Audit Chapter 3

Competence as a certified public accountant includes all of the following except: Having the technical qualifications to perform an engagement. Possessing the ability to supervise and to evaluate the quality of staff work. Guaranteeing the accuracy of the work performed. Consulting others if additional technical information is needed.

Guaranteeing the accuracy of the work performed.

Auditors are periodically punished for holding an investment in a client. This violates which ethical rule? Integrity. Independence. Non compliance with GAAP. Confidentiality.

Independence

Under the AICPA Code of Professional Conduct, which of the following rules is not applicable to CPAs in business? Integrity and objectivity. General standards. Independence. Acts discreditable.

Independence.

Which of the following attributes is more closely associated with attestation services performed by a CPA firm than with other lines of professional work? Integrity. Competence. Independence. Keeping informed on current professional developments.

Independence.

Which of the following is most likely to violate the AICPA Code of Professional Conduct? Accepting audit fees fixed by a public authority. Submitting a competitive bid to a potential audit client. Performing professional services relating to judicial proceedings. Issuing the current year audit report when fees for the past year audit remain uncollected.

Issuing the current year audit report when fees for the past year audit remain uncollected.

If a CPA violates the AICPA Code of Professional Conduct, the AICPA Trial Board may do all of the following, except: Admonish the offending member. Suspend the offending member. Expel the offending member. Revoke the offending member's CPA certificate.

Revoke the offending member's CPA certificate.

A client company has not paid its 20X6 audit fees. According to the AICPA Code of Professional Conduct, in order for the auditor to be considered independent with respect to the 20X7 audit, the 20X6 audit fees must be paid before the: 20X6 report is issued. 20X7 fieldwork is started. 20X7 report is issued. 20X8 fieldwork is started.

20X7 report is issued

Which of the following acts by a CPA would most likely be considered a violation of the AICPA Code of Professional Conduct? Assisting a client in preparing a financial forecast. Forming a professional corporation to practice as a CPA. Accepting a fee in a tax matter relating to an administrative proceeding. A "covered member" owns an immaterial amount of stock in an audit client.

A "covered member" owns an immaterial amount of stock in an audit client.

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: An investigative body of a state CPA society. The trial board of the AICPA. A CPA-shareholder of the client corporation. An AICPA quality review body.

A CPA-shareholder of the client corporation.

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 should be understood to preclude a CPA from responding to an inquiry made by: The trial board of the AICPA. An investigative body of a state CPA society. A CPA-shareholder of the client corporation. An AICPA voluntary quality review body.

A CPA-shareholder of the client corporation.

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

A fee is based on whether or not the public accounting firm's audit report leads to the approval of the client's application for bank financing.

Which of the following is least likely to impair a CPA firm's independence with respect to a nonpublic audit client in the Chicago office of a national CPA firm? A partner in the Chicago office owns an immaterial amount of stock in the client. A partner in the Milwaukee office owns 8% of the client's stock. A partner in the Chicago office, who does not work on the audit, previously served as controller for the audit client. A partner in the Pittsburgh office is also the vice president of finance for the audit client.

A partner in the Chicago office, who does not work on the audit, previously served as controller for the audit client.

Which of the following partners is least likely to be considered a "covered member" for purposes of the audit of Company A, performed by the McLean office of a national CPA firm? the partner in charge of the entire CPA firm a partner in the McLean office who worked on the Company A audit 4 years ago, but currently has no responsibilities with respect to the audit the partner in charge of the McLean Office A partner in the NYC office of the CPA firm who maintains a small, immaterial investment in Company A

A partner in the NYC office of the CPA firm who maintains a small, immaterial investment in Company A

Connor & Sullivan CPAs has one office. Which of the following is least likely to impair independence with respect to an audit client? The client owes the firm for two prior years' audit fees. A partner in the CPA firm is the son of the president of the client. The husband of a partner in the firm has a small direct financial interest in the client. A partner in the firm has an investment in a mutual fund that has a direct interest in the client.

A partner in the firm has an investment in a mutual fund that has a direct interest in the client.

