Exam 2

"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 or a year of major losses 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

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

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

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

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

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

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

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

a

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

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

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

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

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

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

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

management creates financials, we approve the financials that already have bias -> this magnifies the bias

approval

advantage to be on the good side of the client (the client compensates us and can fire us)

attachment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"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

"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 in the current period and immediately reverse in the next period d. To return capital that previously was contributed by shareholders, often through the use of treasury stock repurchases

c

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Audit/attestation services: constrained by the...

client

Law, medicine, social work, engineering, architecture, psychology: work product for benefit of the...

client

Tax advising, consulting, other CPA services: work product for benefit of the...

client

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 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

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

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

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

A CPA's 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

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

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

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

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

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

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 related to requirements for consolidation

d

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

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

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

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 the CEO and CFO certify the financial statements d. Had not unduly focused on short-term stock performance

d

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

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

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

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

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

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

fraud triangle

incentive, opportunity, rationalization

Audit/attestation services: work product for the benefit of the

public

Law, medicine, social work, engineering, architecture, psychology: constrained by the...

public

Tax advising, consulting, other CPA services: constrained by the

public

set up organizations that promote working in self interest (assume employees will work for self-interest) -> bonuses for doing your job better

transactional

transform "I" to "we" trigger moral instincts, evolve to work in small groups and act as a team, activate loyalty, enthusiasm, reduce the need for monitoring, chanting, feeling of teamwork

transformation

behavioral ethics

triggering event, intuiting, judgment, reasoning

moral philosophers

triggering event, reasoning, judgment