Ch.19 Ethics and professional conduct in Audit

An auditor auditing a privately-held entity must follow ______.

ASB standards AICPA Code of Professional Conduct

Which of the following entities has been allowed to set accounting and auditing standards?

ASB, SEC, and FASB

Which of the following bodies are authorized by the AICPA Council to establish accounting principles?

Governmental Accounting Standards Board (GASB) Financial Accounting Standards Board (FASB) Federal Accounting Standards Advisory Board (FASAB)

Which of the following principles of professional conduct requires CPAs to determine that services are consistent with acceptable professional behavior?

Scope and nature of services

Which of the following would impair the independence of a CPA participating in an engagement?

The individual has a sister employed in a key position at an audit entity. A close relative has a material financial interest in the entity and the CPA is aware of the interest.

The first two principles of the Code of Professional Conduct reinforce that ______.

a CPA's role is to serve the public

An indirect financial interest arises when ______.

a covered member has a financial interest in an entity that is associated with an attest entity the auditor does not control or supervise the intermediary the financial interest is beneficially owned through an estate

Commissions or referral fees are prohibited if a member in public practice also performs ______ for that client.

a review of financial statements an audit of financial statements

Part 3 of the AICPA Code of Professional Conduct applies to CPA who work ______.

as accounting instructors

Subject to certain conditions, CPAs may provide ______ to nonpublic attest entities

bookkeeping internal audit outsourcing computer software implementation services

Due care requires that the CPA perform his or her professional responsibilities with ______.

competence and diligence

Procedures for monitoring a firm's quality control include ______.

determination of any corrective actions to be taken review of summarized reports on the findings of monitoring procedures discussions with the firm's personnel

When performing nonattest services for an attest entity, having the CPA supervise the entity's employees in the performance of their normal recurring activities ______ impair the CPA's independence.

does

To perform a compilation of an entity's financial statements a CPA ______ be independent.

does not need

A CPA is performing nonattest services for an attest entity. Activities considered to impair the CPA's independence include ______.

establishing internal controls

The lead partner on an engagement team for a public company audit ______.

has a five-year "time out" after rolling off the engagement of an entity

The Advertising and Other Forms of Solicitation Rule prohibits members in public practice from ______.

implying an ability to influence a court or regulatory agency creating false expectations of favorable results

A CPA is required to avoid relationships that would impair his or her objectivity under the principle of

independence

The first section in Part 1 of the AICPA Code of Profession Conduct includes the Code's ______ rule.

integrity and objectivity

According to the PCAOB, the provision of tax services impairs an auditor's independence to an entity when the tax service ______.

involves aggression interpretation of applicable tax laws is provided to immediate family members of management who serve in financial reporting oversight roles at the entity

The audit committee of a public company ______.

is responsible for auditor compensation serves as a point of contact for the auditor must be independent of management

The first principle of the ______ posits that each person has a right to have the maximum degree of personal freedom that is still compatible with the liberty of others.

justice-based approach

When it comes to methods or theories of ethical behavior that the guide the analysis of ethical issues in accounting, ______. there is little, if any, overlap between the theories

no single approach is necessarily better than another

Part 1 of the AICPA Code of Professional Conduct ______

requires independence applies to governmental auditors

Management responsibilities that would impair a CPA's independence include ______.

setting policy for the attest client preparing source documents for a transaction having custody of entity assets

member in public practice

shall not prepare an original or amended tax return for a contingent fee

The AICPA's Peer Review Program consists of ______.

system reviews engagement reviews

An auditor has the burden of justifying departures from ______.

the Interpretations of Rules of Conduct only

Threats to a CPA's independence include ______.

undue influence self-review

Theories or methods of ethical behavior that can guide the analysis of ethical issues in accounting are the ______ approaches.

utilitarian justice-based rights-based

For CPAs who are neither functioning as auditors or working in business, only Part(s) ______ of the AICPA Code of Professional Conduct is applicable.

3

A private, nongovernmental association which only has the authority to require its members to comply with the Code of Professional Conduct as a condition of continued membership is the ______.

AICPA

Which of the following entity's standards of professional conduct are considered to provide the broadest map of areas in which professionalism is expected from auditors?

AICPA

Which of the following entity's standards of professional conduct are the least stringent?

AICPA

Which of the following are SEC human resource and compensation-related rules?

An audit partner cannot perform audit services for a particular entity for more than 7 consecutive years. The lead engagement review partner cannot provide audit services for a particular audit entity for more than 5 consecutive years.