Which of the following is not a covered member for an attest engagement under the independence rule of the AICPA Code of Professional Conduct? An individual assigned to the attest engagement. A partner in the office of the partner in charge of the attest engagement. A manager who is in charge of providing tax services to the attest client. A partner in the national office of the firm that performs marketing services.

A partner in the national office of the firm that performs marketing services.

A public accounting firm would least likely be considered in violation of the AICPA Independence Rule in which of the following instances? 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. A manager of the firm donates services as vice president of a charitable organization that is an audit client of the firm. An attest client owes the firm fees for this and last year's annual engagements. A covered member's dependent son owns stock in an attest client.

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.

Which of the following is not prohibited by the AICPA Code of Professional Conduct? Advertising in newspapers. Payment of commission to obtain an audit client. Acceptance of a contingent fee for a review of financial statements. Engaging in discriminatory employment practices.

Advertising in newspapers

Which of the following forms of advertising would most likely be considered a violation of the AICPA Code of Professional Conduct? Advertising including the types of services offered and the standard fees for the services. Advertising including the experience of the firm's professional staff. Advertising including an indication that the firm has a close relationship with several tax court judges. Advertising including the percentage of the firm's staff that have CPA certificates.

Advertising including an indication that the firm has a close relationship with several tax court judges.

A CPA should maintain objectivity and be free of conflicts of interest when performing: Audits, but not any other professional services. All attestation services, but not other professional services. All attestation and tax services, but not other professional services. All professional services.

All professional services.

AICPA independence requirements suggest that a CPA should evaluate whether a particular threat to independence would lead a reasonable person, aware of all the relevant facts, to conclude that: A questioning mind reveals doubt as to independence. An unacceptable risk of non-independence exists. The accountant is definitely not independent. There is substantial cause for a legal finding of non-independence.

An unacceptable risk of non-independence exists.

A small CPA firm provides audit services to a large local company. Almost eighty percent of the CPA firm's revenues come from this client. Which statement is most likely to be true? Appearance of independence may be lacking. The small CPA firm does not have the proficiency to perform a larger audit. The situation is satisfactory if the auditor exercises due skeptical negative assurance care in the audit. The auditor should provide an "emphasis of a matter paragraph" to his/her audit report adequately disclosing this information and then it may issue an unqualified opinion.

Appearance of independence may be lacking.

The Code of Ethics for internal auditors Applies both to individuals and entities that provide internal auditing services. Applies primarily to internal auditor support of the external audit function. Requires independence from an internal auditor's employer. Is enforced for public companies by the Internal Audit Division of the PCAOB.

Applies both to individuals and entities that provide internal auditing services.

ndependence is required of a CPA performing: Audits, but not any other professional services. Attestation services, but not other professional services. Attestation and tax services, but not other professional services. All professional services.

Attestation services, but not other professional services.

When a threat to independence arises, an auditor should consider: Alternative threats to a lack of independence. Available safeguards to independence. Global independence rules. Required lack of independence approaches.

Available safeguards to independence.

While performing an audit of a public company, the auditors discovered material illegal acts and resigned due to the client's refusal to disclose them. The auditors' reason for resignation should be disclosed through: CPA Direct Communication With Shareholders The Process of Filing A. Yes Yes B. No Yes C. Yes No D. No No

B

While performing an audit of a public company, the auditors discovered material illegal acts and resigned due to the client's refusal to disclose them. The auditors' reason for resignation should be disclosed through: CPA Direct Communication With Shareholders The Process of Filing A. Yes Yes B. No Yes C. Yes No D. No No

B

Which of the following is prohibited by the AICPA Code of Professional Conduct? Advertising in a general newspaper to attract clients. Auditing a competitor of the current audit client. Charging and accepting a contingent fee for a financial statement review engagement. Purchasing a product and reselling that product at a higher price.

Charging and accepting a contingent fee for a financial statement review engagement.

If the AICPA Code of Professional Conduct does not specifically address a threat to auditor independence, the auditor should: Conclude that the threat is not significant unless proven so. Conclude that the threat results in a lack of independence unless it can be shown that no impairment of independence occurs. Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all the relevant information. Consult the Statements on Auditing Standards for guidance.

