ACCT 323 - Exam 1

Misrepresentation by a person of a material fact, known by that person to be untrue or made with reckless indifference as to whether the fact is true, with intent to deceive and with the result that another party is injured

Fraud

Understanding of relationships is of primary importance to understanding the auditor's Code of Professional Conduct regarding independence. Match the following relationships into the appropriate category. sister niece grandfather dependent parent spouse brother dependent child father nephew roommate mother cousin golf partner college friend independent (i.e. grown) child spousal equivalent (i.e. domestic partner)

Immediate family spouse dependent child spousal equivalent (i.e. domestic partner) dependent parent Close relative sister grandfather mother independent (i.e. grown) child brother father Other relative/friend cousin nephew niece golf partner roommate college friend

Both a principle and rule of the Conduct of Professional Conduct

Independent & Objectivity

The AICPA Code of Professional Conduct includes: Principles, Rules and __________.

Interpretations

Under common law, the CPAs who were negligent may mitigate some damages to a client by proving: (a) contributory negligence, (b) the CPAs' fee was not material, (c) the CPAs were not competent to accept the engagement, (d) the CPAs' negligence was caused by the fact that they had too much work

(a)

Under the 1933 and 1934 Acts, auditors are liable for: (a) both civil and criminal liability, (b) criminal liability only, (c) civil liability only

(a)

When a governmental unit passes laws and regulations that impose potential liability upon CPAs, ______ liability is developed: (a) statutory, (b) contract, (c) common, (d) tort

(a)

When investors sue the audit firm for negligence, the audit firm is the: (a) defendant, (b) beneficiary, (c) plaintiff

(a)

Which of the following cases reaffirmed the principles in the Ultramares case? (a) Credit Alliance Corp. v. Arthur Andersen & Co., (b) Rosenblum v. Adler, (c) Ernst & Ernst v. Hochfelder, (d) Escott v. BarChris Construction Corporation

(a)

Which of the following eliminates voluminous details from the auditors' working trial balance by classifying and summarizing similar or related items? (a) lead schedules, (b) control accounts, (c) supporting schedules, (d) account analyses

(a)

Which of the following is not prohibited by the AICPA Code of Professional Conduct? (a) advertising in newspapers, (b) payment of commission to obtain an audit client, (c) acceptance of contingent fee for a review of financial statements, (d) engaging in discriminatory employment practices

(a)

~ As a consequence of their failure to adhere to generally accepted auditing standards in the course of their audit of Frost Corp., Jones & Telling, CPAs, did not detect the embezzlement of a material amount of money by the company's controller. As a matter of common law, to what extent would the CPAs be liable to Frost Corp. for losses attributable to theft? (a) they would be liable for all losses attributable to their negligence, (b) they would be liable only if it could be proven that they were grossly negligent, (c) the would have no liability because privity is lacking, (d) they would have no liability, since the ordinary examination cannot be relied upon to detect fraud

(a)

Which of the following is most likely to be a violation of the AICPA rules of conduct by Bill Jones, a sole practitioner with no other employees? (a) Jones performs consulting services for a percentage of the client's savings; these are the only services provided for the client, (b) Jones names his firm Jones and Smith, CPAs, (c) Jones advertises the services he provides in an Internet set of telephone "yellow pages," (d) Jones, without client consent, makes available working papers for purposes of a peer review of his practice

(b)

Which of the following approaches to auditors' liability is least desirable from the CPA's perspective? (a) The Ultramares approach, (b) The Rosenblum approach, (c) The Restatement of Torts approach, (d) The Foreseen User approach

(b)

Which of the following individuals is least likely to be considered a covered member by the independence standard? (a) staff assistant who works on the audit, (b) manager who does not work on the audit, (c) tax partner whose only connection to the audit is assistance with the deferred tax liability, (d) partner in charge of the office

(b)

Which of the following is NOT a step involved in making any decision? (a) Identify the problem, (b) Select the least costly course of action, (c) Identify any constraints relating to the decision, (d) Select the best course of action

(b)

The _________ approach includes responsibility toward any foreseeable users of the financial statements.

Rosenblum

Rule of the Code of Professional Conduct

Rules are enforceable applications of the Principles and include Independence, Integrity and Objectivity, General Standards, Compliance with Standards, Accounting Principles, Confidential Client Information, Contingent Fees, Acts Discreditable, Advertising and Other Solicitation, Commissions and Referral Fees, and Form of Organization and Name.

True or false: CPA firms may not advertise their services

False

*A CPA completed an annual audit and failed to detect employee fraud. The CPA should not be held liable for failure to detect the fraud if: (a) the failure did not stem from the CPA's negligence, (b) the audit was performed in accordance with generally accepted accounting principles, (c) the auditor examined 100% of the accounting records

(a)

A CPA ethically could: (a) perform an audit of Tombstone, Arizona for less than ½ of normal audit billing rates, (b) base her audit fee on the proceeds of her client's stock issue, (c) own preferred stock in a corporation that is an audit client, (d) perform a review on a contingent fee basis

(a)

A public accounting firm would least likely be considered in violation of the AICPA Independence Rule in which of the following instances? (a) a partner's checking account, which is fully insured by the Federal Deposit Insurance Corporation, is held at a financial institution for which the public accounting firm performs attest services, (b) a manager of the firm donates services as vice president of a charitable organization that is an audit client of the firm, (c) an attest client owes the firm fees for this and last year's annual engagements, (d) a covered member's dependent son owns stock in attest client

(a)

Audit working papers are the property of the: (a) auditors, (b) client

(a)

For a CPA firm considering the acceptance of new clients, which of the following characteristics would be a deterrent? (a) the prospective client is in a new much-publicized industry offering the possibility of rapid growth but is under financed and possibly on the brink of bankruptcy, (b) the prospective client is in the same line of business as two present clients and is in direct competition with one of them, (c) the prospective client is long established but has shown little growth in recent years, (d) the prospective client is a defendant in an antitrust suit brought by the U.S. Department of Justice

(a)

In which of the following situations would a public accounting firm have violated the AICPA Code of Professional Conduct in determining its fee? (a) a fee based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing, (b) a fee is to be established at a later date by the Bankruptcy Court, (c) a fee based upon the nature of the engagement rather than upon the actual time spent on the engagement, (d) a fee based on the fee charged by the client's former auditors

(a)

Lessons to be learned from the 1136 Tenants' Corporation case include all but which of the following?: (a) oral arrangements are necessary for supplementing items to set forth in the engagement letter, (b) engagement letter are essential for accounting and review services, (c) A CPA firm should never imply that it acted as an independent auditor unless it complied with GAAS, (d) A CPA engaged to perform accounting or review services should follow up on unusual items such as missing invoices

(a)

To identify the specific audit steps performed, the auditors use these symbols when preparing the working paper: (a) tick mark, (b) PBC, (c) index, (d) cross-reference

(a)

~ For a CPA firm with one office, which of the following individuals is most likely to impair the firm's independence with respect to an audit client? (a) a partner who owns 50 shares of stock in the client (the total value is immaterial to both the partner and to the audit client), (b) a manager on the audit has a cousin who has a summer internship with the audit client, (c) the partner in charge of the firm does not work on the audit client, but does provide input into remuneration decisions for all partners and professionals involved with the audit, (d) a friend of a staff member who does not work on the audit owns approximately 10% of the client's outstanding stock

(a)

~ The most significant result of the Continental Vending case was that it: (a) created a more general awareness of the possibility of auditor criminal prosecution, (b) extended the auditor's responsibility to all information included in registration statements, (c) defined the CPA's responsibilities for unaudited financial statements, (d) established a precedent for auditors being held liable to third parties under common law for ordinary negligence

(a) The Continental Vending case was a landmark in establishing auditors' potential criminal liability under the Securities Exchange Act of 1934. The case involved audited financial statements, was brought under statutory law, and did not involve registration statements (which are covered by the Securities Act of 1933).