If a CPA works both as an auditor and in another business capacity, which of the following statements is true regarding the AIPCA's Code of Professional Conduct?

Both Parts 1 and 2 apply to this CPA.

Which of the following parties can have financial interests in an audited entity and not impair the independence of the CPA?

Brother Parent

A CPA may serve as a director or trustee for an audited not-for-profit entity as long as the ______.

CPA does not participate in a managerial role position is clearly honorary

A CPA seeking employment with an educational institution that is an audited entity of his or her CPA firm will not impair independence as long as the:

CPA does not set policies for the educational institution position is nontenured

A financial interest that is under the control of an individual or entity is considered a(n) ______ financial interest.

Direct

A(n) ownership interest in an equity or a debt security issued by an entity is the definition of a(n)______ interest

Financial

To be a credible source of objective and independent assurance, a profession must have a solid reputation for ______.

Integrity, competence, and character

Additional guidance for applying the Rules of Conduct is provided by The ______.

Interpretations of Rules of Conduct

The SEC delegates its authority to set standards for audits of public companies to the ______.

PCAOB

Which of the following parts of the AICPA Code of Professional Conduct applies only to CPAs in public practice?

Part 1

The framework for the Rules of Conduct is provided by The ______

Principles of Professional Conduct

The framework for the Rules of Conduct is provided by The ______.

Principles of Professional Conduct

The conduct, aims, or qualities that characterize a vocation is the definition of______

Professionalism

Part 1 of the Code of Professional Conduct has the most stringent rules because it applies to CPAs who ______.

Provides services to the broader public

Because of their public-interest responsibility the ______ approach is important to auditors.

Right based

Which of the following is specifically enforceable?

Rules of Conduct only

Legal authority to oversee the accounting profession rests with the ______.

SEC

Auditors of publicly held companies must follow the ______.

SEC professional conduct requirements PCAOB Code of Professional Conduct

The purpose of PCAOB inspections is to ensure that registered firms, in connection with their audits of public companies comply with ______.

SEC rules PCAOB rules professional standards the Sarbanes-Oxley Act

Which of the following organizations have established stringent standards of professional conduct, mostly in the area of auditor independence?

SEC, and PCAOB

Which of the following statements are correct regarding litigation by entity security holders or other third parties?

Such lawsuits do not generally alter the fundamental relationship between the entity and the auditor. If management intends to testify against the CPA, the CPA should disclaim an opinion on the audit.

Which of the following part(s) of the ICPA Code of Professional Conduct apply to all CPAs?

The Preface only

Nonaudit services that are considered by the SEC to impair independence if provided to a public company audit entity include ______.

The lead engagement review partner cannot provide audit services for a particular audit entity for more than 5 consecutive years. An audit partner cannot perform audit services for a particular entity for more than 7 consecutive years.

It is often difficult to measure the potential costs and benefits of actions to be taken when applying the -----theory to ethical dilemmas.

Utilitarian

Complying with the AICPA Code of Professional Conduct is ______.

a condition of membership in the AICPA required by courts at the state and federal levels required by most state-level boards of accountancy

Members are prohibited from expressing an opinion that financial statements are presented in conformity with GAAP when departures from GAAP exist under the ______ rule.

accounting principles

A CPA is permitted to seek employment as a(n) ______ faculty member of an educational institution that is an audited entity of the CPA's firm as long as the CPA does not hold a key position or participate on the attest engagement team.

adjunct

The auditor of a public company must report to the company's audit committee ______.

all critical accounting policies used by the company material written communication between the auditor and the company's management all alternative treatments within GAAP for polices related to material items discussed with management

Under the Form of Organization and Name Rule, a firm may designate itself "Members of the American Institute of Certified Public Accountants" if ______.

all of its CPA owners are members of the Institute

The Confidential Client Information rule prohibits the auditor from disclosing confidential client information without the specific consent of the client. However, information can be disclosed without the client's consent to ______.

allow a review of the member's professional practice in conjunction with the sale or merger of the practice comply with a valid subpoena allow a review of the member's professional practice under the authority of the AICPA

Part 2 of the AICPA Code of Professional Conduct ______.

applies to CPAs who are working in business but who are not issuing assurance reports on which the public will rely does not require independence

The Preface of the Code of Professional Conduct______

applies to all CPAs defines ideal principles of professional conduct

If a member of the attest engagement team discusses potential employment or receives a job offer with an attest entity, independence may be impaired with respect to the entity unless the ______.