Consider the threat from the perspective of a reasonable and informed third party who has knowledge of all the relevant information.

A CPA's retention of client records as a means of enforcing payment of an overdue audit fee is an action that is: Considered acceptable by the AICPA Code of Professional Conduct. Ill advised since it would impair the CPA's independence with respect to the client. Considered discreditable to the profession. A violation of generally accepted auditing standards.

Considered discreditable to the profession.

A primary purpose for establishing a code of conduct within a professional organization is to: Reduce the likelihood that members of the profession will be sued for substandard work. Ensure that all members of the profession perform at approximately the same level of competence. Demonstrate acceptance of responsibility to the interests of those served by the profession. Require members of the profession to exhibit loyalty in all matters pertaining to the affairs of their organization.

Demonstrate acceptance of responsibility to the interests of those served by the profession.

In determining the scope and nature of services to be performed in public practice, a CPA firm should: Require independence for all services performed. Determine that the performance of all services is consistent with the firm's members' role as professionals. Have in place internal control procedures. Only perform accounting related services.

Determine that the performance of all services is consistent with the firm's members' role as professionals.

The concept of materiality would be least important to an auditor when considering the: Total value of the account being audited. Adequacy of disclosure of a client's illegal act. Discovery of weaknesses in a client's internal control. Effects of a direct financial interest in the client upon the CPA's independence.

Effects of a direct financial interest in the client upon the CPA's independence.

Which of the following is most likely to violate the AICPA Code of Professional Conduct? Accepting audit fees fixed by a public authority. Submitting a competitive bid to a potential audit client. Performing professional services relating to judicial proceedings. Issuing the current year audit report when fees for the past year audit remain uncollected.

Issuing the current year audit report when fees for the past year audit remain uncollected.

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? Jones performs consulting services for a percentage of the client's savings; these are the only services provided for the client. Jones names his firm Jones and Smith, CPAs. Jones advertises the services he provides in an Internet set of telephone "yellow pages." Jones, without client consent, makes available working papers for purposes of a peer review of his practice.

Jones names his firm Jones and Smith, CPAs.

Which of the following is a possible safeguard implemented by the client that might mitigate an audit independence threat? CPA firm leaderships stresses the importance of complying with professional standards. Management has suitable skills to make managerial decisions. Management maintains substantial common stock investments in the company. Top management selects the auditing firm.

Management has suitable skills to make managerial decisions.

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. Violation No violation

No violation

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). Violation. No violation q

No violation

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. Violation No violation

No violation

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. 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. Violation No violation

No violation

An accounting association established a code of ethics for all members. The most likely primary purpose for establishing the code of ethics was to: Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association. Establish standards to follow for effective accounting practice. Provide a framework within which accounting policies could be effectively developed and executed. Outline criteria that can be utilized in conducting interviews of potential new accountants.

Outline criteria for professional behavior to maintain standards of competence, morality, honesty, and dignity within the association.

Which of the following is an authoritative body that the AICPA Code of Professional Conduct authorizes to promulgate auditing and attestation standards? Auditing Standards Commission. Financial Accounting Standards Board. International Accounting Standards Board. Public Company Accounting Oversight Board

PCAOB

The AICPA allows an auditor to perform which of the following services for an audit client? Performance of bookkeeping services for the client. Authorization of transactions for the client. Preparation of client source documents. Preparation and posting of journal entries without the client's approval.

Performance of bookkeeping services for the client.

Which of the following is not a broad category of threat to auditor independence? Familiarity. Positive work relationship. Financial self interest. Undue Influence.

Positive work relationship

Which of the following nonattest services may be performed by the auditors of a public company? Internal audit outsourcing. Tax planning for all company officers. Bookkeeping services. Preparation of the company's tax return.

Preparation of the company's tax return.

Contingency fee based pricing of accounting services is:

Prohibited for clients for whom attestation services are provided

Which of the following acts by a CPA would not necessarily be considered an act discreditable to the profession under the AICPA Code of Professional Conduct? Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so. Engaging in discriminatory employment practices. Robbing a convenience store. Knowingly signing a false tax return.

