Auditing Quiz #2

Which of the following best describes litigation involving CPAs?

A CPA may be exposed to criminal as well as civil liability

Which of the following statements best explains why the CPA profession has found it essential to establish ethical standards and means for ensuring their observance?

A distinguishing mark of a profession is its acceptance of responsibility to public.

Which of the following statement applies to consultation services engagement?

A practitioner should obtain sufficient relevant data to complete the engagement.

Under the ethical standards of the profession, which of the following situation involving nondependent member of an auditor's family is more likely to impair independence of an individual participating in an audit engagement

A spouse's employment with a client

The profession's ethical standards most likely are violated when CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the time of the presentation that the

Actual fee would be substantially higher.

Which of the following legal situation would be considered to impair the auditor's independence.

Actual litigation by the auditor against the current management alleging management fraud of deceit.

According to the AICPA's standards, which of the following actions should be taken by a member tax preparer who discovers an error in a taxpayer's previously filed tax return?

Advise the taxpayer

According to the profession's standards, which of the following are considered consulting services?

Advisory Services: Yes Implementation Services: Yes Assurance Services: No

Which of the following is required for a CPA firm to designate itself as "Members of the American Institute of Certified Public Accountant" on its letterhead.

All CPA owners must be member.

Martin Corporation orally engages Dawson, CPA, to audit its year-end financial statement. The engagement is to be complete within 2 months after the close of Martine's fiscal year for a fixed fee of $2,500. Under these circumstances what obligation is assumed by Dawson?

An implied promise to exercise reasonable standards of competence and care.

Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is am indirect financial interest?

An investment held through a regulated mutual fund.

Tow which of the following parties may a CPA partnership provide its audit documentation, without being lawfully subpoenaed or without the client's consent?

Any surviving partner(s) on the death of a partner

An issuer client who disagree with the independent auditor on a significant matter affecting its financial statements has several courses of action. Which of the following courses of action would be inappropriate.

Appeal to the FASB to review the significant matter.

When a member of the AICPA prepares a taxpayer's federal income tax return, the member has the responsibility to

Be an advocate for the entity's position

A CPA who performs primary actuarial services for a non issuer client normally is precluded from expressing an opinion on the financial statements of the client if the

CPA prepared an actuarial report using assumptions not approved by the client.

According to the standards of the profession, which of the following activities may be required in exercising due professional care?

Consulting With Experts: Yes Obtaining Specialty Accreditation: No

In which of the following instances is the independence of the CPA most likely not considered to be impaired? The CPA has been retained as the auditor of a

Credit union of which the CPA is a member.

A CPA audits the financial statements of a local bank. According to the AICPA Code of Professional Conduct, the appearance of independence ordinarily would not be impaired if the CPA.

Designs an information system for the bank that is unrelated to its accounting records.

When management refuses to disclose material noncompliance with laws and regulations identified by the independent auditor, the independent auditor may be charged with violating the AICPA Code of Processional Conduct for

Disclaiming and opnion

Which of the following statements concerning an accountatn't disclosure of confidential client data is ordinarily true.

Disclosure may be made to any party on consent of the client.

Which of the following general standards apply to consulting services?

Due Prof Care: yes Independence in Mental Attitude: No Planning and Supervision: Yes

The concept of materiality is least important to an auditor when considering the

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

The form of communication with a client in a consulting service should be

Either oral or written

Under Section 11 of the Securities Act of 1933, which of the following standards may a CPA use as a defense?

Generally Accepted Principles: Yes Generally Accepted Fraud Detection Standards: Ne

In which of the following situations would a covered member's indpendence be considered ti be impaired?

II. and III.

The preparer of a federal income tax return signs a preparer's declaration that states, Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of knowledge and belief, they are true, correct, and accurately list all amounts and sources of income i received during the tax year...... A member of the AICPA who signs this declaration as prepare of clients's tax return warrants that

Information furnished by the client was relied upon in preparing the tax return unless it appeared incorrect, inconsistent, or incomplete

Thorp CPA, was engaged to audit Ivor Co's, financial statwment. During the audit, Thorp discovered that Ivor's inventory contained stolen goods. Ivor was indicated and Thorn was subpoenaed to testify at the crimainal trial in sate court. Ivor claimed accountant-client privilege to prevent Thorn from testifying. Which of the following statements is most likely true regarding Ivor's claim?