auditor removes himself or herself from the engagement

Disadvantages in applying the utilitarian theory to ethical dilemmas include ______.

balancing the interests of all parties involved difficulty in measuring potential costs and benefits

Integrity requires that a CPA______

be honest honor both the form and spirit of ethical standards be candid

Membership in the AICPA can be terminated without a hearing if the member has ______.

been convicted of certain criminal offenses had his or her CPA certificate suspended or revoked by a government agency

Permissible loans for a CPA to obtain from a financial institution which he or she audits include a(n) ______.

car loan collateralized by the car unsecured personal loan loans secured against the cash surrender value of a life insurance policy

Auditor independence would be impaired by the ______.

commencement of litigation by the CPA against the present management alleging management fraud or deceit commencement of litigation by present management alleging deficiencies in audit work for the entity

Generally, a loan to or from an audited entity is ______.

considered to impair a covered member's independence

Nonaudit services that are considered by the SEC to impair independence if provided to a public company audit entity include ______.

contribution in kind reports expert services financial information system design investment broker services

Scope and nature of services requires that a CPA ______.

determines that services rendered are consistent with acceptable professional behavior firm ensures services are delivered competently firm ensures no conflict of interest exists

A financial interest that is beneficially owned through an intermediary is considered a(n) ______ financial interest when the beneficiary either controls the intermediary or has the authority to supervise or participate in the intermediary's investment decisions.

direct

With regard to an a covered member, the underlying investments in a blind trust are considered a(n) ______ financial interest.

direct

According to the Confidential Client information rule the auditor _____ the entity's consent to disclose confidential information to meet disclosure and performance requirements under GAAP.

does not need

The Contingent Fees Rule applies to member firms in public practice ______.

during the period in which a firm provides audit services and the period covered by any historical financial statements involved in such services

Under the AICPA's PRP, CPA firms that don't perform audits or similar engagements, but perform other work such as reviews and compilations undergo_____ reviews

engagement

A firm's independence will likely not be impaired with respect to an entity if a partner or professional employee leaves the firm and is subsequently employed by the entity if the ______.

engagement team exercises sufficient professional skepticism former employee is not in a key position

In performing nonattest services for an attest entity, a CPA should ______.

ensure that the entity assumes all management responsibilities

The justice-based approach emphasizes ______.

equity, fairness, and impartiality social and economic actions should be to everyone's advantage and the benefits available to all each person has a right to have the maximum degree of personal freedom that is still compatible with the liberty of others

Discreditable acts under the Acts Discreditable Rule include ______.

failure to comply with records requests solicitation of CPA Examination questions and answers failure to file a tax return

The Advertising and Other Forms of Solicitation Rule prohibits members in public practice from advertising in a manner that is

false or untrue misleading deceptive or deceiving

When a CPA has such a close, long-standing relationship with a client that it has become difficult to maintain objectivity it is called a(n) ______ threat.

familiarity

To ensure compliance with independence standards CPA firms use

firm-specific rules quality control systems

The utilitarian theory ______.

focuses on the consequences of an action on the individuals affected proposes the interests of all parties should be considered recognizes decision making involves trade-offs between benefits and burdens of actions

The principle of objectivity requires the CPA to be ______.

free of conflicts of interest impartial

Prohibited relationships with an audited client include ______ financial interests.

indirect material direct material direct immaterial

The bedrock of the profession of public accountancy are ______

integrity and objectivity

The "nitty gritty" details in implementing the rules in Part 1 of the Code of Professional Conduct are found in the _____ of each rule

interpretations

With regard to an a covered member, a blind trust and the underlying investments in the blind trust are considered a direct financial interest because the ______.

investments ultimately revert to the covered member covered member retains the right to amend or revoke the trust

A professional staff member of the CPA firm must be independent of the attest entity if he or she ______.

is in a position to influence the engagement becomes a partner in the same office where the attest engagement's lead partner works performs work directly for the entity

A firm's system of quality control should be designed to provide the firm with reasonable assurance that the firm and its personnel ______.

issue appropriate reports comply with regulatory requirements

Nonaudit services that are considered by the SEC to impair independence if provided to a public company audit entity include ______.

legal services bookkeeping actuarial services

Virtually all states have passed laws that allow CPAs to practice as _______ _______ partnerships

limited liability

The requirement that audit and other fees be disclosed in proxy statements and annual reports issued by public companies is to ______.