Prohibiting a client's new CPA firm from reviewing the audit working papers after the client has requested the CPA to do so.

the AICPA Conceptual Framework for Independence requires CPAs evaluate whether a particular threat would lead which type of person to conclude that an unacceptable risk of non-independence exists? AIPCA ethics examiner Peer PCAOB inspector Reasonably informed 3rd party

Reasonably informed 3rd party

Which of the following is least likely to be considered an act discreditable to the accounting profession? Disclosing confidential client information. Failure to comply with federal laws regarding the filing of tax returns. Knowingly disclosing CPA exam questions. Refusing to provide the client with copies of working papers the client prepared for the auditor.

Refusing to provide the client with copies of working papers the client prepared for the auditor.

When an accountant is not independent, the accountant is precluded from issuing a: Compilation report. Review report. Management advisory report. Tax planning report.

Review Report

Which of the following is not a safeguard that is ordinarily considered in evaluating threats to auditor independence? Safeguards created by the Audit Committee Reference Group. Safeguards created by the profession, legislation, or regulation. Safeguards implemented by the attest client. Safeguards implemented by the CPA firm.

Safeguards created by the Audit Committee Reference Group.

Which of the following is not a broad category of safeguards that mitigate or eliminate threats to independence? Safeguards created by the profession, legislation, or regulation. Safeguards created to assure proper training within both the client and attest environment. Safeguards implemented by the attest client. Safeguards implemented by the firm, including policies and procedures to implement professional and regulatory requirements.

Safeguards created to assure proper training within both the client and attest environment.

Which of the following is considered a type of threat to compliance with the Rules of the Code of Professional Conduct? Self interest. Illegitimate skepticism. Lack of management participation. Irrevocability.

Self interest

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

Statements on Responsibilities for Assurance Services.

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? Disclaim an opinion. Issue an adverse opinion. Suggest that Kelly Company engage another CPA to perform the audit. Rely on the competence of client personnel.

Suggest that Kelly Company engage another CPA to perform the audit.

Independence of a CPA with respect to a client is not impaired if: The CPA has a loan to an officer of the client. The CPA has an immaterial direct interest in the client. The CPA is trustee for the client's pension plan. The CPA has an immaterial joint, closely held business investment with the client.

The CPA has an immaterial joint, closely held business investment with the client.

Which of the following family relationships is most likely to impair a CPA's independence with respect to a particular audit client on which the CPA works as a "covered member"? A close relative has a material investment in that client of which the CPA is not aware. A cousin has an immaterial investment in the client of which the CPA is aware. The CPA's sister is controller of the audit client. The CPA's spouse participates in a savings plan sponsored by the client.

The CPA's sister is controller of the audit client.

Which of the following organizations issue international ethics standards for auditors? The AICPA. The IFAC. The SEC. The FASB.

The IFAC

Which of the following statements is true with respect to the PCAOB and SEC's concept of independence when an auditor both prepares financial statements and audits those financial statements for a client? The auditor is not independent. The auditor is independent if he or she is able to maintain a level of professional detachment. The auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements. The auditor cannot audit the financial statements since a lack of integrity exists.

The auditor is not independent.

An audit independence issue might be raised by the auditor's participation in consulting services engagements. Which of the following statements is most consistent with the profession's attitude toward this issue? Information obtained as a result of a consulting services engagement is confidential to that specific engagement and should not influence performance of the attest function. The decision as to loss of independence must be made by the client based on the facts of the particular case. The auditor should not make management decisions for an audit client. The auditor who is asked to review management decisions, is also competent to make these decisions and can do so without loss of independence.

The auditor should not make management decisions for an audit client.

in which of the following circumstances would a covered member be considered independent when performing the audit of the financial statements of a new client for the year ended December 31, 20X3? The covered member resigned on January 17, 20X3 from the board of directors of the client, prior to accepting the new audit engagement. The covered member continues to hold an immaterial indirect financial interest in the client. The covered member continues to serve as a trustee for the client's pension plan and has the authority to make investment decisions. The covered member's spouse owns an immaterial amount of shares of common stock in the client.

The covered member continues to hold an immaterial indirect financial interest in the client.

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

The return is not misleading based on all information of which the CPA has knowledge.