Ivor can claim an accountant-client privilege only in jurisdiction that have enacted to a statue creating such a privilege.

Kopel was engaged to prepare Riff Raff's Year 1 federal income tax return. During the tax preparation interview, Raff told Kopel that he paid $3,000 in property taxes in year 1. Actually, Raff's return, resulting in an understatement of Raff's tax liability. Kopel had no reason to believe that the information was incorrect. Kopel did not request underlying documentation and was reasonably satisfied by Raff's representation that Raff had....

Kope is not subject to the preparer penalty for willful understatement of tax liability because Kopel was justified in relying on Raff's representation.

An auditor strives to achieve independence in in appearance to

Maintain public confidence in the profession

Burrow & Co., CPAs, have provided annual audit and tax compliance series to Mare Corp. for several years. Mare has been unable to pay Burrow in full for services Burrow rendered 19 months ago. Burrow is ready to begin field work for the current year's audit. Under the ethical standards of the profession, which of the following arrangements will permit Burrow to begin the field work on Mare's audit.

Mare commits to pay the past due fee in full before the audit report is issued.

Contract law is the basis for the legal liability at common law of an auditor to his or her client. From which of the following may the auditor's liberality arise?

Negligence, gross negligence, or fraudulent action by the auditor.

According to the standards of the profession, which of the following events will require a CPA performing a consulting services engagement for a nonaudit client to withdraw from the engagement?

Neither I nor II

Richard, CPA, performs complication services for the Norton Corporation, a nonpublic entity. The complication reports issued by Richard disclose lack of independence and are not used by third parties. Richard has accepted a commission form a software company for recording its products to Norton. The commission agreement was disclosed to Norton. Richard also refers Norton to Cruz, CPA, involving he industry in which Norton operates. Cruz subsequently remit to Richard a portion of the fee collected. Ther referral fee agreement was likewise disclosed to Norton. Richard accepts the fee. Who, if anyone, has violated the Code of Professional Conduct?

Neither Richard nor Cruz

Under the AICPA Code of Professional Conduct, a CPA may express an unmodified opinion on financial statements that contain a departure from promulgated GAAP if (s)he can demonstrate that because of unusual circumstances the financial statements would be misleading if the departure were not made. Which of the following is an example of unusual circumstances that could justify such a departure.

New legislation

You are a CPA retained by teh manager of a cooperative retirement village to do bookkeeping and a compilation of the financial statements you are expected to prepare unaudited financial statements with each page market "unaudited" and accompanied by a disclaimer of opinion stating no audit was made. In performing the work, you discover that there are no invoices to support $25,000 of the manager's claimed disbursements. The manager informs you that all disbursements are proper. What would you do?

Notify the owner that some of the claimed disbursements are unsupported and withdraw if the situation is not satisfactorily resolved.

A pervasive characteristic of the CPA's role in a consulting services engagement is that of being a(n)

Objective advisor

A CPA must sign the preparer's declaration on a federal income tax return

Only when the CPA prepares a tax return for the compensation

The prevailing legal view is that an auditor's liability to third parties at common law may be based on

Ordinary negligence if such parties belonged to a specifically foreseen class but were not specially known.

Inclusion of which of the following statements in a CPA's advertisement is not acceptable pursuant to the AICPA Code of Professional Conduct

Paul Fall Certified Public Accountant Endorsed by AICPA

The AICPA Code of Professional COnduct is violated if a CPA accepts a fee for servcies atht he fee is

Payable after a specified finding is attained in a review of financial statements.

Which of the following most completely describes how independence has been defined by the accounting profession?

Possessing the ability to act professionally and in accordance with a professional code of ethics .

How does the Securities Act of of 1933, which imposed civil liability on auditors for misrepresentations or omission of material facts in a registration statement, expand auditor's liability to purchaser of securities beyond that of common law?

Privity with purchasers is not a necessary element of proof.