~ Which of the following is not a function of audit working papers? (a) assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles, (b) assist audit team members responsible for supervision in reviewing the work done, (c) assist auditors in planning future engagements, (d) assist peer reviewers and inspectors in performing their roles

(a) The audit working papers are not prepared to assist management in illustrating that the financial statements are in accordance with generally accepted accounting principles. The other three replies are functions of audit working papers.

~ Which of the following is implied when a CPA signs the preparer's declaration on a federal income tax return? (a) the return is not misleading based on all information of which the CPA has knowledge, (b) the return is prepared in accordance with generally accepted accounting principles, (c) the CPA has audited the return, (d) the CPA maintained an impartial mental attitude while preparing the return

(a) The declaration requires the preparer to acknowledge that the return is "true, correct, and complete...based on all information of which the preparer has any knowledge."

*Under the Securities Act of 1933, the plaintiff (investor) needs to prove that (Check all that apply): (a) the registration statement was misleading, (b) they sustained a loss, (c) they relied on the registration, (d) the auditors were negligent

(a) & (b)

The Code of Professional Conduct suggests during ethical conflicts, CPAs should consider (check all that apply): (a) established internal procedures, (b) irrelevant facts and circumstances, (c) ethical issues involved

(a) & (c)

The PCAOB may conduct investigations of audit firms and may assess (Check all that apply): (a) monetary damages, (b) criminal charges, (c) suspension of firms

(a) & (c)

The purpose of the permanent file is to (Check all that apply): (a) provide new staff members with a quick summary of policies and organizations of the client, (b) provide necessary support for the current year's audit opinion, (c) refresh auditor's memories on items applicable to a period of years for the client

(a) & (c)

10) Match the test of details type with the example: (a) test of account balance, (b) test of class transaction, (c) test of disclosure (i) confirmation of accounts receivable balance, (ii) test of property, plant, and equipment footnote, (iii) tests of inventory purchases to determine if properly accounted for

(a) & i (b) & iii (c) & ii

Match the legal precedent or implication listed below with the appropriate case (a) Rusch Factors, Inc. v. Levin (b) Rosenblum v. Adler (c) Ultramares v. Touche & co. (d) Hochfelder v. Ernst (e) Credit Alliance v. Arthur Andersen & Co. (f) Escott v. BarChris Construction Corp (g) United States v. Simon (Continental Vending) i. A landmark case establishing that auditors should be held liable to third parties not in privity of contract for gross negligence, but not for ordinary negligence ii. A case in which the court used the guidance of the Second Restatement of the Law of Torts to decide the auditors' liability to third parties under common law iii. A landmark case in which the auditors were held liable under Section 11 of the Securities Act of 1933 iv. A case in which auditors were held liable for criminal negligence v. A case that established that auditors should not be held liable under the Securities Exchange Act of 1934 unless there was intent to deceive vi. A case that established the precedent that auditors should be held liable under common law for ordinary negligence to all foreseeable third parties vii. A common law case in which the court held that auditors should be held liable for ordinary negligence only to third parties they know will use the financial statements for a particular purpose

(a) & ii (b) & vi (c) & i (d) & v (e) & vii (f) & iii (g) & iv

CPAs are required to abide by professional standards as outlined in the AICPA Code of Professional Conduct and related guidance. It is important for CPAs to understand the structure of the professional guidance so that they can find the information needed to determine an appropriate course of action when dilemmas arise. Match the following terms with the appropriate descriptions: (a) Principles (b) Rules (c) Interpretations (d) Ethics rulings (i) Provide guidelines as to scope and implementation (ii) Summarize applications in particular instances (iii) Each of these is called an Article (i.e., Article I, Article II, etc. ) (iv) Govern performance of professional services (v) Several of these correspond to GAAS (vi) Overall framework for professional services

(a) & iii, vi (b) & iv, v (c) & i (d) & ii

The Code of Professional Conduct requires independence for all: (a) audit and other accounting engagements, (b) financial statement audits, (c) services performed, (d) services performed except tax engagement

(b)

The most technical audit working paper review is performed by the: (a) second partner, (b) senior, (c) partner-in-charge, (d) manager

(b)

The permanent file of the auditors' working papers generally should include: (a) a copy of key customer confirmations, (b) a copy of the corporate charter, (c) time and expense reports, (d) name and addresses of all audit staff personnel on the engagement

(b)

The firm of Schilling & Co., CPAs, has offices in Chicago and Green Bay, Wisconsin. Gillington Company, which has 1 million shares of outstanding stock, is audited by the Chicago office of Schilling; Welco, of the Chicago office, is the partner in charge of the audit. For each of the following circumstances, indicate whether the public accounting firm's independence is impaired with respect to Gillington Company. (a) Johnson, a partner in the Chicago office, owns 100 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit. (b) Gizmo, a partner in the Green Bay office, owns 600 shares of the stock of Gillington. He has no responsibilities with respect to the Gillington audit. (c) Masterson is a staff assistant in the Green Bay office and owns 10 percent of Gillington's outstanding common stock. Masterson provides no services to Gillington and is not able to influence the engagement. (d) Schilling, the partner in charge of the entire firm, works in the Green Bay office. He owns 100 shares of Gillington stock (market value $2 per share) but provides no services on the engagement. (e) Gorman is a staff assistant on the audit. Gorman's mother owns shares of Gillington that are material to her net worth and of which Gorman has knowledge.

(a) Independence is impaired. As a partner in the office of the lead auditor (Chicago), Johnson is a covered member, and is prohibited from having, among other things, a direct investment in Gillington. (b) Independence is not impaired. As a partner in an office other than that of the lead auditor, Gizmo's investment does not impair independence. (c) Independence is impaired. The restriction on financial interests of more than 5 percent of an attest client's equity securities apply to all firm personnel and, therefore, Masterson's investment would impair independence. (d) Independence is impaired. Schilling, as partner in charge of the entire firm is a covered member, and is prohibited from having among other things, a direct or material indirect financial interest in Gillington. (e) Independence is impaired. Because Gorman participates in the Gillington audit and has knowledge of a close relative's material investment, independence is impaired.

James Daleiden, CPA, is interested in expanding his practice through acquisition of new clients. For each of the following independent cases, indicate whether Daleiden would violate the AICPA Code of Professional Conduct by engaging in the suggested practice. (a) Daleiden wishes to form a professional corporation and use the name "AAAAAAAA the CPAs" to obtain the first ad in the yellow pages of the telephone book. (b) Daleiden wishes to prepare a one-page flyer that he will have his son stuff on the windshields of each car at the Pleasant Valley shopping mall. The flyer will outline the services provided by Daleiden's firm and will include a $50-off coupon for services provided on the first visit. (c) Daleiden has a thorough knowledge of the tax law. He has a number of acquaintances who prepare their own tax returns. He proposes to offer to review these returns before they are filed with the Internal Revenue Service. For this review, he will charge no fee unless he is able to identify legal tax savings opportunities. He proposes to charge each individual one-third of the tax savings he is able to identify. (d) Daleiden and his associates audit a number of municipalities. He proposes to contact other CPAs and inform them of his interest in obtaining more of these types of audits. He offers a $500 "finder's fee" to CPAs who forward business to him. (e) Daleiden wishes to advertise that if he is hired to perform the audit, he will discount his fees on tax services (he does intend to grant a discount).

(a) No violation. There is no apparent violation in this circumstance because the Form of Organization and Name Rule allows a CPA to use a fictitious firm name. (b) No violation. Distribution of such a flyer is acceptable when it is not false, misleading or deceptive. While many would consider this quite unprofessional, it is nonetheless not prohibited. Daleiden must make certain, however, that the $50 coupon truly represents a savings for the client, otherwise the advertising would be considered false, misleading, and deceptive. (c) Violation. Reviewing tax returns for a fee is considered equivalent to preparation, in terms of enforcement of the Contingent Fees Rule. Since the Rule does not allow contingent fees for preparation of tax returns, the proposal of basing the fee on one-third of the savings would be considered unethical. (d) No violation. Paying a finders fee to associates would be considered acceptable under the Commissions and Referral Fees Rule as long as the client is informed of the payment of the fee and so long as the CPAs do not perform a financial statement audit, review or certain compilations, or a prospective financial information examination for the client. (e) No violation. As long as he intends to give the discount, this is acceptable.