The AICPA Code of Professional Conduct will ordinarily be considered to have been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the representation that the: There was a referral fee that was not disclosed to the client. Actual fee would be substantially lower than the fees charged by other CPAs for comparable services. Fee was a competitive bid. CPA would not be independent.

There was a referral fee that was not disclosed to the client.

Pickens and Perkins, CPAs, decide to incorporate their practice of accountancy. According to the AICPA Code of Professional Conduct: This is an acceptable form of organization. This is only an acceptable form of organization if the firm performs no audits. This is an acceptable form of organization if a minority interest of public shareholders is established. This is not an acceptable form of organization.

This is an acceptable form of organization.

In providing nonattest services to an attest client, a CPA is allowed to perform which of the following functions? Maintaining custody of the client's securities. Training client employees. Supervising client employees. Acting as the third approver of large client expenditures.

Training client employees.

Which of the following provisions is not included in The Institute of Internal Auditors Code of Ethics? Performance of work with honesty, diligence, and responsibility. Prudence in the use and protection of information acquired in the course of their duties. Use of appropriate sampling methods to select areas for audit. Continual improvement in proficiency and effectiveness and the quality of services provided.

Use of appropriate sampling methods to select areas for audit.

As compared to the AICPA Code of Professional Conduct, IFAC's International Code of Ethics for Professional Accountants: Applies to more types of services. Has more specific restrictions. Has different rules regarding independence. Uses a conceptual approach.

Uses a conceptual approach.

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. Violation No violation

Violation

Which of the following statements is correct? Client prepared records (e.g., the general ledger) may be retained by the CPA until fees due to the CPA are received. CPA working papers are the joint property of the CPA and the client. Working papers prepared by the auditor solely for the engagement need not be returned to the client. CPA working papers that include copies of client's records are not available to third parties under any circumstances.

Working papers prepared by the auditor solely for the engagement need not be returned to the client.

A CPA sole practitioner purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities were not material to the CPA but were material to the child's personal net worth. Would the independence of the CPA be considered to be impaired with respect to the client? Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor. Yes, because the stock would be considered an indirect financial interest that is material to the CPA's child. No, because the CPA would not be considered to have a direct financial interest in the client. No, because the CPA would not be considered to have a material indirect financial interest in the client.

Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor.

Jennifer Nelson, CPA, has posted the general ledger and has maintained the financial records of Quinn Corporation. As a part of his responsibilities he has recorded journal entries and made closing entries without consulting Quinn's management. Which of the following best summarize the AICPA and SEC views as to the following question: Is audit independence impaired? AICPA SEC A. Yes Yes B. Yes No C. No Yes D. No No

a

Which of the following types of employee must be independent of an audit client? a partner in the office that performs the engagement a senior auditors assigned to the office that performs the audit mangers assigned to an office that does not participate in the engagement all firm professionals, regardless of their position

a partner in the office that performs the engagement

Wilson Company is audited by the Denver office of Anderson CPAs. Which of the following individuals would be least likely to be considered as a "covered member" by the independence standards? staff assistant on the audit a staff assistant who prepared Wilson Company's tax returns a tax partner in Denver who preforms no attest services for Wilson Company or for any other clients. The partner in charge of Anderson CPAs (she does no work on the Wilson Company Audit).

a staff assistant who prepared Wilson Company's tax returns

which of the following forms of organization is most likely to protect the personal assets of any partner or shareholder who has not been involved on an engagement resulting in litigation? professional corporation subchapter M incorporation partnership limited liability partnership

limited liability partnership

Contingency fee based pricing of accounting services is always strictly prohibited in public accounting practices prohibited for clients for whom audit services are provided considered an act of discreditable to the profession never restricted in public accounting practice

prohibited for clients for whom audit services are provided

which of the following statements is true with respect to the PCAOB and SECs concept of independence when an auditor both prepares financial statements and audits those financial statements for a client? the auditor is not independent the auditor is independent if he or she is able to maintain a level of professional detachment the auditor can audit the financial statements only if the audit process does not culminate in the expression of an opinion on the financial statements the auditor cannot audit the financial statements since a lack of integrity exists

the auditor is not independent