A CPA's retention of client-provided records as a means of enforcing payment of an overdue audit fee is an action that is

Prohibited under the AICPA code of Professional Conduct

Ocean and Associates, CPAs, audited the financial statement of Drain Corporation. As a result of Ocean's negligence in conduction the audit, the financial statement included material misstatements/ Ocean was unaware of this fact. The financial statements and Ocean's unmodified opinion were included in a registration......

Securities Exchange Act of 1934 Section 10(b), Rule 10b-5: No Securities Act of 1933, Section 11: Yes

The Sarbanes-Oxley Act of 2002 has strengthened auditor independence by requiring that management of the public company

Select auditors through audit committees.

A violation of the profession's ethical standards would most likely have occurred when a CPA in public practice

Served as an expert witness in a damage suit and received compensation based on the amount awarded to the plaintiff

The appearance of independence of a CPA, or the CPA's firm, is most likely to be impaired if the CPA

Serves as an executor and trustee of the estate of an individual who owned the majority of the stock of a closely held client corporation.

The AICPA Code of Professional Conduct contains both general ethical principle that are aspiration in character and also a

Set of specific, mandatory rules describing minimum levels of conduct a member must maintain.

The AICPA Code of Professional Conduct states, in part, that a CPA should maintain integrity and objectively. Objectively in the Code refers to a CPA ability.

TO maintain and impartial attitude on all matters that come under the CPA review.

Jones, a member of the AICPA, prepared Smith's federal income tax return and appropriately sign the preparers declaration. Several months later, Jones learned that Smith improperly altered several figures before mailing the tax return to the IRS. Jones should communicate disapproval of this action to Smith and

Take no further action with respect to the current year's tax return but considered the implication of Smith's actions for any future relationship.

In which of the following circumstances would a CPA who audits XM Corporation lack independence?

The CPA and XM's president each owns 25% of FOB Corporation, a closely held company.

According to the pofessional thical standards, a CPA is condidered indpendednt in which of the following instances?

The CPA belongs to a country club client in which membership requires the acquisition of a pro rata share of equity.

DMO Enterprises, Inc. engaged the accounting firm of Martin, Seals, & Anderson to perform its annual audit. The firm performed the audit in a competent, negligent manner and billed DMO for $16,000, the agreed fee. Shortly after delivery of the audited financial statements, Hightower, the assistant controller, disappeared taking with him 28,000of DMO's funds. It was then discovered that Hightower had been engaged in a highly sophisticated......

The accountant are entitled to collect their fee and are not liable for $63,000

Which is the true statement about an autitor's statutory legal liability?

The auditor has a greater burden of defense under the Securities Act of 1933 than the Securities Exchange Act of 1934.

An audit indepndence issue might be raised by the auditor's particiaition in consulting serveies engagnemtns/ Which of the following statments i most consisten with the profession's attidutede towards this isse?

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

According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?

The auditor's checking account, which is fully insured by a federal agency, is held at a client financial institution.

According to the AICPA Statements on Standards for Tax Services must a CPA be satisfied that a reasonable effort has been made to obtain information needed to provide appropriate answers to the questions on a tax return before signing the preparer's declaration?

The declaration requires the CPA to state that the return is true, correct, and complete based upon all information of which the preparer has knowledge.

A member of the AICPA who is engaged to prepare an income tax return has a duty to prepare it in such a manner that the tax is

The legal minimum

In accordance with the AICPA's statements on Standards for Tax Services, when reasonable grounds exist for omission of an answer to an applicable question on a tax return,

The member-preparer need not provide an explanation for the omission on the return.

Eagle Company's financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor should express an option that is

Unmodified and descried the departure is an other-matter paragraph

Which of the following acts by a CPA who is not in public practice is most likely to be a violation of the ethical standards of the profession?

Using the CPA designation without disclosing employment status in connection with financial statement issued for external use by the CPA's employer.

Under the antifraud provision of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted

Without good faith

A CPA purchased stock in an audit client corporation and placed it in a revocable educational trust for the CPA's dependent minor child. The trust securities were not material to the CPA but were material to the chids personal net worth. Is the independence of the CPA considered to be impaired with respect to the client?

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

hi

hi