Donald Westerman is president of Westerman Corporation, a nonpublic manufacturer of kitchen cabinets. He has been approached by Darlene Zabish, a partner with Zabish and Co., CPAs, who suggests that her firm can design a payroll system for Westerman that will either save his corporation money or be free. More specifically, Ms. Zabish proposes to design a payroll system for Westerman on a contingent fee basis. She suggests that her firm's fee will be 25 percent of the savings in payroll for each of the next four years. After four years Westerman will be able to keep all future savings. Westerman Corporation's payroll system costs currently are approximately $200,000 annually, and the corporation has not previously been a client of Zabish. Westerman discussed this offer with his current CPA, Bill Zabrinski, whose firm annually audits Westerman Corporation's financial statements. Zabrinski states that this is a relatively simple task and that he would be willing to provide the service for $30,000. (a) Would Zabish violate the AICPA Code of Professional Conduct by performing the engagement?

(a) No. The information provided does not indicate a violation of the AICPA Code of Professional Conduct. Zabish may offer to perform the service on a contingent fee basis because she does not perform financial statement audits, reviews or certain compilations or prospective financial information examinations for Westerman Corporation.

The firm of Bell & Greer, CPAs, has been asked to perform attest services for Trek Corporation (a nonpublic company) for the year ended December 31, Year 5. Bell & Greer has two offices: one in Los Angeles and the other in Newport Beach. Trek Corporation would be audited by the Los Angeles office. For each of the following cases, indicate whether Bell & Greer's independence is definitely impaired. (a) A partner in the Los Angeles office of Bell & Greer has been a long-time personal friend of the chief executive officer of Trek Corporation. (b) The former controller of Trek Corporation became a partner in the Newport Beach office of Bell & Greer on March 15, Year 5, resigning from Trek Corporation on that date. (c) A manager in the Newport Beach office of Bell & Greer is the son of the treasurer of Trek Corporation. (d) A partner in the Los Angeles office of Bell & Greer jointly owns a cattle ranch in Montana with one of the directors of Trek Corporation. The value of the investment is material to both parties. (e) Trek Corporation has not yet paid Bell & Greer for professional services rendered in Year 4. This fee is substantial in amount and is now 15 months past due.

(a) Not definitely impaired. The facts alone lead to an independent conclusion, but the Code of Professional Conduct states that CPAs should consider whether personal relationships between the CPA and the client would lead a reasonable person aware of all the relevant facts to conclude that there is an unacceptable threat to the CPA's independence. Being a partner in the engagement office, he is a covered member, and therefore the firm's independence would be impaired if his independence is deemed to be impaired. (b) Not definitely impaired. While the partner's independence is impaired, the firm's independence is not impaired if the new partner does not participate in audits related to periods for which he or she served as the controller of Trek Corporation. (c) Not definitely impaired. The independence of the manager is impaired because of the business position of his father. However, since he does not work on the engagement, the independence of the public accounting firm is not impaired. (d) Definitely impaired. The Independence Rule prohibits material joint ventures between directors of the client organization and covered members of the public accounting firm. Since the partner is a covered member, both his and the firm's independence is impaired. (e) Definitely impaired. Fees that are long overdue may create the impression that the auditors' prospects for collection depend upon the nature of the auditors' report on the current year's financial statements. Thus, independence is impaired if professional fees for services rendered in prior years are not collected prior to the issuance of the auditors' report for the current year. Of course, this independence problem can be resolved immediately by Trek Corporation paying this liability.

Gary Watson, a graduating business student at a small college, is currently interviewing for a job. Gary was invited by both Tilly Manufacturing Co. and Watson Supply Company to travel to a nearby city for an interview. Both companies have offered to pay Gary's expenses. His total expenses for the trip were $96 for mileage on his car and $45 for meals. As he prepares the letters requesting reimbursement, he is considering asking for the total amount of the expenses from both employers. His rationale is that if he had taken separate trips, each employer would have had to pay that amount. (a) Who are the parties that are directly affected by this ethical dilemma? (b) Are the other students at the college potentially affected by Gary's decision? (c) Are the professors at the college potentially affected by Gary's decision?

(a) The parties directly affected by Gary's decision are the two employers in that they will either split the expenses or each will pay for them in total. (b) Yes. If the employers discover that Gary has requested reimbursement from both of them, it may provide them the impression that students at the college lack ethical values. (c) Yes. If the employers discover that Gary has requested reimbursement from both of them, it may provide them with the impression that the professors at the college are not instilling proper ethical values.

For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": a) The CPA's nondependent child owns an immaterial direct financial interest in the client

(a) Yes

The firm of Harwood & Toole, CPAs, has been the auditor and tax return preparer for Tucker, Inc., a nonpublic company, for several years. In the current year, the management of Tucker discharged Harwood & Toole from the audit and tax engagement because of a disagreement over a tax matter. Management of Tucker has not paid Harwood & Toole any of the current year's audit and tax fees. Another CPA firm has been hired and management of Tucker has requested that Harwood & Toole provide the following items: Indicate which of the following items must be provided to management of Tucker by Harwood & Toole. (a) Accounting records of Tucker, Inc., in the possession of Harwood & Toole. (b) Copies of adjusting entries prepared by the staff of Harwood & Toole. (c) A copy of Tucker's partially completed tax return prepared by the staff of Harwood & Toole. (d) Copies of Harwood & Toole's audit working papers from prior engagements. (e) Several consolidating entries prepared by Tucker, Inc., and reviewed by Harwood & Toole.

(a) Yes (accounting records must be returned). (b) No (c) No (d) No (e) Yes (consolidating entries are considered accounting records and must be returned). The overall rule here is that if the client has not paid its fees, the firm is only obligated to return the accounting records. These records are the client's property. The firm's work product need not be provided to the client.

Match the Code of Professional Conduct component (principles, rules, interpretations) with its definition: (a) issued by the AICPA to provide guidelines for the scope and application of the rules, (b) statements that provide overall framework of profession's responsibilities, (c) requirements that are enforceable under the AICPA bylaws

(a) interpretations (b) principles (c) rules

*Significant audit findings or issues that need to be documented include (Check all that apply): (a) issues related to accounting estimates (b) accounting for complex and unusual transactions, (c) selection of appropriate accounting principles, (d) selection of appropriate auditing standards

(a), (b), & (c)

The auditors' duty is defined by (Check all that apply): (a) generally accepted auditing standards, (b) legal considerations, (c) the engagement letter, (d) fees charged, (e) generally accepted accounting principles

(a), (b), & (c)

Examples of acts discreditable include (check all that apply): (a) failing to correct financial statements that are materially false or misleading, (b) accepting tickets to a major league baseball game from an audit client, (c) signing a document containing materially false and misleading information, (d) making materially incorrect entries in a client's financial statements or records

(a), (c), & (d)

The general standards rule require compliance (check all that apply): (a) due professional care, (b) integrity and objectivity, (c) planning and supervision, (d) professional competence

(a), (c), & (d)

Under the AICPA designation, generally accepted accounting principles are issued by (check all that apply): (a) FASB, (b) PCAOB, (c) GASB, (d) IASB, (e) FASAB

(a), (c), (d), & (e)

* (Review) Advertising by CPAs: (a) is presently prohibited by the Code of Professional Conduct, (b) is permissible as long as it is not false, misleading, or deceptive, (c) may include statements that the CPA is able to influence decisions by tax courts and other official bodies as long as names of officials are not used, (d) must not mention fees for services

(b)