make companies more sensitive to public perceptions of independence and objectivity

Litigation by entity security holders or other third parties ______ impair the auditor's independence.

may

Elements of quality control identified by SQCS No. 8 include ______.

monitoring engagement performance human resources

Auditors must be willing to see issues through the eyes of others and put the interest of other stakeholders ahead of their own self-interest and those of the CPA firm according to the concept known as the ______.

moral point of view

Unpaid audit fees pertaining to services provided ______ will impair the auditor's independence.

more than one year prior to the date of the audit report

According to the Code of Professional Conduct, members employed in industry ______.

must take steps to ensure that a disagreement with his or her supervisor does not result in subordination of judgment

The Code permits CPAs to provide bookkeeping and other services to ______ attest entities.

nonpublic

The SEC's rules with respect to services provided by auditors are based on the principles that an auditor should ______.

not function in the role of management have no conflicting interest with an audit client not audit his or her work

A profession must have a solid reputation for competence, and for unquestioned character and integrity to be a credible source of ______independent______

objective, assurance

Prior to performing nonattest services for an attest client, the CPA should establish in writing the ______.

objectives of the engagement services to be performed

A CPA is required to be impartial and free of conflicts of interest under the principle of

objectivity

Professional competence as defined in the General Standards Rule states that a member should ______.

only undertake those professional services for which he or she has technical knowledge and skill

When a CPA lacks independence with an entity and is asked to perform a financial statement compilation, the CPA may ______.

perform the compilation but must indicate the lack of independence in the report

Proxy statements and annual reports issued by public companies must contain disclosures regarding ______.

preapproval policies of the company's audit committee audit fees tax fees

The guidance provided by the Code of Professional Conduct starts at a conceptual level with the ______.

principles

The guidance provided by the Code of Professional Conduct starts at a conceptual level with the______ and progressively moves to general______and then to detailed______

principles rules interpretations

The SEC has the authority to establish standards for ______.

professional conduct of public accountants audits of public companies financial accounting

The first two principles of the Code of Professional Conduct address a CPA's responsibility to exercise ______.

professional judgment, moral judgment

If an entity is unable or unwilling to oversee nonattest services provided by the CPA auditor, ______.

providing these services impairs the CPA's independence with respect to attest services provided to the entity

Part 1 of the AICPA Code of Professional Conduct applies to all ______.

public practice CPAs

The professional conduct requirements established by the SEC and PCAOB must be followed when auditing ______

publicly held companies only

The Code of Professional Conduct's Independence Rule ______.

relates only to attestation-related services

Procedures for monitoring a firm's quality control include ______.

review of monitoring procedures review of engagement documentation appropriate record reviews

Covered member's immediate family subject to the Independence Rule include ______.

spouse unrelated dependent related dependent

A firm's independence is impaired with respect to an entity if a partner or professional employee leaves the firm and is ______.

subsequently employed by the entity in a key position

The AICPA can discipline members for violating the Code of Professional Conduct by ______.

suspending or revoking membership in the AICPA referring the case to a hearing panel of the Trial Board

Under the AICPA's PRP, CPA firms that perform audits or similar engagements undergo____ reviews

system

An auditor's independence is impaired when ______.

the auditor performs a managerial role for the entity during the period covered by the audit

The SEC rules do not limit ______.

the scope of nonaudit services provided to nonpublic companies certain tax services provided to audit entities the scope of nonaudit services provided to public companies that are not audit entities

Elements of quality control identified by SQCS No. 8 include ______.

tone at the top monitoring

Ethics ______

underpins the successful functioning of nearly every aspect of society is a code of conduct based on moral duties and obligations that indicate how an individual should interact with others

Professions establish rules that define ethical behavior so that ______.

users of the professional services know what to expect when they purchase services members of the profession know what's acceptable

When a CPA performs his or her duties with competence and diligence, the CPA is said to be ______.

using due care

S.M. Mintz suggested three overlapping theories of ethical behavior including the______ theory which recognizes that decision making involves trade-offs between the benefits and burdens of alternative actions.

utilitarian

The value of an action is determined solely by the consequences of the action on the welfare of individuals under the ______ approach.

utilitarian theory

Members of the AICPA must comply with professional standards _____ engaged in the practice of public accounting.

whether or not

The commencement of litigation by the CPA against the present management alleging management fraud or deceit _____ be considered to impair independence.

would