that is not an audit client. f. Implementing a financial information system designed by management for a private company. g. Recommending a tax shelter to a client that is publicly held. The services were preapproved by the audit committee. ​(Assume the the service does not meet the characteristics of an abusive tax avoidance strategy and does not have the potential to impair​ independence.)

a. yes b. yes c. no d. no e. no f. no g. no

The stock ownership could affect the _____ and therefore impact the _____ of auditors. Additionally, these strict requirements eliminate any controversy as to the line between a _____ ownership

appearance of independence reputation and credibility material and immaterial