*If a CPA performs an audit recklessly, the CPA will be liable to third parties who were unknown and not foreseeable to the CPA for: (a) strict liability for all damages incurred, (b) gross negligence, (c) either ordinary or gross negligence, (d) breach of contract

(b)

A type of accounting engagement where the CPA provides no assurance that the financial statements are in accordance with generally accepted accounting principles is called a(n): (a) attestation, (b) compilation, (c) audit, (d) review

(b)

Audit working papers should include: (a) details on client ownership of individual working papers, (b) content that is sufficient to provide support for the auditors' report, including the auditors' representation as to compliance with auditing standards, (c) a number of permanent files each year and a general file that summarizes the permanent files, (d) all authorization details for overtime worked

(b)

Auditors are given 60 days after the audit _________ date to complete the audit file: (a) documentation completion, (b) report release, (c) fieldwork completion, (d) documentation execution

(b)

Differences of opinion between members of the audit staff about auditing matters should: (a) never be documented in the working papers because to do so could lead to legal liability problems, (b) be documented along with the manner in which they were resolved, (c) be included in the note to the financial statements, (d) be described in the auditors' report

(b)

In cases of breach of contract, plaintiffs generally have to prove all of the following, except: (a) The CPAs had a duty, (b) the CPAs made a false statement, (c) The client incurred losses related to the CPA's performance, (d) the CPAs breached their duty

(b)

In what section of the audit working papers would a long-term lease agreement be filed? (a) current working paper file, (b) permanent working paper file, (c) lead schedule file, (d) corroborating documents file

(b)

In which of the following circumstances would a CPA be bound by ethics to refrain from disclosing any confidential information obtained during the course of a professional engagement? (a) The CPA is issued a summons enforceable by court order that orders the CPA to present confidential information, (b) a major stockholder of a client company seeks accounting information from the CPA after management declined to disclose the request information, (c) confidential client information is made available as part of a quality review of the CPA's practice by a review team authorized by the AICPA, (d) an inquiry by a disciplinary body of a state CPA society requests confidential client information

(b)

The 1136 Tenants' case was important because of its emphasis upon the legal liability of the CPA when associated with: (a) a review of annual statements, (b) unaudited financial statements, (c) an audit resulting in a disclaimer of opinion, (d) letter for underwriters

(b)

*When a CPA firm fails to perform a duty in accordance with applicable standards, the CPA can be sued for: (a) breach of contract, (b) constructive fraud, (c) negligence

(c)

~ According to Statements on Auditing Standards, the auditor's responsibility for failure to detect fraud arises: (a) only when the examination was specifically designed to detect fraud, (b) when such failure clearly results from failure to comply with generally accepted auditing standards, (c) whenever the amounts involved are material, (d) only when such failure clearly results from negligence so gross as to sustain an inference of fraud on the part of the auditor

(b)

~ The auditors' working papers will generally be least likely to include documentation showing how the: (a) unusual matters were resolved, (b) client's schedules were prepared, (c) client's internal control structure has been considered, (d) engagement had been planned

(b)

In providing nonattest services to an attest client, a CPA is allowed to perform which of the following functions? (a) maintaining custody of the client's securities, (b) training client employees, (c) supervising client employees, (d) acting as the third approver of large client expenditures

(b) A CPA may help train client employees for an attest client. The Code of Professional Conduct prohibits maintaining custody of client assets, supervising client employees, and authorizing transactions.

Item (F) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA: (F) The plaintiff security purchaser must prove the CPA had scienter: (a) only applies to Section 11 of the 1933 Securities Act, (b) only applies to Section 10(b) of the Securities Exchange Act, (c) applies to both acts, (d) applies to neither of the acts

(b) The plaintiff does have to prove that the CPA had scienter under Section 10(b) of the 1934 Act. Scienter is not needed under the 1933 Act.

Item (E) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA: (E) The plaintiff security purchaser must prove reliance on the document: (a) only applies to Section 11 of the 1933 Securities Act, (b) only applies to Section 10(b) of the Securities Exchange Act, (c) applies to both acts, (d) applies to neither of the acts

(b) Under Section 10(b), the plaintiff must prove justifiable reliance on the financial information. This is not true under Section 11 in which the plaintiff need prove only that material misstatements were included in a filed document and monetary loss occurred.

Auditors must (Check all that apply): (a) perform a detailed examination of all records and transactions to ensure fraud does not exist, (b) provide reasonable assurance that the financial statements are free of material errors, (c) exercise due care and professional skepticism in planning the audit procedures

(b) & (c)

The confidential relationship between the CPA and the client (check all that apply): (a) justifies the CPA to cooperate in a deceitful act as long as it is not material enough to be considered fraud, (b) prevents the CPA from leaking information that could profit the CPA, (c) prevents release of information whose disclosure could financially injure the client

(b) & (c)

~ Categories of traditional financial ratios include (Check all that apply): (a) performance ratio, (b) leverage ratios, (c) activity ratios, (d) longevity ratios

(b) & (c)

Auditors are required to report illegal acts when (check all that apply): (a) a fraud that is not material to the financial statements has occurred, (b) senior management and the Board of Directors do not take appropriate remedial action, (c) the failure to take remedial action will not impact issuing a standard audit report, (d) the failure to take remedial action is expected to lead to auditor resignation

(b) & (d)

For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": b) The CPA's spouse owns an immaterial direct financial interest in the client

(b) No

Donald Westerman is president of Westerman Corporation, a nonpublic manufacturer of kitchen cabinets. He has been approached by Darlene Zabish, a partner with Zabish and Co., CPAs, who suggests that her firm can design a payroll system for Westerman that will either save his corporation money or be free. More specifically, Ms. Zabish proposes to design a payroll system for Westerman on a contingent fee basis. She suggests that her firm's fee will be 25 percent of the savings in payroll for each of the next four years. After four years Westerman will be able to keep all future savings. Westerman Corporation's payroll system costs currently are approximately $200,000 annually, and the corporation has not previously been a client of Zabish. Westerman discussed this offer with his current CPA, Bill Zabrinski, whose firm annually audits Westerman Corporation's financial statements. Zabrinski states that this is a relatively simple task and that he would be willing to provide the service for $30,000. (b) Would Zabrinski violate the AICPA Code of Professional Conduct by performing the engagement?

(b) No. The information provided does not indicate a violation of the AICPA Code of Professional Conduct. Although Zabrinski performs audits for Westerman Corporation, his firm may perform such services for the $30,000 fixed fee.

Identify the ethical dilemmas typically faced by accountants (check all that apply): (a) Senior auditor decides which staff assistant will work on the audit engagement, (b) Senior auditor is aware that management of the audit client has decided to pollute the environment, (c) Senior auditor under reports the number of hours worked on an audit engagement to stay with the time budgeted for the job, (d) Senior auditor accepts tickets to a baseball game from an audit client

(b), (c), & (d)

The code of conduct provides (check all that apply): (a) absolute assurance all professional accounting services are performed accurately, (b) assurance to clients and the public that the profession intends to maintain high standards, (c) assurance the profession will enforce compliance to the code by individual members, (d) practical guidance to members in maintain a professional attitude

(b), (c), & (d)

*(Review) Which of the following fee arrangements for an audit would constitute a violation of the AICPA Code of Professional Conduct? (a) a fixed fee, (b) a fee that is based on the number of hours spent on the engagement, (c) a fee that is computed as a percentage of audited net income, (d) a fee that is based on the difficulty of the engagement

(c)

*CPAs have potential legal liability __________ financial statements: (a) only in regard to audited, (b) only in regard to unaudited, (c) for both audited and unaudited

(c)

A review is an engagement that provides: (a) preparation of financial statements, and offers no assurance that statements are prepared in accordance with GAAP, (b) an opinion, and offers the highest level of assurance that financial statements are prepared in accordance with GAAP, (c) limited investigative procedures, and offers limited assurance that statements are prepared in accordance with GAAP

(c)

A type of accounting engagement where the CPA provides limited assurance that the financial statements are in accordance with generally accepted accounting principles is called a(n): (a) audit, (b) compilation, (c) review

(c)

Bill Adams, CPA, accepted the audit engagement of Kelly Company. During the audit, Adams became aware of his lack of competence required for the engagement. What should Adams do? (a) disclaim an opinion, (b) issue an adverse opinion, (c) suggest that Kelly Company engage another CPA to perform the audit, (d) rely on the competence of client personnel

(c)

In the Ernst & Ernst v. Hochfelder case, Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 was interpreted to mean the plaintiffs must prove _____________, or the intent to deceive, manipulate, or defraud on the part of the auditors (Check all that apply): (a) ponzi, (b) negligence, (c) scienter

(c)

Investors who have sustained large losses can __________ the CPA is at fault: (a) only initiate a lawsuit against a CPA when they have proof, (b) only initiate a lawsuit against a CPA if they believe, (c) initiate a lawsuit against a CPA whether or not they believe

(c)

Mavis, CPA, has audited the financial statements of South Bay Sales Incorporated for several years and had always been paid promptly for services rendered. Last year's audit invoices have not been paid because South Bay is experiencing cash flow difficulties, and the current year's audit is scheduled to commence in one week. With respect to the past-due audit fees, Mavis should: (a) perform the scheduled audit and allow South Bay to pay when the cash flow difficulties are alleviated, (b) perform the scheduled audit only after arranging a definite payment schedule and securing notes signed by South Bay, (c) inform South Bay's management that the past-due audit fees are considered an impairment of auditor independence; therefore, it must be paid prior to the issuance of the auditors' report, (d) inform South Bay's management that the past-due audit fees may be considered a loan on which interest must be imputed for financial statement purposes

(c)

Memoranda of the planning process and significant discussions with management are considered: (a) lead schedules, (b) corroborating documents, (c) administrative working papers, (d) supporting schedules

(c)

Once an illegal act has been reported by the auditors to the Board of Directors: (a) the auditor has no further obligation and should consider resigning from the engagement, (b) the auditors have one day to directly communicate the matter to the SEC, (c) client management is required to notify the SEC and copy the auditor

(c)

Sarbanes-Oxley requires that, for public clients, auditors must retain working papers for: (a) five years, (b) three years, (c) seven years, (d) perpetuity

(c)

The 1136 Tenants' Corporation case was chiefly important because of its emphasis upon the legal liability of the CPA when associated with: (a) letters for underwriters, (b) a review on interim statements, (c) unaudited financial statements, (d) an audit resulting in a disclaimer of opinion

(c)

The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client. This rule may preclude a CPA from responding to an inquiry made by: (a) an investigative body of a state CPA society, (b) the trial board of the AICPA, (c) a CPA-shareholder of the client corporation, (d) an AICPA quality review body

(c)

The Private Securities Litigation Reform Act of 1995, which established proportionate liability, ___________ the auditors' liability to most plaintiffs: (a) had no affect on, (b) increased, (c) decreased

(c)

The Securities Exchange Act of 1934 applies to: (a) all companies within the United States with $1 million or more total assets, (b) all companies within the United states with $10 million or more total assets and five or more shareholders, (c) all companies under the jurisdiction of the Securities and Exchange Commission, (d) all for-profit corporations within the United States

(c)

The backbone of the working papers is the ________, which is the key schedule that controls and summarizes all supporting documents: (a) audit administrative working papers, (b) lead schedulers, (c) working trial balance, (d) adjusting journal entries

(c)

Under common law, auditors are generally liable to the client for: (a) lack of due negligence, (b) ordinary negligence, but not gross negligence, (c) ordinary negligence or gross negligence, (d) gross negligence, but not ordinary negligence

(c)

Under the Securities and Exchange Act of 1934, auditors and other defendants are generally faced with: (a) joint liability, (b) joint and several liability, (c) proportionate liability, (d) limited liability

(c)

Which of the following elements is most frequently necessary to hold a CPA liable to a client? (a) acted with scienter or guilty knowledge, (b) was not independent of the client, (c) failure to exercise due care, (d) did not use an engagement letter

(c)

Which of the following is (are) required when a CPA is performing only consulting services for a client? (a) Independence: Yes, Objectivity: Yes, (b) Independence: Yes, Objectivity: No, (c) Independence: No, Objectivity: Yes, (d) Independence: No, Objectivity: Yes

(c)

Mary Troutt, CPA, has been asked by an audit client to prepare income tax returns and serve as a tax advisor: (a) she is obliged to maintain the same standards of objectivity and freedom from bias in tax work as in auditing, (b) she may accept a fee for her tax services in the form of shares of common stock in the client company without impairing her independence as an auditor, (c) she could properly agree to a combined fee for her audit and tax work based on a percentage of the client's after tax income, (d) she would be free to resolve questionable issues in favor of the client in preparing the tax return

(d)

Which statement best expressed the factors that purchasers of securities registered under the Securities Act of 1933 need to prove to recover losses from the auditors? (a) the purchasers of securities must prove ordinary negligence by the auditors and reliance on the audited financial statements, (b) the purchasers of the securities must prove that the financial statements were misleading and that they relied on them to purchase the securities, (c) the purchasers of securities must prove that the financial statements were misleading: then, the burden of proof is shifted to the auditors to show that the audit was performed with "due diligence," (d) the purchasers of securities must prove that the financial statements were misleading and the auditors were negligent

(c)

~ Current auditing standards do not allow which of the following types of loans from a financial institution audit client? (a) Credit card loans up to a specified limit, (b) borrowings collateralized by cash deposits (c) home mortgage loans, (d) loans of surrender value of an insurance policy

(c)

*Item (A) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA: (A) The plaintiff security purchaser must prove material misstatements were included in a filed document: (a) only applies to Section 11 of the 1933 Securities Act, (b) only applies to Section 10(b) of the Securities Exchange Act, (c) applies to both acts, (d) applies to neither of the acts

(c) Section 11 of the Securities Act of 1933 imposes liability on auditors for misstatements or omissions of a material fact in certified financial statements or other information provided in registration statements. Similarly, under Section 10(b), Rule 10b-5 of the Securities Exchange Act of 1934, the plaintiff must prove there was a material misstatement or omission in information released by the company, such as audited financial statements.

Which of the following provisions is not included in The Institute of Internal Auditors Code of Ethics? (a) performance of work with honesty, diligence, and responsibility, (b) prudence in the use and protection of information acquired in the course of their duties, (c) use of appropriate sampling methods to select areas for audit, (d) continual improvement in proficiency and effectiveness and the quality of services provided

(c) The IIA Code of Ethics does not directly address the use of sampling methods.

Item (B) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA: (B) The plaintiff security purchaser must prove a monetary loss occurred: (a) only applies to Section 11 of the 1933 Securities Act, (b) only applies to Section 10(b) of the Securities Exchange Act, (c) applies to both acts, (d) applies to neither of the acts

(c) Under both Section 11 of the 1933 Act and Section 10(b) of the 1934 Act, the plaintiff must allege or prove that s/he incurred monetary damages.

For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": c) The CPA's brother is the controller of the client

(c) No

Donald Westerman is president of Westerman Corporation, a nonpublic manufacturer of kitchen cabinets. He has been approached by Darlene Zabish, a partner with Zabish and Co., CPAs, who suggests that her firm can design a payroll system for Westerman that will either save his corporation money or be free. More specifically, Ms. Zabish proposes to design a payroll system for Westerman on a contingent fee basis. She suggests that her firm's fee will be 25 percent of the savings in payroll for each of the next four years. After four years Westerman will be able to keep all future savings. Westerman Corporation's payroll system costs currently are approximately $200,000 annually, and the corporation has not previously been a client of Zabish. Westerman discussed this offer with his current CPA, Bill Zabrinski, whose firm annually audits Westerman Corporation's financial statements. Zabrinski states that this is a relatively simple task and that he would be willing to provide the service for $30,000. (c) Now assume that Westerman has indicated to Zabrinski that he is learning toward accepting Zabish's offer. Zabrinski then offers to provide the service for 15% of Westerman's savings for the next three years. Would performing the engagement in accordance with the terms of this offer violate the AICPA Code of Professional Conduct?

(c) Yes. The Contingent Fees Rule of the AICPA Code of Professional Conduct prohibits the performance of such services for a contingent fee when the public accounting firm performs financial statement audits for the client. Therefore, Zabrinski cannot provide the service for a contingent fee without violating the Code.

*Under the 1934 Securities Exchange Act auditors are liable to ordinary trade creditors for the: (a) lack of due diligence, (b) lack of good faith, (c) existence of gross negligence, (d) existence of scienter

(d)

*Which of the following is not a factor that affects the independent auditors' judgement as to the quantity, type, and content of working papers? (a) the nature of the audit report, (b) the need for supervision of the engagement, (c) the nature of the financial statements, schedules, or other information upon which the auditors are reporting, (d) the timing and the number of personnel to be assigned to the engagement

(d)

A primary purpose of the audit working papers is to: (a) aid the auditors by providing a list of required procedures, (b) provide a point of reference for future audit engagement, (c) support the underlying concepts included in the preparation of the basic financial statements, (d) support the auditor's opinion

(d)

According to court decisions, the generally accepted auditing standards established by the AICPA ordinarily apply: (a) only when conducting audits subject to AICPA jurisdiction, (b) only to the AICPA membership, (c) only to those who choose to follow them, (d) to all CPAs in public practice

(d)

In the event that a CPA issues an unmodified audit report on financial statements that he or she knows to be misleading, that CPA is: (a) not subject to liability if he performed no audit procedures relating to the misleading portions of the statements, (b) subject to civil liability, (c) not subject to liability if the client also knows the financial statements to be misleading, (d) subject to criminal as well as civil liability

(d)

In which of the following circumstances is it most likely that a CPA has violated the Code of Professional Conduct? (a) He placed an ad in the newspaper in which he compares his audit firm personnel's with the personnel of several competing firms, (b) he started an audit of a nonissuer (nonpublic company) for which last year's fees have not yet been received, (c) he audits a company in which he previously owned stock, (d) he serves as trustee of an audit client's profit-sharing trust

(d)

The AICPA Code of Professional Conduct: (a) does not apply to CPAs who function as tax advisors only, (b) does not apply to CPAs whose work is limited to consulting services, (c) does not apply to CPAs who hold positions below the rank of partner, manager, or senior in a national CPA firm, (d) applies to all the above categories

(d)

The Code of Ethics for internal auditors was developed by: (a) the Public Company Accounting Oversight Board, (b) the Financial Accounting Standards Board, (c) the American Institute for Certified Public Accountants, (d) the Institute of Internal Auditors

(d)

The study of moral principles and values that govern the actions and decisions of an individual or group is: (a) professional conduct, (b) decision analysis, (c) corruption, (d) ethics

(d)

Which of the following is not a covered member for an attest engagement under the Independence Rule of the AICPA Code of Professional Conduct? (a) an individual assigned to the attest engagement, (b) a partner in the office of the partner in charge of the attest engagement, (c) a manager who is in charge of providing tax services to the attest client, (d) a partner in the national office of the firm that performs marketing services

(d)

~ In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense or privileged communication will be successful only to the one extent it is protected by the: (a) auditor's agreement in the use of this defense, (b) common law, (c) AICPA Code of Professional Conduct, (d) state law

(d)

~ Valid statements concerning gross negligence include all except which of the following? (a) gross negligence is indicative of a reckless disregard for one's professional responsibilities, (b) gross negligence is the lack of even slight care, (c) substantial failures to comply with generally accepted auditing standards might be interpreted as gross negligence, (d) gross negligence may be viewed as "failure to exercise due professional care"

(d)

~ Which of the following nonattest services may be performed by the auditors of a public company? (a) internal audit outsourcing, (b) tax planning for all company officers, (c) bookkeeping services, (d) preparation of the company's tax return

(d) Auditors may currently prepare the company's tax return. The Sarbanes-Oxley Act as implemented by the PCAOB prohibits internal audit outsourcing, performing tax planning for the company's officers, and performing bookkeeping services.

~ If the CPAs provided negligent tax advice to a public company, the client would bring suit under: (a) The Securities Act of 1933, (b) The Securities Exchange Act of 1934, (c) The federal income tax law, (d) common law

(d) Negligent tax advice would ordinarily result in a suit brought under common law. Note that the client is not covered under the Securities Act of 1933 or the Securities Exchange Act of 1934.

The Compliance with Standards Rule requires CPAs to adhere to all of the following applicable standards, except: (a) Statements on Standards for Consulting Services, (b) Statements on Auditing Standards, (c) Statements on Standards for Attestation Engagements, (d) Statements on Responsibilities for Assurance Services

(d) No Statements on Responsibilities in Assurance Services exist.

**Item (C) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA: (C) The plaintiff security purchaser must prove lack of due diligence by the CPA: (a) only applies to Section 11 of the 1933 Securities Act, (b) only applies to Section 10(b) of the Securities Exchange Act, (c) applies to both acts, (d) applies to neither of the acts

(d) Under Section 11 of the 1933 Act, the burden of proof is shifted to the defendant, accountant. The accountant may then defend himself or herself by establishing due diligence—the security purchaser need not prove a lack of due diligence by the CPA. The plaintiff does not have to show lack of due diligence by the CPA Under Section 10, the plaintiff must prove scienter.

*A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably: (a) remain silent on the matter since it is an internal matter of the auditing firm, (b) note that the assistance auditor is completely disassociated from responsibility for the auditors' opinion, (c) document the additional work required because all disagreements of this type will require expanded substantive procedures, (d) document the assistant auditors' position and how the difference of opinion was resolved

(d) When a difference of opinion cannot be resolved, the working papers should be expanded to document the various positions and to describe how the difference of opinion was resolved.

*A CPA issued an unqualified opinion on the financial statements of a company that sold common stock in a public offering subject to the Securities Act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this public offering. Which of the following represents a viable defense? (a) the investor has not proved fraud or negligence by the CPA, (b) the investor did not actually rely upon the false statement, (c) the CPA detected the false statement after the audit date, (d) the false statement is immaterial in the overall context of the financial statements

(d) A CPA may avoid liability under the 1933 Act by proving that their negligence was not the proximate cause of the plaintiff's loss. Accordingly, a finding that the false statement is immaterial would in all circumstances represent a viable defense.

Item (D) relates to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA: (D) The plaintiff security purchaser must prove privity with the CPA: (a) only applies to Section 11 of the 1933 Securities Act, (b) only applies to Section 10(b) of the Securities Exchange Act, (c) applies to both acts, (d) applies to neither of the acts

(d) The plaintiff does not have to prove that s/he was in privity with the CPA under either section.

*Actions that will NOT help CPAs withstand threats of possible lawsuits include (Check all that apply): (a) using professional working papers, (b) exercising extreme care of clients on the verge of bankruptcy, (c) maintaining adequate liability insurance coverage, (d) only accepting clients that have been in business for more than one year, (e) maintaining a close personal relationship with client mgmt.

(d) & (e)

Donald Westerman is president of Westerman Corporation, a nonpublic manufacturer of kitchen cabinets. He has been approached by Darlene Zabish, a partner with Zabish and Co., CPAs, who suggests that her firm can design a payroll system for Westerman that will either save his corporation money or be free. More specifically, Ms. Zabish proposes to design a payroll system for Westerman on a contingent fee basis. She suggests that her firm's fee will be 25 percent of the savings in payroll for each of the next four years. After four years Westerman will be able to keep all future savings. Westerman Corporation's payroll system costs currently are approximately $200,000 annually, and the corporation has not previously been a client of Zabish. Westerman discussed this offer with his current CPA, Bill Zabrinski, whose firm annually audits Westerman Corporation's financial statements. Zabrinski states that this is a relatively simple task and that he would be willing to provide the service for $30,000. (d) Now go back to the original info (do not consider Zabrinski's 15% offer in part c). If Westerman Corp. was a public company ("an issuer"), would Zabish violate PCAOB standards by performing the engagement?

(d) No. Zabish may still provide the service on a contingent fee basis.

For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": d) The CPA's father is a salesman for the client

(d) Yes

For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": e) The CPA's nondependent mother owns an immaterial direct financial interest in the client

(e) Yes

Donald Westerman is president of Westerman Corporation, a nonpublic manufacturer of kitchen cabinets. He has been approached by Darlene Zabish, a partner with Zabish and Co., CPAs, who suggests that her firm can design a payroll system for Westerman that will either save his corporation money or be free. More specifically, Ms. Zabish proposes to design a payroll system for Westerman on a contingent fee basis. She suggests that her firm's fee will be 25 percent of the savings in payroll for each of the next four years. After four years Westerman will be able to keep all future savings. Westerman Corporation's payroll system costs currently are approximately $200,000 annually, and the corporation has not previously been a client of Zabish. Westerman discussed this offer with his current CPA, Bill Zabrinski, whose firm annually audits Westerman Corporation's financial statements. Zabrinski states that this is a relatively simple task and that he would be willing to provide the service for $30,000. (e) Now go back to the original info (do not consider Zabrinski's 15% offer in part c). If Westerman Corp. was a public company ("an issuer"), would Zabrinski violate PCAOB standards by performing the engagement?

(e) Yes. Since the Sarbanes-Oxley Act prohibits the provision of financial information systems design and implementation services for an audit client (independence is impaired) Zabrinski can not provide the service, even for a fixed fee.

~ For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": f) The CPA's five year old son who lives with her, was given a gift by a friend of 20 shares of stock worth, in total $100, in an audit client of the CPA

(f) No

~ For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": g) The CPA owns an immaterial amount of stock in a firm audit client, she does not work on that audit engagement

(g) No

For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": h) The CPA owns an immaterial amount of stock in a firm audit client, she works as a senior on that audit engagement

(h) No

Match the term with its example: Term: (i) direct financial interest, (ii) indirect financial interest, (iii) financial interest Example: (a) owning shares of a mutual fund that owns shares of stock in a client, (b) owning capital stock in a client, (c) owning equity or debt security in a client directly or indirectly

(i) & (b) (ii) & (a) (iii) & (c)

CPAs are required to abide by professional standards as outlined in the AICPA Code of Professional Conduct and related guidance. It is important for CPAs to understand the structure of the professional guidance so that they can find the information needed to determine an appropriate course of action when dilemmas arise. It is important to understand the structure of the auditor's Code of Professional Conduct. Match the following descriptions with the appropriate category. (i) Principles (ii) Rules (a) Responsibilities (b) Form of Organization and Name (c) Accounting Principles (d) Integrity (e) Contingent Fees (f) The Public Interest (g) Advertising and Other Forms of Solicitation (h) Compliance with Standards (i) General Standards (j) Objectivity and Independence (k) Scope and Nature of Services (l) Acts Discreditable (m) Integrity and Objectivity (n) Confidential Client Information (o) Due Care (p) Commissions and Referral Fees (q) Independence

(i) Principles a. Responsibilities f. The Public Interest d. Integrity j. Objectivity and Independence o. Due Care k. Scope and Nature of Services (ii) Rules q. Independence i. General Standards c. Accounting Principles e. Contingent Fees g. Advertising and Other Forms of Solicitation b. Form of Organization and Name m. Integrity and Objectivity h. Compliance with Standards n. Confidential Client Information l. Acts Discreditable p. Commissions and Referral Fees

For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": i) A CPA's father owns a material investment in a firm audit client, she works on the engagement as a partner but is not aware of the investment

(i) Yes

For each of the following situations, indicate whether the CPA is "independent" with respect to the client, by choosing "yes" or "no": j) A CPA's brother works part-time in the warehouse of an audit client

(j) Yes

The __________ ____________ __________ case was a landmark case regarding the accountant's liability for unaudited financial statements

1136 Tenants' Corporation

Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 Accounting related consulting services resulted in a system that misstated income of a nonpublic company

A.

Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 Compiled financial statements of a nonpublic company are discovered to include material misstatements

A.

Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 The client files a lawsuit against the CPAs for negligence in the performance of tax services

A.

~ Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 A bank loses money that it loaned to an issuer in reliance upon financial statements filed with the SEC

A.

The Accounting Principles Rule requires the CPA to recognize the pronouncements of the Financial Accounting Standards Board and the Government __________ __________ ____________.

Accounting Standards Board

Compare & Contrast: Securities Act of 1933 vs. Securities Exchange Act of 1934

Auditors have different liability/responsibility under the different acts. 1933 Act: - Auditors must prove due diligence - Third party does not need to prove reliance on the financial statements 1934 Act: - Auditors must prove good faith - Third party must prove reliance and existence of scienter

Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 A CPA is criminally prosecuted for willingly allowing misstatements in a client's financial statements contained in a registration statement

B.

Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 An initial purchaser of bonds of an issuer sustains a loss

B.

Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 The initial purchaser of common stock of an issuer sustains a loss

B.

~ Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 Form S-1 includes material misstatements of the audited financial statements

B.

The _________ case, a landmark case of liability under the Securities Act of 1933, involved criticism of the auditors' review for subsequent events.

BarChris

Failure of one of both parties to a contract to perform in accordance with the contract's provisions

Breach of contract

Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 A quarterly statement (10-Q) of a client is materially misstated

C.

Listed below are sources of law and legal situations. For each of the situations, indicated the letter corresponding to the law that applies. Sources of Law A. Common Law B. The Securities Act of 1933 C. The Securities Exchange Act of 1934 A stockholder sustains a loss when he purchases 100 shares of stock in a public company (issuer) from another stockholder in reliance upon audited financial statements included in Form 10-K

C.

The Restatement approach requires responsibility towards ____________ users of the financial statements.

foreseen

Unwritten law that has developed through court decisions; it represents judicial interpretation of a society's concept of fairness

Common Law

Unwritten law that has developed through court decisions is referred to as __________ ____________.

Common law

Performing duties with such recklessness that persons believing the duties to have been completed carefully are being misled. The person performing the duties does not have knowledge of misrepresentations within the financial statements

Constructive Fraud

Gross negligence is also referred to as ___________ ___________.

Constructive fraud

The 1933 and 1934 acts include provisions for civil and __________ charges against CPAs.

Criminal

True or false: A CPA firm that performs an audit or review for a client can recommend a product to the client and receive a commission as long as the fact is disclosed to the client

False

Under the Securities Act of 1933, initial purchasers of securities may sue the auditors for misleading audited financial statements and need not prove they relied on the financial statements. The burden of proof is on the auditor to prove that they were _______ _______ in the performance of their work.

Duly diligent

An __________ __________ is the written contract summarizing the relationship between the auditors and the client.

Engagement letter

True or False: The AICPA Code of Professional Conduct generally allows auditors to share working paper without restriction within the client's organization

False

Violation of a legal duty to exercise a degree of care that an ordinarily prudent person would exercise under similar circumstances

Negligence

Principles of the Code of Professional Conduct

Principles are a goal-oriented, positively stated discussion of the profession's responsibilities to the public, clients, and fellow practitioners. Principles are described as Articles and include the following: Responsibilities, The Public Interest, Integrity, Objectivity and Independence, Due Care, Scope and Nature of Services.

*A method of allocating damages to each group that is liable according to that group's pro-rata share of any damages recovered by the plaintiff. For example, if the plaintiff was awarded a total of $500,000 and the CPAs were found to bear 30% of the responsibility for the damages, the CPAs would be assessed $150,000

Proportionate liability

*Damage to another is directly attributable to a wrongdoer's act. This issue may be raised as a defense in litigation - that is, the defense may argue that some other factor caused the loss

Proximate Cause

When damage to another is directly attributable to a wrongdoer's act, ________ __________ is said to exist.

Proximate cause

A document including audited financial statements that must be filed with the SEC by any company intending to sell its securities to the public through the mails or interstate commerce is called a _________ _____________.

Registration statement

A _________ of financial statements involves the performance of limited investigative procedures that provide a basis for the expression of limited assurance that there are no material departures from generally accepted accounting principles

Review

Intent to deceive, manipulate, or defraud. This concept is used in the 1934 Securities Exchange Act to establish auditor liability

Scienter

Under the 1934 Act, third parties must prove __________.

Scienter

A federal securities statute covering registration statements for securities to be sold to the public

Securities Act of 1933

The _____________ requires registration of an initial stock sale.

Securities Act of 1933

The 1934 Act protects any person buying or ___________ the security.

Selling

The Compliance with _______________ rule requires CPAs to adhere to professional standards promulgated by various technical bodies

Standards

Written law created by state or federal legislative bodies

Statutory Law

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: g) Nonpublic: Implement an off-the-shelf accounting package, as well as perform the audit

g) Allowable

The 1933 Act requires _________ to prove a loss and misleading financial statements.

Third parties

~ True or False: Auditors are not required to use analytical procedures as substantive procedures to provide evidence about financial statement assertions

True

The ________ approach assigns responsibility by the auditor to the narrowest category of financial statement users.

Ultramares

The ____________ approach requires auditors to be responsible to known financial statement users.

Ultramares

Compare & Contrast: Ultramares Approach vs. Restatement Approach vs. Rosenblum Approach

Ultramares Approach: - Known user - Auditors must prove due diligence Restatement Approach: - Foreseen user - Auditors must prove due diligence Rosenblum Approach: - Foreseeable User - Third party must prove existence of scienter

When CPAs are associated with _________ _______________ ______________, a possibility exists that the client may misinterpret the extent of the CPAs' services and believe that the accountants are acting as auditors.

Unaudited financial statements

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: a) Public: Provide internal audit outsourcing, as well as perform the audit

a) Not allowable (PCAOB rules prohibit)

The auditors have two types of working paper files, the current file (CF) and the permanent file (PF). Using the initials, indicate which file each of the following documents would most likely be related to: a) A lease agreement b) A confirmation of financial institution deposits c) Articles of incorporation d) An analysis of long-term debt e) A pension agreement f) An adjusted trial balance g) Adjusting journal entries h) An analysis of miscellaneous expenses i) An analysis of owners' equity accounts j) A chart of accounts

a) PF b) CF c) PF d) PF e) PF f) CF g) CF h) CF i) PF j) PF

When a threat exists, a CPA needs to determine whether an ___________________ _____________ of risk of noncompliance with the Code of Professional Conduct exists

acceptable level

CPAs should not seek to obtain clients by ___________ that is false, misleading or deceptive

advertising

Auditors must be independent of any enterprise and must also ________ independent to third parties.

appear

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: b) Public: Prepare the corporate tax return as well as perform the audit

b) Allowable

To avoid liability under Section 10 of Securities Exchange Act of 1934, auditors will attempt to prove there was no _______, which means no intent to deceive or defraud

scienter

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: c) Nonpublic: Prepare the corporate tax return as well as perform the audit

c) Allowable

Under the 1933 and 1934 Acts, auditors who knowingly allow misstatements in SEC filing are liable for both ______ and ______ liability

civil, criminal

The Securities Litigation Uniform Standards Act in 1998 established standards related to _______ _________ lawsuits.

class action

*A concept used by courts to allocate damages between liable parties is called __________ negligence

comparative

For situations not directly addressed in the Code of Professional Conduct, _____________________ ____________________ are included for CPAs in public practice and in business

conceptual frameworks

The communications between CPAs and their clients are ________________ but not privileged under common law

confidential

The AICPA Code of Professional Conduct refers to ethical dilemmas as ethical _____________

conflicts

A CPA may redesign a client's payroll system and charge a fee calculated as 25% of the next four years' cost savings, which is called a(n) _________________ fee

contingent

CPAs in public practice should not accept a fee from an audit client that is ________ upon a specified finding.

contingent

Documents that substantiate representations contained in the client's financial statements such as audit confirmations, minutes of director's meetings and client representation letter are known as ____________ documents.

corroborating

Without public confidence in the attestor, the attest function serves no purpose. Because the need for public confidence is so high, the CPA's product is _______________________

credibility

Reviewers are concerned if immaterial passed misstatements have a __________ material effect

cumulative

The working papers that pertain solely to this year's audit are called the __________ files.

current

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: d) Nonpublic: Provide bookkeeping services, as well as perform the audit, WW will not determine journal entries, authorize transactions, or prepare/modify source documents

d) Allowable

Consulting services for audit clients should be advisory in nature, CPAs should not assume the role of _______ _______ for these clients.

decision maker

A CPA's independence with respect to an enterprise will be impaired if the CPA has any __________ __________ _____________ or material indirect financial interest in the enterprise.

direct financial interest

Retaining a client's accounting records for nonpayment of fees in an act _____ to the profession.

discreditable

CPAs engaging in compilation or review engagements have a liability to their client to exercise______________ _______________ care

due professional

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: e) Public: Provide financial info systems design and implementation assistance, WW provides no attest services for that company

e) Allowable (Because no attest services are provided, the PCAOB allows this)

Managers and partners typically review at the ___________ of the engagement timeline

end

Working papers are reviewed at ______________ supervisory level(s) of a CPA firm

every

Violation of the AICPA Code of Professional Conduct may result in admonishment, suspension, or ________ of the offending member.

expulsion

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: f) Public: Serve on the board of directors of the company, WW provides no attest services for the company

f) Allowable (Because no attest services are provided, the PCAOB allows this)

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: h) Nonpublic: Provide actuarial services related to certain liabilities, as well as perform the audit, the subjectively determined liabilities relate to a material portion of the financial statements

h) Not allowable (AICPA rules prohibit this when amounts are subjectively determined and material)

~ A review of client financial statement amounts and ratios over time is called _____________ _____________

horizontal analysis

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: i) Public: Provide actuarial services related to certain liabilities, as well as perform the audit, the subjectively determined liabilities relate to a material portion of the financial statements

i) Not allowable (Both AICPA nor PCAOB rules prohibit this when amounts are subjectively determined and material)

In evaluating independence, financial interests of a CPA's _______ _______ are ascribed directly to the CPA.

immediate family

The firm of Wilson and Wiener (WW), CPAs, had requests from a number of clients and prospective clients to perform various types of services. Reply as to whether the appropriate independence rules (AICPA and/or PCAOB) allow the following engagements: j) Public: Provide tax planning services for corporate executives of an audit client (not for the company)

j) Not allowable (PCAOB rules prohibit)

Separate summary or __________ ____________ are set up to combine similar general ledger accounts.

lead schedules

The third party user approach revolves around auditor ________.

liability

An analytical procedure's ______________ depends on a number of factors, including the predictability of the relationships and reliability of the underlying data used

precision

CPAs are not liable to any party if they can prove they performed their services with due _____________ ________________

professional care

All rules of the ACIPA Code of Professional Conduct must be followed by CPAs in ______________ _____________, but some of the rules do not apply for CPAs in business, retired and unemployed

public practice

Concurring partners are often concerned with _____________ control standard compliance

quality

For items that are correctly recorded but not fairly presented in the client's financial statement, auditors develop __________ journal entries.

reclassification

The use of statistical models to quantify the auditors' expectation about a financial statement amount or ratio is called ___________ ____________

regression analysis

Reviewers are concerned that the _________ all tie together

working papers